COST ESTIMATES

Capital Cost Estimates

The cost estimate has been prepared covering civil, electrical, signaling and Telecommunications
works, rolling stock, traffic integration facilities, security at Stations, environmental protection,
rehabilitation, etc. at September, 2011 price level.
The rates are taken as per DPRs of DMRC Phase III Corridors, which was at Jan2011 price
level. These rates have been enhanced by 10% to arrive at Sept2011 Price level and also due to
difficult working conditions and different subsoil conditions of Mumbai.

The element of central and state taxes and duties (including customs duty, excise duty, VAT),
octroi and insurance has been excluded for working out the base project cost. However, these
details are tabulated separately for use in financial appraisal of project. The rates of the taxes,
duties, octroi and insurance have been adopted as per the Mahim Kanjur Marg Metro DPR.
Base capital cost of project at September, 2011 price level, works out to be Rs. 150551 Million
excluding land cost and Rs. 166416 Million including land cost. Central and state taxes and duties
(customs, Excise and VAT) have been worked out to Rs. 25467 Million. The component towards
octroi and insurance has been worked out as Rs. 2951.50 Million. The abstract capital cost estimate
is presented in table above

Operation & Maintenance Estimate

The total Operation and Maintenance cost in the years 2016-17, 2025-26 and 2031-32 is
estimated at about Rs. 4407 Million, Rs. 8152 Million and Rs. 12407 Million respectively

ECONOMIC ANALYSIS
The economic appraisal has been carried out within the broad framework of Social Cost Benefit
Analysis Technique. It is based on the incremental costs and benefits and involves comparison of
project costs and benefits in economic terms under the with and without project scenario. In
the analysis, the cost and benefit streams arising under the above project scenarios have been
estimated in terms of market prices and economic values have been computed by converting the
former using appropriate shadow prices. This has been done to iron out distortions due to
externalities and anomalies arising in real world pricing systems.
The annual streams of project costs and benefit have been compared over the analysis period of 44
years to estimate the net cost/ benefit and to calculate the economic viability of the project in terms
of EIRR. The Economic Internal Rate of Return (EIRR) for the project has then been arrived using
Discounted Cash Flow technique to the net benefit stream at economic prices. The EIRR works
out to 17.93 %.
A sensitivity analysis of the EIRR with 10% cost overrun and 10% reduction in traffic
materialization (separately) has been carried out. The EIRRs under these scenarios are given in
table

It can be seen that 10% increase in cost affects economic viability more than it
does in case of reduction in traffic for the project. Accordingly, it is recommended
that controls should be exercised to keep the construction cost under check.
FINANCIAL ANALYSIS
The basic Project cost of the metro corridor at September 2011 prices is estimated at Rs150551
Million. The cost of land is estimated at Rs.15,865 Million. Of the total land cost,Rs 4,985 Million
is cost of private land and the cost of government land has been estimated at Rs 10,880 Million.
The total cost of project including land, is estimated at Rs166,416 Million.
The Central and State taxes and duties (Customs, Excise and VAT) amount to Rs25,467Million.
Of the total taxes and duties, Rs 20,432 Million are central taxes (Customs and Excise duty) and
Rs 5,035 Million are state taxes (Value Added Tax). The component towards Octroi and insurance
works out to be Rs. 2121 Million and Rs. 831 Million respectively.
For the purpose of financial analysis, only cost of private land being a cash payout has been added
to the project. The government land is expected to be available on transfer basis. Further, JICA is
expected to part fund the project through soft loan. The completion cost including IDC works out
to Rs 217,523 Million
The revenue streams have been worked out based on MMRDA fare as well as DMRC fares
(Table).The fare sensitivity of DMRC fares on the expected Metro ridership has not been
considered in this comparison.

The FIRR calculations with the projected ridership, fare box revenue and based on both MMRDA
&DMRC fare structure under various scenarios is given in Table

It is concluded that the project will be able to comfortably bear the O&M cost and thus,has
operational sustainability.

Scenario with VGF

To calculate the Viability Gap Funding (VGF) required to get the project FIRR of 12% has been
calculated with following assumptions:
1. The cost of the project at 2011 prices inclusive of all taxes is Rs 1,49,701 Million.
2. Govt land will be given free of cost for the project.
3. Stake holder contribution of Rs 12,500 million will be available.
4. The Debt Equity Ratio of 3:2 has been assumed for calculation of IDC
5. The rate of interest for market loan is taken as 10%.
VGF required With MMRDA fare structure will be about 89 % while with DMRC fares, the GF
requirement will be about 82 %. As the VGF requirement for the project is very high, the PPP
implementation mode is not considered.

