End of the line?

Print edition : November 30, 2012

V.V. KRISHNAN

The stand-off between the DMRC and Reliance Infrastructure over the Delhi airport metro line shows why public-private partnerships are not suitable for public projects with long gestation periods.

In a recent development in the ongoing saga of bickering between the Delhi Metro Rail Corporation (DMRC) and Reliance Infrastructure over the Delhi Airport Metro Express Line, the former has announced that Reliance wants an end to the concession agreement and a restructuring of the project to make it financially viable. With that formal announcement, the dispute over the public-private partnership (PPP) project has reached its climax. The crisis began with the suspension of the metro line connecting the city to the airport in July this year, which then spiralled into a war of words between the private developer and the DMRC. The crisis has cast a cloud of doubt about the feasibility of PPP in infrastructure projects in India.

The airport metro line was set to become a world-class infrastructure project developed on a partnership basis by the DMRC and the Reliance Infrastructure-led Delhi Airport Metro Express Private Limited (DAMEPL). However, the line was closed down temporarily in July after Reliance Infrastructure expressed security concerns with regard to defective bearings and girders. As per the agreement between the two entities, the DMRC was responsible for the civil construction while Reliance Infrastructure was in charge of operation, maintenance and other activities. The DMRC, however, has alleged that Reliance had plans to pull out of the project even earlier as it was not yielding profits, a charge that Reliance Infrastructure vehemently refutes.

A press statement released on October 26 by the DMRC says: Issues raised by M/s DAMEPL regarding financial non-viability of the project and also their request of restructuring has been rejected by DMRC. On request of M/s DAMEPL the dispute is now being referred to arbitration. Similarly, the issue of the concession agreement has been disputed and the same has been referred to arbitration proceedings. M/s DAMEPL maintained that they will run the airport line services pending resolution of the disputes through arbitration.

Speaking about the dispute, a DAMEPL spokesperson said: At this stage, commercial dispute (if any) between the concessionaire and the public partner (DMRC) are in dispute resolution process and are quasi-judicial in nature. Hence we would not like to comment on the same.

However, when the crisis first surfaced, a Reliance spokesperson had told this correspondent: We have every intention of fully honouring our concession agreement with the DMRC for this line, in the true spirit of public-private partnership.

As a blame game pans out following the temporary shutdown of the metro line, it is important to look at the PPP model as a form of developing new metro rail projects across the country. While the attempt to develop a metro corridor connecting the airport to Delhi is now mired in controversy, a group of concerned citizens in Hyderabad have also protested against some of the provisions of the proposed PPP model there, which is deemed as being anti-people. Another model with a Centre-State partnership is being tried to develop a metro rail project in Kochi.

International experience

The international experience with the PPP model in metro projects has not been encouraging. In a study of metro rail transport systems in 132 cities across the world, a paper of the Working Group on Urban Transport for the Twelfth Five-Year Plan, released in 2011, showed that 88 per cent of metro rail networks had been developed by the public sector. While all prominent modes of transport in the last three decades have seen PPP, the realm of metro rail has remained insulated from this model.

In a number of well-known cases, the use of the PPP model proved to be too expensive for the consumer and eventually collapsed, leading to the operations of the metro network being taken over by the national government. The Hopewell project in Bangkok did not even take off. The PPP experiment of the Star and Putra line in Malaysia was a financial disaster and was eventually nationalised. The much-touted bringing in of private players to run the London Underground in 2003 fell flat on its face with the complete collapse of Metro Net in 2007 and the government owned responsibility for liabilities worth 2 billion.

In an interview to The Financial Express in 2010, E. Sreedharan, former Managing Director of the DMRC, said, A PPP model for a metro has never succeeded anywhere in the world. Some countries had experimented with it, particularly Malaysia. Once a metro system is established, you cant wind it up, so when the company wraps up, all the liabilities have to be taken on by the government.

Repair work being undertaken on the Airport Express line.-V.V. KRISHNAN

One of the reasons for this is that infrastructure projects have long gestation periods and do not yield profits immediately. Attempts by private developers to extract high profits from the projects eventually prove to be unfriendly to commuters and defeat the purpose of the metro as a low-cost public utility service.

The present crisis

While Reliance Infrastructure has emphatically stated that the temporary shutdown of the metro was purely for reasons of public safety and that it had no plans to pull out of the project as such, sources in the DMRC indicated that the company was playing up the defects in the civil structure to pull out of an unprofitable venture and that the company had approached the DMRC for a financial restructuring of the project as early as April this year.

The airport line started operations in February 2011. Reliance noticed defects in the bearings and informed the DMRC in May 2012. However, DMRC sources said that the inspection should have been carried out much earlier.

Reliance Infrastructure maintains that proper inspection was carried out on time and the line was temporarily closed purely because of public safety concerns. In a detailed e-mail response to Frontline, a DAMEPL spokesperson stated: The defects in the bearings and the girders were serious because these were not constructed as per original design by the DMRC. The inspection schedule for bearings arevisual inspection once a year, detailed inspection once in 5 years and the life of a bearing is 15 years. We on our own started inspection of the bearings in time. The defects were noticed and promptly informed to the DMRC in the month of May [20]12. The decision to stop the line was taken after extensive discussions with stakeholders and expert advice received by us, purely on the ground of safety.

