Chicago Transit Authority Open Fare Collection System An ... · The Chicago Transit Authority (“CTA”) operates the nation’s second largest public transportation system, offering

An Overview

Chicago Transit Authority Open Fare Collection System

IntroductionThe Chicago Transit Authority (“CTA”) operates the nation’s second largest public transportation system, offering mass transit services to 3.8 million residents within a 356 square mile area covering the City of Chicago and 40 surrounding suburbs. The CTA annually provides over a half a billion rides on its more than 4,000 buses and trains.

In December 2011, the CTA entered into a 12-year agreement with Cubic Transportation Systems to design, install, finance, operate and maintain a first-of-its-kind Open Fare Collection System. The award was the culmination of a robust procurement process involving potential private sector partners from around the globe. William Blair assisted the CTA as its lead financial advisor in connection with the solicitation and evaluation of proposals.

William Blair was tasked with providing innovative financial and comprehensive business advice in the development of a next generation fare collection system, while accomplishing the following operational goals:

• Shifting capital outlays to the private sector

• Achieving operational savings

• Developing an Open Fare model that provides customer flexibility in payment options

• Divesting the CTA of the issuance and support of proprietary fare media

• Providing the unbanked and under-banked with inexpensive access to payment products

• Shifting the risk of increases in payment industry related fees

• Providing flexibility for the future with regards to emerging technology and changing fare structures

• Identifying new non fare-box revenues

Over the course of a multi-phased bidding process, the business case associated with the transaction was continually refined to satisfy the needs and particular demands of all relevant CTA stakeholders. With this new system, the CTA will move away from producing fare media and operate as an ordinary merchant, accepting bank issued credit and debit cards, and general purpose reloadable cards. The new system will provide CTA customers with greater convenience and flexibility, including better payment options, more points of sale and faster boarding.

BackgroundThe CTA’s once “state-of-the-art” fare collection system now lags far behind other systems in place throughout the world. The current system uses proprietary technology and features a closed loop contactless card that may be either pay-as-you-go or account based. Additionally, magnetic stripe cards are sold on site and through a limited third-party retail network. The CTA was informed that its system will no longer be supported by the sole provider of compatible contactless technology. A change to a system providing any future use would require a capital outlay in excess of $100 million. Faced with the choice of either an upfront payment for a new system or reverting to a mag-stripe only system, the CTA opted to explore innovative methods to acquire a new system.

Shifting capital outlays to the private sector

William Blair assisted the CTA in designing a service fee structure that will compensate the private partner for the entire design, installation, financing, operation and maintenance of the new system. This fee structure includes both a guaranteed minimum base fee as well as a variable rate based on ridership. As the base fee is only payable upon full operation of the new system, the CTA will avoid a significant upfront capital expenditure.

Achieving operational savings

The CTA estimates that it will achieve meaningful operational savings during the term of the agreement.

Developing an Open Fare model that provides customer flexibility in payment options

By migrating away from a proprietary fare product, the CTA will operate in the same manner as any other merchant. The Open Fare system will allow visitors to Chicago to arrive at O’Hare and Midway airports and be able to ride the CTA train using their own contactless debit or credits cards. In addition to accepting all bank issued cards, CTA branded transit-only products will be produced and marketed by the private sector partner. New fare media will be able to support all of the CTA’s current fare structures. Cash will continue to be accepted on buses and at train stations.

Divesting the CTA of the issuance and support of proprietary fare media

Since eliminating tokens in the mid-1990’s, the CTA has encoded all mag-stripe cards by hand, and controlled the management of all account based cards. By assigning the responsibility for card production and management to the private sector partner, the CTA expects to achieve significant operational savings.

Providing the unbanked and under-banked with inexpensive access to payment products

The new system offers important benefits to the unbanked and under-banked. A significant portion of the CTA’s ridership lacks access to traditional credit and debit cards. With the availability of a co-branded fare product, this group of riders will have an accessible and inexpensive option for cashless payments on and off transit. The private partner must provide a retail network more extensive than the one currently operated by the CTA, increasing locations across the CTA’s service area where fare media is sold.

Shifting the risk of increases in payment industry fees

CTA has shifted the risk of increasing credit and debit card transaction fees to the private partner.

Providing flexibility for the future with regards to emerging technology and changing fare structures

The Open Fare System will allow the CTA to readily accommodate advances in payment technology. With the widespread acceptance of new technology, such as NFC devices, the private partner will be required to update and modernize the system throughout the term of the contract. The variable transaction fee based on ridership incentivizes the private partner to adapt to constantly changing customer demands.

Identifying new non fare-box revenues

The new system creates a variety of potential new non-transit revenue sources for the CTA, including use of CTA fare products off transit. An open-ended revenue share design will promote innovation on the part of the private partner, while guaranteeing a monthly payment to the CTA.

Project Goals

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ConclusionThe CTA and the private partner are now beginning the initial phase of implementation. The contract contains extensive milestone goals, based on customer acceptance. Coinciding with the development and installation of hardware is the requirement for a detailed, multi-faceted communications and marketing plan that will be directed at both internal and external stakeholders. The contract also provides important customer security safeguards. The CTA will have ownership rights in the new equipment upon installation.

The CTA’s Open Fare payment system has the potential for extensive applicability, both in and out of transit. By proving more customer choices, with greater access, utilizing the most desirable technology, both the CTA and its customers will benefit by allowing the CTA to focus on its core public transportation mission.

For more information about William Blair & Company’s P3 services, please contact:

Thomas E. Lanctot Partner and Group Head +1 312 364 8120 [email protected]

The accompanying information was obtained from sources which William Blair & Company, L.L.C. believes to be reliable but does not guarantee its accuracy and completeness. The material has been prepared solely for informational purposes and is not a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Historical data is not an indication of future results. The opinions expressed are our own unless otherwise stated. Additional information is available upon request.