Background

Hyderabad is the second largest city in India, by area and the sixth largest city in India,
by population. The city’s population has grown by over 27% during the decade 1991-2001 which is
higher than that of Mumbai, Kolkata and Chennai during the same period. Post liberalization, the growth
in IT sector and construction of international airport in the city has severely constrained the transportation
resources to meet the needs of ever increasing population. To address this problem, Government of
Andhra Pradesh conceived a Mass Rapid Transit System that would span three high traffic density
regions of Hyderabad. Hyderabad Metro Rail Project was formed.

Hyderabad Metro Rail – Project Overview

Hyderabad Metro Rail Ltd, a fully owned public sector undertaking of Government of
Andhra Pradesh (GoAP) undertook the Hyderabad Metro Rail Project (HMRP) in 2005. The project,
estimated at Rs. 8760 crore in 2007, was aimed to decongest three dense corridors, covering a stretch of
66.9 km with an outlay of Rs. 132 crore investment for a kilometer length. Corridors 1, 2 and 3 - Miyapur
– L. B. Nagar, Jubilee Bus Station – Falaknuma, Nagole – Shilparammam – were to be designed for peak
hour peak distribution traffic (PHPDT) of 50,000, 35,000 and 50,000 respectively.  The speed of the
system would vary from 34 kmph to 80 kmph and the trains would have a frequency of 3 to 5 minutes. 
Following the stupendous success of Delhi Metro Rail Corporation (DMRC), DMRC’s
E.Sreedharan was roped in as the prime consultant to HMRP. He had suggested that the project be
developed under a DBFOT (Design, Build, Finance, Build, Operate and Transfer) model for two
important reasons: i. Lower cost of construction compared to other PPP projects, since there was no
tunneling involved. ii. The population increase in the region would means huge ridership to meet the
expected cash flow. The project was decided to be developed under a concession agreement on BOT Toll
basis for a period of 35 years, including a construction period of 5 years. Under the concession
agreement, the operator would have to design, finance, construct, operate, and maintain the 3 corridors
and transfer the assets at the end of the concession period. The assets included everything from stations,
bridges, signaling systems, traction systems, communication systems, and fair collection systems. The
assets would be constructed or procured through contractors and equipment suppliers.
Importantly, in addition to the above, the private party would have access to the
commercial development of space available in the depots (212 acres) and 10% of the carpet area of the
station sites identified in the concession agreement. This aggregated to a whopping 12.5 million square
feet in the case of depots and 6 million square feet in the case of stations.
HMRP’s BOT Framework

Following were some of the salient features of the HMRP’s BOT Framework:

Build
 According to the terms of the Concession Agreement drafted, the Concessionaire had
to provide a Performance Security of Rs. 240 crore for the performance of its
obligations. This security has to be renewed from time to time and replenished within
30 days. The Concessionaire is also liable to pay damages if it fails to achieve any
milestone. Further, the private operator has to submit monthly progress reports and
allow the Independent Engineer to inspect the progress of construction. The
Independent Engineer has to subject the metro system to test and provide a
provisional completion certificate.
 The GoAP would hand over to the land to the concessionaire on or prior to the
Appointed Date (i.e. date on which financial closure is achieved). Further, up to 90%
of the land has to be handed over to the concessionaire within 120 days of signing of
the agreement (contingent on paying of Payment Security). This was a Condition
Precedent for the Agreement, failing which liability damages had to be paid by the
Government.
 At the same time, the Concessionaire was to achieve financial closure by 180 days
after the signing of the contract. GoAP would extend the date for financial closure for
a further 120 days in case the private operator cannot achieve financial closure. The
Concessionaire would be liable to pay damages to the tune of 0.1 percent of
Performance Security for every day of delay in achieving financial closure. The
GoAP has the right to cancel the contract after a period of 6 months from the signing
of the contract.

Operations
 The risk associated with the planning and execution of the project vests with the
private operator. It needs to execute the project in conformance with the detailed
design and construction methodology, quality assurance procedures and the time
schedule for completion of the Project as submitted by the private operator to the
GoAP on or before the Appointed Date. The project is also subject to a review by the
Independent Engineer appointed for the project.
  The private operator has to submit a maintenance manual and maintenance program
to GoAP for approval and needs to comply with the requirements. In case of non-
compliance with these requirements, the government has the right to undertake and
complete these requirements by itself and recover 120% of the costs associated with
completing these requirements or even initiate termination proceedings if necessary.
The private operator can mitigate this risk as he is allowed to appoint O&M
contractors for the running of the system
 The private operator is not allowed a change in ownership that causes the aggregate
holding of the Consortium Members, together with their Associates in the total equity
to decline below 52 percent during a period of 5 years following the Commercial
Operations Date of the Metro System and 26 percent during the rest of the concession
period. Any change of equity greater than 15 percent would require prior written
approval of the government.
 A joint inspection would be conducted by the private operator and GoAP, 90 days
before the termination of the Agreement. This would be verified by an Independent
Engineer and the private operator would have to pay the charges for compliance with
the serviceability requirements, if found deficient.
 The private operator will levy and collect the fares from the users of the Metro and is
entitled to revise these fares up to 60% of the Wholesale Price Inflation in the
previous year. The private operator shares the traffic risk with the government. The
government would provide a revenue shortfall loan to the tune of the revenue
shortfall at an interest rate 2% above the standard bank rate specified by the RBI. In
the event of the actual traffic falling short of the target traffic by more than 2.5
percent, on a pre-determined target date (1 October 2011), the concession period
shall be increased by 1.5 percent of the concession period thereof for every 1%
shortfall compared to actual traffic. In the event the actual traffic is more than target
traffic then the concession period will be reduced by 1% for every 1% reduction in
traffic.