The findings of a joint inspection committee (JIC) constituted to look into the defects in the civil structure indicate that there were indeed serious flaws in the construction. The JIC, consisting of experts from the DMRC, the Indian Railways and Reliance Infrastructure, was set up in July to carry out a survey of the 22.7-km metro corridor. As per its report, 91 per cent of the bearings were defective or dislocated, 32 per cent of the bearings had cracks, were torn or bulged. Also, cracks had appeared in 7 per cent of the girders holding the track. As the DMRC was responsible for the construction, the allegations by Reliance Infrastructure citing public safety reasons for suspension of operations cannot be dissmissed.

DMRC sources also indicated that the planned commercial ventures of Reliance along the metro corridor did not quite take off.

The DMRC also alleged that Reliance Infrastructure had delayed a proper, timely inspection of the civil structure and that inspection started only after about eight letters had been written to Reliance. In a letter from DAMEPL to DMRC Managing Director Mangu Singh, written in April 2012, a copy of which is available with Frontline, Reliance Infrastructure had indicated that the planned retail activities along the metro corridor were not earning substantial yields.

The letter reads: Although we have left no stone unturned, as informed to DMRC from time to time, we have been unable to get a developer on board for Dwarka Depot property as the available time span is only 26 years and also due to the dampened business projections for the location. The retail activities at New Delhi and Shivaji Stadium stations have been progressing but retailers have been taking a significant amount of time in fit-outs as the concept of retailing at a metro station is yet to percolate down to the big brands. In fact, poor ridership is often cited as a reason by retailers to delay fit-outs as they say if their shops are operational early they will have losses in the medium term.

"A PPP model for a metro has never succeeded anywhere in the world.... When the company wraps up, all the liabilities have to be taken on by the government." - E. Sreedharan, Principal Adviser to the DMRC, in an interview to The Financial Express.-BIJOY GHOSH

The letter even goes on to state: This being the first public-private partnership in metro domain, we require strong support from our public partner, namely DMRC, to make it viable.

On the viability of the airport line, the DAMEPL spokesperson told Frontline, This is an infrastructure project with a concession period of 30 years and also the first metro to be developed under the PPP model. It is not expected that a project of this dimension would become profitable from day one. Being a new concept, it did take some time to get accepted by the market; however, the response was positive on all fronts. We reiterate that we have every intention of fully honouring our concession agreement with the DMRC for this line, in the true spirit of public-private partnership.

PPP problems

The present impasse brings to the fore the inherent problems with PPP as a model for developing a public utility service given the emphasis on profits in any private enterprise.

The proposed metro project in Hyderabad, which is to be developed on the PPP model between the Government of Andhra Pradesh and Larsen & Toubro, has also encountered opposition from citizens concerned with the project not being a pro-people, public utility.

C. Ramachandraiah, Professor of Urban Studies at the Centre for Economic and Social Studies in Hyderabad, voiced his concern about the whole PPP project being developed as a real estate project. Speaking to Frontline, he said, There are two anti-people provisions in the concession agreement with L&T. Firstly, competing facilities should not be developed by the State government. This is against the spirit of public transport where several modes complement each other so that the citizen travels by changing modes with a single ticket. The APSRTC buses, which are now carrying three million people a day, will be reduced drastically on the metro corridors so that people are forced to use the metro by paying higher charges. Secondly, L&T is empowered to levy 25 per cent higher tariff during peak hours (four hours a day). This is a scandalous provision. The worldwide practice is to levy higher penalties/ tariffs on private vehicles during peak hours so that people are encouraged to use public transport.

The cost of the project has already crossed Rs.20,000 crore.

Alternatives

In contrast, a metro corridor is being developed in Kochi as a joint venture project between the Government of India and the Government of Kerala, funded by a loan of Rs.2,170 crore from the Japan International Cooperation Agency (JICA). The repayment period for the loan is 30 years and there is an initial moratorium for 10 years.

Sources in the Kochi metro project said: The return on investment in infrastructure projects is very slow. These are projects with low returns. Therefore, the joint venture route was conceived of by the erstwhile Communist Party of India (Marxist) government as it is more friendly to commuters. The project was finally approved in March 2012. The maximum cost of the ticket in the proposed metro will be Rs.30. As the commercial capital of the State, Kochi handles a lot of commuters and a metro project would facilitate development.

The first and the second phases of the Delhi Metro were completed as projects owned and financed by the government. Metro projects in Bangalore, Chennai and Kolkata are also being developed and extended following the same model as the DMRC. Ramachandraiah argued: I personally feel that large infrastructure projects should be in the public sector. In PPPs in mega projects, the deals are not transparent. Most of the agreements are tilted in favour of the private parties. Thousands of hectares of land is handed over to the private parties. PPP agreements are never debated in public.

Going by the experience both at home and abroad, the rationale of deploying the PPP model in large infrastructure projects as well as their mode of operation needs to come under serious scrutiny. The metro rail is meant to be an efficient and user-friendly mode of transport in a rapidly urbanising India so as to decongest choked-up public spaces in our cities. A business model for a metro project should be designed to serve this purpose and not to help profiteering by giant conglomerates.

This article is closed for comments.
Please Email the Editor