Centre to Setup Umbrella SPV to Fund Metro Projects
21, Feb 2019
Prelims level : Economy Mains level : Infrastructure: Energy, Ports, Roads, Airports, Railways etc.,
- The Central government is setting up a fully-owned Special Purpose Vehicle (SPV) to house all its equity and debt investments in metro rail projects across the country.
- The SPV, which will be under the Ministry of Housing & Urban Affairs, will also be monitoring all metro projects. The finance ministry has finalised the contours of the SPV after series of consultations with various ministries.
- From financial year 2019-20, the SPV will raise funds through mix of equity, debt and also borrow from external agencies. The SPV will borrow funds directly through the market or from state-owned India Infrastructure Finance Company Ltd.
- In the Union Budget 2018-19, Finance Minister had proposed the idea of streamlining the Centre’s contribution in equity and debt of the metro ventures floated by state governments. The SPV, a kind of an umbrella body for investments in metro projects across the country, has been seen as an efficient approach to deal with these investments.
- The formation of a SPV at the central government level will ensure that investment and monitoring of metro projects is done by a single agency, in close coordination with the government.
- While the Ministry of Housing & Urban Affairs will evaluate investment structure in metro projects, the SPV will be making these investments.
- The equity contribution to the SPV will be provided by the Central government.
- As per Metro Rail Policy of 2017, the Centre provides funding support to metro projects through various options. In a PPP-based metro rail project, Central funding is governed by VGF
- Another way is the Central Government providing grant of 10 per cent of project cost, excluding private investment, cost of land, rehabilitation & resettlement and tax, to the state government. The Centre can have different forms of equity sharing agreements with the state to fund a metro project.
Metro Rail Policy of 2017:
- According to the new policy, the Metro rail projects will be approved and aided by the Central government only if there is private participation and the projects ensures last-mile connectivity for commuters. The policy allows respective states to formulate rules and regulations and it empowers them to establish permanent fare fixation authorities.
- Further, the projects will now be cleared on the basis on economic internal rate of return of 14%. This is considered one of the widely followed best practices. It will alter the system that runs on the current financial internal rate of return of 8%.
- The policy was proposed by the Union Ministry of Urban Development and provides models for states seeking to develop Metro projects with help by the Centre.
The Three models are outlined in the policy:
- Public-Private Partnership with Central assistance. This will be part of the Union Finance Ministry’s viability gap funding scheme.
- Grant by Centre whereby 10% of Metro project cost will be provided by the Central government as lump sum amount.
- 50-50% Equity sharing model taken between the Centre and state.
All three models have a mandatory requirement of private participation.
- Since Metro projects require huge capital, they were usually financed by the Centre and states with equity and grants. Some amount is usually raised by investment bodies like in the case of Delhi Metro, Japan International Cooperation Agency pooled in massive investment (JICA).
- However, the new policy says that the states will now have to come up with innovative ways to raise funds through means like value capture finance tools. They will also have to issue corporate bonds for metro projects for enabling low-cost debt capital.
- One of the key aspects of the policy is the last mile connectivity that lays down a catchment area of 5km. The feeder services will require a commitment from the government to be provided via feeders, walkways, pathways and para transport means