In the September 2007 issue of India Business Law Journal, we discussed the two models currently being employed in India for the development of mass rapid transit systems (MRTS).
The first is the engineering, procurement and construction (EPC) model, where the state government through its designated entity develops MRTS through independent contractors and operates it after commissioning the project. This model has been adopted by the Delhi Metro Rail Corporation (DMRC).
The second is the public-private partnership (PPP) model where the state government grants a concession to a private developer to develop, maintain and operate the MRTS for a specified period.
Partner
Trilegal
This model has been adopted for the development of Line-1-VersovaAndheri-Ghatkopar in the city of Mumbai. The above article also discussed the advantages of the PPP model over the EPC model.
In early 2007, the Government of India proposed that MRTS would be developed on the PPP model and that the centre would grant 20% of the project cost towards viability gap funding.
Line-1, Mumbai, is the first MRTS in India developed by following the PPP model. In the Mumbai MRTS, the entire systems implementation, including civil construction works is being carried out by a private developer.
Thereafter, DMRC awarded the project of the airport metro express line (apart from civil works) in Delhi on a build-operate-transfer (BOT) basis, by competitive bid following a transparent tender process. The civil works for the construction were carried out by DMRC to make the project viable.
Driving the EPC model
In recent months, certain state governments have begun debating the implementation of MRTS in their states on the EPC model. The reasons that are being cited include: (i) the high cost of construction and low returns, which make MRTS projects unviable for private developers; (ii) the time-consuming process of selecting private developers; and (iii) the success story of DMRC having employed the EPC model.
Senior associate
Trilegal
The Maharashtra government initially proposed to develop the entire MRTS in the city of Mumbai on the PPP model. However, after awarding Line-1 to a private developer led by Reliance, it was considering developing Line-2 and Line-3 of the MRTS on the EPC model, despite the fact that tenders were issued for the development of both lines on the PPP model. Kolkata is also contemplating the implementation of a MRTS on the EPC model.
There is no doubt that DMRC has successfully commissioned the MRTS in Delhi and is now acting as a consultant to most of the MRTS being implemented in India. However, industry experts believe that due to DMRC’s influence over the MRTS, it is nudging states to follow EPC model.
MRTS Hyderabad
The Andhra Pradesh government (GoAP) had issued tenders for the development of 71km of a MRTS. At the time of tendering, the central government proposed to give 20% of the project cost of Rs124.1 billion (US$2.8 billion) as a capital subsidy, with an additional subsidy of 10% from the Jawaharlal Nehru Urban Renewal Mission also being a possibility. Even the GoAP contemplated contributing 10% of the project cost.
However, last month the project was awarded to a Maytas Infra-led consortium which offered to pay GoAP an amount with a net present value equal to Rs124 billion over a period of 34 years.
In the process, the GoAP and the central government have not only saved Rs48 billion which they would have had to pay as a subsidy, but the GoAP will also receive the aforesaid negative grant. Out of the four bidders, two offered negative grants to the GoAP.
By way of contrast, the 42 kilometre MRTS being developed by the Government of Karnataka on the EPC model in Bangalore is costing the government Rs65 billion while Delhi’s 65 km metro, also developed under the EPC model, is amounting to Rs105 billion.
Judging by the success and benefits arising from the Hyderabad model, the Planning Commission has suggested that all other MRTS in the country be implemented on the same structure. The response to the Hyderabad model has prompted the Maharashtra government to shelve the EPC model and develop Line-2 of the MRTS on the PPP model.
The need of the hour is to provide MRTS in major cities of India within the shortest possible time. With the fiscal constraints faced by various governments in India, the case for PPP appears strong.
However, to make the PPP model attractive and successful, private developers should be placed at the same level as the DMRC. A regulatory framework governing the PPP model will also assist in an easier and swifter implementation of MRTS projects.
Abhishek Saxena is a partner and Dinesh Pardasani is a senior associate at Trilegal in Delhi. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 80 lawyers, some of whom have experience with law firms in the United States, the United Kingdom and Japan.
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