26 June, 2018
Metro Rail projects in India have picked up pace and are likely to catalyse substantial opportunities over the next few years for the construction industry owing to a robust pipeline of projects. According to the data available, presently 425 kilometers of Metro lines are operational in 10 cities. In India, metro projects are not perceived only as a solution to transportation requirements but also as a means to transform cities. India is moving towards a metro network of more than 700 kilometers within the next few years and the government has a plan to install metro systems in 50 cities in the country in the months to come.
These are the cities that have a population of more than 1 million. It is estimated that the overall cost of expansion of operational and under implementation approved metro projects is over INR 2,500 billion (Rupees two and half lakh crores), which could result in augmenting the order books of construction contractors by INR 750 -900 billion (Rupees seventy five thousand crore- ninety thousand crore) over the next three to five years. The Centre has planned an outlay of approximately INR 142.6 billion (Rupees fourteen thousand two hundred and sixty four crores) for metro projects across the country, for the current fiscal year.
With the increasing reliance of commuters on rapid transport or mass rapid transport, several metro projects are being incubated or delivered with increasing reliance on public private partnerships (PPPs) and private finance. The first metro system in India was operationalized in 1984 in Kolkata, and today there are about 10 operational metro systems functioning as lifelines to its passengers with the Delhi Metro being the largest metro project in the country.
Regulatory Framework for Metro Projects
a) Railways, as a subject, falls under the Union List of the Seventh Schedule of the Constitution that gives the Parliament exclusive power to enact legislation relating to it. The Metro Railways (Construction of Works) Act, 1978 , which was enacted by the Centre, governs the construction of metros in the metropolitan cities and related matters, in India. Operation and maintenance of metros are governed by The Delhi Metro Railway (Operation and Maintenance) Act, 2002. Both of the aforementioned legislations were amended in 2009 with the passing of The Metro Railways (Amendment) Act, 2009. The amendment widened the coverage of both the acts to cover metro projects in all metropolitan areas of India.
b) Metro Rail Corporations – The jurisdiction specific metro rail corporations are the governing bodies to oversee the development of the respective metro system and its operation. For instance the Delhi Metro Rail Corporation (“DMRC”) was incorporated under the Companies Act, 1956 with equal equity participation from the Government of India (“GoI”) and Government of National Capital Territory of Delhi (“GNCTD”); the Lucknow Metro Rail Corporation (“LMRC”) is a Special Purpose Vehicle (“SPV”) incorporated under the Companies Act 1956 jointly owned by the GoI and the Government of Uttar Pradesh (“GoUP”) with an authorized capital of INR 20 billion (Rupees two thousand crores). Similarly, Bangalore Metro Rail Corporation Limited (“BMRCL”) is also a Joint Venture between the GoI and Government of Karnataka (“GoK”) as an SPV entrusted with the responsibility of Bangalore Metro Rail Project. The Kolkata Metro Rail Corporation Limited (“KMRCL”) is a GoI enterprise implementing the Kolkata (East-West metro) Corridor Project. On the other hand the Hyderabad Metro Rail Limited (“HMRL”) is a government of Telangana Enterprise; the Kochi Metro Rail Limited (“KMRL”) is a state public sector company equally owned by the GoI and the Government of Kerala (“GoK”).
c) Metro Rail Policy 2017 – The New Metro Rail Policy- 2017 (“Policy”) was approved by the Union Cabinet in August 2017 with an aim to rationalize metro expansion in the country. The stated objective of the this policy is to provide clarity on development of projects in terms of collaborations, participation, standardization of norms, financing and creating a procurement mechanism for effective implementation of projects. According to this policy, the metro rail projects would be considered for approval and aided by the Central government only if there is private participation and the projects ensure last-mile connectivity for commuters. The policy allows respective states to formulate rules and regulations and it empowers them to establish permanent fare fixation authorities. Further, the projects will now be cleared on the basis on economic internal rate of return of 14%. This is considered one of the widely followed best practices. It will alter the system that runs on the current financial internal rate of return of 8%.
Various Models of Development under the Policy
The policy highlights several models for development of mass rapid transport systems in the country which are as follows:
a) Private Sector Participation – The policy prescribes private participation for either complete provisioning of metro rail or for some unbundled components of the project, forming an essential requirement of the project. Metro Systems may also explore the possibility of engaging private players in Operation and Maintenance (“O&M”) as well as in provisioning of rolling stock, signaling systems etc. Some indicative O&M Models are:
(i) A Cost and Fee Contract where the authority pays an operator on a monthly or annual basis and the remuneration could be inclusive of a fixed fee and a variable component. The risks are however borne by the authority.
(ii) A Gross Cost Contract is when a fixed sum is paid to the operator for a given period of time with the O&M risks being borne by the operator, whereas, the revenue risks are borne by the authority/ owner.
(iii) A Net Cost Contract where the operator collects the revenue generated from the services provided that if the revenue is lower than the O&M Cost, the remaining cost is compensated for by the authority/owner. However, in this contract all the risks during the tenure of the contract are borne by the operator.
b) Public Private Partnership – It is strongly encouraged under the policy that if the state governments intend to utilize any financial assistance governed by the Viability Gap Funding (“VGF”) Scheme or from the central government, it shall mandatorily explore PPP arrangements. Some of the indicative models of involvement of private sector could be through the following:
(i) Construction of new metro systems through Design- Build- Finance- Operate- Transfer (“DBFOT”);
(ii) Award of concessions for operational services;
(iii) Award of concessions for maintenance and upgradation of infrastructure.
Central Government’s Support to the Metro Projects Envisaged under the Policy
a) Support to PPP – Central financing for this model is available under the VGF Scheme of the Govt. of India.
b) Grant – The central government may consider providing 10% of project cost to the state government excluding the private investment, cost of the land, rehabilitation and resettlement costs and tax for development of a metro system. Private participation in some form of implementation would be required to the extent it is feasible for availing this grant.
c) Equity Sharing Model – Under this model equal equity would be shared between the central government and the state government with formation of an SPV being an essential feature. This model too like most of the other models suggested under the policy has the requirement of having a private sector participation in any feasible form. The GOI will provide financial support to the metro system project in the form of equity and subordinate debt (for part of taxes) subject to an overall ceiling of 20% of the cost of the project excluding the private investment, cost of the land, rehabilitation and resettlement costs.
Conclusion
The metro projects being capital intensive require large scale funding from the central government or external funding agencies. However, according to the new policy the states will have to come up with innovative ways to raise funds through means like value capture finance tools. They will also have to issue corporate bonds for metro projects for enabling low-cost debt capital. The policy lays stress on private sector participation in implementation of the metro projects going forward.
While the opportunity in the metro space is without a doubt enticing for international EPC contractors and design firms, however, infrastructure sector being a high risk sector it is advisable to seek legal and tax advise at the drawing board stage so that the foreseeable risks could be optimized and mitigated well in advance.
For further information, please contact:
Parul Kashyap, Counsel, Clasis Law
parul.kashyap@clasislaw.com
Sudipto Mitra , Clasis Law
sudipto.mitra@clasislaw.com
