EPC vs PPP for metro projects
This article is in response to the editorial Metro Rail - Let
there be action! (Projectmonitor, September 1-7, 2008). The editorial has
rightly brought out the differences in expert opinions regarding the suitability
of methodology to be adopted for metro projects in view of their size and
In actual practice, none of the planning, designing, construction, operation and
maintenance of metro railway projects has been taken over by the Union ministry
of urban development, as the nodal agency for implementation and operation of
these projects, as Indian Railways has refused to finance them as being
un-remunerative. Although the urban development ministry has no organisational
expertise in such projects, it has taken over the projects with investment and
implementation with the help of international experts, keeping Indian Railways
outside the loop even on technical matters.
International experts have created an impression that the metro rail they have
proposed is quite different from the railway system in operation in India and
that there is a need to induct the best of the world system for Indian metro
rail. In fact, Indian Railways has experience of more than 150 years in railway
system and more than 75 years in metro rail. MRTS on Western and Central
Railways is being operated since 1930 and underground metro in Kolkata since
1980. The structure and operation of the proposed metro are superior than the
MRTS proposed by Delhi Metro Rail Corporation, both in capacity and frequency
and rated as one of the best in the world in efficient management of operations.
This article proposes the ideal model to be adopted for Indian MRTS in the
backdrop of the recent differences between DMRC and metro organisations in
Hyderabad and Mumbai, and awakens Pune Municipal Corporation and Pune-Chinchwad
Municipal Corporation to learn lessons from the leveraging tactics adopted by
DMRC for arrogating a decision making role to itself instead of an advisory
PPP model is being considered as the only solution for all infrastructure
projects of the 11th Plan. The Planning Commission and the finance ministry
refuse to look at any other model for railway projects. The DFC railway corridor
has been delayed by more than a year on this account. The main objective of a
PPP model is improvement in quality, cost and efficiency of a given
infrastructure service to the citizens. The private sector borrowing cost is
more than the government borrowings; hence, efficiency gains in PPP should
offset the higher private sector borrowing cost. Non-cooperative practices add
to the project cost and in turn the cost burden impinges on the citizen, thereby
offsetting whatever efficiency gains the PPP is expected to deliver.
For metro systems in India, DMRC followed the EPC model for Delhi, while for
Metro-I and Metro-II in Mumbai and MRTS in Hyderabad, the respective states of
Maharashtra and Andhra Pradesh have followed the PPP model, which was accepted
by DMRC till award stage. The financial implications of the project cost under
the two models have 100 per cent variation in addition to viability gap funding
Why PPP costs more
The reasons for increased cost under PPP model are, apart from certain basic
inputs required to be added to the cost, large amount of margins are made
provision of, to cover project risk, operation risk, financial risk and
political risk etc. Reasons for additional investment necessary in such projects
in PPP models are summarised below:
u Cost of pre-tender
feasibility studies i.e. technical, traffic and financial.
u Project completion risk
including land acquisition delays.
u Provision for legal
documentation financial closure etc.
u Additional cost for
international partner in JV.
u Training cost
internationally and locally for O&M.
u Payment to
international consultants for PMC during construction.
u Additional margins and
contingencies for political risks.
u Restricted competition
for financial bid within three-five parties.
u Long concession period
of 30-35 years for contractual obligation.
In case of road projects, the PPP contracts were generally higher than the EPC
contracts by about 15-20 per cent. And, in case of railway projects, the
responsibility of complex railway operations with risk of derailments, import of
rolling stock, associated high element of import duties and high replacement
cost of assets, long concession period and safer margin against risk have
resulted in 75-100 per cent over EPC cost. It is, therefore, suggested that
railway projects should be generated on EPC model.
New mixed model
u For railway projects,
PPP model, if adopted, should be for fixed assets and maintenance with differed
payment or on annuity basis. And EPC model should be adopted for mobile assets
and operations, due to their technical complexities. If IR is unable to supply
BG wider coaches, from its existing workshops at ICF and Kapurthala, DMRC should
set up an exclusive manufacturing plant for BG wider coaches capable of
negotiating 100m curves, with necessary induction of technology; or BEML may be
asked to manufacture BG wider coaches as above, keeping in view the country's
demand of coaches for new metros.
u Operations of metro
systems being complex and IR having more 75 years of metro experience, backed by
RDSO's research support, should be handed over to IR for operation on
subcontract basis or operated by DMRC. This will give tremendous benefits and
savings in O&M cost, thereby eliminating VGF subsidy with consequent heavy
reduction in fares.
Reduction of risk and cost
Even though we have indigenous expertise in construction, supply of coaches,
operation and maintenance of a BG system, the mistake done by DMRC is to adopt
imported SG coaches, at three-four times the cost of indigenous coaches, with
equal operational performance. Capacity, comfort and safety are more with BG
indigenous coaches. Therefore, if BG with indigenous coaches of metro railway
similar to that operated on Western and Central Railways-a mixed EPC-cum-PPP
model-could be considered for partial investment by the private sector, in fixed
railway assets only, along with its maintenance, and leave the mobile assets and
operations on EPC basis, will eliminate to a great extent viability gap funding
to such metro rail projects reduce the fare structures considerably.
Financial Implications of Project Cost
Rs 1,500 crore
Rs 650 crore
Rs 2,350 crore
Rs 6,100 crore
Rs 4,500 crore* (approved)
Rs 9,000 crore** (anticipated)
Rs 281 crore
CBM Corridor (actual based on
Rs 1,532 crore
(18.57 per cent of gross cost)
Rs 8,250 crore (lowest bidder
Rs 258 crore/km
Approved at 50 per cent of bid price ** Expected price of proposed bids due to
DMRC and Hyderabad Metro
Regarding the recent disagreement between the Hyderabad Metro authorities and
DMRC resulting in cancellation of DMRC's contract by HMRTS, DMRC seems to be on
the wrong track as it was, from the beginning till the award of contract,
associated with the project. There are two methods of financing the
un-remunerative part of the project - one by provision of a VGF subsidy by the
Centre and the other by exploitation of land. In fact, DMRC is using the second
alternative for Delhi Metro, and therefore, there is no reason why Hyderabad
should not adopt the second alternative for its metro. I would like to
compliment Maytas, the winning bidder, for being honest enough to give the
government a large amount as negative viability gap funding out of the receipts
from the exploitation of land. DMRC is probably unhappy as its role in decision
making is reduced and that this model has proved to be superior to VGF subsidy
by the Centre. Let me compliment the Hyderabad government for its bold stand in
executing the project without DMRC.
Lessons to learn
Of late, Mumbai Metropolitan Region Development Authority is also facing similar
problems with DMRC which is now dictating the state government to adopt EPC
model for the Charkop-Bandra-Mankhurd (CBM) corridor, failing which it will
withdraw support to MMRDA. In fact, DMRC has given a letter to MMRDA threatening
its withdrawal from the project and MMRDA seems to be in a fix. DMRC wants to
change its role from advisory service to decision-making service, as they did
for deciding the adoption of SG for Mumbai metro; even though BG was superior
and economical by 20-25 per cent and advocated by the ministry of railways.
It is high time PMC and PCMC and the Government of Maharashtra learn their
lessons from the above; particularly the Pune Municipal Commissioner who openly
accepts that they do not understand the complex metro subject and have paid very
high consultancy fees. The PMC would abide by the decision made by DMRC on the
subject of gauge and adoption of imported coaches.
(V.K.J. Rane, based in Pune, is former Managing Director of IRCON Ltd. He
invites readers to respond to his article. He can be contacted at email@example.com.)
[October 13-19, 2008]