A Positive Assertion of Intent
The trend of metro rail as an urban transport has gathered momentum ever since Delhi has seen successful implementation of its metro rail project. Other cities have followed suit and metro lines are either operational or in the pipeline to be launched soon. At present, around 370 km of metro rail network is operational in the country and around 537 km is under construction.
Metro rail projects are highly capital-intensive entailing significant costs for operation and maintenance. The success of these projects therefore requires optimal allocation of risk by the central and state governments during implementation. State governments are primarily responsible for initiating and implementing metro projects as urban infrastructure is a state subject, while the central government, through the Ministry of Urban Development (MoUD), is responsible for legislative and policy decisions related to the construction, operation and maintenance.
As metro rail continues to invoke a great deal of interest from the central government, MoUD issued Metro Policy 2017 on August 28, 2017 taking into account the domestic experience and global trends in the sector. The Metro Policy placed emphasis on the need to have sustainable urban transport mechanisms in urban areas to reduce congestion of roads and impact on the environment caused by vehicles.
The Metro Policy provides key guidelines that will help the state governments to plan and implement metro projects in a resourceful manner. It introduces the concept of 'alternative analysis,' where comparative analysis of alternate modes of transport will be made to match demand projections over the project lifecycle for transit mode selection. While reducing the cost, it makes public-private partnership (PPP) a mandatory component to secure central financial assistance. Moreover, as state governments are responsible for financial modelling of the metro project, the Metro Policy has laid guidelines to be followed by them at the inception stage itself.
Key features of the Metro Policy
(a) Private participation and public-private partnership: The central government will encourage PPP for implementation of projects. State governments, desirous of availing central financial assistance for metro rail system in cities, will mandatorily explore the possibility of having a PPP arrangement. Additionally, one of the essential requirements for all project proposals seeking central financial assistance will be private participation for complete provisioning of metro rail or some unbundled component. An indicative list of the PPP models has been provided and that includes: (i) Design, build, finance, operate and transfer (DBFOT); (ii) Award of concessions for operational services, which could include supply of rolling stock and (iii) Award of concessions for maintenance and upgrading of infrastructure.
(b) Planning and implementation of the project: Emphasis is placed on adopting an integrated approach to the planning and management of urban transport. For projects taken up with central assistance, state governments must set up and perationalise Unified Metropolitan Transport Authority (UMTA) in the city within a year. UMTA would inter alia prepare the Comprehensive Mobility Plan (CMP) which would be a mandatory prerequisite for planning metro rail in any city, organising investment in urban transport infrastructure and managing Urban Transport Fund (UTF). Cities having a population of 20 lakh or more may start planning for mass transit system, including metro rail, based on the CMP.
(c) Framing project report: The project report prepared by the state government will be the key document in assessing the feasibility of the metro project and the issue of central assistance. The report will examine the techno-economic feasibility and include provision of infrastructure for integration of various modes of transport. Pricing of urban transport should be aimed at encouraging the use of public transport. Financial support of the state government/city authorities is essential for ensuring good financial health of the agency implementing or operating the project. Proposal for additional metro lines in a city, or new metro in a state that already has metro rail in one of its cities, would be appraised keeping in view the state government efforts in ensuring financial viability of the existing lines. Economic rate of return for any project proposal should be 14 per cent or more for consideration of its approval. This requirement is a shift from the present financial internal rate of return of 8 per cent and is in line with the global practices.
(d) Revenue enhancement:
(i) Every proposal for metro rail should include a proposal for feeder system that helps enlarge the catchment area of each metro station to at least 5 km. Last mile connectivity through pedestrian pathway and non-motorised transport infrastructure will be essential for availing central assistance for the proposed projects.
(ii) The promotion of compact and dense urban development along metro corridors is mandatory since it reduces travel distances, besides enabling efficient land use in urban areas. Further, the states need to mandatorily adopt:
(1) transit-oriented development (TOD) with proposed intermodal integration, universal accessibility, adequate walkways and pathways for non-motorised transport, stations for public bike sharing, commensurate parking lots and adequate arrangement for bus movement at the metro stations and (2) innovative mechanisms like value capture financing (VCF) tools to mobilise resources for financing metro projects.
(iii) Metro rail implementing agencies should endeavour to maximise revenue through commercial development at stations and on land allocated for the commercial development as in cities like Hong Kong and Tokyo.
(iv) State government shall ex ante commit the enabling policy and regulatory framework and provision for requisite permission, clearances and licenses for all avenues for exploiting non-fare box revenues (i.e., non-fare revenue through advertising, leasing of space) backed by statutory support.
(v) State government should enable metro rail implementing agencies to raise cheaper long-term debt by allowing
them to issue corporate debt bonds or earmarking revenue from VCF mode, like betterment levy.
(e) Fare fixation: The fixation of fare will be as per the extant provision of the Metro Railway (Construction of Works) Act, 1978 and Metro Railway (Operation and Maintenance) Act, 2002 - the Metro Acts governing metro projects.
(f) Private participation in operation and management (O&M): To bring managerial efficiencies and entrepreneurial spirit of the private sector, metro rail agencies are allowed to explore the possibility of provisioning of rolling stock, signalling system and maintenance and operation by a private entity. The exact nature of private participation is to be defined at the early stages of planning. The Metro Policy has suggested three O&M models, namely (i) cost plus fees contract; (ii) gross fees contract and (iii) net cost contract.
(g) Central assistance: The state government has options in availing central assistance to implement metro projects. They include:
(i) PPP: Financing for this model will be governed by the viability gap funding scheme of the central government.
(ii) Grant by the central government: The central government will consider providing a grant of 10 per cent of the project cost excluding private investment, cost of land, rehabilitation and resettlement and tax to the state government for the construction of a metro project.
(iii) Equity sharing model: Metro projects will be taken up under equal ownership of the central and the concerned state government through equal sharing of equity. The central government will provide financial assistance in the form of equity and subordinated debt, subject to an overall ceiling of 20 per cent of the project cost excluding private investment, cost of land, rehabilitation and resettlement, after evaluating various parameters and as per the extant practices and policies. Under all the aforesaid options, private participation is mandatory.
The Metro Policy aims to provide guidelines to regulate this developing sector and there are a number of key takeaways. First, the PPP model is mandatory to seek central financial assistance. There is emphasis that private participation, either for complete provision of metro rail or for some unbundled components like automatic fare collection, and operation and maintenance of services, will form an essential requirement of all metro projects seeking central financial assistance. However, the Metro Acts do not contain provisions or guiding criteria with respect to the metro projects implemented under the PPP model. Therefore, to avoid any inconsistency or conflict between the Metro Acts and the Metro Policy, it is necessary for the central government to amend the Metro Acts to incorporate the PPP models for effective implementation of the metro projects.
Second, while Metro Acts also empower the metro rail authority to develop any metro railway land for commercial use and to use its premises, land and building for displaying commercial advertisement and fixing any hoarding, billboards, etc., the Metro Policy emphasises that the metro rail implementing agencies should endeavour to maximise revenue through commercial development at stations and on the lands allocated. It also states that the detailed project report should mandatorily contain a chapter on enhancing non-fare box revenue backed by statutory support. This is a welcome step for private participants in the metro projects, it would facilitate revenue generation through different streams by enabling non-fare mechanism to recover project cost and expected rate of return.