BY FRAN SPIELMAN City Hall Hall Reporter January 20, 2014 4:41PM
The company that supplies bicycles, stations, docks and software for Chicago’s Divvy bike-sharing program filed for bankruptcy Monday, casting a cloud over an ambitious expansion plan.
The Public Bike System Company’s decision to seek federal protection from creditors owed millions forced the city of Montreal to take over its local bike-sharing program to protect its investment.
The development was announced Monday by Montreal Mayor Denis Coderre and reported by the Canadian Broadcasting Company and the Montreal Gazette.
Three years ago, the Montreal City Council rode to the rescue of Public Bike System, also known as Bixi, by approving a $108 million bailout package.
It included a $37 million loan to cover the company’s operating deficit and $71 million in loan guarantees Bixi hoped to use to expand into other cities.
On Monday, the CBC quoted Coderre as saying his city would seize control of the troubled company’s $11 million in local assets, rather than sink even more money into it.
“If Bixi can be saved, It’s through the Bankruptcy and Insolvency Act,” the Montreal mayor was quoted as saying.
The CBC quoted the troubled company as tying its cash-flow problems to the development of “new proprietary technology for international clients.”
The story further claimed that “persistent delays and problems with the technology” had prompted “many clients,” including Chicago, to withhold payments. Chicago and New York together owe Bixi $5.6 million, according to the CBC.
Until Monday, Chicago’s Divvy program appeared to be rolling along smoothly with the only hiccup being Chicago’s heavy snow and record cold.
In November, Mayor Rahm Emanuel’s office announced plans to use a $3 million federal grant to add 75 more stations. At the time, the program had already resulted in 650,000 trips over 1.5 million miles and sold more than 125,000 daily passes and 11,000 annual memberships.
The 75 stations planned for next year would have made Chicago’s bike-sharing program the largest in North America — bigger than New York and Montreal.
But, Monday’s bankruptcy filing by Divvy’s supplier calls the expansion into question.
City Hall and Ron Burke, executive director of the Active Transportation Alliance, had no immediate comment, either on the bankruptcy filing or the city’s apparent decision to withhold payment from Bixi.
Elliot Greenberger, deputy general manager for Divvy Bike-Sharing Chicago, could not be reached.
Two years ago, the Emanuel administration delayed the launch of Chicago’s bike-sharing program as Inspector General Joe Ferguson continued to investigate a rival bidder’s claim that the bid process was greased for Alta, an Oregon company that once hired newly-departed Transportation Commissioner Gabe Klein as a consultant.
At the time, problems with Alta’s newly-developed Bixi software to keep track of rented bikes and accept rider payments had also stalled the company’s 10,000-bike rental program in New York.
But, the Emanuel administration insisted then that neither complication played any role in the Chicago slowdown.
Wait, what? Nooo. I don't want anything to get in the way of expansion!
I'd be more concerned about replacement parts for the existing infrastructure.
Christine (5.0) said:
Wait, what? Nooo. I don't want anything to get in the way of expansion!
My heart just got that sinking feeling.
MONTREAL — Bixi was not supposed to cost them a cent but Montreal taxpayers could be on the hook for tens of millions of dollars, the city admitted Monday.
The bike-sharing service's debt is almost $50 million.
Citing Bixi's "grim financial portrait," Mayor Denis Coderre announced he had forced the city-controlled non-profit company to enter bankruptcy protection.
Though he wants Bixi out of the international bike-sharing business, Coderre said he would like to see Bixi continue to roll in Montreal.
"We will have Bixi in Montreal this summer," he said, noting many users have purchased memberships. Keeping Bixi operating in the city in 2014 could cost taxpayers a further $1.5 million.
Coderre was less definitive about whether Montrealers will have access to bike-sharing beyond 2014.
Bixi is unable to neither "meet its financial obligations nor find a viable short-term solution," Coderre said. That was causing "uncertainty regarding the possible recovery of the sums injected by the city."
Bixi owes the city $31.6 million on a $37-million city loan. Montreal also guaranteed a line of credit on which Bixi owes $6.4 million.
That means Montreal taxpayers could be stuck with a $38-million bill, though the city hopes a sale of the international part of the business will cut that amount.
Bixi also owes its suppliers $9 million.
In total, then, Bixi's total debt is at least $47 million.
