COMMENTARY

december 7, 2013 vol xlviii no 49 EPW Economic & Political Weekly18

Delhi Airport Metro FiascoWhat Can Be Done to Redeem the Project?

Kumar V Pratap

The latest public-private partnership project to fall through, the Delhi Airport Metro Express, brings to light fl aws in the concession agreement between the public and private parties. Improper risk sharing and aggressive bidding, coupled with the application of the jugaad principle, have led to contractual disputes resulting in the cancellation of the partnership.

The Delhi Airport Metro Express (DAME) is a metro rail connectivity project connecting the New Delhi central business district to the new and swanky T3 terminal of Delhi Inter-national Airport. It is 22.7 km long, has been built with a capital investment of about Rs 5,700 crore,1 and is the fi rst public-private partnership (PPP) metro rail project to be operational in the country. It is also a showcase project de-signed to propel Delhi into the big league of cities like London, Hong Kong, Seoul, Tokyo, and Kuala Lumpur, with metro rail connectivity to the airport.

Though the project was completed within the budgeted costs, its time per-formance was poor. After missing sever-al deadlines,2 the project fi nally became operational in February 2011. Delhi Air-port Metro Express Private Limited (DAMEPL), a special purpose vehicle consortium formed by Reliance Infra-structure Limited and Construcciones y Auxiliar de Ferrocarriles, SA (CAF) of Spain with 95% and 5% stake, respec-tively, implemented the project. How-ever, after some more hiccups,3 DAMEPL terminated the project in June 2013, which is now being run by the public sector Delhi Metro Rail Corporation (DMRC). DAMEPL has fi led an arbitration claim against DMRC amounting to sever-al thousands of crores of rupees.4 Subse-quently, DAMEPLs bank guarantee of Rs 55 crore has been encashed by DMRC because of the failure of the private part-ner to perform as per the concession agreement (The Economic Times 2013).

DAMEPL is the latest example of project cancellations5 in India. The inci-dence of project cancellation in infra-structure projects is quite low world-wide: as per the Private Participation in Infrastructure database of the World Bank, less than 10% of the 5,783 PPP

projects in developing countries have been cancelled till now. The incidence of project cancellation is still lower in India; only 6 of the 725 projects have been can-celled (less than 1% incidence), the other such major project being the infamous Dabhol Power Project.6 The low inci-dence is mainly due to the keenness of governments to avoid cancellations because of concerns about service conti-nuity, possible payments to be made in the event of termination, as well as the negative publicity surrounding these perceived failures (Pratap 2011).

The Concession Agreement

The Concession Agreement (CA) lays down the respective rights and obligations of the stakeholders in a PPP project. The CA for this project was signed between DMRC and DAMEPL in August 2008 for a concession period of 30 years, after which the project would be transferred to DMRC. Under the CA, the concessionaire (DAMEPL) has right of way, licence and access to the site to develop, design, fi nance, con-struct, commission, operate and maintain the project for the concession period.

In consideration of the licence and right of way, the concessionaire shall pay to DMRC till termination of the project: (a) annual concession fee amounting to Rs 51 crore from the fi rst year of opera-tion, with the concession fee increasing 5% every year; (b) revenue share start-ing from 1% of gross revenue from fi rst to fi fth year of operations, and reaching up to 5% of gross revenue from 16th year onwards; and (c) licence fee of Rs 10,000 per annum.

In return for its obligations, the con-cessionaire has the following rights: (a) levy, demand, collect and appropriate the fares from the public for using the project; and (b) undertake activities and derive revenue from advertisement, retail, vending machines and property development.

Causes of Private Sectors Exit

The main reason for the private sector exiting from the PPP project was that it was a loss-making proposition owing to actual traffi c being much less than the projected traffi c 17,000 passengers per day compared to the projected 42,500

Views expressed are personal.

Kumar V Pratap (k_pratap@hotmail.com) is a civil servant with the Planning Commission, New Delhi.

