After Delhi, Mumbai and Hyderabad, six more cities—Chennai, Kochi, Bangalore, Ahmedabad, Chandigarh and Pune—are expected to launch metro rail systems in the near future. But the stir created by Delhi Metro Rail Corporation (DMRC) chief Ellatuvalapil Sreedharan’s missive to the Centre over perceived risks stemming from the Hyderabad project being awarded to a private developer could throw a spanner in the works.
With an estimated $13.5 billion required to construct the five metro rail systems in Delhi, Bangalore, Kolkata, Hyderabad and Mumbai, the question of how these projects should be financed has become a bone of contention between the urban development ministry (the nodal department for metro projects) and the Planning Commission (which advises the government on infrastructure projects).
The differences centre on whether or not private players roped in for metro projects should be allowed to develop real estate along metro lines to help pay for the overall project and keep passenger costs low. Though all concerned, including the finance ministry, agree that the ultimate decision lies in the hands of the respective state governments, the urban development ministry seems to favour a Centre-state partnership as that would ensure better service quality. It also feels that lack of resources should not be the only consideration.
While Delhi, Bangalore and Kolkata are being taken up on a joint-ownership pattern with the Centre and concerned state as project promoters, the metro projects in Mumbai and Hyderabad have been taken up on a PPP basis. Chennai is also hoping to go the DMRC way. But the Planning Commission is pushing to award the project to a private bidder and is making a similar case for Kochi.
“In my view, the Centre and states should not get into the running of metro rail projects because they will not be able to handle the liabilities. However, the metro being an urban amenity, the Centre should extend some funds through the viability gap funding route,” Planning Commission deputy chairman Montek Singh Ahluwalia told FE.
The commission, which has framed the model concession agreement (MCA) for the Mumbai and Hyderabad metro projects—the only two to have so far been auctioned out to private players—feels the government’s resources are not sufficient to fund all infrastructure projects and actively makes a case for awarding projects to private bidders. In such cases, real estate development by the concessionaire helps make the project viable.
The finance ministry, which stamped its approval to the Hyderabad metro project, is willing to provide up to 20% as a viability gap fund grant for PPPs, if states opt for that route. But it admits there is room for greater debate on land use as well as valuations. “There is need for an informed discussion on whether land should be parcelled out for a metro project. The issue of land valuation must also be looked into,” a senior finance ministry official said. “We cannot make predictions on the Hyderabad metro at a time when it is not even operational,” he added.
“Whatever the funding pattern, our objective should be to provide a sound system with a reasonable fare structure, which can be used by the common man,” M Ramachandran, secretary, urban development ministry, said, stressing that the primary concern should be to provide an effective metro rail system, not realty development.
Incidentally, the urban development ministry had asked the Planning Commission to draft a concession agreement for metro rail projects, just as the think-tank had done for ports and highways. But while it is yet to clear the document, it has been used successfully for Hyderabad and Mumbai.
“The Hyderabad MCA has been approved through an inter-ministerial process in the government. It is a standard document based on international best practices and allows for a transparent bidding process,” Gajendra Haldea, principal advisor (infrastructure) in the Planning Commission, said while laying to rest any possible fears of misuse of land in Hyderabad.
Analysts point out that internationally, metro rail systems are sustained by property development, as in Hong Kong, Tokyo, Singapore, Taipei and even for homegrown DMRC. The funding model for DMRC is at sharp variance with that in Hyderabad. For Phase-I of the Delhi Metro, which stretches over 65 km, funds amounting to Rs 10,571 crore were spent. While the Japan Bank of International Cooperation provided 60%, the Centre and the Delhi government chipped in with the balance.
As far as Hyderabad is concerned, the Andhra Pradesh government opted for the PPP model. It awarded the project to Nava Bharat Consortium last month. As a sweetener, it also gave the concessionaire rights to develop a part of the 269-acre land used to operate the metro rail. The 71-km Hyderabad metro is estimated to cost Rs 12,132 crore. None of the four consortia that eventually submitted financial bids wanted viability gap funding as they felt real estate development would be a sufficient revenue stream.
The Nava Bharat Consortium—comprising of Nava Bharat Ventures Ltd, Maytas Infrastructure Ltd, Italian-Thai Development Plc and Infrastructure Leasing & Financial Services Ltd (IL&FS)—will undertake the project on design-build-finance-operate-transfer basis. The consortium has actually offered to pay the state Rs 30,311 crore during the 35-year concession period. NVS Reddy, managing director Hyderabad Metro Rail Ltd (HMRL), said, “Metro projects are not financially viable and so realty development helps cross-subsidise losses to the private bidder.”
DMRC’s Sreedharan, who was advising the HMRL project until his recent outburst to Ahluwalia led to a severance of ties, noted in his plaint: “It is apparent the BOT operator has a hidden agenda which appears to be to extend the metro network to a large tract of his private land holdings so as to reap a windfall profit of four to five times the land price…. State governments will not be able to achieve standardisation and uniformity, which is essential to reduce the cost and encourage equipment vendors in the country.”
Hemant Sahai, the legal consultant who drafted the Mumbai and Hyderabad concession agreements, said, “The Hyderabad concession agreement is similar to the one drafted for Mumbai. There is no separate piece of land being given to the concessionaire for development,” Only the airspace above the maintenance depot and stations is being given, he noted.
Interestingly, as a consultant to the Hyderabad project, DMRC had pointed out the efficacies of financing it through the PPP route. It has made similar recommendations for Kochi and Mumbai as well. DMRC, although run in partnership with the Centre and Delhi government, is itself roping in private players to construct select routes like the airport express link in the capital.
Moreover, real estate development is the main money-spinner for the rail operator. It has developed properties in prime areas of the Capital, including Shahdara, Seelampur and Khyber Pass, some of which have been given on 90-year lease. In six years of operations, DMRC has earned over Rs 600 crore from realty development. In 2006-07, DMRC generated Rs 542.78 crore in revenue. It earned Rs 222.66 crore from operations, Rs 6.6 crore from consultancy and Rs 61.71 crore from other income. But the highest revenue came from real estate--Rs 251.81 crore.
On being contacted, DMRC declined to comment on the issue.