Bixi is also embroiled in multimillion-dollar lawsuits with a former software supplier.
Montreal's auditor general had warned the city about Bixi's precarious situation.
In September, Jacques Bergeron expressed "serious doubts about Bixi's ability to continue operations." At the time, the city denied Bixi was on the brink of bankruptcy.
Bixi has operated Montreal's popular bike-sharing service since May 2009.
Though backed by the city, the company has refused to make public basic information about its operations.
For example, Bixi's 2012 financial statements have yet to be disclosed. For 2013, all Bixi would say is that it had 41,000 Montreal members and that it operated with a deficit of about $4.5 million.
Coderre, who took power in November, promised his administration will "keep Montrealers informed about any new developments regarding Bixi."
The mayor said "if Bixi can be saved," it is through bankruptcy protection, which will allow Bixi to restructure and give it time to sell its international arm.
But Coderre admitted previous attempts to sell off that part of the business have failed. On Monday, he disclosed that for the second time, a potential buyer walked away from a deal after taking a closer look at Bixi's books.
Under former mayor Gérald Tremblay's plan, devised in 2007, the sale of the Bixi system to other cities would completely finance bike-share operations in Montreal.
It did not work out that way.
Bixi was stymied by legal disputes, software glitches, upgrade delays and, most recently, by New York City and Chicago withholding payments, claiming Bixi was not fulfilling its end of the bargain.
Since 2012, Bixi has been in a legal dispute with 8D Technologies, the Montreal firm that provided the software for initial Bixi stations. The dispute arose after 8D refused to sell all the rights to the software. Bixi hired a company to build software to replace 8D's in future systems.
That software, initially plagued with bugs, is now used by several cities.
The latest problems involve back-end software under development by Bixi.
It is used by cities to track and analyze usage, among other things. Bixi admits it has been late in providing promised updates, angering New York and Chicago.
Bixi chief executive Michel Philibert said Chicago owes Bixi $2.6 million. New York City owes $3 million. In addition, Alta Bicycle Share, the company that operates New York's service, has told Bixi it wants $11 million in damages for software delays.
Such disputes are common in business. But Coderre said a city should not be involved in commercial enterprises.
He called the international expansion "a mistake." The city "embarked on commercial operations that it should not have been involved in. ... It is not up to taxpayers to assume the financial risk involving a business plan."
The opposition at city hall backed Coderre's move.
Projet Montréal leader Richard Bergeron said when the dust settles, the system could end up costing taxpayers $25 million or more.
He blamed wrong-headed decisions by the Tremblay administration, which shovelled money into Bixi to create an innovative system that would sell internationally. Instead, it should have focused on developing a basic, inexpensive system for Montreal.
Bergeron said Montreal's transit authority, the Société de transport de Montréal, has already drawn up a contract that would see it take over Bixi's Montreal operations, though it wants nothing to do with the service's debt.
Whether the STM or a private company runs the system, "Bixi will be in the streets in 2014 and there's no reason why it shouldn't be on the streets in 2015, 2016 and so on," Bergeron said. But "it will be a public service, as it should have been from the very beginning."
That means an annual city subsidy, which Bergeron estimated would range from $1.5 million to $2 million.
"That is not too much for such a service, with more or less 2 million trips a year," he said. "If you pay $1.5 million for 2 million trips, it's 75 cents per trip. That's perfectly acceptable and affordable."
Bergeron compared Bixi to public transit: Bixi users pay a fee but not the full cost.
The bankruptcy protection process gives Bixi an initial 30 days to restructure. That period can be extended for up to six months, the city said.
Bixi employees 66 people. "No job losses are expected at this time," the city said.
BIXI BY THE NUMBERS
$31.6 million: Amount Bixi still owes the city of Montreal on $37-million loan.
$6.4 million: Bixi line of credit, guaranteed by Montreal taxpayers.
$1.5 million: Estimated amount it could cost the city to ensure Bixi service operates in Montreal this year.
$4.5 million: Bixi's estimated deficit for 2013 (financial results have not been made public).
$9 million: Amount Bixi owes to suppliers.
$3 million: Overdue amount owed by New York City to Bixi.
$11 million: Amount that Alta Bicycle Share, the company that operates New York's bike-share service, has told Bixi it wants in damages for software delays.
