Gaining Momentum: PPP experience in urban mass transit projects

PPP experience in urban mass transit projects

The majority of urban mass transit (UMT) projects continue to be funded by the central and state governments. The experience with private sector participation in the sector, particularly in the urban rail segment, has been mixed. To date, public-private partnerships (PPPs) in the urban rail segment have been very limited due to factors such as low financial viability, inadequate risk allocation and lengthy dispute resolution. Other key reasons that can be attributed for such a scenario are implementation complexities, multiplicity of stakeholders and financial issues, among others. However, recently, the uptake of PPP projects on a new business model has been witnessed. Moreover, PPP has found more traction in bus rapid transit (BRT) systems.

PPP experience

The success of PPP projects in urban rail is still questionable. There have been cases of unsuccessful PPPs, where private developers have terminated their contracts with the government after the completion of the project. For example, in the case of the Delhi Metro Airport Express Line, the developer – Delhi Airport Metro Express Private Limited – a subsidiary of Reliance Infrastructure Limited, withdrew from the project after its completion in 2013, on account of a “material breach of contract” and the financial unviability of the project. Besides, in the case of the Versova-Andheri-Ghatkopar corridor of Mumbai Metro, the developer faced issues in acquiring land due to delays/absence of right of way on account of encroachments and the presence of religious structures, following which it terminated its contract with the government for Mumbai Metro, Line 2.

However, learning from past experience, Hyderabad Metro has laid greater emphasis on revenue generation from land and other commercial sources. To this end, transit-oriented development has been incorporated into the business model. This pertains to the development of commercial and retail space at metro stations. In 2010, the Andhra Pradesh government signed a concession agreement with Larsen & Toubro and a special purpose vehicle – Larsen & Toubro Metro Rail Hyderabad Limited – was formed for the development of the project under a design-build-finance-operate-transfer basis. So far, the company has operationalised 45 km of Phase I of the project – 29 km in November 2017 and 16 km in October 2018.

In the case of BRT systems, PPP projects have been prevalent partly because these systems entail only a fraction of the costs involved in metro rail development and 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 (O&M).

Policy impetus

Recognising the financing challenges of UMT infrastructure, the Ministry of Housing and Urban Affairs launched the new Metro Rail Policy, 2017, in November 2017. The policy aims at encouraging PPP by tying private participation to central assistance through diverse structures and models such as the O&M, equity sharing models.

With the launch of the policy, in October 2018, the first UMT project was awarded to a consortium of TRIL Urban Transport Private Limited (a Tata Group company) and Siemens Project Ventures by the Pune Metropolitan Region Development Authority for the development of Pune Metro, Line 3 (Hinjewadi–Shivaji Nagar). The construction is scheduled to commence by June 2019 and completed within a span of three years. Tata Projects will be the engineering, procurement and construction partner supporting the consortium.

Challenges and the way forward

Until now, the performance of PPPs in the sector has been mixed. Issues surrounding PPP-led projects include legacy issues, risk identification, overestimated ridership, risk allocation, regulatory delays and land acquisition-related problems. While the policy push provided by the government aims to overcome the financing challenges in the sector by providing diverse structures and models, its success in bringing greater private participation into the sector is yet to be seen.

Even though these initiatives are necessary to successfully attract PPPs, significant attention will also need to be paid to improving the risk allocation in concession agreements, ensuring the availability of low-cost debt funding, and putting in place a robust dispute resolution mechanism.