Cycle Sharing in India: Finding the Right Business Model

By Peter Bennett and Ranjana Menon

WRI India is exploring the market for Public Bicycle Sharing (PBS) in India. This article is part of a series focusing on different challenges to PBS, and how other global cities have addressed it.

Public Bicycle Sharing (PBS) systems are brought to cities through a financing process that is shared with many other modes of transportation. Initially, the capital costs of the cycles and stations must be funded. Once the system is built, operations expenses exist for the staff and maintenance. At this point, revenue begins to cover the costs, from fares and memberships, but also from external sources like a sponsor, advertisements, and government subsidies. From highways to metro rail, the distinction of capital and operational costs is familiar. Likewise, with any transportation investment, the degree to which it is self-sufficient reflects the value it has as a public good – for example, providing reduced congestion or improved air quality.

In this context, PBS systems in India has faced the challenge of finding the right business model. In speaking with existing operators and international vendors, we learned how their past models, and tenders for upcoming systems, were structured, and what challenges they faced.

Signs of Success?

It’s no surprise that many PBS systems choose to generate revenue from advertisement. The cycles and stations are visible and ubiquitous. For this reason, it was a street furniture advertisement firm, JCDecaux, that developed Vélib, the pioneering system in Paris.

An advertisement based model involves a city government giving a contract to a vendor to both operate the cycle share and place advertisements. It is then up to the operator to find advertisers and install the ads, in exchange for payment. At the same time, the operations of the PBS system, and collecting fares, is the responsibility of the same vendor.

The downside of this model is that it does not guarantee a quality PBS operation. The advertisement revenue may have been the motivation for bidding, and the financial benefit for keeping the cycles functional is less worthwhile. Several of the small PBS systems in India to date have suffered as they became billboards with bicycles attached.

Advertisement will continue to be a critical component of the PBS business model, but the contracts must evolve to ensure success. Cities could separate this responsibility from the operations contract. Indeed, Arjit Soni of MyByk hoped that he could focus on what he does best: operating a cycle share.

Up Front Capital

Another common business model is for a municipality to gather the state funding and advertisement revenue themselves, then sign a contract with a vendor for the installation and operation of the PBS system. In these models, the cash flow from the government to the operator is set by the contract. In contrast to the fare box revenue, this contract is the attractive component from a vendor’s perspective.

Just like a transit investment, a PBS system with this business model will have different costs in the first year versus the fifth. The cost of procurement and installation of the system are one time capital costs, and are much greater than any future operating expenses. For this contract to work, most of the funding must be delivered up front. There is a clear downside to such a contract. A vendor, having made a profit by installing the system, may have little interest in operating it beyond a minimum level of service. Setting service standards in the contract will only have weight if a significant portion of the funding is on the line.

One solution is to separate the contracts yet again, buying the equipment from one vendor and finding another to operate it. Arjit Soni pointed out that another vendor would need training to operate his custom hardware and proprietary software.

Incentivizing Quality Service

Like any investment, there is a tool for spreading the financing for a PBS system over time: an annuity. The payments for the capital costs can be delivered as a set amount over a number of years. The key to this business model is a contract that ties these payments to quality operation of the system. A set of service-level benchmarks will be set in advance – for example, how many daily trips per cycle.

With any service-based contract, the success hinges on the ability to monitor and evaluate the system. Raj Janagram, of Cycle Chalao described PBS as “a nimble operation – one requiring adjustment on a daily basis, not monthly or yearly.” Local governments are less familiar with evaluating their contractors in this manner, in contrast to a highway project. An independent engineer for evaluation may be the optimal choice for both sides of the contract.

Lastly, the detail of setting service-level benchmarks was highlighted by several of the vendors as a potential problem. Deena Harapanahalli, of The Atlanta Foundation, described number of users and cycle ridership as noble goals, but not solely the responsibility of a PBS operator. A city must look holistically at the cycling infrastructure and existing riders to understand how demand is generated. In a future post, we will explore the common theme of safe cycling as a crucial ingredient to PBS success.