PPP model in metro rail may not be a good idea

New policy makes PPP component mandatory for availing central assistance for metro projects

GN Bureau | August 17, 2017


#public private partnership   #PPP   #metro   #metro rail policy  
Reliance Mumbai Metro
Reliance Mumbai Metro

The PPP model has been made mandatory in metro rail projects, but it has not been successful in at least three cities – Delhi, Mumbai and Hyderabad. 

The cabinet chaired by prime minister Narendra Modi approved a new Metro Rail Policy that makes PPP component mandatory for availing central assistance of new metro projects. 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. 

 “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,” says the policy, to capitalize on private resources, expertise and entrepreneurship. 

Former DMRC chief E Sreedharan criticised the decision and said: “It will never work.”

“Nobody will come forward for construction of Metro rail as it has never been a profitable investment. Private players will look at least 12-15% return while no Metro project has ever yielded an investment return of over 2-3%. It’s the most disastrous and retrograde urban transport policy,” Sreedharan told the Indian Express

He added: “The policy seems to have been framed by someone sitting in the NITI Aayog with absolutely no experience of how Metro rail is built and operated. As it is, in India, all 12 such projects put together, only 20-25 km of new Metro rail is opened every year. China is galloping way ahead at 300 km being opened every year. We are already at a snail’s pace; now with this policy, everything will come to a standstill.”

Read: Case of a missing P: where is public interest in PPPs? 

The PPP model has run into rough weather in Delhi, Mumbai as well as Hyderabad.

In 2012, Delhi Metro's Airport Express project developer, Reliance Infrastructure, sent a notice to Delhi Metro Rail Corporation (DMRC) and sought termination of the project.

The Reliance Infra-led consortium has been using the safety excuse to abandon the project. The cost of the Airport Express line was Rs 18,000 crore, but it suffered a loss of Rs 300 crore in the first year of operation, reported India Today

Five years later, Delhi Airport Metro Express Private Limited (DAMEPL), a subsidiary of Reliance Infrastructure, won an arbitration against DMRC, which would fetch the company a compensation of Rs 2,950 crore for the termination of the concession agreements for the project, the Anil Ambani-led company said in a statement, reported Economic Times

The story was similar in Mumbai where Reliance Infrastructure-owned Mumbai Metro One Pvt Ltd (MMOPL), operates the 11.4 km Versova-Andheri-Ghatkopar metro line, said in June 2016 that it was incurring huge losses.

Reliance runs MMOPL in a public–private partnership with Mumbai Metropolitan Region Development Authority (MMRDA).

“MMOPL is incurring annual loss over Rs 300 crore and cash loss of about Rs 175 crore per annum. This loss is preliminary on account of increase in project cost due to delay in receipt of unencumbered Right of Way (RoW) / Land by Government & Mumbai Metropolitan Region Development Authority (MMRDA). Further, 100 percent unencumbered RoW / Land was to be given to us by September 2007 as per the Concession Agreement, but was finally handed over to us in February 2014, a month before we applied for CMRS (commissioner of metro railway safety) certification,'' MMOPL spokesperson told Business Standard.  

Reliance Infrastructure also told the Bombay High Court in August 2016 that it was incurring daily losses of Rs 1 crore to keep the services running. “For the project, we put in Rs 4,000 crore, of which a large chunk was borrowed. We now have to start repaying that. Initially, the MMRDA had promised that they would put in Rs 1,500 crore, but in the end, only contributed Rs 600 crore,” senior counsel Janak Dwarkadas told Justice VM Kanade and Justice MS Sonak, reported Mid Day.  

Hyderabad too saw the PPP model running into trouble. 

In September 2014, Larsen and Toubro Ltd (L&T), the company building the Rs.16,375 crore Hyderabad Metro rail project, threatened to pull out because of issues relating to project viability and non-availability of right of way. 

L&T proposed that the Telangana government take over the project. 

“GoT should do so by restituting the concessionaire in a manner whereby the concessionaire’s property and entitlements are returned to it,” V.B. Gadgil, chief executive and managing director of L&T Hyderabad Metro Rail Pvt. Ltd, wrote in a letter, reported The Mint. 

The new metro rail policy announced on Wednesday stresses that it opens a big window for private investments. 

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. 

Seeking to ensure that least cost mass transit mode is selected for public transport, the new 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 new policy mandates Transit Oriented Development (TOD) to promote compact and dense urban development along metro corridors since TOD reduces travel distances besides enabling efficient land use in urban areas. Under the policy, States need to adopt innovative 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’. States would also be required to enable low cost debt capital through issuance of corporate bonds for metro projects. 

At present, metro projects with  a total length of 370  km are operational in 8 cities -- Delhi (217 km), Bengaluru (42.30  km), Kolkata (27.39 km), Chennai (27.36 km), Kochi (13.30 km), Mumbai (Metro Line 1-11.40 km, Mono Rail Phase 1-9.0 km), Jaipur-9 km and Gurugram (Rapid Metro-1.60 km). 

Metro Projects with a total length of 537 kms are in progress in 13 cities. New cities acquiring metro services are; Hyderabad (71 km), Nagpur (38 km), Ahmedabad (36 km), Pune (31.25 km) and Lucknow (23 km).

Metro projects with a total length of 595 km in 13 cities including 10 new cities are at various stages of planning and appraisal. These are; Delhi Metro Phase IV- 103.93 km, Delhi & NCR-21.10 km, Vijayawada-26.03 km, Visakhapatnam-42.55 km, Bhopal-27.87 km, Indore-31.55 km, Kochi Metro Phase II-11.20 km, Greater Chandigarh Region Metro Project-37.56 km, Patna-27.88 km, Guwahati-61 km, Varanasi-29.24 km, Thiruvananthapuram & Kozhikode (Light Rail Transport)-35.12 km and Chennai Phase II-107.50 km. 

 

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