New Metro Rail Policy puts onus on states; stresses on economic viability, private participation: ICRA

Pune, August 22, 2017: The Union Cabinet has recently approved the new Metro Rail Policy (MRP) which aims to facilitate the development of metro rail infrastructure in a responsible manner. The policy also aims to address the increasing metro rail demand from multiple cities, the highly capital intensive nature of its infrastructure development and limited public resources.  As per an ICRA note, the policy empowers states, by putting the onus on them to improve project viability, by promoting transit-oriented development (TOD) and allying it with real estate development, improving last-mile connectivity; and attracting private investments through the Public Private Partnership (PPP) model.

Commenting on the development, K. Ravichandran, Senior Vice-President and Group-Head, Corporate Ratings, ICRA, said: “the new Metro Rail policy will increase the state government’s role and responsibility in developing the new metro projects.  However, the policy’s increased emphasis on PPP model for metro development is expected to face challenges, given the low ridership witnessed in some of the operational metro projects and subdued interest of the private sector in taking up PPP projects.”

The policy provides for rigorous assessment of new metro proposals, including alternate transit mode analysis to ensure that the least-cost and most-efficient mass transit mode is selected for public transport. Further, it also proposes an independent third-party assessment of proposals by government identified agencies.

Besides the new policy  plans to empower states to regulate and set up a Fare-Fixation Authority as well as promoting other non-fare revenues such as advertisements, lease of space etc. Also there are provisions to raise resources using innovative mechanisms like ‘Betterment Levy’ on nearby assets, issuance of corporate bonds etc and improve last-mile connectivity for a catchment area of nearly 5 km, to promote metro ridership.

With the objective of closing the gap as far as financial resources constraints go and to improve the project viability, the new policy has made it mandatory to have PPP component (either for complete provision of metro or for some unbundled components like O&M) to be eligible for availing central financial assistance for new metro projects. States can now choose any of the three options for availing of Central assistance, subject to private participation:

·         PPP with Central assistance under the Viability Gap Funding scheme

·         Central Government Grant whereby 10% of the project cost will be given as lump sum assistance

·         50:50 equity sharing model between Centre and state governments

The policy shifts from the present Financial Internal Rate of Return (FIRR) of 8% to theEconomic Internal Rate of Return (EIRR) of 14% for approval of metro projects. The EIRR takes into account the project externalities including financial as well as social and environmental gains.

The PPP in the metro rail sector has so far been limited to only six such projects, one of which (Mumbai Metro Ph-2) was terminated before the start while another one (the Delhi Airport Line) was terminated after it became operational. Currently, there are three operational PPP-based Metro projects (one in Mumbai, and two in Gurugram) while one project is under implementation (Hyderabad Metro).

According to Mr. Shubham Jain, Vice-President and Sector-Head, Corporate Ratings, ICRA: “PPP  in metro rail projects has been limited thus far due to three key factors – low financial viability, inadequate risk allocation, and lengthy dispute resolution. While TOD/commercial development rights can enhance project viability to an extent, this may not be sufficient. The encouragement of PPP in the metro rail sector would require adequate risk allocation in the concession agreements, availability of low-cost debt funding, and the presence of a robust dispute resolution mechanism.”

While attracting private participation for funding, metro projects could be challenging, private sector interest in O&M of metro services would be relatively more. As per the policy, in O&M private sector participation can be in three major ways: cost plus fee contract, gross cost contract, and net cost contract. In all these modes, the revenue risk is borne by the project owner while the private sector brings in the capital, technology, and efficiency for operation and maintenance of the metro rail.