Cabinet Committee clears Metro Rail policy; focus on PPP Model, Urban Development

Big Push For Private Players as Central Government unveils New Metro Rail Policy. Future projects are to be tendered while keeping in mind not only the estimated financial return, but also their social and economic impact!

NEW DELHI: The central government has cleared a new mechanism to hasten Public Private Partnership and privatisation of state-owned companies for strategic disinvestment, as opposed to minority stake sales in public sector units, public offers of equity and the like. Among other major decisions by the Cabinet and the Cabinet Committee of Economic Affairs (CCEA) on Wednesday, a nationwide policy for metro rail transportation was approved. Future projects are to be tendered while keeping in mind their social and economic impact, not only the estimated financial return.

The new policy on metro rail projects requires a higher than before commitment from states and public-private partnership (PPP), in terms of land clearances and funding obligations, expansion of viability gap funding, monitoring by the Centre and provisions to help on delays.

The policy stipulates a shift from the present ‘Financial Internal Rate of Return of eight per cent’ to ‘Economic Internal Rate of Return of 14 per cent’ for approving of projects, in line with global practices, went an official statement.

It allows private investments across a range of metro operations through a mandatory PPP route for availing of central assistance for new projects. Private investment and other innovative forms of financing have been made compulsory to meet the huge resource demand for these capital-intensive schemes.

“PPP, last-mile connectivity, rigorous analysis to provide right solution to the right city, a shift from financial rate of return to economic rate of return for large infrastructure projects, and fare fixation authority. All these would set the pace for great expansion of metro rail in this country,” said Vinayak Chatterjee, chairman of infrastructure services provider Feedback Infra.

Earlier, only financial rate of return, which is the rate of return on capital invested, was looked at for metro projects. The economic rate of return is a social cost benefit analysis. “It takes into account multiplier effects that railways brings,” said Chatterjee.

Finance Minister Arun Jaitley said after the meeting that the policy provides for rigorous assessment of new proposals and third-party assessment by agencies to be identified by the government. Metro rail projects with a total length of about 350 km are operational in eight cities — Delhi, Bengaluru, Kolkata, Chennai, Kochi, Mumbai, Jaipur and Gurugram. Others are underway in Hyderabad, Nagpur, Ahmedabad, Pune and Lucknow. In the next four years, said Jaitley, the aim is for 900 km of a metro rail network.

The policy, approved by the Union Cabinet at a meeting chaired by Prime Minister Narendra Modi, also empowers states to make rules and set up a permanent Fare Fixation Authority for timely revision of fares.

The policy also provides for a rigorous assessment of new proposals by independent third-party to be identified by the government, said Housing & Urban Affairs Secretary D S Mishra.

It outlines three models of metro projects for central assistance. In one of them, the Centre will provide a lump sum grant of 10 per cent of the cost, Union Finance Minister Arun Jaitley said briefing reporters on Cabinet decisions.

The second one envisages 50:50 equity sharing model between central and state governments. The third is PPP model with central assistance under the Viability Gap Funding scheme of the Finance Ministry.

Under all these options private participation is mandatory, said Mishra, who was also present during the briefing.

Private participation could be either for complete provision of metro rail or for some unbundled components like automatic fare collection, operation or maintenance.

Such a provision is made compulsory to meet huge resource demand for capital-intensive and high capacity metro projects, Mishra added.

Under the policy, Mishra said, states need to adopt innovative financing mechanisms like Value Capture Financing (VCF) and issue of bonds.

VCF seeks imposition of new taxes or ‘Betterment Levy’ to capture a share of increase in the assets value in the vicinity of state-sponsored infrastructure projects like metro rail project.

Besides Delhi, metro services with a total length of 370 kms are currently operational in seven cities — Bengaluru, Kolkata, Chennai, Kochi, Mumbai, Jaipur and Gurugram.

Metro projects of 537 kms are under construction.

Projects about 600 kms in length are under the consideration of the government and will require to follow the the new policy, an official said.

Meanwhile, Mishra said the policy also seeks to ensure last mile-connectivity, requiring state to give commitment regarding feeder bus services and ensuring infrastructure like walking and cycling pathways.

To ensure that least-cost mode of public transport is selected, the new policy also mandates that alternate analysis is carried out before proposing the metro rail projects.

The policy requires state to compulsorily set up Urban Metropolitan Transport Authority (UMTA) which will prepare comprehensive mobility plans for cities to ensure complete multi-modal integration.

It also stipulates shift from the present ‘Financial Internal Rate of Return‘ of 8 per cent to ‘Economic Internal Rate of Return’ of 14 per cent for approving metro projects.

Economic rate takes into consideration, apart from financial aspect, other benefits of the projects like employment generation and reduction in pollution.

The new policy also mandates Transit Oriented Development (TOD), which envisages setting up projects like housing and offices within walkable distance from the metro corridor.

The new policy also mandates evaluation of various modes of mass transit like the bus rapid transport system, light rail transit and tramways. Executing authorities must ensure last-mile connectivity through environment-friendly infrastructure like walkways and cycling corridors, according to the policy.

Strict pre-conditions on financial aspects will see fewer projects being taken up, said Anwarul Hoda, professor at the Indian Council for Research on International Economic Relations, a think tank. “The government has done this in a situation of high demand and less resources. This is to match the available resources for the projects that have been taken up.”