Traction in the Metro Rail Infrastructure development will provide opportunity for construction companies & equipment manufacturers

– Abhishek Gupta

(Sector Head & AVP Corporate Ratings), ICRA

India has witnessed significant traction in the metro rail infrastructure development over the last one decade. From only about 156 km of network in the year 2010, India’s metro rail network has grown sharply and is now amongst the top ten largest metro networks in the world. Over the last few years most of the big cities with population over 2 million, have proposed to develop metro rail network, or expand their existing network.

As per the latest available data, 15 cities in the country have operational metro networks of about 746 km (many of which are undertaking network expansion), while another seven cities of about 640 km have under-implementation metro projects.

However, this is still modest in comparison with some large countries like China which has metro rail network of ~4000 km (~30% of global metro network). The large urban population with many cities with over a million population leaves tremendous potential for expansion of the metro network in India.

The operational metro network is expected to increase at a faster pace with multiple new metro rail projects approved/under implementation and an even larger network in planning stage. Currently about 868 km of network is under implementation with total sanctioned cost of Rs. 3.5 trillion. Further, as per ICRA estimates, metro rail projects worth Rs. 2 trillion are in the approval/proposal stage; of which a 352-km of new metro network has been approved, with the balance being in the proposal stage.

Metro Rail projects under implementation stage in India

Currently there are many metro rail projects in under implementation stage which are likely to be completed over the next 2-3 years. In total metro rail projects with estimated cost of Rs. 3.5 lakh crore are currently under implementation stage.

Approved/planned Metro Rail Network in India

Apart from this, incremental projects with estimated cost of Rs. 2 trillion have been proposed by many state governments for financial assistance is being considered by Central Government.

Exhibit: Details of Metro Rail Projects which are under proposal stage

 Source: ICRA research, PIB, MoUD, Metro websites

Execution and Funding remains key challenges with weak private sector participation

While India has seen few projects awarded on public private partnership (PPP) model, it has seen limited success thus far. In total six PPP projects in the metro rail sector have been awarded in India. However, the track record of the PPP in metro sector in India is not encouraging. Of the six projects awarded on PPP basis, one project – Mumbai Metro Ph-II was terminated before the start of project while another one – Delhi Airport Line was terminated after becoming operational, Gurgaon’s Rapid metro (divided in two phases) was terminated after becoming operational. Currently there are two operational metro projects (Mumbai Metro One, and Hyderabad Metro), while one project (Pune) is under implementation. The details of the PPP projects in metro rail is provided below:

: Status of PPP based Metro Rail projects in India

 Source: ICRA research, Metro websites

Globally also limited metro projects have been taken up in the PPP mode despite the strong market and stable regulatory environment with respect to ridership and passenger fare pricing. The key reason for weak PPP participation in India has been low ridership, delay in fare fixation, high dependence on real estate monetization, and delay in handing over of right of way and other issues leading to cost and time overruns. Consequently, most of the projects in India have been taken up with the public finance on the EPC mode. Metro projects have received significant funding support from Government of India (GoI) as many state governments have taken lead in developing infrastructure. Given the Government’s thrust for infrastructure development, the metro rail network is likely to witness 2.7 times expansion in the next five years.

Execution of metro rail projects is often challenging as projects are developed in urban areas with high density and issues on land availability or right of way.  Often, due to lack of land, metro projects have to be developed underground or at elevated levels which have high complexity, particularly the underground structure due to presence of underground utilities, uncertain below the ground conditions, etc. Metro projects being capital intensive require sizeable funding including long term low-cost debt funding. In the absence of adequate private sector participation, most metro projects have been funded by Central and State Governments with debt from multilateral agencies. So far, agencies like Japan International Cooperation Agency (JICA), Germany’s KFW (KfW), Agence Française de Développement (AFD), European Investment Bank (EIB), have supported metro rail financing in India.

Concluding Remarks

The Metro Rail infrastructure development has seen strong traction in the last decade and is expected to provide sizeable opportunities for construction and equipment manufacturing companies over the next three to five years due to a pipeline of projects which are in the approval/planning stage. However, this would also be dependent on adequate budgetary allocation from Governments and availability of low cost borrowings. Among the other key constraints which could impede metro projects include availability of land, approvals, and complexity of execution.

Typically, the metro rail development cost ranges between Rs. 280-320 crore/km for elevated metro and the cost could be much higher in the case of an underground metro network. Civil construction forms ~35%-45% of the overall cost. Given the large size of the metro projects, this is likely to offer sizeable opportunities for construction companies over the next five years. ICRA estimates that metro rail projects will generate Rs. 800 billion of opportunities for construction companies over the next five years. This would also translate into healthy demand for construction equipments from these construction entities.

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