Funding Dichotomy

The population surge, rapid urbanisation, and the consequent congestion have time and again fuelled the ´need for speed´. Mass rapid transit system like the metro rail has dawned as a panacea in this regard. Massive funding requirements however, impede the expeditious proliferation of this system.

¨With the introduction of the Mumbai Metro last year, my travel time has reduced by over 90 per cent. It takes me precisely nine minutes to reach my office at Marol Naka from Ghatkopar, as opposed to the earlier 50-minute hassling auto rickshaw ride,¨ aptly states Subhajit Mishra, a daily commuter. Without a shade of a doubt, the metro rail system has evolved as an integral part of the Indian urban transportation system- a true blue solution for the pestered urban commuters. Metro rails operate on an exclusive right-of-way, which is either underground or elevated. They are highly capital-intensive, with long gestation periods, and require a shell out that is around 20û30 times that of the bus rapid transit system, depending on whether it is underground or elevated. Thereby, financial sustainability of these systems has long been under scrutiny. Globally, a lion´s share of the metro rail projects has resorted to public funding aid for financial viability.

In India, most projects have been public sector undertakings- through the engineering, procurement, and construction (EPC) mode- with the burgeoning public-private partnership (PPP) projects making gradual inroads. While the veteran Kolkata Metro was the nursling of the Federal Government of India, the Delhi Metro was a cooperative venture of the federal and state governments- entailing equal shares from both- and the remainder from loan and property development. The Bengaluru and the Chennai Metro followed the footprints of their precursors.

The four metro projects with a PPP model are: Delhi Airport Link, Mumbai, Hyderabad, and Gurgaon. Gurgaon is a one-off metro rail system in the nation, being privately built and operated- singularly by private funding. Currently, mass rapid transit systems operate in 15 cities, and more are under construction or in the planning phase, spanning cities galore.

In May 2015, Prime Minister Narendra Modi expressed his consent to the Union Urban Development Ministry´s proposal to implement metro rail systems in 50 cities. The majority of the planned projects will be implemented through special purpose vehicles (SPV), which will be established as 50:50 joint ventures between the Union and the respective state governments. According to reports, the Union Government is slated to invest an estimated Rs 5 lakh crore.

EPC Vs PPP
The PPP model is being furthered on account of improvement in quality, cost, and efficiency of a given infrastructure service to the citizens; involving the public-private sharing of the financial burden. However, the private sector borrowing cost being higher than the government borrowing is a major impinging factor. According to Biswanath Bhattacharya, Partner, KPMG in India, ¨Higher cost of borrowings can add to the project cost, which in turn could result in higher fares.¨

The increased cost under the PPP model can be ascribed to the fact that apart from certain basic inputs required to be added to the cost, large amount of margins are made provision of, to cover project risk, operation risk, financial risk, political risk, etc. ¨Key reasons for adoption of the EPC model are high construction costs of the metro rail projects, capped fares, and unattractive internal rate of return (IRR) for private sector equity participation,¨ Bhattacharya remarks.

Innovative financing mechanisms to make PPP more rewarding are inevitable and this power is vested in the policymakers. ¨The risk allocation between the public party and the private party needs to be more rational, as against the current framework, where it is skewed for the private sector,¨ avers Abhay Kumar Mishra, CEO, Mumbai Metro One Pvt Ltd.

The success of the PPP projects necessitate the government to ensure that all lands and right of way are acquired and given to the private player in a time-bound manner, as per the contract, and compensation mechanisms, in case of delay, should be established explicitly in the contract. Arun Chandran, Programme Director (Parsons Brinckerhoff), L&T Hyderabad Metro Rail, opines, ¨If an alternative can be worked out, where the entire right of way is secured by the government, and then handed over to the PPP player, the risk on executing the project can be better forecast by the private player.¨

VGF SUBSIDY
The Government of India has notified a scheme for viability gap funding (VGF) to infrastructure projects that are to be undertaken through public-private partnerships (PPP). ¨The amount of VGF will be equivalent to the lowest bid for capital subsidy, but subject to a maximum of 20 per cent of the total project cost,¨ states Chandran. ¨The total project cost for the Mumbai Metro Line 1 is Rs 4050 crore. The viability gap funding provided by the government is Rs 650 crore, which is around 16 per cent of the total project cost. The promoters have infused Rs 1150 crore in the project, which is slightly above 28 per cent of the total project cost,¨ seconds Mishra.

The prevailing debt-to-equity ratio is 30:70, and the government has proposed a debt-to-equity ratio of 20:80 with some riders, wherein the metro rail project has to be developed as a sheer transport project. ¨Metro projects are highly capital-intensive, and an equity-to-debt ratio of 30:70 requires a high investment by the concessionaire. The 20:80 structure will definitely be better, but other overall conditions of ROI (return on investment) should improve to generate interest in PPP models for the metro rail,¨ asserts Chandran.

INTERNATIONAL FUNDING
It is a pre-requisite for the Indian Government to create a level playing field for the public sector and the private sector- extending all the benefits to the private players, such as cheaper loans, tax exemptions, etc., that are availed by the public players. The loans from international agencies like JICA, JBIC, and World Bank are for longer time periods and at lower interest rates. ¨While this arrangement can be deployed on mega projects, it is also necessary to have a clear model of pay-back, and the risk sharing mechanism for loan servicing between the stakeholders,¨ claims Sanjay Bhatia, Vice-Chairman and Managing Director, CIDCO. In this regard, Mishra emphasises, ¨There is a need for the government to ensure that the entire sector can receive such funding, and not only the government projects. If the benefits which are granted to the government metros are also granted to Mumbai Metro One, it would be self-sustainable at the existing fares.¨ Tomohide Ichiguchi, Senior Representative, JICA, claims that they haven´t been approached by the Indian Government to fund a PPP project yet. He however, adds, ¨A project which could generate very high financial returns, and could attract private financing is usually not eligible for ODA loan financing.¨

The decision to remove Japan International Co-operation Agency (JICA) from the list of multi-lateral lenders, under the new foreign trade policy of the Union Commerce Ministry, would escalate the project costs as the deemed export benefits would no longer be available. Chandran highlights, ¨The new Foreign Trade Policy that was introduced for 2015-20 has been applauded by the industry, and any concerns regarding agencies like JICA need to be addressed.¨

RETURN ON INVESTMENT
The success of any metro project, in terms of RoI, would have different connotations for different companies as the financing terms are not similar for everyone. ¨For DMRC, the majority of its funds are financed from JICA due to sovereign grantees provided by GoI, which comes with a very low rate of interest, whereas the private sectors do not have any access to such cheaper funds. Having said that, the metro projects in India are yet to attain positive returns on investments,¨ affirms Mishra. The high-level committee on railway restructuring under NITI Aayog member Bibek Debroy – the Debroy panel report has highlighted how the Kolkata Metro is running at an operating ratio of a staggering 300 per cent. This implies that the metro system spends Rs 300 for every Rs 100 earned. Talking about the PPP projects, Bhatia says, ¨Mumbai Metro Line-1 on PPP mode is currently going steady. However, the Airport Express Line under Hybrid PPP at Delhi has not been successful.¨

OTHER BOTTLENECKS
For metro rail projects, construction cost varies significantly, depending on whether the route is underground or elevated. The capital cost for an elevated metro rail is estimated at Rs 200 crore per km, but that for an underground route could be thrice as much, around Rs 650 crore per km. The selection of EPC or PPP mode is therefore, also ascertained by the extent of underground coverage. For underground route, private players are rather reluctant to invest. For instance, as opposed to the overhead Lines 1 & 2 of the Mumbai Metro, for Line 3 (Colaba-Bandra-SEEPZ), which is fully underground, the Mumbai Metropolitan Region Development Authority, has almost finalised the EPC mode, courtesy the exorbitant cost of Rs 9000 crore. In this case, Japan Bank for International Cooperation has agreed to part-finance Line 3. Funding apart, land acquisition, acquiring right of way, and the efficiency of the implementing agency, are some of the other roadblocks in the smooth execution of the metro rail projects. SB Kulkarni, General Manager- Tendering and Estimation, Gammon India Ltd, reveals, ¨Kolkata Metro packages, being implemented by the Rail Vikas Nigam, are progressing slowly on account of land acquisition issues.¨ In some cases, even the coordination between the partners involved in the concerned projects poses a hindrance. Affirming reports of their Russian counterpart abandoning the Chennai Metro Project, Kulkarni points out, ¨The management of Mosmetrostoy, who were handling package two and three, has changed, and they have left the project, and this will slow down the project, though marginally, and the costs are likely to go up.¨

The government has to play a proactive role in exterminating these issues by ushering in better management, and an effective monitoring system for enhanced checks and controls. It has to be in the vanguard of policy formulation and implementation as well as reformation, where necessary.

IT Recommendations
To prevent the PPP mode from losing sheen, and to ensure greater private sector contribution, certain reforms at the policy level would be mandatory.

• While the EPC contract could be generally preferred, hybrid modes of implementation- a mix of EPC and PPP modes- could be rewarding.
• PPP mode, if adopted, should be for fixed assets and maintenance with differed payment or on annuity basis.
• EPC model should be adopted for mobile assets and operations due to their technical complexities.
• Segregation of elevated and underground lines, wherever possible, so that elevated sections could be developed on the PPP mode, and EPC modes for the remainder, could be an innovative measure.
• For underground sections, the PPP mode could be deployed for running the metro rail service (as in the case of the Delhi Airport Express Link), even while retaining the EPC mode for civil construction.
• The government needs to provide funds at a cheaper rate, irrespective of the implementing agency (be it government owned or under PPP).
• Cheaper loans, like those received from inter¡national agencies, should be made available to the private players along with other benefits like tax redemptions, so as to do away with the hassles of hedging.

Issues faced by Mumbai Metro Line 1
While implementing the Versova – Andheri – Ghatkopar Corridor in Mumbai, we had to face multiple challenges.

There was presence of huge number of utilities like water lines, sewer lines, storm water drains, electricity cables, telephone cables, etc with no mapping available. As per provisions of the Concession Agreement, we were supposed to be provided with unencumbered RoW for construction by the government.

Due to various challenges, there were significant delays in availability of depot land, and we were provided with reduced land as compared to the land envisaged in the Concession Agreement. This led to development of an extremely constrained depot with no further scope of expansion.

The project is financed through Indian banks also by the foreign bank with an average interest rate of 10%. The project was subjected to an interest rate of 13% during the construction period. Currently, the rate of interest for Rupee term loans is 11.75%. High interest cost is making the project unviable.

¨Right of Way is a huge challenge¨

Arun Chandran, Programme Director (Parsons Brinckerhoff), L&T Hyderabad Metro Rail, comments on the funding and RoI of the metro rail projects.

What are the pros & cons of the PPP and EPC models? Which is the preferred alternative and why?
A PPP structure will ensure better value for money, higher performance incentives, apart from faster construction and cost-effective delivery. The accountability is well-defined, and the risk is with the PPP player. An EPC structure will ensure a guaranteed price, a specified level of performance, with a single point of responsibility. Since the current growth conditions in India cannot support the PPP projects, EPC would be the way to go with loans secured by the government.

How far has the government´s target of attracting investments of Rs 56 lakh crore into the infrastructure sector during the 12th Five-Year Plan (2012-13 to 2016-17) benefited the progression of the metro rail projects?
This has not been largely used in the metro rail sector as yet, and this sector is still developing. Though more cities are looking to build the metro rail network, it is to be noted that these projects take a long time to construct and the huge challenge of right of way needs to be overcome.

What is your take on the funding from international agencies like JICA as well as the World Bank´s keenness to fund mega projects?
India does need sustained funding for large capital-intensive infrastructure projects, and the funding from agencies like JICA and World Bank will be a big boost in the development of the infrastructure in the country. This is generally a win-win situation as this helps keep the project costs lower by 15 to 20 per cent, and also boosts indigenous manufacture and supply on such capital-intensive projects.

In terms of RoI, how many metro rail projects in India have been successful?
Currently none. Large upfront capex requirements, opex requirements (supported by the existing revenue inflows), and constant upgrades on the existing network with time consume large chunks of capital.

¨Metro projects are capital-intensive, with low IRR¨

Sanjay Bhatia, Vice-Chairman & Managing Director, CIDCO, reveals the progress of the Navi Mumbai Metro and more.

How is the work on the three phases of the Navi Mumbai Metro progressing? Are they likely to meet their respective targets of commencement?
The progress on phase-I of the Navi Mumbai Metro Civil Works is nearly 60 per cent. CIDCO has embarked on a Turnkey Single Contract for all metro systems, to facilitate single point responsibility for integration and interface of the metro systems together with three years Maintenance Responsibility. This implementation model is the first of its kind in India.

While there have been issues in relation to the metro crossings over Railway Land, National & State Highway, and the raising of EHVT overhead lines, most of these are getting sorted out, and we expect to commission Line-1 in mid 2017. The phase-II & phase-III are also planned to be taken up shortly.

Is it right that the first phase which was due for completion in December, 2014 was delayed on account of the change in coach size to align it with Mumbai Metro and the change in the signalling system technology? Also did the clearance from the Central Railway (CR) for connecting Kharghar and Pendhar Metro stations cause any delay?
In phase-I, CIDCO has laid emphasis to equip the Navi Mumbai Metro with the latest technology, and adapt the size which could in future offer seamless integration with the various corridors planned in MMR region. The clearance for crossing the Railway Land has now been obtained, and the allied construction related modalities are being firmed up. Phase-I will be completed by mid-2017.

What kind of Viability Gap Funding subsidy has been extended by the government?
CIDCO has taken up the development of its Navi Mumbai Metro Project Line-1 on its own internal accruals, and no VGF subsidy has been taken from the central or state government.

In terms of ROI, how many metro rail projects in India have been successful?
The metro rail projects are capital-intensive, generally, with low IRR, but carry a robust EIRR.

¨No official request to fund PPP projects¨

Tomohide Ichiguchi, Senior Representative, JICA, speaks on the ODA loans.

Out of the metro rail projects in India that are under construction or are being planned, which ones are being funded by JICA?
Delhi Mass Rapid Transport System Project- Phase 1, 2, and 3; Bangalore Metro Rail Project; Chennai Metro Project; Kolkata East-West Metro Project; and Mumbai Metro Line 3 Project are the metro rail projects that have been funded by JICA.

What are the criteria for extending these ODA loans?
There is a process of appraisal by JICA to confirm whether a project is suitable for ODA loan financing by ascertaining whether and to what extent the proposed project will contribute to the economic and social development, or economic stabilisation of the borrowing country, whether the project is planned appropriately and in sufficient detail, and whether successful implementation and sustainable operation and benefits of the project may be expected.

Out of the PPP (Public-Private-Partnership) & EPC (Engineering, Procurement and Construction) models for funding metro projects, JICA has funded EPC projects so far. Would you consider funding a PPP project, where private players are also involved?
Since JICA has not been officially requested to fund public-private-partnership (PPP) projects by the Indian side, JICA has funded engineering, procurement and construction (EPC) projects only.

Have the metro rail projects funded by JICA been able to recover the investments made in them?
The repayment period of JICA´s loans is 30 years. Therefore, the outstanding has not been repaid fully as of now.

Will the Indian Union Commerce Ministry´s decision to remove JICA from the list of multi-lateral lenders under the new foreign trade policy affect JICA and the metro rail projects under construction or in the planning stage?
Since deemed export benefit is not available for JICA´s project in the current policy, the project cost would be increased.