The experience with the public-private partnership (PPP) model in the metro rail segment has not been very good. Sweeteners such as land parcels at prime locations failed to elicit an encouraging response. The key reason for the failure of the PPP model was that it was not a profitable business deal for the private sector. While the infrastructure that has been created through the PPP route so far is undoubtedly a good asset, the process of project execution and running operations has been quite challenging and warrants a great deal of attention from both the government and the private sector itself. Moreover, the PPP model has found greater traction in bus rapid transit (BRT) systems.
Experience so far
In India, at present, there are four operational metro projects that were developed in the PPP mode. There are examples such as the Delhi Metro Airport Express Line where the developer withdrew from the project after its completion in 2013, on account of a breach in contract and issues with the financial viability of the project. The Delhi Metro Rail Corporation (DMRC) is making an effort to revive ridership on the line. In the case of the Mumbai metro, the developer faced issues in acquiring land due to delays/absence of right of way (RoW) on account of encroachments and presence of religious structures. The Mumbai Metropolitan Region Development Authority therefore handed over only 45 per cent of the land to initiate construction, instead of the 59 per cent promised. Further, the operational Gurgaon Rapid Metro has been witnessing revenue shortfalls due to low ridership, rendering both the special purpose vehicles (SPVs) (for Phase I and II) loss making. However, in March 2018, IL&FS Rail Limited saw its non-fare revenue rise higher than the fare segment, accounting for at least 50 per cent of the total revenues collected. Later, with the IL&FS Group running into a financial crisis, DMRC took over operations of the Rapid Metro with effect from October 22, 2019.
Acclaimed as the world’s largest metro project being implemented on a PPP basis, the Hyderabad metro has put to rest questions about its viability, clocking a daily ridership of over 250,000, as against estimates of 60,000 passengers per day with the partial opening of Phase I. The SPV has ascertained its transit-oriented development, branded Hyderabad Next, as a vital component of its business model, will contribute to about 50 per cent of the overall revenues, with the rest coming from ridership and advertising. For earning higher advertising revenues, the SPV seeks to leverage transit-oriented advertising to provide better brand recall. Overall, the Hyderabad metro’s PPP experience has been encouraging.
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, Indore, Rajkot, Bhopal, Raipur, Amritsar and several other cities have involved the private sector in the provision of bus services, particularly for operations and maintenance.
Challenges
Due to long gestation periods and the capital-intensive nature of metro projects, these projects render a return of not more than 3 per cent vis-à-vis private players’ return expectation of 12-15 per cent. Also, as the fares cannot be hiked steeply and there are cost and time overruns, metro projects generate unstable revenue streams. Hence, private players do not find this sector a viable proposition for investment. Another issue is the procurement of RoW and land. The responsibility of procuring RoW and land rests with the concerned state government. Acquisition by private players is very difficult due to lengthy procedures involved. Moreover, there is no effort on the part of the central government to reduce unit (per km) costs of metro projects through tax concessions or higher equity participation.
The way forward
In India, political and bureaucratic constraints, such as fragmented decision-making due to the involvement of multiple public agencies, the emphasis on administrative procedures rather than on strategies and results, and the lengthy tendering process, are among the key problems for implementation of PPP projects in public transportation. That said, there are also reasons in favour of PPPs in metro projects. The structure helps in speedy, efficient and cost-effective delivery of projects, apart from yielding better value for money and high performance. The accountability and risk rest with the private sector. However, the success of a project will depend on the contract agreement (PPP framework) that the owners enter into with the construction company.
The Metro Rail Policy, 2017, aims at encouraging PPPs through diverse structures and models such as operations and maintenance, equity sharing mode, etc. The state government also plans to adopt value capture financing and issuance of corporate bonds to address its financial woes and incentivise indigenous development and manufacturing of imported components. However, these initiatives alone will not be sufficient to attract private players. Emphasis will also need to be laid on improving the risk allocation in concession agreements, and ensuring availability of low-cost debt funding and the presence of a robust dispute resolution mechanism.