Metro on rocky route: A Catch 22 situation for the future of urban projects

Two failed private metro operations have been taken over by the public sector, yet the private sector remains the sole engine of expansion for this mode of urban transport

Some weeks from now, Delhi Metro Rail Corporation (DMRC), a joint venture of the Union and Delhi governments, will be running the operations of 11.7 km metro network in Gurugram, the country’s first privately-funded metro system. The two lines of the Rapid Metro Gurgaon are currently owned by the state government-owned Haryana Mass Rapid Transport Corporation (HMRTC), which took them over after the IL&FS group, imploding under a financial scandal, exited on September 9.

This is the second private metro that DMRC has taken over. In 2013, it took over the Delhi Airport Metro Expressline, previously operated by Anil Ambani's Reliance Infrastructure (RInfra). For the Rapid Metro, a five-year operatorship and management contract will replace the 98-year concession agreements that Rapid Metro Rail Gurgaon Ltd and Rapid Metro Rail Gurgaon South, the special purpose vehicles for the two lines, signed with the Haryana Urban Development Corporation, now called Haryana Shehri Vikas Pradhikaran (HSVP). 

These two companies are owned by IL&FS Transportation Network Ltd and IL&FS Rail Limited (IRL). The IL&FS group's exit has resulted in arbitration with the state government under an order of the Punjab and Haryana High Court. 

One of the key points that the arbitration will settle is how much debt was raised for the Rs 3,700-crore project. This is crucial since 80 per cent of the debt will have to be paid by the Haryana government to the beleaguered IL&FS companies, under the court order. But before this, the Comptroller and Auditor General along with a private auditor appointed by the Rapid Metro Rail will conduct an audit to ensure that the debt is not inflated. “It is a group where there is an ongoing serious fraud investigation and the erstwhile top management is under probe. Therefore, an audit is important,” said a senior Haryana government officer. 

The collapse of two private metro lines in the National Capital Region point not just to the failure of private companies in infrastructure but also their unwillingness to live through the long gestation projects that could be slow to take off. E Sreedharan, one of the key men in India’s metro history, was famously against private metro systems. In an interview with Business Standard in 2011, he said constructing metro systems was highly capital intensive and in themselves they do not generate profit, which is why private sector is not suited for the job.

Both Delhi Airport Metro and Rapid Metro cited poor ridership numbers and advertising revenue to back out from the projects. In the case of the airport line, the situation was made worse by RInfra’s allegations of defects in the civil structure that had been put up by DMRC. The line was built under a unique model under which DMRC constructed the civil structure in return for which RInfra had to pay a concession fee.

When private operators exit infrastructure projects, governments try to put assets to use instead of allowing them to decay. So public sector undertakings are asked to pick up the baton. Though operations go on, the collateral damage is that government entities get caught in legal disputes that have financial implications. For instance, DMRC is fighting an arbitration award in the court that entails an outgo of Rs 5,800 crore for it. RInfra had demanded the amount as termination claim. Besides, DMRC is required to service the debt of about Rs 2,940 crore taken by the RInfra-promoted Delhi Airport Metro Express Private Limited (DAMEPL). 

According to DMRC, a number of measures have been adopted since then to improve the efficiency of airport line which include increasing the frequency of trains from 15 to 10 minutes. It also reduced fares after the takeover which led to an immediate increase in ridership, from 10,069 in July 2013 to 58,515 in August 2019.

For the Rapid Metro, the daily ridership estimate was 100,000 but even after the operation of two sections spanning 11.6 km, it is roughly 65,000. When it comes to the financial burden, it is HMRTC that will take on 80 per cent of the project’s debt liability. 

Under the MoU signed between DMRC and HMRTC, DMRC is only an operator and not the licensee. The Haryana government-owned corporation will give it Rs 2.75 crore annually. Another Rs 25 crore will be given as handholding support for maintenance besides the actual cost of DMRC employees posted to the project would be reimbursed. 

The two failed private sector metro projects raise questions on traffic and cost estimates, but some argue that low cost alternatives to these expensive structures are the only way out. These could either be light rail transit system or high capacity buses especially in smaller cities. The failure of private metros, however, occurred in Gurugram and Delhi, which are both hubs of economic activity with high traffic volumes. 

The other alternative is public-private partnerships, such as the 72-km Hyderabad Metro Rail which is operated by Larsen & Toubro. The infrastructure major invested Rs 14,000 crore in the project along with viability gap funding from the state. Under an agreement with the state government, the company is allowed to recover 50 per cent of its investment through ticket sales, five per cent through advertisement revenue and 45 per cent through leasing of retail space. The average passenger traffic each day on Hyderabad Metro is around 300,000. 

Another example of PPP is the 12-km Mumbai Metro One line in which RInfra holds 69 per cent and Mumbai Metropolitan Region Development Authority holds 26 per cent with the remaining 5 per cent being held by French company Veolia Transport RATP. Nonetheless, these projects built on PPP are yet to cross the point where they could be called successful metros.

Metros developed on PPP mode appear attractive given that the benefits accruing from Delhi's metro rail had led to a clamour for such projects in other cities. But state funding may not be possible, given the restricted fiscal space. This suggests that the future of urban metro projects are in a Catch 22 situation:  Despite the spectacular failures of two private metro projects, private investment remains the sole route for expansion.