Risk management in project finance type PPP metro rail transit projects

Abstract

Post liberalisation, the last two decades, India has witnessed along with a fast economic growth, also a very high pace of urbanisation . This large scale, and very unorganised and unstructured, urbanisation and sporadic growth of the cities have been throwing serious challenges in respect of managing urban transportation; our cities are just in chaos and by and large in traffic rampage. As per NUTP 2006 and the world bank report presently some more than 30 cities in India, with population more that 1 million (and out of them three are with population more than 10 million and 5of them with more than 5 million population), lack basic mass transportation system, and as per the international norms and practices they need to be provided with mass transit/metro rail transit system, to deal with this urban transportation chaos. However as per estimation of DMRC, the prime agency in planning and development of metro rail system in India, the creation of this scale of infrastructure on urgency basis needs a huge capital investment, to the tune of something Rs2,50,000crores(USD 60 Billion).In background of present transport infrastructure development by and large confined in sole domain of government capital investment ,which is already struggling against huge fiscal cost and very inefficient and inadequate project execution capability , this is very challenging call and it cannot be met without large scale private participation in development o f metro transport sector in India. To note along, the post globalisation last two decades have globally been very exciting, and challenging as well, in respect of infrastructure development, especially in emerging economies and also in some part of the developed world, and many of innovating and participative project financing ways in infrastructure sector, have emerged out. One of them has been Project Finance. A number of project finance based PPP projects have come successfully, since nineties, particularly in Latin America, Europe, and East Asia, especially in Energy, Road and Mass Transportation sector. Off late India has also been picking up the thread and the infrastructure planners in India are now very serious about adopting project finance based private investment participation in infrastructure development, especially in the urban transport infrastructure development .In last few years a number of project finance based PPP Metro rail projects, such as Mumbai Metro Line 1 and 2, Hyderabad Metrorail, Delhi express have come out ,the concession for the projects awarded by the government and their execution is in progress, and they get operational soon. It is worth to mention that project finance is an innovative method of project financing where most of capital comes through non-recourse or limited recourse debt from the banks/finance institutions, along with limited equity contribution from the project developers/sponsors/owners. The main recourse to the debt is the long term revenue cash flow stream expected out of such projects. Thus it provides high leveraging for participation by private sector developers/sponsors for developing high capital intensive metro rail projects, with their moderate equity contribution. Moreover public transport projects by their nature depend on additional support from government in terms of subsidies in terms of free land and right of way to provide the system and more over some viability gap funding (VGF) to make these projects financially viable. However this added dimension of project finance with PPP , along with x-factor of VGF, requires very intricate risk management system to be put in place to deal with inter relationship between large number of partners and stakeholders such as project sponsors, government, the banks, the project contractors, the local government and other statuary authorities related with approval and licences to the project. It is not to exaggerate if we say the risk management is the crux of successful implementation of any project finance based project. In addition being the non/limited recourse nature of the debt, the lenders/bank have to be careful about the due diligence process adopted by them to ensure about the technical and financial feasibility, viability and soundness of the project, in long term perspective and also how the associated risks to the project implementation and its operation throughout it cash flow life , being allocated properly, efficiently and effectively, so that no uncertainty or unwarranted event comes in the way of success and smooth running of the project and its projected revenue generating capabilities. In this context, the topic of this dissertation work- the Risk Management in Project Finance Type Metro Rail Transit Projects have been selected. As a case study Mumbai Metro Line-1, a project finance based PPP project, under advance stage of execution and to get operational soon has been selected in this dissertation work. Normally the concession agreement, the due diligence process by the lenders, the loan agreement, the independent engineers project monitoring agencies appointed on behalf of lenders/government and the risk management system of the project company provide basic framework for this risk management. Hence through literature review in chapter II these aspects have been analysed and explained in detail. Through this effort, a collated literature is being provided as a ready reckoner for anyone interested in practicing project finance. This literature review is further supported with the international experience and perspective on risk management in project finance based PPP projects in Transport sector. The case study stands on methodology of the thorough study and analysis of primary data collected from the project company MMOPL, the lender bank IDBI, and the government office MMRDA, interaction and discussion with key managers and directors in these offices. In this regard all project documents, the concession agreement, the project appraisal report from IDBI bank, the loan agreement and associated finance documents, and all other relevant documents in process of project finance, the risk management process adopted by the project company have been analysed in chapter V of this dissertation report. Based on the study, the issues and challenges being faced in the way of this project finance project have been presented along with their policy implication in the further planning of PPP projects in Metro Rail systems in India, as chapter VI. Chapter VII concludes the study along with specific recommendations which are perceived as long term directions to facilitate the private participation in Metro Rail Infrastructure development, on the high scale and note of the future planning and targets sets.