Jerusalem light rail extension hits snags

Jerusalem light rail
Jerusalem light rail

The state is considering buying the light rail back from CityPass in 2019.

Wide gaps have emerged in the negotiations between the state and CityPass on the extension of the red line of the Jerusalem light rail and the franchise tender for the green line. In a meeting last Wednesday between CityPass representatives, Ministry of Finance deputy budget director Udi Adiri, and Ministry of Finance senior deputy Accountant General Yariv Nehama, the state offered NIS 40 million in compensation to the franchise holder for future losses from extension of the red line, amounting to an estimated 10% of the amount the franchise holder stands to lose.

The extensions are to run from Mount Herzl to Hadassah Ein Kerem Hospital in southwest Jerusalem and between Pisgat Zeev and Neve Yaakov in northeastern Jerusalem. The 2.7-kilometer section to Neve Yaakov will have four stops, while the new section to Hadassah Ein Kerem will be six kilometers long. When the extensions are completed, the light rail will be 22 kilometers long.

In response to the Ministry of Finance's offer, CityPass's management sent the government a letter announcing its willingness to accept 25% of the projected revenue from the red line extension, amounting to NIS 270-300 million in compensation. CityPass complains that the state is disavowing its explicit contractual obligation, but the government says that CityPass is relying on an interpretation of the contract that may not be accepted by a court.

The dispute concerns the franchise contract signed by the state with CityPass in 2002 establishing a safety net for revenue from tickets and supplements from the state if needed. Where revenue in excess of the safety net in the extension segments is concerned, it was agreed that the state would receive 58% and CityPass 42%, because the state would fund construction of the section.

In the central section of the line, which is already operational, the proportions are different; CityPass is entitled to 67% of the revenue in excess of the safety net, and the state 33%, because the franchise holder funded construction of the line.

Under the franchise agreement, the state has an option to buy the project back from CityPass in March 2019, 17 years before the end of the franchise period. The agreement also stipulates, however, that in such a case, CityPass will receive an estimated NIS 360-400 million in compensation for the loss of future revenue from the extension sections. The main dispute concerns this amount , with the state seeking to reduce it to NIS 40 million.

The state is trying to compensate for its contractual inferiority by damaging Alstom in two areas: its chances of continuing to operate the red line, and construction work on the branches. Last June, following lengthy negotiations between the parties, the state and CityPass agreed that CityPass would carry out the extension project together with Alstom, its French partner, for €350 million, as well as the building the red line branch between Givat Ram and the Chords Bridge.

Last week's offer to CityPass was accompanied by an ultimatum saying that if the offer was not accepted before the Passover holiday, a preliminary selection procedure for a franchise on the green line between Gilo and French Hill would be held. This franchise, which will begin next month, will also include the work it was agreed that CityPass would be responsible for, and operation of the red line. Fearing loss of the extensions project, CityPass is willing to settle for 25% of the compensations to which it claims it is entitled, and says that this is a generous offer that goes beyond what it is legally required to accept.

Sources associated with CityPass say that the taking work on the extensions and the branch to Givat Ram away from it will cause a major delay in construction, because municipal company Moriah is already working on the civilian infrastructure for the project, and CityPass and Alstom are ready to start work within six months. The main sufferers from the dispute will therefore be the residents of Jerusalem, who need a railway in areas where it does not currently operate.

In response to this assertion, the government says that CityPass is indeed ready to carry out some of the sections fairly quickly, such as the one between Mount Herzl and Kiryat Yovel, but nevertheless adds that that the entire extension to Hadassah Ein Kerem will take a long time in any case, and a new tender will not be the factor delaying it.

The parties also disagree about two other points in the background. One is the compensation that CityPass will receive for loss of the revenue from the temporary closure of the section between the Chords Bridge and Mount Herzl in order to build infrastructure for connecting the Givat Ram branch. The government is currently offering NIS 5 million in compensation, while it was previously agreed that this compensation would be based on an examination of the revenue in the section over a three-month period, a mechanism on CityPass continues to insist, because it is likely to result in tens of millions of shekels in compensation.

Another disputed point is the division of the revenue in excess of the safety net on the extension sections. The state has offered to change the balance from 58%-42% in its favor to 80%-20%. In its response today, CityPass said it was willing to compromise on 70%-30%.

This dispute is a little surprising, because an attempt to clarify why the state is insisting on a buy back in 2019 was answered with a statement that a stand on principle by the Ministry of Transport was involved, to the effect that a single operator should operative both lines, rather than an attempt to reduce CityPass's excessive profits. Now, however, the government is giving the impression that it is all a question of money, and that having two different operators for the two lines is possible.

An attempt to clarify this point revealed that the government is attributing the question to sections that can be opened before 2019, such as the one to Kiryat Yovel. In this context, there is indeed an advantage in having CityPass and Alstom involved in the project. The government also says that there is an inclination to combine the operation of the two lines, and that this will be reflected in a preliminary procedure for the green line franchise, but a final decision on the matter has not yet been taken.

Published by Globes [online], Israel Business News - www.globes-online.com - on March 30, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Jerusalem light rail
Jerusalem light rail
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