Involvement of Government
Government contribution is essential to keep debt-servicing levels low with a view to maintain
overall long term sustainability of the system. Government involvement also generates
considerable amount of confidence in other players involved in the process of construction &
operation. The capital investment of Line-III of Mumbai metro project is estimated to give an
economic rate of return to the tune of 17% and the city/society can recover the investment within
6 to 7 years time. Thus, the involvement of Government is essential to provide
integrated, efficient public transport system in the City.

Funding For the Project

Following assumptions are made for the finalizing the funding pattern for the
project:

i. Cost of Land: Govt land required for the project shall be given as grant by the State Government.
Cost of private land has been added to the project and included as government equity but efforts
shall be made to meet this cost through TDR and higher FARs.

ii. Exchange Rate Fluctuation Risk- As adopted for Phase-I and Phase-II of Delhi Metro and
recently approved Phase III of Delhi Metro, it is assumed that exchange rate fluctuation risk on
the repayment of JICA loan shall be borne in equal proportion by the equity holders, viz, GOI &
GOM
.
iii. Payment of Dividend- As adopted for Phase-I & Phase-II of Delhi Metro,this metro corridor
of Mumbai MRTS shall be exempted from the payment of dividend on equity till the senior debt
has been fully repaid.
The total completion cost of the project including IDC and excluding govt land works out to Rs
217,523 Million. The funding for the same shall be as under:

a. Government Contribution GOI & GOM will contribute a total equity of Rs 64,343 Million
which is 30% of the total completion cost. This means that both GOI and GOM will share 15% of
the total cost amounting to Rs 32,172 Million.

b. JICA Loan JICA funding of 60 % of total completion cost excluding taxes, duties and land
cost, works out to 48% of the total completion cost including land and taxes and amounts to Rs
104,647 million as loan.

c. Subordinate Debt: To pay back state and central taxes and duties amounting to Rs33,109
Million which is 15% of the total completion cost of the project, interest free Subordinate Debt
from GOI and GOM is considered. It includes Rs 2471 Million Octroi which can be waived off by
the City agencies as the project is for the benefit of the City. The payment of this loan will be after
the payment of JICA loan.

d. Stake holder Contribution: The cost of stations falling in the areas belonging to MIAL
(Mumbai International Airport Authority & ASIDE (Assistance to States for Infrastructure
Development for Export Promotion) will be borne by them. Total 5 stations fall in their
area and cost of the stations amounting to Rs 14,563 Million (7% of the total project cost) is
proposed to be contributed by these agencies as stake holder contribution.

Financing of Project Completion Costs Including IDC

Year JICA

With above funding pattern, the project generates positive cash flows during the analysis period
of 44 years. But once the payment of loan starts the project has negative cash flows for 11 years
and the project is not able to meets its loan obligations. However, after these 11 years, the project
has positive cash flows except two years when replacement of the equipments is required. During
the negative cash flow period, the loan liability of the project can be met by soft loans from
MMRDA/MMRC which will be adjusted from future surplus revenues. Thus, the project has
potential to service its debt.
All over the world all metro systems do require support from government in initial years till the
system gets established and its revenue generation potential is truly exploited. Mumbai Metro Line
III may also be implemented on the basis of these international practices.
Cost and Value Analysis

Assumption made in carrying out Economic Analysis

Various assumptions have been made, while assessing the economic benefits to the society on
account of various factors after introduction of MRTS system. Following are the assumptions
made for each of the factors:
Assumption for Inflation Rate
The prices for various calculations made are at Sept 2011 level. The inflation rate calculated for
each year has been calculated from wholesale price index for various years as given in Economic
Survey20022003. The years for which WPI figures not available, inflation rate are from inter net
have been obtained.
 Damage cost of Pollution Rs. 55.30/ per Kg.
Price of Fuel
Petrol Rs71.92/ per litre
CNG Rs. 31.47/ per litre

Assumptions for Bus characteristics

Fleet Utilization 90%
Load Factor 90%
Carrying Capacity 50 passengers
Daily Utilisation 211 km.

