Economy Public Funds Andhra Pradesh
Give us a break, Mr Sreedharan
The Delhi Metro chief's recent letter to the Planning Commission, warning that Hyderabad's model for its Metro could lead to a political scandal overlooks the subsidies his own organisation has received, writes Sunil Jain.
In a fairly well-publicised letter to Planning Commission Deputy Chairman Montek Singh Ahluwalia, Delhi Metro Rail Corporation (DMRC) chief E Sreedharan has lambasted the Hyderabad public-private partnership (PPP) model, arguing that his state-owned model is the best one, that the Hyderabad model can “lead to a big political scandal”, that the idea’s to reap a windfall profit from the land allocated, and so on.
He points out that while the Maytas consortium has agreed to pay the government Rs.30,300 crores over the project’s life (in terms of net present value, that’s Rs.1,240 crore), much of this is due to the fact that the government gave the Metro 296 acres of land it can use for development - had this not been so, Sreedharan says Rs 10,000 crore more would have been required in terms of viability gap funding.
Most who read the letter, the contents of which were liberally leaked to the press, would assume none of this applied to the DMRC - indeed, the finance ministry’s so impressed by the argument, it is actively examining the merits of this vis-a-vis the PPP model being pushed by the Planning Commission.
A closer look at the Delhi Metro annual report makes it clear that most of these arguments are self-serving, apart from of course the fact that the DMRC model, where the Union and Delhi governments own just 50 per cent each of the equity, means that no one’s really in charge of the project - this has its own implications in terms of accountability and vigilance, but that’s the subject of another column. Let’s look at the sops the DMRC’s getting and compare them with the Hyderabad ones that have so shocked the DMRC chief.
In 2006-07, DMRC had a total loan base of Rs.6648 crores, on which the average interest rate was 1.44 per cent and equity of Rs.3702 crores, which had earned no dividend so far and looks unlikely to ever earn one. If you assume a market interest rate of even 12 per cent and the same return for equity (though equity returns are usually much higher), this means DMRC is getting an annual subsidy of more than Rs.1000 crores. Nearly 90 per cent of the loan is a concessional one from the JBIC of Japan, but the exchange rate risk (which is significant in a project of such a long gestation) is borne by the Government of India.
DMRC never paid any excise/customs/sales taxes on capital equipment either - assume this to be a conservative 20 per cent and that’s a one-time saving of another Rs.2000 crores, or another Rs.240 crores per year subsidy assuming the same 12 per cent interest rate. It also gets electricity at half the commercial rate, a saving of another Rs.25 crores per year. All this, by the way, when DMRC’s annual revenues are just Rs.543 crores, of which Rs.252 crores is from real estate transactions!
Contrast this with the Hyderabad case, where Maytas will raise all funds at commercial rates, has the same tariffs as the DMRC and will still pay the government a net present value of Rs.1240 crore. So, the savings from the PPP route are obvious.
But if you’ve been following Sreedharan’s arguments, you’ll have noticed the fatal gap in my argument - there’s no mention of the 269 acres of real estate the Hyderabad metro’s got, what Sreedharan calls the selling of family silver. According to the DMRC chief, had this land not been given, Maytas would have asked for Rs.10,000 crores instead of offering to pay the government.
What’s important to keep in mind here is that the Delhi Metro itself got a huge amount of land - the 2006-07 annual report talks of 960 acres of land in just one place! In other words, whatever the Hyderabad metro got, Delhi Metro got many times that. And while the Hyderabad metro didn’t get any land to lease/sell (it can develop/lease only the space above the metro stations/depots), the Delhi Metro’s also transferring the leases of chunks of land for as many as 90 years - this is tantamount to selling government land.
While DMRC’s auditors have said that this amounts to selling property and violates the law, the CAG says it is okay - the short point, however, is that DMRC’s land deal is a lot sweeter than Hyderabad could ever imagine. Not surprisingly then that the Municipal Corporation of Delhi has levied a Rs.452 crores property tax on DMRC, which the latter has contested, citing the Chief Secretary’s decision that this would not be levied. The New Delhi Municipal Corporation has followed with a Rs 33 crore demand.
Not paying taxes on the land, in turn, boosts Delhi Metro’s profits even more, and it’s unlikely the Hyderabad one will ever get any tax breaks like this. Interestingly, real estate income in 2006-07 accounted for 53 per cent of DMRC’s total revenues, nearly 70 per cent of EBDIT profits - in terms of pre-tax profits, real estate profits were 11.6 times the overall profits.
