Public-private partnerships (PPPs) are being encouraged in India's Metro Policy 2017 and this has opened up opportunities for the private sector, says Elias George, Partner and National Head, Infrastructure, Government and Healthcare at KPMG in India. Excerpts of the interview...
What is the current policy for promoting public-private partnerships (PPPs) in metro rail projects? India's Metro Rail Policy 2017 encourages private sector investments in metro projects by making PPP a compulsory component to avail central assistance. The policy mandates PPPs in some form, either in implementation, operations and maintenance, fare collection or any other unbundled activity, to avail grant or equity participation from the Central Government.
In line with the policy, it is observed that all the metro rail projects that are currently being implemented in the country, are coming up with one or the other form of PPP procurement. The policy offers huge scope for innovatively structuring metro projects and reducing the burden of financing on the state and Central governments.
How much of PPP can we expect in India's metro programme, especially for procurement of rolling stock? What are the challenges to PPP in procuring rolling stock? According to the recently unveiled document by the Department of Economic Affairs (DEA), titled National Infrastructure Pipeline (NIP), the construction of 50 mass rapid transit systems in the next five years has been planned with a capital expenditure of Rs 5.73 trillion ($78bn). Given the fiscal constraints of the federal and state governments, more metro projects with innovative structuring to encourage private sector participation will come up to ease the burden of budget financing.
Besides private investments in the area of ticketing, operations, maintenance and transit-oriented development, it is expected that rolling stock procurement will see private sector investments in the upcoming metro projects in the country. NITI Aayog had recently come up with draft guidelines for the wet lease model in railway operations. A similar model is likely to be followed for some of the metro rail projects in the future where financing, delivery, testing and commissioning, operation and maintenance risk lies with the private sector.
Since the risks are higher for the rolling stock suppliers in the wet lease model, the cost of procurement will be at a premium. This cost will need to be paid by the metro rail as per the availability-based mechanism, for which financing must be planned appropriately. This wet lease model will, however, be useful especially for smaller cities where the requirement is barely 100 coaches and the basic maintenance equipment required could be too expensive for such a small operation.
How can metro projects be made viable? Or, are metro projects usually not viable and should be considered from a social service perspective to be paid for by the taxpayer? Metro rail projects are very capital intensive and considering that their role in a city is to primarily encourage a modal shift towards public transport, the fares are fixed at affordable rates. This affects the financial viability of the projects and, thus, they are seldom profitable.
Metro rail projects, however, generate wider economic benefits and externalities that are not accounted for in monetary terms. Therefore, a strong case exists for the implementation of the metro system or any similar mass transit system if there is largely social and economic benefit attached to it, even if it is not financially self-sustainable. Having said that, there is a huge scope of increasing the financial performance of the projects and if planned and implemented properly, it can ease the burden on the exchequer.
What are some examples of profitable and viable metro projects globally and is there a lesson that India can take as it struggles with urban transportation? Only a very few metro rail projects in the world are financially profitable. The viability of such profitable projects is a result of thoughtfully planned and well-designed metro rail systems, favourable policy intervention by the government towards public transport, well-developed land value capture mechanism, a successfully implemented rail plus property model and seamlessly integrated mobility systems that encourage public transportation.
The management of urban mobility in India is too fragmented and lacks a collective vision for a multimodal, integrated, connected, sustainable mode of transport comprising of public transport, intermediate public transport (IPT), non-motorised transport (NMT) and walking. Rethinking travel as a truly unified urban mobility solution with a metro system at the heart of it will not only drive the metro rail projects towards financial viability but will also be socially, environmentally and economically sustainable.
An important dimension to drive the financial viability is to create a mechanism of revenue collection from indirect beneficiaries of the metro rail system in the form of land value capture, betterment levies, the increased toll on private vehicle operations, etc. Besides, developing sustainable and highly dense urban growth centres connected with or close to the transport system not only improves accessibility and livability but also increases the revenue potential of the transport system.
The Indian government has outlined its intent to introduce metros in smaller towns and cities as well.
How can this be a commercially viable proposition when even Delhi and Mumbai are struggling to achieve profitability? There are more than 20 small towns and cities in the country where an urban transit system is likely to be implemented. Given the financial constraints, newer forms of urban transport systems must be explored, which support a higher value for money proposition.
Ministry of Housing and Urban Affairs (MoHUA) has released the standard specifications for Metro Lite, a low-capacity light rail transit system (LRTS), and Metro Neo, an elevated or at-grade rubber-tyred rail- guided transport system with overhead electric traction. These urban transit systems have substantially lower capital and operational costs and can be commercially more attractive than the medium metro system that is currently being implemented in India.
Moreover, an increased thrust is being given to increasing ridership and revenue streams through policy interventions, innovative non-fare box revenues, sustainable transit-oriented solutions and land value capture mechanisms. All these measures can propel the commercial viability of the projects significantly.
With innovative structuring and rational risk allocation, it is also possible that some of these upcoming projects in the smaller towns and cities will get built on a fully integrated PPP mode.
- NEEYOR B. SHARMA