On August 16, the central government’s cabinet chaired by Prime Minister Narendra Modi approved a new Metro Rail Policy that seeks to “enable realization of growing metro rail aspirations of a large number of cities but in a responsible manner” and requires a higher than before commitment from states and public-private partnership (PPP), in terms of comprehensive transit plans and funding obligations.
The new policy was prepared by the Ministry of Urban Development in consultation with different states and makes the private sector’s participation mandatory for seeking the central government’s assistance. With this clause, the government hopes the projects would benefit from private-sector resources, expertise and entrepreneurship in running different elements such as operations & maintenance (O&M) or even automatic fare collection.
As per the government’s press release, the new policy empowers states to make rules and regulations and set up permanent Fare Fixation Authority for timely revision of fares. States can take up metro projects in a number of different ways, each requiring private participation, in ways such as:
1. 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.
2. 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.
3. 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.
The policy stipulates a shift from the present Financial Internal Rate of Return of eight per cent to Economic Internal Rate of Return of 14 per cent “in line with global best practices”. The government notes that metro projects should be seen not just as transport but rather as urban transformation. As such, the policy requires transport authorities to prepare comprehensive mobility plans for cities, including multimodal integration and transit-oriented development (TOD). Detailed project reports must include last-mile connectivity for 5 km catchment areas around stations. This can include non-motorised transport infrastructure such as walkways and cycle paths, as well as the introduction of feeder services or paratransit. Proposals for such infrastructure & services, and their associated investments, must be reported by the states in the detailed project reports.
Apart from that, the new Metro Rail Policy requires states to clearly indicate in the detailed project report 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. It also requires the states to adopt ‘innovative’ financing mechanisms such as value capture financing tools and betterment levies to take advantage of increased land values around stations. Low-cost debt capital must also be sought through corporate bond issuance.
Recap of the policy via Doordarshan:
This new policy is not another run-of-the-mill PPP supporting policy that was pushed through hastily by some state governments in the previous decade. It puts in place several goals and changes to make the development and post-development commercial operations of metro systems more holistic – something that has not existed or been enforced by local & government authorities.
The new policy is likely to have been born after the half-hearted and politically motivated approvals of new metro projects by state governments in tier 2 cities (Patna, Guwahati, Vijayawada, Trivandrum etc.) without any proper funding in place or road-map to service debt. Experience from operational projects in Jaipur and Chennai, where the operators have done little to improve passenger ridership numbers (through last mile connectivity solutions, competitive fare revisions or property development), is likely to have necessitated that states come up with comprehensive mobility plans and introduce different supporting infrastructure & services to make them attractive and sustainable.
Outside of the traditional PPP projects (Hyderabad Phase-1, Mumbai Line-1), the Delhi Metro Rail Corporation is the only operator to engage private participation in O&M. They recently ventured back into PPP land (after the Airport Express Line) by publishing an expression of interest notice to lease 150 new coaches and off-load the Green Line’s O&M component. While the Bangalore Metro’s upcoming 17 km ORR line has private participation, the scope of their engagement is limited to funding the line and not O&M.
With this new policy in place, the following big-ticket projects currently under planning and appraisal are going to be affected in the near-term in addition to smaller ones planned in tier 2 cities:
Bidding and construction work on these projects can of course start with local and state government funds (as seen in Delhi for Phase 3 and Lucknow) while the central government’s assistance is awaited, but metro operators often shy away from doing that. That said, it’ll be interesting to see how different operators go about rejigging their funding plans and what unique PPP schemes are explored as a result of that.
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Featured image courtesy RMRG