The cost of being wrong

Since they do not have access to cheap finance or subsidy, it would help if private infrastructure operators kept costs low and projections realistic

When the Satyam scam broke in 2009, Maytas Infra and Maytas Properties, owned by Satyam promoter B Ramalinga Raju and his family, had just started to make inroads into infrastructure creation in the country. Some in the group believed Maytas was an unlucky choice of name because it was Satyam spelled backwards, and hence the attempt to take over the company by Satyam proved inauspicious for the group. 

Both Maytas Infra and Maytas Properties were taken over by the Infrastructure Leasing & Financial Services Limited (IL&FS) group which was also a shareholder in Maytas Infra. With Maytas was born IL&FS’ ambition to run a metro all by itself. So it became the first private operator after Reliance Infrastructure to open a metro line in 2013. But just as the Reliance Infrastructure (RInfra) threw up its hands and quit the Delhi Airport Express project, IL&FS Transportation Network Ltd in September 2018 served a notice on the Haryana government threatening termination of a contract under which it ran two lines of the Rapid Metro Gurgaon. The similarity between the two privately-run metro systems does not end there. The Delhi Metro Rail Corporation (DMRC) has been contacted by the Haryana government to take over the Rapid Metro, quite like the way the Union Urban Development Ministry asked the DMRC to take over the Reliance line which it eventually did in 2013.

One of the reasons cited by Rapid Metro for its losses was lack of support from the state. This includes local authorities not allowing the operator to use metro pillars for advertisements. Though the metro, in the initial days of its operations, did put up billboards, one can now see barren pillars with empty display frames along the upscale Golf Course Road stretch in Gurugram, following a notification of the Haryana Municipal Corporation Advertisement Bylaws in 2016 forbidding such advertising. Globally, metro systems rely on non-fare revenue to make their networks viable even if passenger tariff is low. The DMRC, for instance, gets almost two thirds of its revenue from non-fare sources. RInfra, too, cited lower advertising revenue as the reason for the non-viability of the Delhi Airport Express project, though low ridership on the system was also a big cause for worry. 

The DMRC, the first independently-run metro network in the country, was planned based on a ridership estimate of 3.5 million by 2005, but 13 years later, only 2.8 million ride it every day. Investment was justified on the grounds that it would help unclog Delhi roads and offer people an environment-friendly commute. The ridership number was later revised and the DMRC admitted to inaccurate estimation by its consultant, RITES Ltd. In the case of Rapid Metro Gurgaon, the ridership estimate was 100,000 daily but even after the opening of two sections spanning 11.6 km, it is roughly 50,000.

High-cost investment in infrastructure assets is often justified on the grounds of high traffic or capacity utilisation. Private builders of almost all beleaguered infrastructure projects have been aggressive in their estimates. Viability of a project can go for a toss since over-investment in assets creates an expensive facility that then needs higher user charges to survive.

For airports, where users are airlines, charges can be more freely changed though there is a regulator in place for the sector. Metro operators, on the contrary, do not have a free hand. For one, there is a tariff fixation committee that decides on fares and with Delhi and state governments being equity partners in the case of DMRC, there will always be public pressure to keep tariffs low. That apart, metro systems compete with many other modes of transport. Higher fares can render them uncompetitive. 

The lesson here is simple: keep costs low and projections realistic, especially if the infrastructure is to be run by the private sector that does not have the option of cheap finance or subsidy.