New Delhi: The central government will approve and aid metro rail projects only if they have private participation and ensure last-mile connectivity for users, under a new policy cleared by the Union cabinet on Wednesday.

Under the new metro rail policy, states will get powers to make rules and regulations and set up permanent fare fixation authorities. In line with global best practices, metro projects will be approved on the basis of ‘Economic Internal Rate of Return of 14%’, a change from the existing ‘Financial Internal Rate of Return of 8%’.

“Private participation either for complete provision of metro rail or for some unbundled components (like automatic fare collection, operation and maintenance of services, etc) will form an essential requirement for all metro rail projects seeking central financial assistance," says the policy.

Urban development secretary Durga Shankar Mishra outlined three options for states wishing to take up metro projects and are keen on central assistance.

One, public-private partnership with central assistance under the finance ministry’s viability gap funding scheme; two, central government grant under which 10% of the project cost will be given as central aid in a lump sum; and three, 50:50 equity sharing model between central and state governments. Private participation will be mandatory under all three options.

Metro rail projects are capital-intensive and are generally financed by central and state governments with equity and grants. The rest is raised from multilateral agencies like Japan International Cooperation Agency (JICA) and European Investment Bank (EIB).

However, under the new policy, states need to adopt innovative mechanisms like value capture financing tools to mobilize resources for financing metro projects by capturing a share of increase in the asset values through ‘Betterment Levy’. States will also be required to enable low-cost debt capital by issuing corporate bonds for metro projects.

Transport economist and IIM Bangalore director G. Raghuram says, “I have studied Delhi, Hyderabad and Mumbai metros, the three PPP projects in the country. Comparing it with other metros and other infrastructure, my view is that having PPPs at the construction stage is not advisable since the construction risk in an urban environment is very high." He suggests that it is far better for the government to be the front entity rather than a private party. However it may work in the operations and maintenance space.

He says a positive aspect of the policy is its focus on last mile connectivity through feeder services for a catchment area of 5km.

The move comes at a time of rising demand for metro rail networks and various state governments making project proposals.

The new policy also says states must commit to building last-mile connectivity through feeder services, non-motorised transport infrastructure like walking and cycling pathways and para-transport facilities. States proposing such projects will be required to indicate in their project report the proposals and investments that would be made for such services.

From 2014 to 2017, the Union urban development ministry sanctioned Rs30,653.78 crore for metro rail projects, out of which only Rs12,345.33 crore was released to companies overseeing them. In the current fiscal year, the ministry has allocated around Rs17,960 crore for metro rail companies, of which, till the first quarter ended June, only Rs4,650 crore had been spent. The figures are for Uttar Pradesh, Maharashtra, Gujarat, Rajasthan, Tamil Nadu, Kerala, Karnataka, and Delhi NCR.

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