BRT (Bus Rapid Transit) case study

Hanoi’s transportation has been characterized by the dominance of motorcycles, a symbol of high
personal mobility associated with rapidly rising incomes. Over 5 million motorcycles and 585,000 private
cars are occupying 85.8% of the city’s road networks. Congestion was already becoming a critical
problem in the city. Traffic was in general unorderly and sometimes chaotic at intersections, posing safety
concerns and exacerbating air pollution especially for vulnerable groups such as women, children,
elderly, and long-distance motorists. City’s efforts to curb motorization aimed to restrict motor vehicle
access to the inner city by the year 2030 and to increasingly promote public transport. With these
motivations, the City of Hanoi, backed by the World Bank, approved the construction of a critical road
infrastructure (a Bus Rapid Transit system) to improve access to city’s less developed areas and to
facilitate an environmentally sustainable urbanization of Hanoi.
In the year of 2020, a project contract between Hanoi transportation company (HTC) and
People’s committee of Hanoi was signed to invest a bus rapid transit (BRT) route from Nuoc Ngam- Ho
Tay. The BRT line will begin operate on January 1, 2021 to December 21, 2025. In the end of year 2025,
all of current assets, working capital will be liquidated.
Financial model for BRT project in Hanoi
The Hanoi project is the first BRT line in Vietnam. It consists so far of one route, a 15km from
Nuoc Ngam station- Ho Tay (including 21 stations, 2 terminal, 1 depot, 10 pedestrian overpasses). This
project will operate 360 day per year (from 6 AM to 11PM). The average operating speed of BRT buses
is 20km per hour then the travel time for all route is 2 hours. In order to cover this schedule, HTC need to
buy 6 BRT vehicles (5 active and 1 for reservation)
Investment cost
The price for 6 imported BRT vehicles is 55,000$ per vehicle, the imported tax rate is about 80% on the
imported price. Economic life is 10 years and straight-line depreciation method will be applied in this
project. By the end of 2025, HTC will liquidate all vehicles with the price as book value (including
inflation) and liquidation cost accounts for 45% of liquidation value.
Project financing
Half of investment cost will come from commercial bank. A term loan is 5 years with 15% per year as
interest rate. Total of principal is repaid evenly each year.
The remaining investment cost will be financed by company’s equity. The nominal cost of equity capital
is 20%
Revenue
Now, a one-way ticket cost 12,000 VND (half of this cost will be subsidized by Hanoi). Forecasted price
increasing rate is 15% per year. The BRT has been operating with a service frequency of one bus is 8
trips per day. Approximately 60 people use the service per trip and this number will increase annually at
the rate of 10%
Operation cost
The average bus diesel consumption is 32 liters/100km. Current diesel price is 12,500VND/liter.
Each bus requires a driver and assistant. The salary payment (including monthly salary, health insurance,
social insurance, accident insurance and bonus) is 10 million VND/month for driver and 7 million
VND/month for assistant.
Maintenance cost is 15 million VND/month/vehicle in price of 2020
Annual car insurance premium equals to 1.85% value of vehicle for first 3 years and 1.91% value of
vehicle for next 2 years.
Annual management cost (salary for managers and indirect labor, office rental, ect) is 935 million VND
per year
Diesel price, wages, maintenance and administration costs are assumed to vary with annual inflation rate
Working capital
Working capital was used to finance the difference between receivables, cash balance and payables.
Project inventory is not available.
All bus fares are collected on the bus so the receivable for the business category is 0. The price subsidy of
Hanoi is paid every 3 months. Thus, project liability is equal to 25% of total annual subsidy.
The project’ payables equal to 50% of fuel and maintenance costs.
Cash balance equals to 5% of total annual revenue
Other information
Inflation rate is forecast at 10%, corporate income tax is 22%
Nominal WACC = Real WACC + Inflation + (Real WACC * Inflation)

QUESTION:
Building financial model and calculate possible financial indicators