Limited Success: PPP in UMT yet to take off

PPP in UMT yet to take off

The government – central as well as state – continues to fund the majority of urban mass transit (UMT) projects. Private sector participation in the sector, particularly in the metro rail segment, has so far been limited due to high construction costs, and long gestation and payback periods. Contractors are more comfortable undertaking engineering, procurement and construction (EPC) projects, which have no financial risk, as compared to public-private partnership (PPP) projects. Only a few cities such as Delhi, Hyderabad, Gurugram and Mumbai have been able to mobilise private funds.

The most common financing pattern of UMT projects is where the majority of the funds are provided by the central, state and local governments. But realising the inadequacy of government funds and overseas development assistance in meeting UMT infrastructure funding needs fully, the government has recently launched a raft of measures in support of PPPs for UMT. However, these initiatives are fairly recent, and are yet to show any significant impact.

PPP experience and new policy initiatives

The success of PPP-based projects in the urban rail segment is still debatable. On the one hand, there are unsuccessful PPP examples of the Delhi Metro Airport Express Line and the Versova-Andheri-Ghatkopar corridor of the Mumbai metro; on the other hand, the Hyderabad metro project, which is yet to commence operations, is expected to change the perception of PPP being a failed model of project execution. Here, the developer has flexibility with respect to innovation and design. Contracts were awarded on financial and technical capacities taking the life cycle costs into consideration. But this flagship project, implemented with Rs 14.58 billion in viability gap funding support from the government, too has seen time and cost escalations, and instances of fear that the developer would pull out.

On the other hand, PPPs have been more prevalent in bus rapid transit (BRT) systems, partly because these systems entail only a fraction of the costs involved in metro rail development, and barring Delhi, uptake has not been a problem. Ahmedabad, Surat, Nagpur, Ludhiana, Kota, Indore, Rajkot, Bhopal, Jalandhar, Raipur, Amritsar, Jamnagar, Bhavnagar, Vadodara and several other cities have involved the private sector in the provision of bus services, particularly for operations and maintenance.

In the backdrop of widely acknowledged financing challenges in UMT infrastructure, the Ministry of Housing and Urban Affairs (MoHUA) has come out with the Metro Policy, 2017, which makes it mandatory for states to explore PPP prospects first if they want to tap into central funds for a metro project. Although it is eventually the level of industry interest – contingent on various business environment related determinants – that will drive up PPP in UMT, the policy directions are clear in terms of government readiness to leverage private participation in the sector.

Further, the Vijay Kelkar Committee on Revisiting and Revitalising Public Private Partnership Model of Infrastructure also came out with recommendations in 2015 to encourage PPP in infrastructure including in urban transport. An upcoming New Green Urban Transport Scheme, announced in November 2016, also seeks to promote PPPs and comes with a Rs 250 billion central grant component for a period of five years.

Challenges and the way forward

The performance of PPPs so far has been mixed. Issues surrounding PPP-led projects include legacy issues, risk identification, over-estimated ridership, risk allocation, regulatory delays, and land acquisition-related problems, among others.

Besides entailing vast capital expenditure, UMT infrastructure projects also have to endure challenging economics. While innovative financing mechanisms such as value capture finance, transit-oriented development and the use of debt instruments are now being leveraged, the risks are difficult to fully ascertain, and unless contracts are clear and well designed, difficult to allocate as well. Compounding problems for developers is the lack of an independent regulator and smooth dispute resolution mechanisms.

Another major issue of concern for these projects is inadequate farebox revenues. Both in Delhi and Mumbai, metro fare hikes have faced political backlash as well as court battles. The Hyderabad metro relies heavily on transit-oriented development, but the Gurugram Rapid Metro example shows that betting big on real estate development may prove costly, due to a combination of poor macro health and unpredictable consumer behaviour.

In a nutshell, PPP appears to be a better model for implementing UMT projects with respect to project management and technology selection. However, the financial viability of such projects is still questionable given the social pressures of keeping fares low. At the same time, a focus on non-fare sources of revenue can be a game changer.