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Urban Transport in India: Status, Investment

Needs and Financing Options

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 The IUP Journal of Infrastructure
Vol V Issue 3 (September 2007) Pg 53-65

Urban Transport in India: Status, Investment Needs and Financing Options

Ramakrishna Nallathiga
Knowledge Manager (Infrastructure & Environment)
Centre for Good Governance
Dr MCR HRD IOA Campus, Road No. 25, Jubilee Hills
Hyderabad – 500 033 (INDIA)
e-mail: ramanallathiga@yahoo.co.uk

Abstract

Rapid population growth and accelerated economic development have been

exerting greater pressure on the provision of public services in urban areas in India,
particularly on the delivery of infrastructure services like urban transport. Yet, many
cities have not come up with development and investments plans in urban transport,
which is resulting in chaotic traffic and transport conditions in several cities. This paper
attempts to highlight this deficiency by analyzing urban transport scenario and by
estimating the investment requirements of urban transport infrastructure. Subsequently, it
discusses the resource mobilization methods available for meeting the same – particularly
funding channels and partnership mechanisms, given the fact that transport infrastructure
services have fallen outside the purview of municipal functions and finances.

Key Words: urban transport infrastructure, investment needs, resource mobilization,

public-private partnerships and multi-sector investment planning

1. INTRODUCTION

Increasing economic growth, improving trade and commerce and enhancing

employment options are at the core of development goals of the economies across the
world. At the same time, much of the economic growth is now coming from non-
traditional sectors like services, which have more of an urban base. Infrastructure is
considered as critically important for achieving the goals of economic development, and
urban infrastructure assumes further importance in growing economies like India,
wherein urban areas have been increasingly contributing to the country’s economic
growth. The Expert Group on India’s Infrastructure (1996) (also known as Rakesh
Mohan Committee) had estimated the annual investment requirements of funds for urban
infrastructure at Rs 28,298 crores during the period of 1996-2001. This amount was
meant to be for the provision all major civic services like urban water supply, sanitation,
roads and street lights; it, however, did not account for the investment requirements of
urban transport infrastructure, which is a very important and enabling function of urban

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economy1. Urban transport supports local economy by providing much needed mobility
between work/business centres and residences in cities, so that the firms and households
can organize at respective locations in economic production and consumption activities.

Good urban transport enables both citizens and firms to engage in their activities
in an efficient manner by providing faster mobility and comfortable traffic conditions,
thereby avoiding wastage of time and energy in traffic jams and long travel. Inefficient
urban transport leads not only to a loss of time, but also to loss of fuel energy, increase in
gaseous emissions and to behavioural problems like fatigue, irritation and frustration.
Moreover, availability of good efficient mass urban transport can also enable the urban
poor and low income groups in participating in city development through supply of
labour, as they can then chose to locate at farther locations that are affordable to them2.
As economic growth of a city depends upon the level of urban transport infrastructure
and its support to mobility of people and goods, it is imperative for the cities to come out
with appropriate transport strategies for meeting with the challenges of urban transport.
An important element of the strategies is to come out with appropriate plans for the
development of urban transport in a comprehensive and holistic manner, and also
ensuring their delivery through appropriate mechanisms3. However, full scale of transport
planning has been happening in only large metropolitan cities, and several other cities are
yet to plan or make provision for the same4. With the framework and guidelines provided
under MoUDPE (2004), this might get kick started in several cities.

While the lack of appropriate plans and strategies for managing urban transport is
one shortcoming, the lack of adequate funds for the development of transport projects
identified under them is another important aspect of it. Urban transport infrastructure has
several components – transport corridors (overground/elevated/underground), bridges,
alighting/boarding stations, vehicles/ modes, communications and logistics infrastructure,
and support services like journey tickets. Laying down urban transport infrastructure
involves investing large amount of capital and warrants highly specialized approach in
the selection of technology, materials, design and methods. Unless adequate provisions
are made for and project is implemented in a professional manner, progress of transport
project can hang-on for a long time for nearing its completion and can cause frustration to
citizens. Large transportation systems do not come in cities over night, as it is not in the
capacity of municipal authority; yet, they can play a major role in the development of
transport infrastructure in cities by steering appropriate projects through various modes.