COMMENTARY

Economic & Political Weekly EPW december 7, 2013 vol xlviii no 49 19

passengers per day.7 As a result, the ex-pected non-fare revenue from advertise-ments, lease of commercial space built along the rail infrastructure, and from vending machines and retail outlets at metro stations did not materialise.8 Con-sequently, the project lost money every month (operational losses estimated at Rs 4 crore per month),9 and thus had be-come fi nancially unsustainable. Conse-quently, the private party had to fi nd ali-bis (like non-fulfi lment of the contractu-al obligations by the public partner, DMRC10) to exit the project.

Demand overestimation is a common problem in greenfi eld projects like DAMEPL. Worldwide, many rail connec-tions to airports have a small market share (for example, Washington/Reagan (14% market share), Boston/Logan (6%)). Further, the centre of the city (New Delhi Railway Station) generates only a small fraction of the trips to and from the airport. According to a survey, only about 8% of the passengers originating or terminating at Bostons Logan Airport came from or went to the whole city of Boston, spread out over some 20 square miles (Leigh Fischer et al 2000, quoted in Neufville and Odini 2013). In addition, highways and automobiles are the domi-nant mode of airport access for passen-gers, employees, and supply services on account of convenience (door-to-door service and on-demand availability) and costs (Neufville and Odini 2013).

The problems of the project are also associated with a fl awed CA between DAMEPL and DMRC, and relates to improper risk sharing and aggressive bidding by the private sector.

Improper Risk Sharing: It is an accept-ed principle that risk should be assigned to the party that has more control over the risk factor. Thus, in general, com-mercial, operational and maintenance risks should be allocated to the private party, while political risk, including ex-propriation, should be assigned to the public party. As per the CA, responsibil-ity for civil works (stations, tunnels and viaducts) is with DMRC, and system works (track, signals, power distribution system and rolling stock) is with DAMEPL. Thus, maintenance risk was effectively

shared between the partners, which meant that either party could blame the other, leading to disputes, and this is what actually happened.

Aggressive Bidding: Metro rail opera-tions generally lose money because of huge capital costs. For example, DMRC has made a loss of Rs 185 crore in 2011-12 and Rs 414 crore in 2010-11 (DMRC 2012). DAMEPLs bid was on the higher side (and thus fi nancially unsustainable) and included a Rs 51 crore per annum conces-sion fee and a progressively increasing revenue share to be paid to DMRC. By way of comparison, the losing bidder, a Larsen & Toubro-General Electric (L&T-GE) consortium had asked for an annual sub-sidy of Rs 346 crore, or an interest-free loan of Rs 1,440 crore for a longer term.

A possible reason for the private sec-tor bidding aggressively is the famous jugaad principle in India, the idea being to fi rst bag the projects and renegotiate later. Thus, Guasch (2004) talks about the following equation: R = PQ OC T D = rKi, where R is Profi ts, P is Price or Tariffs and Q is Quantity, and their product represents Total Revenue; OC, T and D denote Operation and Maintenance Costs, Taxes, and Depreciation, respec-tively, adding up to total expenses; rKi represents opportunity cost of capital and Ki the invested capital.

An opportunistic bidder would bid aggressively, where the above equation would not balance, in the hope that he would be able to renegotiate the deal later. So, one option for public authorities can be to keep from considering aggressive bids. But, not considering aggressive bids is also problematic: it is diffi cult for corruption-wary public agencies to ignore a more favourable bid from the public sector perspective in favour of a less favourable bid, on the grounds that it is aggressive.

The Way Out

It is crucial that the government identi-fi es the issues that caused contractual diffi culties, and ensures that these prob-lems do not recur in any new agreement. DAME was a badly contracted project with no clear risk allocation between the

public and the private sectors, which led to contractual disputes. It was also a case of aggressive bidding, probably based on over-optimistic traffi c projections.

It is generally believed that the private sector is more effi cient compared to the public sector owing to lesser agency problems and better property rights. Therefore, the project should be rebid competitively to the private sector on the basis of the Model Concession Agreement for Urban Rail Transit Systems (Planning Commission 2009) (only the operation and maintenance component), which provides balanced risk sharing among stakeholders. This document provides for clear risk allocation depending on which party has more control over the risk factor, provisions for traffi c risk mit-igation, symmetry between risks and re-wards, unambiguous termination clauses, key performance indicators to safeguard user interests, performance monitoring to foresee problems, etc. Specifi cally, the concessionaire should be allocated the entire maintenance risk to ensure its full responsibility for the maintenance func-tion. If the concessionaire requires more time to assess the construction work performed by DMRC, an Enhanced Moni-toring Period of, say, a year should be al-lowed during which the maintenance risk would be with the public sector, but after which the entire maintenance responsibility should be transferred to the private sector.

