Wednesday, December 9, 2009

India's first private metro rail project is down, but not out

The Rapid Metro Rail Gurgaon (RMRG) Ltd -- India's first totally private metro rail project -- failed to get financial closure by November 30, 2009.
It is a Rs 900 crore project owned by IL&FS (74%) and DLF (26%) linking the DLF township in Gurgaon to Noida, covering a stretch of 5km involving six stations.

It was a disappointment for many who wanted this to be the precursor for clearing many other privately funded infrastructure projects in the country.Some view this failure to achieve financial closure with alarm, but there are others who see this only as a temporary setback.

After all, there are many who desperately want to see this project sail through. For instance, those who want IndiaĆ¢'s Commonwealth Games in Delhi to be an impressive show want this project to roll on.

It will complement the existing Delhi Metro Rail Corporation's network. Haryana's government too wants it, and has already given its go-ahead. IL&FS -- which has become one of the largest players in the real-estate sector both directly and indirectly (though several affiliates) -- lobbied hard to meet the deadline, as this project allow its investments in real estate to gain value.

It would pave way for IL&FS to become one of the biggest bidders for several other metro-rail projects proposed in India's cities. It would be a desperately needed morale-booster for IL&FS -- after it had burnt its fingers badly in the real estate and other development projects linked to Maytas in Hyderabad (IL&FS is now the majority shareholder of this beleaguered company).

DLF, India's largest real-estate player, also wants the RMRG because it would allow its landbanks and proposed townships in Haryana to get a significantly larger valuation.

So why could RMRG not achieve financial closure?

Not because funds were not available, says one analyst.

IL&FS has access to funds, and even now expects the financial closure to be achieved by March 2010.

The stumbling block was the non-clearance of permissions from the central government where its files have got stuck.

After all, once this project gets cleared, it establishes a precedent for other similar projects coming up all over the country.

It also paves the way towards ending the railways monopoly over the railway network.Today, the only semi private railway lines are those which are port linkages (thanks to the Adani group's Mundra Port).

Then there is the Mumbai Metro. Significant parts of this network are currently being constructed by the Anil-Ambani-Reliance group.

But Mumbai Metro is still owned by the state government, unlike the proposed RMRG.The land over which RMRG's rail lines are to be built is owned by DLF.Hence even the stations that come up will be managed by IL&FS-DLF.

In the absence of any clear policy of how to permit this, the financial closure could not be achieved. But many believe that such a policy should get cleared by the end of this financial year.

Significantly, such a policy is already being discussed in Delhi.It will allow for privatisation of airports, of major stretches of roads linked to real-estate-development-rights, and to the building of more metro rail projects.

This, say economy watchers, is an inevitable outcome of coping with India's infrastructure needs which could require money in excess of over$7 trillion (Rs 350,15,000 crore), several times India's annual GDP of $1 trillion.

The government does not have the money. The private sector can get it, provided it can actually own and run the project. It may be recalled that even the RMRG was to be originally developed by the Haryana government, but it went to the private sector because the state government did not have the funds. Ditto for several power projects across India.And ditto for several first class ports as well.

Backing such a policy are the ministries of roads and aviation. The Planning Commission
too is in favour of clearing such projects. Kamal Nath, Union minister for roads and highways has gone on record stating his preference to award large stretches of roads and highways to parties who can fund it themselves by earning money from real estate and development on either side of the roads.

This would effectively make the private sector mini-municipalities for some years, allowing them to introduce well-planned urban infrastructure, with suitable linkages. Praful Patel too has been lobbying for such a policy for allowing at least 200 private airports to come up across India.

Obviously such a policy, mooted by both ministries will require provisions permitting both land acquisition and protection from abuse of pricing (because all public utilities are essentially monopolies).

At the same time, fearful that they might lose clout, many elected representatives would
be reluctant to favour such amendments. But given India's desperate need for funds to finance both infrastructure and the creation of new jobs, the passing of such policies is likely to be just a matter of time.

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