Assumptions for Road Accidents

Cost of a Fatal Accident Rs 9,61,661*
Cost of an Injury Accident Rs. 2,34,890*
*Source: Road Cost Evaluation study conducted by M/S Tata Consultancy Services1999. Values brought to
current price level using escalation factor of 5%

Cost of damage to Vehicles due to an Accident.*

CARS Rs 29,093
USES Rs 84,585
TRUCKS Rs 87,458
SC/MC Rs 7,363
 RISK IDENTIFICATION AND RISK ANALYSIS

There are various risks in Mumbai metro:

1) political
2) commercial
3) financial
4) market
5) land acquisition
6) technology
7) cost overrun
8) operational and maintenance
9) regulatory
10) environmental

Risk Allocation

Risks borne by MMRDA:

1) land acquisition
2) environmental
3) political

Risks borne by private parties:

1) design and construction

2) operation and maintenance
3) subcontractor
4) financing
5) revenue
6) financial technology
7) project completion
8) environmental

ENVIRONMENT RISK:
At locations where pollution level
as already exceeded thepermitted level or is on higher side, every construction activity needs very
close scrutiny to ensure that there is no further
environmental degradation. Planning for method of construction and type of materials used plays a very
vital part in containing the adverse environmental impact.

POLITICAL RISKS:

Political risk concerns government actions that affect the ability to generate earnings. These could
include actions that terminate the concession, the imposition of taxes or regulations that severely
reduce the value to the investors, restrictions on the ability to collect or raise tolls as specified in
the concession agreement etc. Many projects are delayed because of the difficulties of
acquiring right-of-way or environmental clearances that both the governments and the operators
underestimate. Government generally agrees to compensate investors for political risks, although
in practice, governments may cite justifications for their action to delay or prevent such payments.
Thus, private investors generally assume the risks that are associated with the dispute resolution
and the ability to obtain compensation if the government violates the concession agreement.

CONSTRUCTION RISKS

A common cause of cost overrun stems from design changes and unforeseen weather conditions
during the construction phase. The private sector typically bears primary responsibility for the
construction uncertainties and attempts to cover it through insurance. The public sector may
assume responsibility for risks under its control such as competing complementary facilities or
allowing cost increases associated with major design changes.

MARKET AND REVENUE RISKS

Demand uncertainty continues to be a major factor in most of the projects. Traffic and tariff levels
may not be sufficient to cover all costs, including construction, operation and maintenance. The
private sector fully depends upon the government for the handling of the traffic and revenue risks.

FINANCIAL RISKS:

Financial risk is the risk that project cash flows might be insufficient to cover debt service and then
pay an adequate return on sponsor equity. Financial constraints like lack of long-term debt capital
hinder the road development projects. Non-availability of local or domestic finance markets may
lead to the higher risks for road sector projects which need long-term financing.

Currency risks involve the impact of exchange rate fluctuations on the value of domestic currency.
It can subject to the convertibility as the operator may not be allowed to convert the local currency
into the foreign currency.
Financial risks are best borne by the private sector but a substantial government risk sharing is
required either through revenue or debt guarantees or through participation by state or multilateral
development institutions.

LEGAL RISKS:

Regulatory risk stems from the weak implementation of regulatory commitments built into the
contracts and the laws or other legal instruments that are relevant to the value of the transactions
as it was originally assessed. The major risk lies on the part of the concessionaire like lack of
power and capacity.
OPERATING RISKS

Operating risks are the risks that emerge at the time of the operations of the project on the part of
operators default. It can also involve the risks like force majeure risks that are beyond the control
of both the public and private partners, such as fire or earthquakes, or other non- political factors
such as strikes and industrial disturbances that impair the projects ability to earn revenues.
Sometimes private insurance is becoming available for catastrophic risks but generally public
sector faced with the need to restructure the project if such disaster or problem occurs.

LEARNINGS
1. Expediting the bid process - Entire bid process to choose the successful bidder took more than 2 years.
This led to very less no. of bidders bidding for the project.

2. Delay in obtaining VGF approval - Substantial delay in obtaining VGF approval from the govt. because
model concession agreement was not in place.

3. Delay in getting approval- Delay in getting approval for construction of over-bridge that passed over
the railway line. This was because railways were thinking of a project that could invade the path of the
metro line. It is recommended that authorities be cognizant of all other upcoming infrastructure projects
that have the potential to affect operations of the planned project while bidding out such projects and
resolve the same prior to the appointment of a developer.

4. Land acquisition issues Land for the depot was under dispute. It is recommended in the future
concerns such as these are addressed before the project procurement stage itself to ensure smooth
functioning of the project.

5. Clear specification on Asset transfer on termination 5 years before the expiry of the concession period
a survey of the assets would be carried out to determine whether they are in working condition as given
in the agreement. Schedule in the concession agreement does not have clear and robust specifications.
Risk of a difference of opinion between the concessionaire and the government and this can potentially
lead to a dispute.

The government could manage this better by incorporating clear and robust specifications on the
condition it would want the assets to be handed over to the government. Risk allocation has to be
equitable; Tendency to pass on maximum risk to the Concessionaire will prove counterproductive.