This paper makes an attempt to assess urban transport investment requirements in

India and reviews the mechanisms for implementing the projects. It analyses first the
current status of urban transport to provide an overview of the state of urban transport in
India, which is done through secondary data sources. It then attempts an estimation of
1
Although, provision is made for laying down the roads, they are mostly meant for internal connecting
roads rather than for laying down arterial roads, external links.
2
Hon’ble Minister of Finance P Chidambaram in his inaugural address at the International conference on
Urban Renewal held at Taj Mahal Hotel, Mumbai on May 24, 2005
3
A detailed discussion of transport strategies is warranted here; the same can be found in Nallathiga (2006)
4
It has not been formally within the scope of urban local bodies, until the Schedule 12 of the 74 th
Constitutional Amendment Act, 1992 has mandated transport planning as a municipal function.

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the funding requirements of urban transport infrastructure in cities using existing norms.
Finally, it discusses the alternative approaches to financing urban transport infrastructure.

2. OVERVIEW OF URBAN TRANSPORT IN INDIA

India has been witnessing urbanization and urban area growth over last several
decades; it not only confined to the existing cities but also spread to several other new
centres as evident from the rise in number of urban areas shown in table 1. India’s
economic growth has reached new heights only in the last decade and half, and it can be
seen from table 1 that of the rise in the number of vehicles has also increased in the recent
past, matching with the period of rapid economic growth5. It can be fairly understood
that much of the vehicular population growth would have taken place in urban areas, as
average urban population growth rate has been more than that of the rural counterpart,
and so do the average annual incomes of urban vis-à-vis rural people.

Table 1: Urbanization, Urban Population Growth and Transportation

Year No. of Per cent of Annual Total no. of Per cent
towns/ UAs urban to total exponential Registered exponential
population growth (%) vehicles growth rate
1951 2843 17.29 3.47 306 -
1961 2345 17.97 2.34 665 2.77
1971 2590 19.91 3.21 1865 10.86
1981 3378 23.34 3.83 5391 11.2
1991 3768 25.72 3.09 21374 14.96
2001 4368 27.78 2.73 54991 9.91
Source: India Infrastructure Report (2006)

As most of the GDP is now increasingly being generated in urban areas, they have
the tasks of providing basic infrastructure to ensure non-declining levels of quality of life
(which is linked to both service quality and levels as well as environment) on one hand
and they have to meet the challenges of ensuring adequate transport options available so
that the growth does not get hampered due to infrastructural bottlenecks on the other. To
meet with the challenges of providing urban transport, adequate investments need to take
place in order to provide the services at the first instance; the estimation of investment
needs have to be made periodically by urban development authorities as a preparatory
step towards meeting with transport challenges. However, with little planning work
done, urban transport investment requirements are not estimated; further, there are
coordination difficulties at city level due to inadequate or poor institutional structures.

Public transport in the form of train and bus modes has traditionally been
considered as the appropriate means of transport for urban areas, as both rail and road are
efficient modes of mass transport. However, as cities grow the distance between service

5
Aggarwal (2006) provides a good review of the state of urban transport in India and presents various
strategic options for better urban transport management in an exclusive chapter.

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provision stretches and residences increases, therefore, service accessibility reduces.

Train services, in particular, stand out to be losing the ground6, because of this particular
reason and given the fact that there are few cities which started with transportation
systems (both corridors and services) as a planned approach to deal with urbanization.
The only exception is perhaps Mumbai, wherein the transportation corridors laid down in
the past still act as quick routes and the dispersal from the stations takes place through
buses and intermediate public transport like taxis and autos. Trains provide fast and
efficient transport but they have some constraints in the form of inflexibility once laid
down, poor connectivity unless well planned and long time for laying down, which are
difficult to control and, hence, it is not found in several other cities except some major
metropolitan cities. Yet, the development of city form based on a structure provided by
transport corridor is considered as most suitable and energy efficient in the long term
(Owens 1986).