$2.3 million: Overdue amount owed by Chicago to Bixi. That city, too, is unhappy with software delays.
37,000: Number of Bixi bikes in operation around the world.
15: Number of cities that have adopted Bixi, including London and New York.
5,000: Number of Bixis on Montreal streets in 2013
One of the better reads from the list-o-sphere:
An interesting comment on reddit about this. I can't vouch for it, but the person sounds knowledgeable.
As a Montrealer who followed closely Bixi and its organization, let me explain to you why it won't be much of a problem for Divvy (or other systems in NYC, Washington or Minneapolis). It'll cause delays, but it won't shut down the whole thing.
Bixi didn't file for bankruptcy as in they're closing shop; they filed for protection in order to reorganize. They have to settle their debt, but they're still operating meanwhile. And their creditors are definitely going to settle this as their main creditor is the city of Montreal who would have to absorb the debt in case of default. That would be too much of a political problem and the city will do anything to save the company. There's also a consensus around here that Bixi is important for the city and scrapping it would be a political suicide.
The actual situation stems from the fact that Bixi has had a rough start. Montreal wanted a bike share system and, instead of buying an existing system, they created a new one. It hoped to sell the concept abroad to finance the installation of the local system. This kind of activity is clearly outside of a city's jurisdiction, so Bixi was created as a subsidiary of the Board of Trade (who gets its financing from the parking meters and the city), with the city as a guarantor. Eventually, the provincial government examined the organization and decided that the international activities couldn't be financed (even indirectly) by the city and forced it to sell that part of the company. That was two years ago and since then it's been on sale.
Each city's system is profitable (or about to be). The export part of the business isn't in great trouble either. However the company grew a little bit too fast and its corporate structure made it difficult to get credit. Since the beginning, Bixi has been on the verge of going down. The obligation for Bixi to sell its international activities have repelled potential new markets. And when Chicago and NYC decided to retain a part of their payment a few months ago, it was just too much and the city of Montreal decided to force Bixi into bankruptcy to reorganize itself. There is enough value in that company in terms of intellectual property and possible revenues to sell it and cover Bixi's debts. There were a few serious offers already. As soon as it's sold, it'll continue to grow again. It's a financing and corporate structure problem, not a profit problem.
BTW, Chicago and other US cities are dealing with Alta Bike Share (a Portland based company) that's buying the bikes and stations from PBSC (aka Bixi). That's because of the Buy America Act as a Canadian company couldn't have dealt directly with US cities. The main obligation towards Chicago is for Alta and not Bixi. Alta couldn't really sell new bikes if Bixi goes out of business, but it has could find a new way to build the bikes under license.
The problem seems to be cash flow, caused by cities imposing penalties because Bixi was unable to deliver software/systems in a timely manner. Since the software had already been developed, why was Bixi unable to deliver it in a timely manner?
The answer seems to be that Bixi is in a C$26 million dispute with the original software developer, 8D, about who owns the software and technology that the system relies upon. Much of the original docking station hardware along with virtually all of the front- and back-office software appears to have been developed by 8D as part of a joint venture agreement. Bixi eventually tried to cut 8D out of the deal and was forced to have much of the software rewritten, causing significant delays to new installations and updates to old ones. The delays and problems with the replacement code have led many cities to withhold payments, hurting Bixi's anticipated cash flow. Additionally, the potential for a multi-million dollar judgement against Bixi for the contract dispute has hurt their ability to sell new systems and to borrow money to get them through the cash flow troubles.
Bottom line: Bixi tried to part ways with 8D and 8D fought back. Partnerships are kind of like marriages - they are rarely easy to end and doing so is often messy and expensive. The new software was late and hasn't worked as promised so Bixi isn't getting paid and may also end up taking a whopping hit for breaking the contract with the original developer. Squeezed by late payments, redevelopment costs and potential damages, Bixi is out of cash, has no ability to borrow and the primary investor - the city of Montreal - wants out of what they are deciding is a venture they can't legally be a part of and which has turned into a money pit, anyway. Bankruptcy will provide Bixi with some protection, hopefully allowing them to resolve the problems they are experiencing with former partners and current customers but they are going to have to find a way to become profitable enough to pay their vendors and investors relatively quickly or they are toast.
From Montreal Examiner: BIXI vs. 8D Technologies
From the NY Times: