Hybrid modes of implementation

India´s urban transportation system can be vastly modified by effective implementation of the metro rail projects. A combination of PPP and EPC modes could be the way forward.
The Central government approved Smart Cities Mission involves the development of one hundred smart cities in India. One of the most important elements of smart city infrastructure is economical and environment friendly mass scale rapid public transport system. Public transport in Indian cities has not been able to cope up with the rapidly increasing demand for sustainable conveyance so far. Metro systems are an option that can improve the quality of transportation infrastructure in Indian cities. The year 2015 has witnessed rapid developments in metro rail projects like unveiling of the metro in Chennai and Jaipur, and expansion of metro lines in Delhi and Bengaluru, with construction ready to begin in a few other cities.

These developments have gained momentum due to key government initiatives like allowing 100 per cent investment in most segments of rail Infra¡structure, including metro rail, and ´Make in India´ initiative which has helped to indigenise the rolling stock manufacturing. The government is also encouraging setting up of the metro rail systems by providing support in the form of viability gap funding (VGF). Metro projects offer business opportunities related to construction, tunnelling, provision of rolling stock, and other rail equipment as well as engineering, procurement and construction (EPC) and in some cases public-private partnership (PPP) contracts.

Implementation models
Although the public-private partnership (PPP) model is being adopted as the model for implementing metro rail projects, the engineering-procurement-construction (EPC) contract route still remains a preferred model.

Metro rail was first set up in Kolkata in 1984 when PPP model was non-existent. Subsequently, India witnessed the development of metro rail in Delhi. Phase I and II of the metro became operational in December 2002 and June 2008, respectively. The first two phases of the Delhi Metro were executed through EPC contracts. The Government of India (GoI) and the Government of National Capital Territory of Delhi (GNCTD) brought in the project equity component, while majority of the project debt was sourced in the form of low interest soft loans from multilateral agencies and a smaller portion was sourced from subordinate debt and internal accruals.

As per the recommendations of the Working Group on Urban Transport for the Twelfth Five Year Plan, an analysis of the metro rail systems in 113 cities across the world showed that about 88 per cent of the metro rail projects have been developed and operated through public mode, whereas only 12 per cent of the projects include some form of the PPP structure.

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. Construction cost of metro projects depends on their structures and routes. The cost of the metro project with an underground route is much more than a project with elevated route. Hence, the route structure of a metro rail project is a key determining factor in selection of EPC or PPP mode for its implementation.

Currently, hybrid modes of implementation are being looked at by the implementing agencies. Phase I of the Mumbai Metro Rail Project is the first metro project in India that was implemented on PPP mode on a build-operate-transfer (BOT) basis. The second and third phases may be built on EPC basis, with funding to be secured in the form of equity infusion by the centre and state governments and soft loans from multilateral agencies respectively.

The PPP model is generally adopted with an objective of improvement in quality, cost, and efficiency of a given metro rail project to the citizens. However, the flip side is the higher cost of borrowing for the private player than the government borrowings. Higher cost of borrowings can add to the project cost, which in turn could result in higher fares.

Funding from multilateral agencies
Multilateral agencies have been at the forefront in supporting the implementation of metro rail projects in India. Loans are granted according to the agreement between participating governments. These funds are in turn loaned to the metro rail projects by GOI through Pass through Assistance. Loans are granted to the metro rail projects on soft terms and conditions in terms of low interest loans, and with long moratoriums and repayment periods stretching typically beyond or up to 20 years . Domestic loans have also been secured from Indian banks at or close to their base rates. The tenure of domestic loans is typically shorter than those through multilateral agencies.

In conclusion
RoI of the debt or loans for metro rail projects implemented through the PPP model is significantly higher than projects directly funded by governments and multilateral bodies. As more number of Indian cities intend to implement metro rail projects and investments lean towards capital intensive rail-based mass transit systems, financing of such projects can remain a challenge. Hence, implementing models need to become increasingly innovative.

Segregating elevated and underground lines as separate projects, wherever possible, may make it possible to adopt PPP model for developing the elevated sections and EPC model for the underground sections. Further, for underground sections, even if the EPC model is adopted for construction, PPP model may be used for operating the metro rail services.

GoI has laid emphasis on private participation in infrastructure development and operation as it is constrained by its budget and may not be able to finance many metro rail projects on its own. Viability Gap Funding (VGF) is also often limited to 20 per cent of the project cost.

A gamut of avenues have opened up in urban transport sectors and governments are looking forward to tap into cost-effective, technical, and manufacturing expertise of private players. The need is to assess the alternate financing mechanisms for the metro projects, thereby helping ensure cost-effective public transportation solutions for the citizens. Therefore, it is essential to internalise revenues from project assets, especially real estate, with a view to improve the financial viability, and also reduce the VGF payable by the governments for the metro projects.

The article has been authored by Biswanath Bhattacharya, Partner, KPMG in India. The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.