Metro rail projects: Whose line is it anyway?

By Akshay Malhotra and Ishita Gupta, HSA Advocates

Metro rail projects provide mass transportation at affordable fares, as well as decongesting vehicular traffic. As with other infrastructure plans, metro rail projects are capital intensive and involve risks such as political, regulatory and conflict over land acquisition. The legal framework of metro rail projects is governed mainly by the Metro Railways (Construction of Works) Act, 1978 (Construction Act) and the Metro Railways (Operation and Maintenance) Act, 2002 (O&M Act).

Akshay MalhotraAssociate partnerHSA Advocates
Akshay Malhotra
Associate partner
HSA Advocates

The government initiated the development of a model concession agreement (MCA) through the Planning Commission of India to promote public private partnerships (PPP) in metro railway construction and lessen its financial burden. The MCA requires the bidder to undertake construction and operation and maintenance (O&M) of the project with a right to collect user fares, which are disclosed at the bid stage. A bidder can project the revenue by means of the pre-determined and regulated user fare and is also entitled to viability gap funding (VGF), as an up-front capital grant to make the project viable.

Contracts for the Mumbai (Line 1) and Hyderabad metro rail projects were awarded by the respective state governments by way of PPP in 2007 and 2010 respectively, under the authority of the Indian Tramways Act, 1886 and the Andhra Pradesh Municipal Tramways (Construction, Operation and Maintenance) Act, 2008. The concession agreements for both projects provide for VGF and a predetermined user fee, a suitable escalation mechanism, technical specifications including testing methodologies and detailed rights and obligations of the parties.

During construction, the central government extended the applicability of the O&M Act to Mumbai and Hyderabad, resulting in a changed regulatory framework. There are notable discrepancies in the respective concession agreements made under the Tramways Act, Andhra Pradesh Municipal Tramways Act and the O&M Act such as user fares, safety certifications, powers of the metro rail administration (MRA), which would be the concessionaire in PPP projects under the O&M Act. The most contentious of these discrepancies is user fares, which, under the O&M Act, are to be determined by a fare determination committee. The initial fare, that is the user fare until the setting-up of the fare determination committee was to be set by the MRA. The predetermined user fare provision was ignored. The concessionaire, having the liberty to determine the user fare, would put at risk its VGF entitlement in the case of user fares being higher than those agreed in the concession agreement. This is because the VGF guidelines require the project to offer per-determined user fares to receive VGF.

Ishita GuptaAssociateHSA Advocates
Ishita Gupta
HSA Advocates

Amid this controversy, the government promulgated the Metro Rail Policy, 2017, to encourage development of other metro rail projects. The policy, among other matters, highlights three options for states wishing to undertake metro rail projects with assistance from the central government. Firstly, establish a PPP with assistance from the central government under the VGF scheme. This would be subject to an overall ceiling of 20% of the cost of the project excluding private investment, cost of land, rehabilitation and resettlement. Secondly, accept a central government grant amounting to 10% of the project cost. Lastly, agree a 50:50 equity sharing model between central and state governments. The policy also proposed private sector participation in O&M through one of three models: cost plus fee, where the private operator is paid a monthly or annual payment with the revenue risk borne by the owner; gross cost, where the operator is paid a fixed sum for the duration of the contract and bears the O&M risk with the revenue risk being borne by the owner; and net cost, where the operator collects the revenue, with any shortfall from the O&M cost, being met by the owner.

Though the policy seeks to attract private investment through the PPP model, existing structures have faced difficulties. The policy does not greatly assist the attempts by the government successfully to complete existing metro rail projects. Attempts at amending the Construction Act and the O&M Act to provide for effective frameworks for PPP projects have been unsuccessful.

With new projects on track, it is imperative that the government create an investor-friendly framework that, to the fullest extent possible, eliminates uncertainty. At the same time, retrospective application of the amendments should be considered in order to safeguard and enhance projects already contracted on a PPP basis.

Akshay Malhotra is an associate partner and Ishita Gupta is an associate at HSA Advocates. HSA is a full-service firm with offices in New Delhi, Mumbai, Bengaluru and Kolkata.

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