The rapidly growing infrastructure company Maytas Infra Ltd has come under the cloud of the Satyam controversy. Maytas is not merely a reflection of Satyam (in the way it is spelt); it is an extended family enterprise. As of September 2008, the promoter group including members of the B. Ramalingam Raju family held over 36 per cent stake in Maytas Infra Ltd. As widely reported, the Andhra Pradesh government has already ordered a probe into the projects awarded to the company.
Maytas, in a very brief span, has seen meteoric growth. It has marked its presence in diverse areas—roads, seaports, railways, airports, metro rail, rural electrification, water supply etc. In fact, when it comes to transport infrastructure, there is no new vertical left for Maytas to explore. Maytas is involved in the Machilipatnam port project in Andhra Pradesh, apart from the greenfield airports at Gulbarga and Shimoga in Karnataka. This is only a small subset of the large number of projects in Maytas’ kitty. As of July 2008, the company's order book stood Rs 11,474 crore, with significant inflows in subsequent months.
Row over Hyderabad Metro
What is most notable, and now disconcerting, is that Maytas Infra Ltd is part of the consortium that has won the Rs 12,000-crore Hyderabad metro rail project—India’s largest PPP initiative so far. The Satyam controversy has festered an old wound that seemed to be healing. Readers might recall the ripples of controversy created when the celebrated Hyderabad metro project was awarded in July last year. The ongoing debate of whether the EPC or PPP route is the preferred route for metro rail project has resurfaced, but this time for very different reasons altogether. Planners, policymakers and government agencies are sure to be revisiting the issue given that India has planned to construct metro rails in at least 20 cities.
The Maytas consortium, in winning the Hyderabad metro rail project, did not expect any funding from the government. It was a case of “negative grant” where the consortium paid Rs 1,240 crore to the grantor of concession. Clearly, the incentive in building the metro and “paying” for it was the right conferred to develop 18.5 million sq. ft of real estate space.
As an extension of this argument, an important question that arises here is whether metro rail projects can be viable on PPP basis without concomitant real estate development rights. Well, the answers seems no. The Hyderabad metro minus the real estate development rights could never even merit PPP consideration, many experts feel.
By itself, offering real estate development rights to make metro rail projects viable is not a bad idea. Metro rails will necessarily come up in cities having high density of population. (Incidentally, a metro rail for its economic viability needs a potential traffic of at least 20,000 persons per hour per direction.) Secondly, as it is famously said “a metro never ends,” it grows with the city. In many cases, the growth in metro rails have resulted in the growth of the city itself, coming about mainly through real estate development.
Real estate volatility
However, the real estate market can be very volatile. Linking the viability of a metro rail (or for that matter any PPP infrastructure project) to real estate development can undermine the financial equations. Today, the Indian real estate market is at its ebb. Even leaving alone the Satyam controversy, it would be difficult to say how viable the PPP route could have been for the Hyderabad metro in these times of real estate slowdown.
In the light of the Hyderabad metro debacle, it would not be unrealistic to assume that future metro rail projects would be more inclined to go in for the EPC route, adopting the Delhi Metro Rail model. Apart from the Hyderabad metro, the only metro rail that is being implemented on the PPP route is the Mumbai Metro (Line 1), which incidentally is a much smaller project costing Rs.2,350 crore. Metro rail projects at Bangalore and Chennai have embraced the DMRC model and the Kochi metro rail project, for which the PPP route was being contemplated, is now likely to be modeled on the EPC route.
It would also be interesting to see what course the Mumbai metro (Line 2) project takes. Although the state government has planned to use the PPP route, as in Line 1, there is no clarity yet on the issue. For Line 3, which is underground, and would cost much more, the state government has nearly finalized the EPC route, according to sources in nodal agency Mumbai Metropolitan Region Development Agency.
In the DMRC model, which has sufficient “track record”, the Central and state governments come together with equity participation. The remaining funds are raised through borrowings, including international assistance. It may be mentioned that the Centre's viability gap funding mechanism is also applicable to PPP metro rail project, just like any other PPP infrastructure project. According to information available, the Centre has sanctioned a total of Rs 4,544 crore for the Mumbai metro (Lines 1 and 2) and the Hyderabad metro rail project. It is also interesting to note that the Mumbai metro (Line 1) had “bureaucratic” difficulties in securing VGF as the project was conceived much before the Centre's VGF scheme was announced.
It is premature to predict what course the Hyderabad metro rail project would take, but a considerable setback in terms of commissioning schedule is inevitable. Although the present focus is on issues relating to the “developer” and not on the “implementation route”, it is clear that the Hyderabad metro rail project could become an important case study for not just future metro rail projects but also be an inspiration to fine-tune guidelines governing PPP projects in general.
Source : www.projectsmonitor.com
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