The roll-out of personal electric vehicles is slowly starting to ramp up in emerging and developing economies (EMDE), with the high initial upfront cost of purchase and the lack of availability of cheap financing barring the entry to many customers. The scale of this problem is even larger when we turn our attention to the electrification of public transportation. For instance, the initial cost of purchasing electric buses can prove to be prohibitive for usually highly indebted public transportation operators. An e-bus can indeed cost between 30% and 70% more than an otherwise comparable diesel bus, and there is little ability for the operators to recoup this marked up investment, as fare hikes are typically limited by regulation. As a result, there are even fewer financing options available for e-buses than for EVs.

The People's Republic of China (hereafter, “China") is responsible for about 80% of all electric bus sales in 2022, but many other countries in EMDE have a double priority of increasing the availability of public transportation to ease the pressure on saturated urban systems, and also to address pollution problems. Several of them have launched ambitious targets for deployment of electric buses in their national plans. India, for example, introduced the National Electric Bus Program in 2022 with an aim to deploy 50 000 e‑buses over the next five years, in addition to already existing programmes (Faster Adoption and Manufacturing of Electric Vehicles [FAME] and PM E-bus), India is working on an ambitious plan to replace 800 000 diesel buses with electric buses over the next seven years. Today, only 4 000 e‑buses are estimated to be on the road in India, just over 1% of new bus registrations since 2015.

Reaching this target is proving challenging as bus fleet operators in the country typically don’t have access to upfront capital to purchase the buses and usually operate on shaky financial footing, often constrained by regulators to keep fare prices as low as possible. Manufacturers also face limited capital availability as banks are reluctant to provide funding for e‑buses because of higher perceived risk-return profiles, higher costs, and the low perceived resale value of the buses as collateral.

To address these two challenges, the Government of India has rolled out two main mechanisms. The first one is the bulk procurement model, implemented by state-owned Convergence Energy Services Limited (CESL), which aims at aggregating purchasing e‑bus procurement contracts to secure better pricing in exchange for the purchase of large quantities. This model aims to replicate some of the positive outcomes of similar bulk procurement mechanisms that were successfully piloted in the country, for instance in the efficient lighting and clean cooling sectors by CESL’s parent company, Energy Efficiency Services Limited.

But even with savings arising from bulk procurement, the cost of e‑buses would still be too high to bear for local transportation systems with little access to financing and an uneven track record of on-time payments. The Government of India therefore designed a “pay as you go” leasing model, called gross cost contracting, where the e‑bus manufacturer leases the e‑bus to the public transport corporation in exchange for a fee per kilometre, thus reducing the cash constraint on the bus operator entity.

These two mechanisms have shown some successes and about 20 000 e‑buses have been tendered to date. However, a few issues exist that prevent a wider adoption of the scheme, notably wider participation from bus manufacturers.

In the gross cost contracting model, the ownership of the assets stays with the manufacturer, who by not selling the bus is not able to free up the necessary capital required to increase production capabilities and further respond to increasing electrification of public transport. Operating a fleet of vehicles might also be outside manufacturers’ typical business models.

What’s more is that banks often fail to recognise the revenue stream from leasing and might not allow its use as collateral for additional lending to manufacturers. Despite their higher costs, electric buses are also seen as having a lesser resale value than a diesel bus, as the resale price hinges extensively on the availability of an adequate charging infrastructure and the existence of a dynamic secondary market.

The manufacturer also typically signs a lease agreement based on a pay-per-use mechanism, based on the number of kilometres driven. The manufacturer therefore runs the risk that the bus is underutilised and doesn’t receive adequate payments. Splitting the contract into two different components, one fixed fee for the availability of the bus to the operator and another kilometre fee based on utilisation of the bus, could solve that issue.

Solutions exist to address these challenges, including designing a pooling of funds and having an intermediary entity taking ownership of the operation and leasing of the buses. This would ease the burden on manufacturers and allow investment to be refinanced and securitised notably via international/multilateral development bank financing. The newly created entity could also look to issue first loss guarantees in case bus operators fail to make on-time payments.