Metro, rapid rail concessionaires may get additional VGF

Written by Rajat Arora | New Delhi | Updated: Nov 13 2013, 05:36am hrs
In a major policy initiative, the Centre may let concessionaires of metro and rapid rail seek an upward revision of viability gap funding in the event of significant changes in macroeconomic and financial parameters such as interest rate spike, exchange rate fluctuation and also variation in the gross domestic product and realty index.

The ministry of urban development has moved a note for the Cabinet, proposing these investor-friendly policies for the projects that are to come up in the PPP-BoT mode.

Under the VGF scheme for metro PPP projects, the Centre currently contributes only up to 20% of project cost as grant with no provision of changing it mid-way of a project cycle.

Two metro projects Mumbai Metro and Hyderabad Metro have been undertaken under the PPP-BOT mode and have got 20% VGF from the central government. In both projects, there have been cost escalations.

Suggestions have been made by the concessionaires to have an option of renegotiation in case of significant changes in the detailed project report. However, renegotiation would tantamount negotiations on a single tender basis and would defeat the open bidding principle. Hence, we have proposed the clause of upward revision in additional viability gap funding, a senior urban development ministry official told FE.

The ministry in the note said macro-economic and financial parameters like interest rates, wholesale price index, exchange rate, gross domestic product, reality index, which are in public domain and give a fair measure of uncertainty that are almost outside the control of the concessionaire, have direct impact on the project viability.

It has been proposed that just like we have a price variation clause in an engineering procurement contract (EPC) we may have a formula for additional viability gap funding incorporation in these macroeconomic and financial parameters, the official added.

The ministry in the note also said that property development component should be only a mild sweetener for metro rail projects and not the major source of projected revenue for the metro rail projects. We have proposed to limit the property development component to about 20% of the gross revenue, the official added.

In case of the Delhi airport metro express line, the property development component in the initial years was taken to 70% of the revenue which was later reduced to 37%, but with the slump in real estate business, the entire revenue collection of this line got jeopardized eventually seeing the exit of the concessionaire for the project.