New Metro Rail Policy: Salient Features and Issues with PPP

On 16 August, the Union Cabinet has approved a new Metro Rail Policy which seeks to enable realization of growing metro rail operations in large number of cities in a responsible way.

Salient Features

The salient features of this policy are as follows:

• It opens a big window for private investments in metro operations by making PPP component mandatory for availing central assistance on metro projects. Thus, this policy clearly links the government assistance to capitalizing the private resources, expertise and entrepreneurship.
• The new policy seeks to ensure that the metro rail provides last lime connectivity in the cities. Towards this, a catchment area of 5 kilometres has been fixed for such projects on either side.
• To ensure that least cost mass transit mode is selected for public transport, the 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 makes it mandatory to set up Urban Metropolitan Transport Authority (UMTA). This authority will prepare Comprehensive Mobility Plans for cities for ensuring complete multi-modal integration for optimal utilization of capacities.
• The policy provides for rigorous / third party assessment of metro rail proposals.
• Taking note of substantial social, economic and environmental gains of metro projects, the Policy stipulated a shift from the present ‘Financial Internal Rate of Return of 8%’ to ‘Economic Internal Rate of Return of 14%’ for approving metro projects. This is in line with global practices.
• Noting that urban mass transit projects should not merely be seen as urban transport projects but more as urban transformation projects, 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.
• 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.
• To ensure financial viability, the Metro Rail Policy requires the States to clearly indicate the measures to be taken for commercial/property development at stations and on other urban land and for other means of maximum non-fare revenue generation through advertisements, lease of space etc., backed by statutory support. States are also required to commit to accord all required permissions and approvals.
• The states are empowered to make rules and regulations and set up permanent Fare Fixation Authority for timely revision of fares.
• States can take up metro projects exercising any of the three options for availing central assistance. These include
  • PPP with central assistance under the Viability Gap Funding scheme of the Ministry of Finance
  • Grant by Government of India under which 10% of the project cost will be given as lump sum central assistance
  • 50:50 Equity sharing model between central and state governments.
  • Under all these options, private participation, however, is mandatory.
• The policy envisages private sector participation in O & M of metro services in different ways. These include:
  • Cost plus fee contract:  Private operator is paid a monthly/annual payment for O&M of system. This can have a fixed and variable component depending on the quality of service. Operational and revenue risk is borne by the owner.
  • Gross Cost Contract:    Private operator is paid a fixed sum for the duration of the contract. Operator to bear the O&M risk while the owner bears the revenue risk.
  • Net Cost Contract:        Operator collects the complete revenue generated for the services provided. If revenue generation is below the O&M cost, the owner may agree to compensate.

Current Status of Metro Rail Projects

Currently, Metro projects are operational on 370 kilometres of eight cities of India viz. Delhi, Bengaluru, Kolkata, Chennai, Kochi, Mumbai, Jaipur and Gurugram. Metro Projects with a total length of 537 kms are in progress in 13 cities including the eight mentioned above.

Analysis: Making PPP Mandatory in Metro Projects

The Government’s adaptation of the new metro rail policy has come under severe criticisms from different sectors. 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. Previously, the partnership model had been tried in the airport line in New Delhi, Mumbai, and Hyderabad. However, all three attempts were failures. Reliance Infrastructure became the country’s first private company to join the initiative, but abandoned it due to huge losses. For the PPP models in Chennai and Delhi money was borrowed from Japan, but despite exorbitant fares, the cost could not be procured.

The new policy of the Union Cabinet seeks to enable private investments in metro operations to deal with the poor financial state of the country as a whole. Through the new policy the Government has made it mandatory for the state governments to seek private investors in execution as well as running of the systems.

Problems with the PPP model in Indian scenario

• The project is capital-intensive. This makes it tough for the private players to get ROI easily.
• The ROI could only be generated by increasing fares. But that comes with its own share of problems and issues.
• There are several externalities that requires Central Government subsidy.

According to the past experiences it has been seen that the private investors look for a profit of around 12-15 percent. However, till date, no metro project in the country has showed more than 3 percent ROI. As cities expand and the need for an ever-expanding transit system is on the list, metro is going to be an important means of transportation. It would be inappropriate to measure it in terms of profits and losses, which the PPP model might bring in.

The world scenario

In a recent report by the Union Urban Development Ministry it was stated that, “In 113 cities across the world having Metro rails, 88% have been developed and are being operated in public sector mode whereas in only 12% cities some form of PPP exists.” No city outside India has proposed metro rail on full city on PPP if data from the past few decades is considered.  Till date, the PPP model has shown success in highway projects.

Importance of Central government to fund metro railway projects

As cities are growing at a fast pace, it has become extremely important for the public transportation systems to be fast, reliable, affordable, and well-maintained. Metro is never a profitable venture for the private players and thus, to keep things smooth, government must invest in it. In Mumbai the metro railway project is 100% subsidized by the government. In other states to, the metro railway projects are solely funded by the government.

If the scenario of the last few decades in India is considered, it could be observed that in cities like Hyderabad, Bangalore, Mumbai, and Delhi, the metro airports have been built through PPP. The operation of the container trains in railways is also under the public private partnership model. According to a report by the World Bank, in terms of infrastructure, in the year 2011, private participation was in high concentration in only one country of the world – India! The country till date has implemented a total of 43 projects with a total investment at $20 billion.

What the future holds?

After analyzing India’s scenario it could be said that there were many reasons for the failure of India’s PPP projects. Improper and uncounted approaches to the partnership models are some of the main reasons for the failure. Poor preparations bundled with fiscal uncertainties, novice business models, and inexperienced management together responsible for the failure of the projects. Before implementing the new PPP mandate, the government should address the problems more aggressively.

Questions for GS Mains

1. What are the new authorities states have been mandated to establish under the new Metro Rail Policy? Discuss while highlighting the key features of new policy.
2. The PPP model as a part of the New Metro Policy aims at lessening the burden on the Central government in funding metro projects however, past experience has not been very good. Why PPP Model did not succeed in metro rail projects? Discuss.