Urban Infrastructure | Business or Welfare?

Urban infrastructure is complex business. Rarely have we built any major world class infrastructure in our cities, which have had a good sustainable business case for private investment. Let´s not consider Airport Terminal Projects, where all implications of higher capex and cost and time overruns have been conveniently passed on to the hapless air commuter taking advantage of lack of price elasticity of demand. Starting from the past examples of Kolkata Metro to Delhi Metro, moving on to Mumbai Sea Link, and Airport Line of Delhi, and current projects of Mumbai Monorail or Namma Metro of Bangalore or Mumbai Metro Line One, and projects under construction like Hyderabad Metro or Kochi Metro, and even the future marquee projects such as Sewri -Nhava Sheva Sea Link or Metro lines 3 to 7 in Mumbai – all are unviable investments. These projects are either running up huge cash losses, or are hiding behind the fatade of absurdly low concessional interest rates offered to our sovereign state borrowers by generous countries like Japan. None of these ventures can even dream of generating usage fees from citizens which would be adequate to recover operating costs and pay for market interest rates, leave alone return on investment for equity! Does this leave any room for private investments, or Private – Public Partnerships in infrastructure space? How is this handled in other countries?

Let´s go beyond the inherent strategic economic unviabilities of such urban infra projects and take a look at what´s happening at a tactical or implementation level. An interesting study by Aalborg University in Denmark on cost and ridership in transport projects reported that urban rail projects, on an average, turn out to be significantly costlier than budgeted. For the 44 urban rail projects in the Aalborg sample for which data on cost overruns were available, average cost overrun was 45 per cent. At the same time, the study shows urban rail achieving considerably fewer passengers than forecast and thus lower revenues. For the 22 urban rail projects in the sample, actual ridership was on average 51 per cent lower than forecast. Thus, viability of urban mass transit systems is threatened on two fronts, both costs and revenues. Urban rail is doubly risky in economic and financial terms, and the possibilities for financing cost escalations incurred during construction through increased revenues from more passengers during operations often turn out to be limited, if not impossible.

So, how can we create a business case for such infra projects? How can we attract private investors? Can construction of such capital intensive assets be bankable? Finding an answer to this vexing proposition is more important today, given our strategic push into developing Smart Cities. Thankfully, a few interesting solutions are emerging, which may transform the sustainability of such projects and help in risk mitigation for the private players as well.

A first step could be to demerge the asset building and operational phases into separate PPP contracts. To make the construction phase attractive to ´build and own´ investors, tools like commercial real estate space, additional building permits and Value Capture Financing (VCF) can be allowed. The projects can be bid-out only after all statutory clearances, rights of way and utility relocations are done and dusted, so that execution risk is minimised. The second solution, for the operational phase, will be to invite bids for revenue-based O&M services, wherein upsides and downsides in ridership revenues beyond a stipulated zone of variation are to be shared by the private and public partners.

Some of these have been tried out in some of the mega-cities of the world, and lessons learnt there can be utilised.

Our cities need huge investments to upgrade our urban infrastructure, and this is not going to happen fast enough, only with taxpayers´ money. We have to find workable solutions to take these infra projects from their current state, which is nothing but welfare projects, to a future state, which is sustainable business ventures.