Challenging Economics: Need to ramp up non-farebox revenues

Need to ramp up non-farebox revenues

The urban mass transit (UMT) segment continues to be funded largely by the government, with allocations from the central and state governments. Multilateral funding too plays an important role. Upfront financing of UMT projects is just one aspect, the other being financial sustainability of such ventures. The economics of UMT is such that farebox collections are hardly ever enough to recover costs. At the same time, there is social pressure to keep fares low. Many metro rail corporations are now focusing on non-fare revenue sources. Also, the public good nature of UMT makes typical business considerations such as profits difficult to pursue.

Public funds alone are insufficient to meet the investment requirements of the country’s public transport systems, given the massive capital expenditure involved in building UMT infrastructure, particularly metro rail systems. It is to be noted that the operating expenses of UMT projects typically command up to half of the total life cycle expenditure, making steady income flows an imperative.

The funding challenges for bus rapid transit (BRT) systems are similar though these projects entail a capital expenditure of only 8-20 per cent of a metro rail project. Given the existing funding challenges, the centre has issued directives urging state and local governments to explore innovative financing options such as value capture financing (VCF), advertisements, leasing of space, etc.

Innovative financing options

Closely linked with the financing of UMT projects is the strategy of transit-oriented development (TOD), which is a variant of land value capture, based on the increased value of land due to public investments in infrastructure.

In line with TOD strategies, metro rail corporations in Lucknow, Delhi and Bengaluru have already started to benefit from additional floor area ratio (FAR) in areas through which the metro lines pass. The additional land from the increased FAR has the potential to be a major stream of revenue for metro corporations. For example, between 2005 and 2009, the Delhi Metro Railway Corporation (DMRC) earned 30 per cent of its income by selling development rights to land around metro stations to real estate developers. Likewise, the revenue expectation from property development along the Hyderabad metro corridor is equal to the estimations of farebox collections.

Land value incremental tax, the transfer of development rights (TDR), premium on floor space index (FSI)/FAR, land-use change fee, etc., are all variants of VCF which find mention in the Ministry of Housing and Urban Affairs’ (MoHUA) VCF Policy Framework, 2017, as well as the Metro Rail Policy, 2017. These are expected to play a key role in improving non-fare revenue of metro rail corporations.

Further, debt financing as a means to fund urban transport has gathered momentum, with the Bangalore Metro Rail Corporation (for the first time in India) going to the market and raising Rs 3 billion through bonds, that too with a favourable credit rating.

Perhaps taking a cue from this experience, the MoHUA is mulling allowing the issue of tax-free bonds by the country’s metro rail corporations. Tax-free bonds may incentivise higher subscription and help mobilise more funds.

These financing mechanisms are also being leveraged by BRT systems. For instance, the Pimpri Chinchwad Municipal Corporation is utilising innovative instruments such as TDR, incremental FSI, development charges, etc., for increasing revenue generation from its BRT project. It projects a revenue generation of Rs 8.71 billion through TDR by 2024, accounting for about three-quarters of the total revenue from the BRT project.

Also, since urban local bodies play a big role in funding BRT projects in particular, municipal bonds, now widely in use, also constitute a funding source for BRT systems.

The way forward

The UMT segment continues to operate with the limitations of challenging economics. At present, the operating cost of metro projects is very high. Take the DMRC, for example. It is arguably the most successful UMT project in India with ridership levels touching new highs every year. But the year (2015-16) in which it carried 2.59 million passengers per day, it also reported a loss of Rs 7.08 billion. Recent fare hikes meanwhile carry an imminent threat of ridership loss, with implications for revenue generation. Cost optimisation and improved energy efficiency could help in reducing operations and maintenance costs.

Going forward, even as government and multilateral agencies seem likely to remain predominant financiers, TOD, VCF and bond issues are expected to substantially raise revenues. These will not only plug financing gaps but also raise the financial sustainability of UMT projects.