Consequent to the limited potential and the losing ground of trains in urban
transport, buses stand out as the important means of public transport in cities. This is
evident from the fact that their share has gone up from 1.4 per 1000 population in 1981 to
3.24 per 1000 population in 2001, yet, the growth of bus services is smaller than that of
the cars and two-wheelers which grew from 81.4 per 1000 population to 245.4 per 1000
population (Aggarwal 2006). Moreover, it is also reported that the share of buses as a
mode of transport has gone down from 9 per cent in 1951 to 1.1 per cent in 2001, which
reflects a decline in service quality. Only few metropolitan cities like Hyderabad and
Bangalore have been able to come-up with efficient management of operations and
management innovations (Aggarwal 2006)7. Table 2 provides a summary of human and
vehicular population in urban areas. The staggering number of vehicles in metropolitan
cities and their density (with respect to population and road length) clearly reflect the
increasing share of private and intermediate public modes of transport in several cities.
However, it is also important to recognize that even for the movement of private transport
roads – both connecting and arterial – need to be laid down and well maintained.

Table 2: Population, Vehicles and Vehicle Density in Select Urban Areas

Urban Population Vehicles Vehicles per Vehicles per
Agglomeration (2001) registered (1999) 1000 population km road length
Mumbai 16368084 859734 860 448
Bangalore 5686844 1129836 1130 n.a.
Chennai 6424624 975009 975 n.a.
Delhi 12791458 3033045 3033 418
Kolkata 13216546 664046 664 534
Hyderabad 5533640 887367 887 2237
Source: Bombay First (2003)
n.a. – Not Available

6
Even otherwise, Singh (2000a) forecasts the passenger and freight traffic movements to conclude that
railways stand out to lose much to the road ways in the next 10-20 years.
7
In fact, there are few studies that assessed the performance of road transport undertakings in cities or
states, one such attempt was made in Singh (2000b)

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3. INVESTMENT REQUIREMENTS OF URBAN TRANSPORT

INFRASTRUCTURE

Given the rising number of urban centres and increasing urban population, the
transport needs are also seen to be rising. The Rail India Technical and Economic
Services (RITES) had estimated the travel demand using projections for the future years
to find that the number of trips was expected to rise from 183 million in 1994 to 614
million in 2021 and the number of vehicular trips was expected to rise from 126 million
to 430 million during the same period (Aggarwal 2006). Table 3 shows city-class wise
projected travel demand. It may be noted that though urban population in class A cities
grows at 2.5 times during 1991-2021, the corresponding travel demand grows at 3.5
times. Such high growth of transport demand has profound implications to urban
transportation planning in India, particularly with reference to the transport infrastructure
and transport services.

Table 3: Projection of Travel Demand in Urban Areas

Class of city (population Traffic demand (person km per day) Growth (%)
size in millions)
1994 2001 2021
A (0.1-0.25) 103.9 149.43 453.25 4.36
B (0.25-0.5) 75.89 90.43 309.57 4.08
C (0.5-1.0) 109.20 148.66 227.23 2.08
D (1.0-2.0) 94.41 132.07 347.08 3.68
E (2.0-5.0) 92.08 97.22 270.30 2.94
F (> 5.0) 284.34 420.99 903.80 3.18
Total 759.00 1038.80 2511.23 3.31
Source: RITES (1998) cited in Aggarwal (2006)

In the metropolitan cities (those of million-plus population, which amount to 35

as per the latest census), transportation planning needs to pay attention to two major
aspects of the travel demands of urban transport – (i) mass urban transportation systems
(ii) urban transportation infrastructure. Here, first, we attempt to make an estimate of the
current investment requirements of these two aspects of urban transport in Indian cities
based on the normative unit cost estimates. Subsequently, we will discuss the appropriate
mechanisms for ensuring this money flow to come into the system.

3.1 Investment Requirements of Urban Mass Transport Systems

Mass urban transport systems are becoming essential in large cities, which spread
over vast distances, and they need to be planned in all major cities with a million plus
population according to the Tenth Planning Commission. An attempt is made here to
estimate the investment requirements of providing urban mass transport systems by
considering various technological alternatives that were evaluated in Badami and
Koppikar (2004). As these services are meant to be provided in the metropolitan

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cities/agglomerations, the 35 MCs with urban agglomeration population more than one
million population are considered and categorized into Class AA, A and B based on the
prevalent city (MC) population as on 20018.