Transfer
 If the private operator default’s, GoAP is liable to pay 90% of the due less insurance
claims and 70% additional Termination Payment comprising real estate development
and any other assets developed after 5th year of Commercial Operations date.
  If the GoAP default’s, 150% of adjusted equity, 115% of Concession Royalty
Payments which have already been paid to the GoAP, Debt due and 115% of
Additional Termination Payments comprising Real Estate Developments and any
other assets

Post VfM Analysis

A VfM qualitative assessment reveals the following would be the key determinants that
would have encouraged the Government of Andhra Pradesh to go ahead with the BOT model of PPP
project exection.

1. Reduction in financial burden on the state budget: The PPP project was structured to ensure that it
was viable by providing a viability gap funding for the project. The lowest financial bid quoted
was in fact a negative viability gap funding of Rs. 1,204 crores (present value terms). The
government is only committed to compensating the concessionaire for expenses incurred towards
shifting of public utilities on the right of way. Thus the government is able to achieve, through
private sector participation, the construction and operations of a critical infrastructure facility for
a period of 30 years with a reduced requirement of upfront money.
2. Substantial risk transfer: The burden of the project risk, such as financing, construction,
operations and revenue risks, would shift to the private sector. This shift during the build and
operation phases clubbed with a stiff performance security imposition (Rs. 240 crore) ensures that
the private operator will place its best efforts in operating the system to ensure sustainability of
operations.

While the above factors do point to the fact that there was substantial merit in adopting
the PPP approach, the implicit risks that the public sector have to bear would continue to persist.
 A Special Purpose Vehicle (SPV) named Maytas Metro Limited (MML) was formed
with Maytas Infrastructure holding 26% equity, Government of Andhra Pradesh (GoAP) holding 11%
Nav Bharat Ventures holding 16% and IL&FS and Ital-Thai holding 5% each. MML owned the
remaining 37%, which it proposed to sell partially or completely, at a premium by roping in more
partners.

Project Financing

The total cost of the project in 2008 was estimated at Rs. 11,814 crore. Government of
India had approved a viability gap of Rs. 3,500 crore (~ 30% of the project cost) for the project. MML
had quoted a negative viability gap funding and thus did not seek VGF support for this project. 

The consortium quoted a negative viability gap (i.e. the consortium would pay the
government) with a present value of Rs. 1,240 crore (discounted at 13.5 percent). This amount was
proposed to be paid by the consortium over a period of 35 years as per the following schedule. Experts
claim that this was the real clincher that made government favour MML to other bidders. Questions about
the project’s financial viability were answered saying that substantial increase in the economic activity
surrounding the regions would bring in the necessary traffic. “A lot of commercial activity would take
place at the terminal points (100 acres each at Miyapur and Nagole; 17 acres at Falaknuma) and also the
spaces abutting the 33 stations,” claimed Mr. N.V.S. Reddy, Managing Director of Hyderabad Metro Rail
Ltd.

CONCESSION PAYMENT
YEAR
Upfront Rs. 11 crore
Appointment Date Rs. 50 crore
4th Year Rs. 200 crore
7th to 9th Year Rs. 100 crore
18th to 34th Year Rs. 1,750 crore
20th to 35th Year 1% of the net realisable fare in the 20th year, 2% of the net realisable fare
in 21st year and so on.
 The cost of the project was to be financed with a debt to equity ratio of 2:1. Therefore the
consortium had to raise debt of Rs. 7,876 crore and contribute equity of Rs. 3,938 crore without any VGF
support.

References:
1. http://www.pppindia.com
2. Chapter II: Hyderabad Urban Agglomeration: Demography, Economy and Land Use Pattern,
Jawaharlal Nehru National Renewal Mission
3. C. Ramachandraiah, Maytas, Hyderabad Metro and the Politics of Real Estate, Economic and Political
Weekly, January 2009, pp. 36 – 40.
4. The Hindu Business Line: Hyderabad Metro: What clinched it for Maytas consortium, Hyderabad, July
29, 2008.
5. E.Sreedharan, The Indian Express: BOT Seriously, http://www.indianexpress.com/news/bot-
seriously/379475/0, October 31, 2008.