What’s most galling is that while the DMRC chief is so fulsome in his praise for his model, he doesn’t care to mention that even as he’s getting these hundreds of crores of annual sops, the Metro’s struggling to meet even its physical targets. While the original target for Phase I was to carry 2.18 million passengers by 2005, this was lowered to 1.5 million in 2005 - the 2006-07 report says the ridership was 610,000! So, as the criticism of PPP projects builds up, you’ll do well to keep these facts in mind.
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Cite this article
Sunil Jain (2008) ‘Give us a break, Mr Sreedharan’, India Together, 8 October 2008. https://indiatogether.org/dmrc-economy/
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Gaurav Dwivedi and Shripad Dharmadhikary · 10 October 2008
The conclusion drawn or implied by Shri Jain that the Hyderabad project is better because it is a private sector project is premature and the information on which his arguments are based is incomplete. Firstly, the article tries to compare an already running project (Delhi) with a project which is still far off in the future. Hyderabad projects performance is still only a promise so we should be cautious in making too much out of it. There are examples of projects like Metro Manila Water Supply Project in Philippines where a private company came in with a lot of promises including reduced tariffs, was lauded by the World Bank and others but the project failed to deliver with tariffs shooting up well beyond these contractual obligations. A few years down government of Philippines had to come in with huge sums of money to bail-out the failing water supply system. Some may remember the astronomical bids that were received when Indias telecom sector was first opened up for private participation, bids that could never be realised. In fact, as there is need to be wary of bad contracts, caution is also called for in projects that promise things too good to be true. In such cases it is important to be clear about how the developer can promise all these good things otherwise we may end up with a default. For example, the thousands of crores that Hyderabad concessionaire has promised to pay the Government start essentially from the 18th year. What if the project fails before that? How is it that companies like Siemens, Bombardier and Alstom experienced in implementing metro projects backed off indicating financial non-viability of the project while a firm with no previous experience in handling metro projects offers so much? We also need to know exactly what the developer stands to gain to be able to offer all this. These points can be clear only after seeing the Concession Agreement, which does not appear to be in the public domain. Lastly: The article states that the Delhi Metro itself got a huge amount of land - the 2006-07 annual report talks of 960 acres of land in just one place! but fails to mention that the DMRC paid for this land.
aashish Gupta · 11 October 2008
According to me, instead of debating whether we should have private or public ownership of metro systems, we should debate whether we should be having metro systems at all. Here is an article i wrote sometime back for a course in infrastructure planning. ----- The Delhi Metro Rail Project (technically the Delhi Mass Rapid Transit System) is perceived to be one of the most successful infrastructure projects in India . The project was dedicated to the nation by a former prime minister of India as a gift on his birthday, in its first phase runs over 68 km, and was built at a cost of US$ 2.4 Billion . The English media has been particularly enthusiastic about the project, and in an opinion poll carried out by CNN-IBN, a popular news channel, E Sreedharan, the managing director of the Delhi Metro, was named the Indian of the year . Some of this recognition is well deserved. The normal story of infrastructure projects in a developing country like India is about cost over-runs, innumerable delays, faulty planning and corruption. None of this happened with the Delhi Metro. The first line in Phase 2 of the project was inaugurated 7 months ahead of the deadline, an unheard phenomenon in India. The Delhi metro is also a hit with the public, who like the air-conditioned and clean stations, as well as the comfortable ride. The Metro is considered the beginning of the exercise of making Delhi a World-Class city. However, the success of the Metro has to be evaluated in comparison to its aim. The aim was to reduce congestion on roads, encourage people to use public transport, and ultimately go for sustainable transportation. The economic justification for the project (when sanctioned eight years ago) was based on an expected ridership of 21.8 lakh per day in 2005. Today the website of the Delhi Metro Rail Corporation states that The expected ridership, in the year 2005, is 15 lakh passenger trips per day. We are not informed where the 6.8 lakh passenger trips disappeared. Further, all newspaper reports suggest that in late 2006, the ridership of the system is between 4 to 5 lakh passengers per day! In an article called Squandering Public Funds for a handful of people, Prof. Dinesh Mohan, Founder of the Transport Research and Injury Prevention Centre at IIT Delhi asks, According to the Transport Department of Delhi, the total number of trips per day in the city total to about 1.2 crore. This means that Delhi Metro is benefiting only 3 per cent to 4 per cent of the citizens of the city, with no benefit to anyone else in the country. If we take a modest 8 per cent as the cost of interest plus depreciation on the projects capital expenditure, we get a subsidy of Rs 35,000 per passenger per year. This certainly cannot be justified as a public expenditure in a cash-poor society. The obvious question that arises is, why does a small minority of Delhis population deserve such a huge national subsidy? (Mohan 2006) On top of that, the project got various subsidies in electricity charges, taxes, etc which alone amount to 1,194 crore. (Mohan 2006) According to Mohan, The tax exemption of Rs 1,194 crore planned for the metro in Delhi would fund a modern 200 km bus rapid transit system with the capability of transporting about 8 lakh passengers a day. Here, the Delhi Metro seems as a machination of politicians to spend public money on a system that does not work, possibly for personal gains that result from awarding contracts. It is surprising for me to see more Indian Cities wanting to have Metro Systems, despite the failure of the Delhi metro in creating sustainable transportation. Already, cities such as Bangalore, Chennai and Hyderabad are in various stages of implementing the Metro. Perhaps the reason why Metros are implemented is because of our obsession to become world class, forgetting that the Metro requires land-use patterns very different from our own cities. One just needs to go to research being done on sustainable transportation at such places as ITDP or even at TRIPP in India to realise that metro systems are not suited for indian cities.
