DMRC-RInfra controversy shows potential glitches in framing PPP contracts

The Public Private Partnership Appraisal Committee has cleared 79 projects with a total project cost of Rs 227,268.1 crore from FY15 to FY23, noted the latest Economic Survey

The cost of arbitration over the Delhi Airport Metro Express holds salutary lessons for government bodies setting up public private partnership (PPP) projects as India pushes ahead with an over Rs 100-trillion infrastructure agenda. The critical learning is how to share the risks from these projects.

Last week, the Delhi High Court ordered the Delhi Metro Rail Corporation (DMRC) to fully pay, within March, the Rs 8,009.38 crore due to a Reliance Infrastructure Ltd (RInfra) company arm that was running the Delhi Metro stretch to the airport up to 2013. DMRC, the court ruled, had lost the arbitration claim and must pay up promptly (of the total, 21 per cent has already been paid). The sum is several times the annual revenue of DMRC from its Delhi operations.

The arbitration award made in 2017, much to the discomfiture of DMRC’s joint owners, the Delhi government and the Union Ministry of Housing and Urban Affairs, in a 50:50 ratio, far exceeds the cost of the project. The 22.7 km railroad cost about Rs 5,700 crore and was India’s first PPP metro rail project.

The Delhi Airport Metro Express was built by 2011 to connect the heart of the city to the newly rebuilt Delhi International Airport. The trigger for the project that was signed in 2008 was the Commonwealth Games of 2010.

DMRC was to be responsible for the civil work — stations, viaducts and tunnels — while a special purpose vehicle formed by Anil Ambani-owned Rinfra — Delhi Airport Metro Express Private Ltd (DAMEPL) — was to provide and maintain the system: tracks, signals and rolling stocks. DAMEPL was 95 per cent owned by Rinfra with a 5 per cent share for Spain’s CAF Group, a railway company.

The project missed the Games deadline and started operations in 2011 but, significantly, it was completed within budget.

Yet, missing the prestigious deadline made the partnership fraught with tension. In July 2012, DAMEPL had to suspend services for safety repairs after complaints. A joint inspection team with DMRC found the majority of the bearings in the civil construction were defective.

Services resumed in January 2013. But now there was acrimony over the high fares, then about the punctuality of the services; each becoming intractable. DAMEPL terminated the project in June 2013. Since then, the project has been run as a public sector enterprise by DMRC. In response to the termination, DMRC encashed a bank guarantee of Rs 55 crore. But DAMEPL claimed this was unfair and filed the arbitration claim against DMRC, which it has won.

In the arbitration court, DAMEPL asserted it had the right to claim a termination payment equal to 130 per cent of the adjusted equity, plus 100 per cent of the debt it had raised for the project. The terms, the courts held, were valid, according to the concession agreement in the event of a default by DMRC.

In the latest judgment, the Delhi High Court has said either the Government of India or the Delhi government has to underwrite a loan DMRC needs to raise, to pay its dues immediately. Otherwise, the Union government will at the end of two weeks repatriate all money received from DMRC after March 10, 2022, to a corpus to pay for the dues. But at about Rs 2,890 crore this amount will not be enough. The Court has threatened that it reserves the right to frame appropriate directions against the Union housing and urban affairs ministry and Delhi government to recover the money.

This is embarrassing. The sum is not huge for the Centre. But absorbing the lessons from this debacle is critical. Generally, in a PPP the political risks are borne by the public party while the system risks are that of the private party. But here the construction risks were handled by DMRC while the issues of fare-setting and others were handed over to a private party. “Optimally, risks should be transferred to the party that has more control over the risk factor. So in user fees, such as passenger tickets in this case, if the private sector has to run the service that will need to be compensated,” said Rajesh Chakrabarti, co-author of Public Private Partnerships in Infrastructure: Managing the Challenges.

Also, given that DMRC knew how to run a metro, there was no good reason why a private partner was brought in. The latter in turn was dependent on the Spanish company for technology transfer.

That this was largely true was provided by the line-up of the bidders. Where DAMEPL offered to pay a Rs 51-crore annual concession fee to the government plus a progressively increasing share of revenue, the second highest bidder, the L&T-GE consortium, had asked for an annual subsidy of Rs 346 crore or an interest-free loan of Rs 1,440 crore. The huge difference in how the two bidders perceived the project should have alerted DMRC officers. The project rationale seemed to be moving the liability of the government to the future rather than providing any reasonable value for money. This does not help the cause of a PPP, Chakrabarti pointed out.

Adding to the stress was the fact that the traffic projection was hopelessly unrealistic — the actual traffic was 17,000 per day compared with a projected 42,000 per day, leading to a far below expected revenue yield.

India is the first or second largest market for PPPs in the world. Most of these projects have run without bother. The latest Economic Survey notes that “PPPs are vital instruments for governments in channelling the strength of the private sector in critical areas of infrastructure states”. The Public Private Partnership Appraisal Committee has cleared 79 projects with a total project cost of Rs 227,268.1 crore from FY15 to FY23 it added. To provide financial assistance to those projects that are socially or economically desirable the states and the Centre have dished out viability gap funding of Rs 5,813.6 crore between FY15 and FY23 including the Vizhinjam trans-shipment project in Kerala.

Clearly, money has not been in short supply. The Delhi Airport Metro project shows it is often inadequate project preparation work that has led to such spectacular blowouts. Knowing how to share risks helps to ward off these controversies.

The project

• Delhi Metro Express was India’s first PPP metro rail project
• DMRC to create civil works and private sector DAMEPL to levy passenger fares, operate trains etc.
• Project started operations in 2011 after missing Commonwealth Games deadline, but was completed within budget

Weaknesses

• Moved liability of the Government of India to the future rather than providing value for money
• Allocation of risks between parties was incorrect

PPP overview

• GOI has cleared 79 projects with a total project cost of Rs 2.27 trillion from FY15 to FY23