Centre refuses Rs 2.5 billion for Metro, Hyderabad approaches NITI, PMO

The Centre has refused to release about Rs 2.5 billion to Hyderabad Metro project, citing breach of contract, which has made the latter push back, escalating the issue to NITI Aayog and the Prime Ministers’ Office. The project will throw open its second line, a 16-km stretch between Ameerpet and LB Nagar in the city, on Monday. 

The disputed sum is the last tranche of Rs 14.58 billion as viability gap funding agreed to between the finance ministry and the L&T Metro Rail Hyderabad (L&TMRH), the concessionaire building the rapid Metro for the capital of Telangana. The spanner thrown in by the Union finance ministry could create perception problems since this could worsen the debt equity ratio of the project, estimated to cost Rs 180.8 billion when completed. 

While agreeing with L&TMRH that it has brought in good practices and engineering sophistication to the project, the Union finance ministry has pointed out that the company has violated more than one element of the public private partnership project contract it signed with the state government in 2010. 
 

Crucially, L&TMRH has raised the fares by about 150 per cent last year, days before Hyderabad Metro began commercial operations. The ministry has argued that when the viability gap was sanctioned, the basis for the calculation was a lower set of passenger fares. Those fares had made the finance ministry agree to fund the gap between revenue and costs. With the rise in fares, the gap has disappeared, it was argued. L&TMRH has come to depend on the raise fares to meet its revenue projections since the ridership of the trains at just about 100,000 everyday is quite low. In comparison, the much smaller Bengaluru Metro ferried about 336,000 passengers in the last financial year. 

The concession agreement signed between the company and the then Andhra Pradesh government stipulates that there will be an “increase in fare by five per cent thereof for 15 years commencing from April 1, 2014 (base rates)”. 

The actual raise was far steeper. Also, the state government accorded the company dual rights to act as both the regulator and the concessionaire, which too has not gone down well with the ministry. 

In its submission, the company, a subsidiary of L&T has claimed that the low ridership was something beyond its ability to control and so the sum should be released. The Ministry of Urban Affairs and Housing has also supported the stand taken by the company. 

Questions to L&TMRH via mails and phone calls last week, are yet to receive a response. The proposed 72-kilometre project for Hyderabad and Secunderabad is served by three lines, making it the largest Metro network in India after the Delhi Metro project. A consortium of 10 banks, led by the State Bank of India, has sanctioned the entire debt requirement of the project. According to the website of L&TMRH, it is the “largest fund tie-up in India for a non-power infrastructure public private partnership project” in the country. 

The differences over the release of the last tranche of viability gap funding could spill over into the political arena at a time the Telangana government has called for fresh elections, possibly by December this year. The L&TMRH is one of the most high profile successful projects under the state. 

The finance ministry provides viability gap funding to projects under the scheme of “Financial Support to Public Private Partnerships in Infrastructure Scheme” of 2006. L&TMRH shows that of the total committed funds the Centre has released Rs 9.57 billion by March 31, 2017. Hyderabad Metro is what is known as a design-build-finance-operate-transfer project for which the concession period is initially for 35 years and extendable by another 25 years at the option of L&TMRH, “subject to fulfilment of certain conditions under the  concession agreement”. One of those conditions is that the release of the government funding can only happen according to the terms of the contract. Significantly, unlike many PPP projects, the finance ministry will not have to fund the rising cost of the project, since its liability through viability gap has been demarcated in absolute numbers. 

For the lenders, the differences are a cause of concern as the viability gap funding is treated as part of the total equity of L&TMRH besides retained profit, general reserves and of course share capital. 

A cut back in the sum would worsen the debt equity ratio of the company, which would reduce the capacity of the company to raise fresh funds. 

The company’s annual report for FY17 says its “indebtedness” at the end of the financial year stood at Rs 87.31 billion while its total equity was Rs 20.38 billion. “The project cost shall be funded by promoters’ share capital, viability gap fund and term loans from a consortium of banks with State Bank of India, as lead bank”, the annual report notes.