Investment Options

Urban mass transit (UMT) is a highly capital-intensive segment and is funded mainly by the central and state governments along with debt financing from various multilateral funding agencies. These agencies play a vital role as they generally constitute 30-60 per cent of the total project cost of a metro project. They furnish loans at cheaper interest rates and also provide technical assistance in some cases. Their strict compliance requirements and due diligence ensure that metro authorities establish safeguard measures and environmental baseline for sustainable development and the protection of the environment. How­ever, despite the assistance provided by multilateral agencies, there are various issues with me­tro rail projects, as these projects put a heavy burden on developers in the form of loan repayment and interest payment. Further, the low financial return often impedes private investment in such big-ticket projects as the social welfare component in UMT projects outweighs typical business considerations such as profits.

Recent funding trends and developments

UMT projects have gained traction in the past few years due to increasing population in major cities of the country. The Union Budget 2020-21 had set aside Rs 200 billion for mass rapid transit system (MRTS) and metro projects, registering an almost 6 per cent jump from Rs 189 billion apportioned in 2019. Meanwhile, the Union Budget 2021-22 has significantly em­phasised on the infrastructure sector to kick-start the economy, which was severely hit by the pandemic. Thus, the year 2021-22 saw the highest outlay of Rs 235 billion for metro projects during 2015-22. The central government’s contribution to the funding of metro projects is currently around Rs 1,510 billion. Further, funds pitched in by private partners in the case of public-private partnership projects are approximately Rs 160 billion.

The joint venture model has been the most prominent in the metro rail sector, with both the central and state governments sharing the costs of the respective projects in a 50:50 ratio. Some of the key projects funded under this model are Delhi Metro, Mumbai Line 3, the Chennai, Bengaluru and Nagpur, etc. Further, there is an increasing trend of financing from local bodies, financial institutions and commercial banks. Innovative sources of funding are also being explored by the government, such as equity participation, leasing and commercial exploitation of lands, and corporate bonds. The Kochi Metro Rail Cor­po­ration is planning to come up with a bond issue for funding metro expansion plans.

Value capture financing (VCF) is also gaining prominence in the arena of funding of UMT projects. VCF works on the conviction that public policy and infrastructure projects typically lead to positive externalities such as improvement in the quality of housing, job access and transportation, and the emergence of commercial, cultural, institutional or residential developments in the influence area. Appropriate VCF tools can be deployed to capture a part of the increment in the value of land and buildings. In turn, these can be used to fund projects being set up for the public by the central/state governments and urban local bodies (ULBs).

VCF also has several limitations such as issues with existing legislations, political constraints in fixing rates and absence of provisions for ring-fencing revenues for capital in­vest­me­nts. Despite these challenges, the Value Cap­ture Finance Policy Framework was laun­ched in Feb-ruary 2017 to improve the financial health of ULBs. The Metro Rail Policy, 2017 urges states to adopt VCF tools to mobilise resources for fi­n­ancing metro projects.

New revenue streams

Metro rail corporations are looking at various avenues for inc­reasing their revenues. Property development, sale of commercial spaces, station semi-naming rights, train wrapping, ATM licen­ce fee, higher property tax in the MRTS in­fluence zone, licensing for telecom equipment and fibre optics, advertisements, additional sta­mp duty, etc. are gaining a lot of traction.

Commercial and retail activities in and around stations are being promoted to further en­hance revenue generation. Realty firm Pacific India has completed the shopping mall and multilevel car parking project in Dwarka. The company will pay Rs 150 million annually to the Delhi Metro Rail Corporation during the 25-year lease period. Meanwhile, in the Delhi metro, Uber kio­sks have been set up at the Sikanderpur, Dwa­r­ka Sector 21 and Rajiv Chowk metro stations.

Property development and real estate development are also being explored as potential sources of revenue generation for UMT projects. L&T, the concessionaire for the Hydera­bad metro, has so far commissioned three malls as part of the overall metro project development plan. There is further potential to develop 3.5 million sq. ft comprising commercial retail and grade A office space.

The road ahead

Due to the large upfront investment requirement, low profitability and an extremely long gestation period, the majority of urban transport projects continue to be funded by the government. Apart from the government, multilateral and bilateral agencies will have a crucial role to play in financing these projects. Hence, going forward innovative financing sources need to be actively tapped by metro authorities.

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