PPP in Metro Rail Projects: Constraints and Opportunities

The PPP model as a part of the New Metro Policy aims at lessening the burden on the Central government in funding metro projects.

0
948
PPP in Metro Rail Projects: Constraints and Opportunities
PPP in Metro Rail Projects: Constraints and Opportunities
The Government of India has made Public-Private Partnership (PPP) component mandatory for states for availing central assistance of new metro projects as part of its New Metro Rail Policy, 2017. Private investment and other innovative forms of financing of metro projects have been made compulsory to meet the huge resource demand for capital intensive high capacity metro projects. As per the Metro Policy, “Private participation either for complete provision of metro rail or for some unbundled components (like Automatic Fare Collection, Operation & Maintenance of services etc) will form an essential requirement for all metro rail projects seeking central financial assistance”. This development has raised the question whether PPP model can be successful for metro rail projects in India.

The PPP model as a part of the New Metro Policy aims at lessening the burden on the Central government in funding metro projects. This is not the first time that the PPP model has been tried in India. The first partnership model had been tried in the airport line of Delhi Metro Rail Corporation (DMRC). However, this attempt was not successful. Reliance Infrastructure became the country’s first private company to join the initiative, but abandoned it due to huge losses. Mumbai Metro Line-1 and Hyderabad metro rail have been taken up as PPP project with Viability Gap Funding (VGF) from Government of India. The Rapid Metro in Gurugram is an initiative of Government of Haryana where full funding is by the private concessionaire.

Constraints

The major issues, related to PPP in metro projects in India are commercial viability and procurement of Right of Way (RoW) and land. Metro projects are high capital intensive. Private players look for a return of around 12-15 per cent, while no metro project has yielded an investment return of more than 3 per cent. Metro projects are also long-haul projects and will take long time to break-even. The returns can only be generated by steep hike in their fares, but this is a problematic prospect for various reasons. The collection of revenues is highly uncertain in most of public transportation projects. The private investment has not been successful in Airport Metro Express Line because the usually unstable revenues which make them commercially unviable.  A trade-off is then often present in the case when the financial rate of return is below the market rate for private funds; some form of public support is required to make the project feasible (viability gap funding). The financial rate of return may be improved by way of additional user charges then economic rate of return may be affected negatively.

Another issue is the procurement Right of Ways (RoW) and Land. The responsibility of procuring RoW and land rests with the concerned state government. Private acquisition is very difficult with lengthy procedures and social considerations also need to be addressed, which is a challenging assignment.   In Mumbai Metro Line 1, Reliance Infrastructure took almost 7 years to complete 11 km of the relatively easier elevated line. This is due to delay in receipt of unencumbered Right of Way (RoW) / land by Government & Mumbai Metropolitan Region Development Authority (MMRDA). So delay of procurement of RoW and land is another obstacle for PPP projects.

In India, it is seen that political and bureaucratic constraints, such as fragmented decision making due to the involvement of multiple public agencies, the prevalent emphasis on administrative procedures rather than on strategies and results and lengthy tendering process (normally split in three or four phases, from planning to final operation) lead the problems for implementation of PPP projects in public transportation.

Opportunities

But there are also reasons in favour of PPP in metro projects. The PPP structure will help speedy, efficient and cost effective delivery of projects apart from better value of money and high performance incentives. The accountability and risk is with the private sector. But the success of the project will depend on the contract agreement (PPP framework) that the owners enters into with the construction company.

Way Forward

As cities are growing at a fast pace, metro will be an important constituent of the transport mix. Metro is more capital-intensive as it requires everything from land acquisition to civil works, signalling, and rolling stock. The capital-intensive nature of such projects does not allow private players to get a return on their investments easily. The metro has several externalities that make it imperative for the government to subsidize it. From enhanced mobility, to its relatively low carbon footprint, metro usage has benefits that cannot be measured through the purely commercial yardstick of profit and loss. So instead of PPP, state governments should give more emphasis for adopting innovative financing mechanisms like Value Capture Financing tools to mobilize resources for financing metro projects by capturing a share of increase in the asset values through ‘Betterment Levy’. The government has also to ensure affordable public transport and hence it must invest in it. To ensure that least cost mass transit mode is selected for public transport, the New Metro policy mandates Alternate Analysis, requiring evaluation of other modes of mass transit like BRTS (Bus Rapid Transit System), Light Rail Transit, Tramways, Metro Rail and Regional Rail in terms of demand, capacity, cost and ease of implementation.

(The author is Manager (Transportation), Bangalore Metro Rail Corporation Ltd.)
If you want to share your views and experience with urban mobility projects in India and around the world please share us your story/article at editor@metrorailnews.in

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.