A new report has shed light on the Financial Internal Rate of Return (FIRR) of Mumbai’s metro projects, revealing that only two metro projects currently have a positive FIRR of 10%. FIRR is a metric used to measure the returns an investor would get on his/her investments.
Naturally, the FIRR needs to be higher for the business model to be feasible in the long run. However, the fact that only two metro lines - Metro 4A (Kasarvadavali to Gaimukh) and 2B (DN Nagar to Mandale) - currently have the highest FIRR is somewhat concerning. It’s worth mentioning that all metro projects have a relatively high economic IRR ranging between 15% to 25%.
It is said that Metro 4A has a relatively high FIRR of 12.68% which is partly due to the sudden surge in properties in the area. Authorities cite the lack of hi-speed public roads, as well as congestion in the Thane region as one of the major reasons why locals flock to the Metro.
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Senior Director of Crisil Ratings, Sachin Gupta said - “Financial internal rate of return is how a private developer would look at a project. It is based on costs and direct benefits. Economic IRR is used by the government or public sector to make decisions as it includes FIRR plus the indirect benefits for the state including the addition to tax revenues due to the project.”
“For a private developer, the FIRR is useful in deciding whether to invest in a project. For a project to be viable, FIRR would have to be above 10%, which is a ballpark figure for the cost of debt,” Gupta added.
The authorities are planning a 9 KM extension from Gaimukh to Shivaji Chowk in Kashimira. This project is reportedly expected to carry 7.5 lakh passengers per day, and as a result, will have a FIRR of 10.91%.
While taking FIRR into account, other factors like the space available for commercial renting or advertisements are also taken into account. This is why longer Metro routes don’t translate into higher passengers or revenue.
The 25 KM long Metro 5 (Thane-Bhiwandi-Kalyan) line will only have an average passenger count of 3.03 lakh per day, and as a result, will generate lesser revenues compared to shorter trips. This also explains why the FIRR from this particular metro line is the lowest of the lot at 6%. It is said that out of the eight metro lines currently under development, six have a FIRR rating of 6% to 8.65%.
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