Urban rail projects have been mainly funded by the central and state governments (and in some instances, urban local bodies [ULBs]) along with debt financing from various multilateral funding agencies. The major source of income for mass transit projects is fare box revenue. However, due to low fares, these revenues alone are not sufficient to cover the operating costs. Non-fare box revenue, another source, has started witnessing an upward trend, accounting for over 50 per cent of the total revenues collected by some projects like the Delhi metro, the Gurgaon Rapid Metro and the Chennai metro. This can be largely attributed to the innovative sources of revenue such as train wrapping, semi-naming rights and branding of stations being explored.
The joint venture model has been the most dominant in the metro rail sector, with both the central and state governments sharing project costs in a 50:50 ratio. Some of the key metro projects funded under this model are those in Delhi, Mumbai (Line 3), Chennai, Bengaluru and Nagpur.
The role of private developers has been quite limited so far, owing to issues such as low financial viability, long payback period and high capital expenditure. For the four operational metro projects (Gurugram, Delhi Airport Express, Mumbai and Hyderabad) implemented on a public-private partnership (PPP) basis, equity contributions were in the range of 20-30 per cent. Engineering, procurement and construction (EPC) has been the preferred mode of project implementation.
Value capture financing
Around the world, various cities have tried to capture value from land and use it to develop infrastructure. Cities in India, too, have resorted/are resorting to such measures. However, the potential of value capture financing (VCF) is yet to be fully exploited as VCF has not been systematically deployed. Limitations in existing legislations and political constraints in fixing rates have restricted its use, along with the absence of provisions for ring-fencing revenues for capital investments. Notwithstanding these challenges, the Value Capture Finance Policy Framework was released in February 2017 to improve the financial health of ULBs. In addition, the Metro Rail Policy, 2017, also urges states to adopt VCF tools to mobilise resources for financing metro projects.
The following are some examples of VCF tools in the Indian context.
- Both the Delhi and Haryana governments have notified the transit-oriented development scheme wherein higher floor space index (FSI) will be provided on both sides of the metro corridors to partly finance the project.
- The Bangalore Metro Rail Corporation proposed a revenue-sharing model of land value capture keeping in mind all the agencies involved in provisioning infrastructure and other public amenities. These include the municipality, the water and sewerage board, and the development authority.
- The Karnataka government has decided to create a dedicated fund for investment in
mass transit systems using VCF, such as fixing premium FSI and levying fees for change of land use in the vicinity of a project.
- The Maharashtra government is levying a 1 per cent surcharge on stamp duty to fund vital urban transport projects related to mass rapid transit systems such as metro rail, monorail, freeways and sealinks.
Non-fare revenue streams
Non-fare box revenue sources play a very crucial role in improving project viability and ensuring sustainability of metro projects. Factors that strongly influence non-fare box revenue collection include ridership, type of consumers, availability of commercial space at the station, and quantity and quality of local transport services like rickshaws, autos and buses near metro stations.
The Bengaluru metro has witnessed a quantum jump in its non-fare revenue from Rs 202 million in 2016-17 to Rs 440 million in 2017-18 on account of licence fees levied on retails outlets, ATMs, parking lots, etc. In the Delhi metro, Uber kiosks have been set up at the Sikandarpur, Dwarka Sector 21 and Rajiv Chowk metro stations. Further, in the Gurgaon Rapid Metro, companies including Vodafone, Micromax, Airtel and IndusInd Bank have branded themselves at stations by lending their names. Since 2014, the Delhi Metro Rail Corporation has been auctioning naming rights of select stations to companies and public sector undertakings. As part of the station naming spree, the Vishwavidyalaya station has become Honda 2 Wheelers Vishwavidyalaya and the Noida City Centre station is now Wave City Centre, Noida.
Bright outlook
With a strong project pipeline, the urban rail sector presents significant opportunities for various stakeholders. Over 25 cities in the country will have metro rail networks in the coming years. The policy and regulatory environment has seen continuous improvement, but private participation is still limited. Though the Metro Rail Policy, 2017, aims to reinvigorate PPPs, private players will take time to step up investments in metro projects. Metro rail corporations will continue their efforts to enhance non-fare revenues. To this end, variants of VCF such as betterment levy and premium on FSI will become crucial to bridge the financing gaps. These are expected to reduce the dependence on government allocations and improve financial returns of urban rail projects.