The mass urban transport systems considered here include: elevated metro system
for class AA and A cities (with service length of 100 and 50 km, respectively) and bus
rapid transit system for Class B cities (with a service length of 100 km). Therefore, for
all the cities, according to their city class, mass urban transport investment requirements
are estimated using the capital investment norms provided in Badami and Koppikar
(2004) together with the assumed service length as under.
Mass Rapid Transport System Investment Needs = Norm * Service length

Apart from these systems, several studies have clearly indicated that very large
metropolitan cities need to have underground metro and some of the cities have already
come up with expensive but vital proposals. The cost of such metro systems is about Rs
400 to 425 crores per km length according to Badami and Koppikar (2004). The
investment requirement of such mega transport has also been estimated with an assumed
service length of about 25 km. While Kolkata already has an underground metro system
of 17 km lenth, Delhi has undertaken a metro covering about 61 km in first phase
extending to 241 km finally at a cost of Rs 8,000 crores. Mumbai also has an
underground metro proposal costing about Rs 18,000 to 20,000 crores.

3.2 Investment Requirements of Urban Transport Infrastructure

Besides the mass urban transport systems needed in all major cities, the cities also
need arterial express ways for rapid dispersal of vehicular population, which can be laid
down in the form of straight express ways and/or ring roads. An attempt is made here to
estimate the investment needs of providing such urban transport infrastructure with the
help of norms drawn from the most recent cost estimates of a major project for providing
road infrastructure in the form of inner and outer ring roads in Hyderabad in order to
ensure faster movement of vehicles.

Here, we assume that the road infrastructure needs include: Outer and Inner ring
roads for all class AA cities (with a service length of 100 km), Inner ring roads for class
A cities (with a service length of 100 km) and Inner ring roads for class B cities (with
service length of 50 km). The norms for Outer and Inner investment needs of the roads /
expressways per km length in urban areas are derived using the adjusted actual cost
estimates of their provision in Hyderabad9. Using these norms and coverage length, the
investment needs of the cities for the provision of road infrastructure/ expressways has
been estimated as under.

Road infrastructure Investment Needs = Norm * Service length

8
Here, AA, A and B class cities are those with population more than 25 lakhs, more than 5 lakhs but less
than 25 lakhs and less than 5 lakh population, respectively.
9
The Hyderabad Urban Development Authority (HUDA) has undertaken this major project in Hyderabad
city and it shared the unit costs data, which form the norms used here.

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3.3 Total Investment Requirements

The total investment requirements of providing urban transport infrastructure

services can be expressed as:

Urban Transport Infrastructure Services Investment Needs =

Mass Rapid Transport System Investment Needs +
Road infrastructure Investment Needs

Table 4 provides an account of the summary of estimates of investment needs for

ten years in the the urban areas in India. The amount required is very large to the extent
of more than Rs 300,000 crores.

Table 4: Projection of Investment Requirement in Urban Areas

S. No. Urban Transport Infrastructure Investment Need for Ten Years
Component (2004-05 to 2013-14) (Rs Crore)*
1 Mass urban transport services Rs 2,53,700
2 Road infrastructure services Rs 47,025
3 Total urban services Rs 3,00,725
* At 2004-05 prices.
However, when we account for providing underground metro services in the four
major metropolitan cities the total investment requirements sums up to about Rs 341,250
crores. This translates to investment requirement of the order of Rs 10,000 crores in every
city with more than one million population. It needs to be understood that these estimates
are still conservative on several accounts. The logistical points i.e., stations and ports,
need either redevelopment or construction or restructuring in order to facilitate the
passenger and cargo movement and the cost of building such hubs involves deployment
of good amount of resources as well, which have not been considered. While the
requirements reflect the costs of new infrastructure creation, it has been assumed that the
maintenance expenses of the infrastructure would be met through the budgets of
municipal governments or that of any special purpose vehicles created for that purpose.

4. MEANS OF RAISING INVESTMENT

The very high investment requirement in urban transport systems points to the
question of how to raise such large amount with the narrow fiscal bases of sub-local
governments10. Urban transport infrastructure is primarily undertaken by the state
agencies (public works departments) or para-statals (road development corporations) to a
good extent and to a limited extent by the municipal governments. However, the finances
of most of the state governments are neither very strong enough to undertake large scale

10
We avoid a detailed discussion of the financial position and fiscal status of urban local bodies for the
want of space, but the same can be found in Mathur and Thakur (2001)

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investments in urban infrastructure. Given their development mandate to the entire state,
most of the funds are delegated to vital inter-linking district and state roads. The
budgetary resources available for several municipal bodies in the states are spread thinly
over several functions and are less than or not adequate to lay down even the connecting
roads in the cities11.

