Most urban mass transit projects continue to be funded by the central and state governments. To date, the role of private developers has been quite limited owing to issues such as low financial viability, long payback periods and high capital expenditure requirements. While the Metro Rail Policy, 2017, envisaged an important role for the private sector, private companies are still reluctant to invest in metro rail projects. Looking at the past track record, even deal sweeteners like land parcels at prime locations have failed to generate the desired interest. The public-private partnership (PPP) model though has been able to find greater acceptance in bus rapid transit systems (BRTSs).
Experience so far
At present, there are four operational metro projects that were developed on a PPP basis – the Delhi Airport Express Line, Rapid Metro Gurgaon, Mumbai metro, Line 1, and Hyderabad metro.
The Delhi Airport Express Line PPP was considered to be a complete failure, with the private player, Reliance Infrastructure (RInfra), abandoning the project on account of it being financially unviable. Passenger volumes on the metro line fell far short of the estimated target, clocking only 6.8 million passengers in the first 18 months of operations. The Delhi Metro Rail Corporation is now making efforts to increase ridership on the line.
The Rapid Metro Gurgaon was another unsuccessful PPP project. The high cost of borrowing, low ridership and unsuitable location were some of the reasons that rendered the project unviable. Both the lines were built in areas that had low ridership. The two special purpose vehicles (SPVs) set up by Infrastructure Leasing & Financial Services – Rapid Metro Rail Gurgaon Limited and Rapid Metro Rail Gurgaon South Limited – which have been running the Rapid Metro since 2013 and 2017, respectively, served termination notices to the state government in June 2019 alleging a breach of contract.
Commissioned in June 2014, Mumbai metro, Line 1 witnessed several delays, primarily because of issues in acquiring land due to delays in/absence of right-of-way (RoW) permits on account of encroachments and religious structures. RInfra-led Mumbai Metro One Private Limited failed to complete the project before the deadline due to various factors such as changes in design, rupee depreciation, space crunch, utility shifting and getting of approvals, litigations, addition of extra coaches and delays in receiving permissions from Indian Railways.
However, learning from past experience, Larsen & Toubro Metro Rail Hyderabad Limited (LTMRHL), the SPV incorporated for the development of the Hyderabad metro project under the design-build-finance-operate-transfer mode, has laid greater emphasis on revenue generation from land and other commercial sources. LTMRHL’s transit-oriented development (TOD) initiative, branded Hyderabad Next, is a vital component of its business model. TOD is expected to account for about 50 per cent of the overall revenues, with the rest coming from ridership and advertising. For advertising revenues, the business model seeks to benchmark and transform the transit-oriented advertising industry to provide better brand recall.
With regard to BRTSs, PPP projects have been popular partly because these systems entail only a fraction of the cost involved in metro rail development.
Weak points
The low rate of return is one of the major deterrents to private interest in the metro rail segment. While private players usually look for a return of 12-15 per cent in an infrastructure project, returns in the urban rail segment typically lie between 2 per cent and 3 per cent. Further, metro projects generally have long capital cycles, with a huge quantum of funds required in the first phase itself. While all PPP projects qualify for viability gap funding from the government, issues arise in case of time overruns, when costs escalate exponentially, thereby affecting project viability. Limitations on fare hikes due to the socialist nature of the service also pose a challenge for capital recovery.
The involvement of several stakeholders is yet another issue faced by PPP projects, as this leads to uncoordinated implementation and unaligned interests. Further, the absence of a regulatory authority and an effective dispute resolution mechanism often leads to delays in implementation as well as cost overruns. Acquisition of private land and grant of RoW, traffic management, shortage of manpower, selection of technology, utility diversion, etc. are some of the other problems faced by private contractors in project implementation.
Opportunities galore
While the PPP experience in the sector so far has not been very encouraging, the opportunities emanating for private players are aplenty, particular in the area of operation and maintenance (O&M). The operation of trains and stations is a key area where private players can be roped in. In this context, Chennai Metro Rail Limited (CMRL) handed over the O&M of six metro stations on the Thirumangalam-Chennai Central stretch to private players in September 2019. Besides, CMRL also has plans to involve private operators to run trains under Phase I. Bangalore Metro Rail Corporation Limited too is planning to lease metro trains from private firms for the R.V. Road-Nagawara, Silk Board-K.R. Puram and K.R. Puram-Kempegowda International Airport corridors of Phase II, as well as for the corridors proposed in Phase III of the project. Meanwhile, the Ministry of Housing and Urban Affairs has approved the proposal for the involvement of private players in running trains on the corridors proposed under Delhi metro, Phase IV. This will be the first time in the country that private operators will be roped in for running of trains.
The Metro Rail Policy, 2017, also envisages an important role for private players. It seeks to introduce PPP as an essential component in the sector by making it mandatory for all urban transport projects seeking central assistance. Since the release of the policy, a number of metro projects have been planned for implementation in the PPP mode. The Pune metro rail project (Corridor III) will be the first metro project in the country to be undertaken on the PPP model after the introduction of the policy. The project has been awarded and is expected to be completed by March 2023. In January 2020, the Maharashtra government approved the extension of the Pune metro, Phase III corridor from Hinjewadi-Shivajinagar till LoniKalbhor that is to be developed on a PPP basis.
The 5.42 km Gujarat National Law University-GIFT City corridor under Phase II of the Ahmedabad-Gandhinagar metro rail project has also been proposed to be developed on the PPP model. The project was approved by the state government in February 2019.
Meanwhile, the Mumbai Metropolitan Region Development Authority (MMRDA) and the City and Industrial Development Corporation have proposed the development of Line 8 of the Mumbai metro rail project. The MMRDA is likely to consider either the PPP model or the Swiss Challenge method for developing the project. The Maharashtra government has also approved the development of the 45 km Line 14 of the Mumbai metro on a PPP basis. The project is presently at the detailed project report preparation stage.
The way forward
So far, the performance of PPP projects in the metro rail segment has not been up to the mark. Issues such as fragmented decision-making, discrepancies in ridership estimates, poor record of underground utilities, and high cost of financing for the private concessionaire have been impediments in the implementation of PPP projects.
While the metro rail policy is aimed at encouraging greater private participation and state governments are planning to adopt value capture financing and incentivise indigenous manufacturing of imported components, greater emphasis needs to be laid on improving the risk allocation in contract agreements. In addition, ensuring the availability of low-cost financing and the presence of an effective dispute resolution mechanism is imperative.
Taking into consideration the lacuna in financing, there is a need to structure PPP projects properly. Customised contracts, divided into smaller parts, should be developed to attract private players with smaller pockets as well. In this regard, O&M of trains and development of infrastructure for first- and last-mile connectivity could be undertaken on a PPP basis.