Law to ease fund flow for Metro

In Budget speech, Jaitley said Metro rails are emerging as an important mode of urban transportation

The central government’s promise of a new legislative framework for Metro rail systems would help us, say companies in the sector. They’d clarity on operations, safety, regulation and construction.

Currently, various laws govern the sector, such the Indian Railways Act of 1989 and even the Indian Tramways Act of 1886. Industry is also hoping for a framework which would suggest innovative financial models for such projects, highly capital-intensive. They’d also like a single nodal agency to address issues on alignment, shifting of utilities’ lines and like items and on environment clearances.

“The main risk in execution is obtaining the right of way and clearing all utilities that obstruct the alignment of a Metro rail system,” says R Shankar Raman, chief financial officer, Larsen & Toubro. Construction, he said, ought to begin only after 100 per cent right of way is available and utilities are cleared. Such saving on cost and time would enhance investor interest.

L&T was awarded the Hyderabad Metro rail project by the government of Andhra Pradesh in 2010. It has incorporated a Special Purpose Vehicle, named L&T Metro Rail (Hyderabad) Ltd, to implement the project — a design, built, finance, operate and transfer one. Shankar Raman suggests providing a real estate development option, with full rights to develop or sublease or monetise, with ownership for, say, 99 years. The real estate could be around the depots and stations or along the alignment. In addition, long-tenure and low-cost debt would be required, with a high initial moratorium on payment.

In his Union Budget speech, Finance Minister Arun Jaitley said Metro rails were emerging as an important mode of urban transportation. “A new Metro Rail Policy will be announced, with focus on innovative models of implementation and financing, as well as standardisation and indigenisation of hardware and software.” A new Act would be coming, he’d added. 

Consultancy PwC’s leader (infrastructure) Manish Agarwal says successful Metro rail projects will require integration of land use and transport, and of various forms of transport. This integration is required physically (Metro and bus stations), commercially (ticketing systems) and, importantly, financially (capturing land value appreciation, development charges).

“The current institutional arrangement, being split between central, state and local governments, is not designed to deliver this. The National Transport Policy had included various measures towards this and some Metro projects have been able to implement such measures to different extents. If amendments to the Metro Act can create institutional solutions to deliver on these requirements, by aligning stakeholder interests, it could hasten the development and financing process, while providing significantly improved public transport to citizens, he says.

The existing public-private partnership (PPP) models in such projects work on a revenue share model and ridership risk is placed with the private sector partner, said Rajaji Meshram, KPMG India’s director (infrastructure & government services).

“However, internationally, the private sector involved in Metro transport project does not take the ridership risk and actually gets paid on the metric of ‘availability’. Their responsibility is to ensure a level of service that is agreed with the authority. If this model is adopted in India, there could be a lot of interest from the private sector,” he said.

Shankar Raman says other than PPP, a model involving government sponsorship such as in the Delhi Metro Rail Corporation is viable. He said a hybrid annuity model could be considered once the basic concession framework is well addressed. “PPP can still work, provided the project is offered with 100 per cent alignment clearance for construction and real estate rights being provided without restrictive conditions for generation of additional revenues.”

Maharashtra Metro Rail Corporation’s managing director, Brijesh Dixit, says the new policy and Act need to address organisational and financing issues for expansion of these projects across the country and for expansion of existing projects. “The government may consider setting up of a Unified Metro Transport Authority on the lines of Singapore, Dubai and a couple of other countries, to coordinate the developmental activities of a city by mobilising resources and linking various departments,” he says. Also, a dispute resolution mechanism would be useful.

On the contentious issue of fare fixation, Meshram says since Metro rail services cater to the general population, a city municipal authority will always desire to have a say in the rates. “A transparent mechanism of fare fixation, where the costs are clearly identified and a fair return is assured to the service provider, needs to be put in place. The Regulated Asset Base model followed in various other infrastructure assets such as airports or railways could be looked into.”

Investors’ speak

• Constructions ought to begin only after 100 per cent right of way is available and utilities are cleared

• Successful projects will require integration of land use and transport, and of various forms of transport

 

• A model involving govt sponsorship such as in the Delhi Metro Rail Corporation is viable

• The new policy and Act need to address organisational and financing issues for expansion of the projects across the country

• Since Metro rail services cater to the general population, a city municipal authority will always desire to have a say in the rates