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Construction : Urban Infrastructure | March 2018 | Source : Infrastructure Today

Sizeable Opportunities

Metro rail sector has seen strong traction in the last couple of years and is expected to provide sizeable opportunities for construction companies over the next three to five years due to a strong pipeline of projects which are currently in the approval or planning stages.

The overall cost of expansion of the operational and approved metro projects under implementation is over Rs 2.5 lakh crore, and another Rs 2 lakh crore worth projects are in various stages of approval and are likely to come up for bidding in the next five years. This is expected to boost the order book of construction companies from Rs 75,000 to Rs 90,000 crore over the next three to five years. 

Urban public transport in India consists of mass rapid transit (MRT), para-transit and personalised public transport. MRT can be rail- or road-based and carry very large number of people by using up minimum space. For cities with large population, MRT is essential to reduce the burden on other modes of transportation. However, within MRT there is a need to select the right mode of transport, as these projects are highly capital-intensive and cities will have to find the right mix of cost and operational efficiency. The benchmarks used for the selection of the right mode of urban transport are shown in Table 1. There are 18 cities with a population of over 2 million and 35 cities with a population between 1 and 2 million.

In India, out of 18 cities with a population over 2 million, nine cities have operational metro network and another five have metro projects that are under implementation or with proposals for development. Further, many of the cities with operational metro network have sizeable expansion plans. In total, about 440 km of new metro network development has been approved and another ~800 km is in the proposal stage. Given the large size of metro projects, sizeable opportunities exist for both infrastructure developers and construction companies over the next five years.

Sizeable construction opportunities
Given the pipeline of metro projects, order inflows to the construction sector from the metro development sector are expected to remain healthy, considering the large number of projects which are under approval or in the evaluation stage. Many contracts are yet to be awarded to the ongoing metro projects. Apart from the operational metro projects and those under construction, another 15 cities holding a potential of over 1,400 km of metro rail network have proposals for development. Currently, metro rail projects worth Rs 200,000 crore of project cost are in the approval stage. Assuming 400 km of metro network is taken up for development over the next five years, it would involve a total capital investment of Rs 100,000 crore of which ~Rs 35,000 crore is expected to be from civil construction opportunity. Hence, the opportunity for the construction sector is immense, considering the large number of projects under implementation or planning.

Operational and under implementation metro rail projects
Currently, metro rail network is operational in nine cities in India while projects on new or expansion of existing network are under implementation in 11 cities (including eight with operational metro). In total, close to 950 km of network is either operational or under various stages of implementation. These projects have an approved cost of Rs 2.5 lakh crore, of which funding from the Government of India (GoI) is close to Rs 59,800 crore.

With the overall cost of projects going beyond Rs 2.5 lakh crore, construction contractors have benefitted from the proliferation of the metro rail projects in India.

Proposed and under approval stages of metro rail projects
Apart from the operational and under construction projects, another 15 cities holding a potential of over 1,400 km of metro rail network have proposals for development. Currently, metro rail projects worth Rs 200,000 crore of project cost are under approval stage.

Nature of metro rail contracts
Metro rail development project comprises three main components - civil construction, rolling stock and systems (power supply, signalling and communication) work. Civil construction is the biggest chunk and forms about 35 to 45 per cent of the overall development cost of the project. It is followed by rolling stock (~25û30 per cent of project cost) and systems work (~15û20 per cent of project cost). Typically, metro rail development cost ranges between Rs 250 and 300 crore/km. The cost is much higher in case of underground metro network. The scope of the construction work is purely engineering procurement construction (EPC) and the payment timelines are generally favourable to the contractors, as the funds are available through budgetary allocation or multilateral funding.

Execution challenges are high in metro projects. This is because a majority of projects are developed in areas which already have high traffic and building density, resulting in limited land availability. While both underground and elevated structures involve high complexity, underground structure is more complex.

Many large Indian construction companies have taken up projects in the metro sector in the past. Some of the players with large metro contracts are: ITD Cementation, NCC, Afcons Infrastructure, L&T, IL&FS Group, Simplex Infrastructure, Tata Group and J Kumar Infraprojects. ITD Cementation has bagged the highest number of EPC projects in metro sector, while L&T has exposure to both EPC and publicûprivate partnership (PPP) contracts and is developing the largest metro PPP project (Hyderabad Metro). Afcons, NCC and IL&FS Group also hold sizeable metro rail projects.

Onus on states
The Union Cabinet has recently approved the new Metro Rail Policy (MRP), which aims to facilitate the development of metro rail infrastructure in a responsible manner. It also aims to address the increasing metro rail demand from multiple cities, the highly capital-intensive nature of its infrastructure development and limited public resources. The policy empowers states by putting the onus on them to improve project viability, promoting transit-oriented development (TOD) and allying it with real estate development, improving last-mile connectivity and attracting private investments through the PPP model.

The policy provides for rigorous assessment of new metro proposals, including alternate transit mode analysis to ensure that the least cost and most efficient mass transit mode is selected for public transport. Further, it proposes an independent third party assessment of proposals by government-identified agencies. It also plans to empower states to regulate and set up fare fixation authority as well as promote other non-fare revenues, such as advertisements and lease of space. Also, there are provisions to raise resources using innovative mechanisms, like "betterment levy" on nearby assets and issuance of corporate bonds, and improve last mile connectivity for a catchment area of nearly 5 km to promote metro ridership.

With the objective of eliminating constraints in financial resources and improving project viability, the new policy has made it mandatory to have a PPP component (either for complete provision of metro or for some unbundled components like operations and maintenance or O&M) to be eligible for availing central financial assistance for new metro projects. States can now choose any of the three options for availing central assistance, subject to private participation:
  • PPP with central assistance under the viability gap funding scheme
  • Central government grant whereby 10 per cent of the project cost will be given lump sum as assistance
  • 50:50 equity sharing model between the central and state governments
The policy shifts from the present financial internal rate of return (FIRR) of 8 per cent to the economic internal rate of return (EIRR) of 14 per cent for approval of metro projects. The EIRR takes project externalities including financial as well as social and environmental gains into account.

Limited success of PPP
PPP in the metro rail sector has so far been limited to only six such projects, one of which (Mumbai Metro Phase 2) was terminated before starting, while another (the Delhi Airport Line) was terminated after it became operational. Currently, there are three operational PPP-based metro projects (one in Mumbai and two in Gurugram) and one is under implementation (Hyderabad Metro). The PPP participation in metro rail projects has been limited thus far, due to three key factors: low economic viability, inadequate risk allocation and lengthy dispute resolution. While TOD/commercial development rights can enhance project viability to an extent, this may not be sufficient. The encouragement of PPP in the metro rail sector would require adequate risk allocation in the concession agreements, availability of low cost debt funding and the presence of a robust dispute resolution mechanism.

While attracting private participation for funding, metro projects could be challenging, private sector interest in O&M of metro services would be relatively more. As per the policy, in O&M, private sector participation can take place in three major ways: cost plus fee contract, gross cost contract and net cost contract. In all these modes, the revenue risk is borne by the project owner while the private sector brings in the capital, technology and efficiency for operation and maintenance of the metro rail.

- Rajeshwar Burla, Assistant Vice President and Associate Head, Corporate Ratings, ICRA.

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