Srinivas Savaram · 11 October 2008
Irrespective of Mr. Sridharan's alleged hypocrisy (or lack of it)...the 30,300 crores of revenue promised to the AP government, the lack of previous experience of Maytas, the AP government's unprecedented selling of government property and the recently levied fee on users of the RJI airport by GMR, all bring up questions about the viability of this agreement.
Akhil Kumar · 16 October 2008
Delhi Metro vs Mumbai suburban transport Is it not cruel to the Mumbaikar that while each Delhi Metro passenger gets a de facto subsidy in super comfortable air conditioned seats of Rs.35,000 p.a. the Mumbai commuter on (pre independence compartments) most uncomfortable standing accommodation (no protection against pushers, stone throwing urchins, pickpockets , no first aid help in coach or stations) century old tracks ....he pays Rs.35,000 (?) on first class and Rs 10,000 by cattle (or should one say monkey) class to have the doubtful distinction of being in the highest personal accident rate, death inviting commuting travel in the whole world. No politician fights for the rights of Mumbaikars who pay fares honestly and commute like animals to give honest day's work and pay taxes !!!
Vikrant Kumar · 3 November 2008
Though the comments put up by Mr.Sreedharan might be relevant, the talk of corruption inside DMRC also might be relevant but the bottomline is that the metro is benefiting the common man of Delhi and people of other cities also deserve some benefit in return of the taxes paid by them. With metro in place people will have at least an option to reach to CP, ITO, East Delhi, Rohini, Old Delhi, Janakpuri, Dwarka and many more places in Delhi without spending much of the time in the cruel traffic and uncomfortable roads (which even after so much of technical advancement have not improved much ) of many parts of Delhi. At least some fraction of the common man is being benefitted. Otherwise with so many fly overs (and very less facilities for bus commuters and pedestrians) built all over Delhi or Mumbai the congestion of these city roads was never reduced as a whole. On most of such loactions the problem of congestion was shifted from one location to another. Just see Guragaon. There is no (or very little) attempt to improve the public transport of the city. No intra city buses and no auto rickshaws. It is a city only for the persons with a personalized mode. The aim of Metro (even if it was) should not have been to remove congestion from the road because in growing cities like Delhi it is very difficult to achieve such an aim. Instead one of the aims i.e. to achieve a multi modal transportation system is rather more achievable, in which the load from the then public transport system i.e. buses would be shared by the Metro, LRT, BRT, personalised modes.People who do not want to hang on the door of buses have an option of getting to the Metro station via an efficient feeder bus system at both origin and destination points. It is also good to see inefficient blue lines giving way to the DTC buses (only if they maintain their punctuality and reliability. along with this if the traffic management and augmentation measures are adopted with sensible forethinking and not just project generation motto, it can reduce the size of the future traffic problems. The foremost root cause of traffic congestion the landuse planning needs to be addressed first before developing any new transport intensive development.
Praveen · 15 January 2009
I hope the author, at least now, must have understood what the time-tested metro man detected as an anomaly. MAYTAS is not merely a political scandal, but many times more than that. Had maytas been bought 'freely' as admitted by Raju, would it not have collapsed? I request you to write a follow-up. Will you?
Venkat · 16 January 2009
With Satyam fiasco right in front of us now will Mr. Sunil Jain take a more objective view now of E. Sreedharan's analysis?
dibin · 31 August 2009
Mr Sunil Jain, I hope now u stop supporting maytas and satyam. Not all government companies and govt servants are corrupt. learn to respect people with integrity like sreedharan. Have some confidence in your country and people!!!