The lack of/ inadequate resources available for investment in urban transport
infrastructure calls for raising financial resources through application of economic
instruments and innovative practices on one hand and using alternative approaches to
meet with the same, on the other. We examine these options hereunder.

4.1 Economic instruments for raising investment

Given the limited financial capacity of urban local governments, whose primary
revenue base has been property tax and other variants of taxation, their capacity to
provide the infrastructure is also limited, which is also the experience of several cities
across the world. Therefore, urban and transport economists suggest applying several
economic instruments to raise investments, and, some times, even advocate ‘ear marking’
of such revenues to urban transport infrastructure development. Taking this route will
break the services tied to municipal tax revenues. The economic instruments available
are discussed very widely in literature, which include (Schwaab and Thielmann 2001):
(i) Pricing instruments, which influence the demand for transport by increasing the price
through levies of tax, toll, charge, surcharge etc. Road pricing is considered as the first
best measure to internalize the social costs of transport through appropriate mechanisms
and can be used as a user charge mechanism to recover the costs fully. Tolls can also be
levied on bridges, tunnels and important roads to recover the costs of the project. Charges
like those on vehicle parking are also common and should be high enough to cover the
costs of parking lots and traffic management. Surcharges can be levied on certain
consumption items relating to transport such as fuel and passenger/freight fare. Further,
in the US special tax districts are formed to collect taxes for catering to specific transport
or any other infrastructure creation in a particular area.
(ii) Quantity instruments, which restrict the demand for transport through measures like
quotas and permits. These instruments set the maximum number of vehicles that can be
owned or used and the number of permissions that could be given for entry into a zone
during certain times. Singapore has successfully used these instruments to restrict the
vehicle ownership and use. Further, with the ceiling imposed on vehicles, there emerged
a market for licenses of use/ownership and phasing of vehicles got incentivised.
(iii) Regulatory instruments, which impose certain restrictions like entry restrictions,
bans/curbs on vehicle speeds/freight load, traffic calms, car pools, area licensing etc.
These measures are heavily used in European and Asian cities primarily to attain better
traffic and transport management. They also serve the purpose of environmental
management very well. Singapore has, in particular, used the measures like cordon

11
Further details on the status, prospects and reform agenda of urban local bodies in India can be found in
the study of municipal finances and services in India by Mathur (2005)

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pricing and area licensing effectively to deal with transport demand and, recently,
London has proposed congestion pricing methods to curb traffic inflows to central parts.

4.2 Alternative means of raising investment

In the backdrop of huge financing requirements, two alternative approaches can

be advocated to meet the investment needs for providing urban transport infrastructure
(Wegelin 2005), which are further discussed below:
(i) multi-sectoral investment planning
(ii) partnerships among governments
(iii) partnerships between public and private agencies

(i) Multi-sectoral investment planning

The first option referred above is an arrangement of pooling investment resources
from various sectoral agencies and it is felt in this context that the dedicated urban
transport funds are a good means for pooling resources and spending on the same on
transport infrastructure projects. The pooling requires the commitment of all three levels
of government – central, state and local – towards releasing resources for the purpose of
meeting with urban transport requirements on a continuing basis without any lapse in the
commitment and also other major stakeholders – including the beneficiaries such as
private businesses, individuals and employers. The pooled resources need to be governed
by a board with membership of the respective governments (officers/heads of concerned
departments), technical, financial and legal experts, and the civil society.

Such proposals have already been implemented in the case of road transportation
sector in several countries12, including India through Central Road Fund. However,
transport funds have been highly dependent upon the operational principles of fund such
as ‘ear marking’ and ‘user contributions’. Given its implications to local and/or state
government budgets and protests of citizens, the IMF has argued that they can play a role
when city governments lack self-discipline and their governance is poor. However, the
reality of urban local government finances and governance are far from satisfactory in
India. Moreover, governance structures of the fund management need to be drawn more
carefully to induce more professional approach to its management, rather than making it
another cake box for the vested interest groups. Box 2 presents the details of a dedicated
urban transport fund proposed for Mumbai as an example of such funds.

