The inauguration of Bangalore Metro last month was a milestone for the urban transportation sector. Metro rail started way back in 1984 when Calcutta Metro started its partial service between Esplanade and Bhowanipore. It took another 18 years for India to start the next metro rail service in 2002 in Delhi. Now in 2011 about eight cities are in the process of either upgrading or constructing a metro rail. Along with Kolkata and Delhi, cities of Bangalore, Chennai, Hyderabad, Mumbai, Jaipur and Kochi are under various stages of implementing metro rail. Cities of Chandigarh, Ludhiana, Patna, Indore, Pune, Lucknow are looking at developing metro rail services.

The proliferation of metro rail projects has led to a debate on its economic sense to a country like India. The recent study of CRRI on Delhi Metro concludes that the economic rate of return (ERR) of Delhi Metro is now 19.98% and the value of social and economic benefits from it will reach upwards of R10,000 crore by March 2012. ERR of Kolkata Metro is estimated to be 13.1% and Bangalore Metro, 22.3%. These are well above the criteria of 12% prescribed by the Planning Commission. Then there are other benefits not captured in ERR like regeneration of economic activity in congested areas or far flung parts of city.

Chandni Chowk in Delhi is a classic example. The famed shopping hub of Chandni Chowk was literally dying as the commercial district until the Metro chugged in. Since then more people have started returning to Chandni Chowk and local shopkeepers vouch that business is growing. Similar can be the effect on far flung areas, like the Dwarka sub-city in Delhi. Then there are other gains like job creation and public health improvement due to pollution reduction.

Critics argue that the capital costs of metro are too high compared to its usage. It is too early to draw a conclusion like that. The entire Phase-I of the Delhi Metro started only in 2005, and has by now clocked a ridership of 18 lakh per day. This despite the fact that the entire metro network is yet to be built and the feeder services are not organised. The ridership will further increase as the network grows and the feeder services improve.

Metro rail systems or urban mass rapid transport systems are inevitable for cities given the pace of urbanisation. McKinsey Global Institute estimated that about 40% of Indians i.e. about 59 crore people, will live in cities by 2030. Mobility in our cities is already under strain from the rising urban population. Metro rail systems are built over decades and India is already late. It already has 53 cities with million-plus population. There will be more cities which will become million-plus by 2030. The need is to invest in mass urban transportation systems and invest right now.

However, metro rails are expensive and government funds are limited. So other funding sources have to be explored. Private sector funding through PPP is the only viable and long-term funding source available. Metro on PPP is being implemented in cities like Hyderabad and Mumbai by L&T and Reliance, respectively. We are yet to gauge their performance. There are merits in the arguments of those opposing PPP, but one question crops up. If the PPP has been successful in other infrastructure sectors, why its success cannot be applied in metro? The answer is that it can be applied provided you financially structure the project in way that risks are allocated prudently.

The basic argument given against PPP is that the metro projects have low return because the low metro fares. Private players look for high returns, which is possible only with high fares. Then, private players bring additional benefits by sharing projects risks and improving the level of services.

Metro rail projects have high risks levels; construction risks are high because capital costs are very high; revenue risks are high because a metro cannot offer last mile connectivity to all. PPP provides a framework for sharing revenue and commercial risks. If all risks are borne by the public sector, it can constrain funds for other projects.

The private sector also brings in efficiency in operations and generally provides high quality services. Delhi Metro is probably an exception. Railways have been unable to upgrade the Kolkata Metro or Mumbai locals within time. These services are nowhere compared to international metro rails.

The experience of PPP in roads has highlighted that the private sector controls completion costs better than the public sector. Completion costs refer to the actual costs expended on completing the project after cost and time overruns. A recent study by IIT Madras on the unit cost of public and PPP road projects in India provides statistical evidence to this. The huge savings, given the costs of metro, itself can be a motive for PPP.

PPP in its various forms have been applied or planned for metro services in Kuwait, Bangkok and Kuala Lumpur. PPP can be a useful mode for metro rail services provided the projects are structured right.

The writer is executive director & PPP leader, Ernst & Young. Ankur Goel also contributed to this article.

Views are personal.