Box 2: Dedicated Urban Transport Fund for Mumbai

Mumbai does not have a very long history, unlike its counterparts, but it has a
fairly entered the history books as the city built with purpose and function, which kept on
changing to the needs of the hour. However, unlike other cities, Mumbai has several
structural difficulties which still form a major stumbling block to its adaptation. Its
physical structure of peninsula is one of the blockades in terms of physical structure.
Knowing these structural inadequacies, it has been provided with a uniquely different
12
Heggie and Vickers (1998) discuss the experience of constitution of road funds for managing transport
infrastructure in several developing countries.

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kind of transport structure extending from the Southern tip of the island city (rather,
peninsula) towards North along both sides of sea, thereby forming a V-shaped city. The
structure, which was largely laid down by the colonial rulers, which still guides much of
the city transport and there has been hardly any attempt to change it.

The city traffic has been increasing and public transport, which takes care of 88% of
transport needs is in a crumbling state with crushing loads at peak hours. There has been
a slow response in putting up investments in transport infrastructure. The rising
mismatch of resource requirement and actual allocation in Mumbai city transport calls for
setting up a separate urban transport for supporting the projects that improve current
transport systems or provide new transport systems. The proposal had been mooted with
the success of creation of Central Road Fund that paved way for the improvisation of
national highways and completion of golden quadrilateral road network connecting major
metros. The acute paucity of funds was pointed out by several studies in the past and it is
increasingly pointed as a pointer of declining infrastructure and investment attractiveness.

The proposed dedicated urban transport fund (UTF) was expected to have contributions
coming from major shareholders including transport users, property owners, employers,
automobile manufacturers and those involved in commercial activity and was to be
legitimatized by concerned bodies. The fund amount was to be used exclusively for
providing finance to major urban transport projects based on the priorities laid down by
the fund managers. The UTF proposal was mooted as a means for supporting financial
requirement of long term transport needs of Mumbai. It was expected that the State
government would contribute one time capital or annual grant support and Central
government may also chose to park funds, if the experiment were successful.

The UTF constitution would have all stakeholders – (i) Central government
representatives like ministries of finance, roads, waterways and railways, (ii) State
government representatives like finance, roads, revenue, public works, transport and
urban development, (iii) Local government like MCGM, BEST etc (iv) Non-government
representatives like Chambers of Commerce, Civil Society Groups /Non-Profit
Organisations, User Associations (e.g., Truckers’, Automobiles and Passengers). The
Fund management was envisaged in the form of an autonomous board headed by a
Chairman, who shall of eminent personality and leadership qualities.

Source: Mokashi (2002)

(ii) Inter-governmental partnerships

Partnerships between various governments can provide great inducement to

leverage the strengths and pool resources towards meeting the objective of providing
urban transport. An important concept that has been mooted in India is the inter-
governmental partnerships and the recently announced Jawaharlal Nehru Urban Renewal
Mission (JNNURM), which precisely spelt out the need for partnership based urban
infrastructure building and which also replaces the earlier Central government sponsored
schemes that laid down Central government support for infrastructure projects. It covers

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63 cities with a fund size of 50,000 crores to be spent over a period of seven years, but
requires the cities to undertake mandatory and optional reforms for accessing it13.

Under the JNNURM, the local government proposes a capital improvement plan,
which can include transport infrastructure improvements and which can be financed by
the central, state and financial institutions in the ratio of 35:15:50 in the case of cities
with 4 million plus population, 50:20:30 in the case of cities of million plus population
and 60:30:10 in case of other cities. This mechanism might prove to be a boon, at least to
the smaller cities which primarily receive grant support and also for mission cities, which
receive a good share of loan and grant. However, as this scheme covers all capital works,
the allocation available to urban transport infrastructure will be very small than the actual
investment requirement. Yet, some of the important long pending projects can find light
under this initiative.

(iii) Public-private partnerships

Public-Private Partnerships (PPP) are next major alternative to steer investments

in urban transport and they are increasingly becoming the means of undertaking high
investment transport projects on a partnership mode. To some extent, India started
undertaking construction of roads and bridges under the PPP mode in the mid 1990s, but
it did not take off the ground at an expected pace due to several risks arising during
project implementation. The Government of India also encourages investments coming
in this mode in the recent economy policy (GoI 2005). There is a spectrum of
partnerships with widely varying participation of private sector in investment and
expertise pooling and the public participation to pool the risks and provide secure
conditions for project implementation. Box 2 details out some important PPP options
that can be used in the creation of urban transport infrastructure.

Box 2 Public Private Partnerships in Urban Transport Infrastructure

1. Service Contracts
This is a type of small duration contract where a private operator performs specific tasks
such as providing buses. By using this option, it is possible to take advantage of private
sector expertise for performing technical tasks or even opening such tasks to competition.
The public utility manager has the responsibility for coordinating the tasks performed by
private operators and ensuring investment in the sector. It is not possible to bring in
management expertise or improve operating efficiency under this option. However
unlike other infrastructural sectors, it is possible bring in additional investment in the
public transport sector.

2. Management Contracting
This short term option transfers the responsibility for the operation and maintenance of
the existing system to a private operator for a fixed fee, which could be related to various
performance parameters. Though the public utility is still responsible for rehabilitation
13
A detailed discussion on the applicability and conditions of the JNNURM in the context of city
development planning can be found in Meshram (2006)

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and new investment, this option can bring in technical and managerial expertise to the
sector and improve operating efficiency. Management contracts in the transport sector
are particularly relevant in the management of deports and workshops of large bus
operators.

Management contracts are generally for a period of three to five years. This allows the
private sector operator to implement changes and to be accountable for results.
Management contracts are sometimes seen as an attractive option when fuller private
participation is not appropriate or where it is expected that a management contractor can
help to improve information about the enterprise and its market before further private
participation options are considered.

3. Lease contract
Under a lease contract, a private firm operates and maintains a Government-owned
enterprise at its own commercial risk, with income derived directly from tariffs. The
lessee (which is a private firm) is under no obligation to invest in the infrastructure. In
fact, the only obligation the lessees under is maintenance – that has to be agreed upon.

Under this option, a private firm leases the assets of the public utility typically for 10-20
years for a fee and takes on the responsibility of operating and maintaining these.
However, the responsibility of financing new investment lies with the public utility. This
contract can bring in technical and managerial expertise and improve operating
efficiency. While investment risk lies with the public utility, the commercial risk is
shared between the private operator and the public utility.

4. Concessions
Under this, a concession agreement or franchise is a means of awarding fixed long term
monopoly rights to private firm for providing services within a geographic area. Under
this option, the private operator not only has the responsibility for operation and
maintenance of existing assets but also for new investments, although ownership lies with
the government or the public utility. As such, the investment and commercial risks like
with the private operator. This option can bring in technical and managerial expertise,
operating efficiency and additional investment to the sector.

The net cost scheme is the application of the concession type of private participation in
the public transport sector. In this scheme, the operator receives the revenue from ticket
sales, as opposed to a fixed payment in the gross cost approach, thereby taking the risk of
changes in financial performance over contract period. A public entity continues to set
routes, prescribe fares and service quality, and may either provide a fixed subsidy or
receive a fixed contract fee (if the route makes profits). The government awards each via
a competitive bid to the lowest bidder.

Due to the revenue risk involved, this option would be suitable for high density corridors
with only a few operators, where the ridership would be more certain, so that private
operators have no motivation to adopt dangerous passenger-capturing techniques such as
rash driving and speeding. However, this would imply that a private operator would have

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Vol V Issue 3 (September 2007) Pg 53-65

a near monopoly over an area and hence would require appropriate regulation to rule the
misuse of such power.

5. Divestiture
The divestiture option, exercised through the sale of assets or share through management
buyout, can be partial or complete. It gives the private operator full responsibility for
operation, management, and investment. Unlike the concession contract, it transfers
ownership of assets to private sector. This model has been adopted in the rail transport
industry in the United Kingdom.

Source: Kohli and Deb (2004)

Acknowledgments
This paper is a modified version of another paper i.e., Nallathiga (forthcoming). It has
been partly drawn upon the work carried out under a research project sponsored by the
Reserve Bank of India. The author expresses his sincere thanks to Dr Rajan Goyal,
Director, Department of Economic Analysis and Policy, Reserve Bank of India for his
supervision and inputs. He also acknowledges his gratitude to Dr P K Mohanty, the then
Director of Centre for Good Governance, Hyderabad for overall direction.

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Vol V Issue 3 (September 2007) Pg 53-65

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