Now that DAME is a brownfi eld project, as against being a greenfi eld project earlier, the risk of the project has come down, in that traffi c projections could be more realistic, and the problems of land acquisition and environmental clearances

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COMMENTARY

december 7, 2013 vol xlviii no 49 EPW Economic & Political Weekly20

have been largely addressed. In addi-tion, with the public sector DMRC operat-ing the DAME project now, public sector benchmarks about the ridership, profi ta-bility, etc, may be released into the pub-lic domain so that the private sector has better estimates of the operating param-eters of the project. This will help them submit more realistic bids and check aggressive bidding.

In addition, some measures like the city check-in facility should be made more widespread (currently, it covers Air India and Jet Airways only).11 It has also been opined that with just a 5-6 km extension, involving extra ex-penditure of Rs 1,000-1,200 crore, the airport end can meet DMRCs Gurgaon network. These measures are likely to increase traffi c on DAME, but their fi nancial viability would have to be studied more rigorously.

Recent newspaper reports12 suggest that in order to resurrect the project, DAME is being considered for being made a part of the regional rail transit system corridor connecting Delhi to Alwar. But, this would only compound the initial folly as the losses on the ex-tended line are likely to increase. It is also unjustifi ed to increase overall pub-lic sector losses just to remove the liabil-ity of running the loss-making DAME line from the books of DMRC.

Notes

1 Total project cost is Rs 5,697 crore (Rs 2,812 crore incurred by DMRC, and Rs 2,885 crore by DAMEPL) (CAG 2013).

2 DAME missed the fi rst deadline of 31 August 2010, and the second deadline of 30 September 2010, which was three days before the Common-wealth Games. DAME fi nally became operational on 23 February 2011. DMRC imposed penalty on DAMEPL for a total amount of Rs 60.4 crore for repeatedly missing the deadlines.

3 DAMEPL suspended services for safety repairs on 8 July 2012. The joint inspection team found that a majority of the bearings in civil construc-tion were defective. After repairs, services were resumed in January 2013.

4 DAMEPL has claimed from DMRC a termina-tion payment equal to 130% of the adjusted equity and 100% of the debt due for the project. This is as per the CA for DMRCs Event of Default.

5 As per the Private Participation in Infrastruc-ture database of the World Bank (ppi.world-bank.org), a project is deemed to have been cancelled if one or more of the following events occur before the end of the contract period: the private company physically abandons the project; the private company ceases operation

or halts construction for 15% or more of the contract's expected life following the revocation of the licence or repudiation of the contract by the relevant authority; or the private company sells or transfers its economic interest in the project to the public sector.

6 Dabhol Power Project (DPP), promoted by the infamous Enron Corporation, was a 2,184 MW project, which had become a no-risk project for the private sector (take or pay contract, dollar denominated tariffs, guarantees and counter-guarantees from the state and the central government, etc). Consequently, the public sec-tor offtaker, Maharashtra State Electricity Board, found that the price of power sourced from DPP was more than double the amount it was paying for power from other sources. There-fore, it terminated the project for technical rea-sons, pointing out that the pace of ramping up of power did not meet the agreed contractual conditions.

7 The ridership of DAME was about 17,000 pas-sengers per day as on the date of the initial shutdown of the project, 8 July 2012 (Rajya Sabha Unstarred Question No 1226, answered on 22 August 2012). The ridership during the peak of DAMEs operations was recorded at 21,000 per day. Now, the ridership is 10,000 to 12,000 per day (from 1 July 2013, the period after the DMRC takeover).

8 Only one-fourth of the total revenue was ex-pected to come from fare collections (Satish Mishra, director of DAMEPL, in a letter to DMRC). But, the other sources of revenue did not materialise due to inadequate traffi c.

9 Accumulated loss of DAMEPL as on 31 March 2012 was Rs 341 crore (CAG 2013).

10 The termination clause had to be invoked by DAMEPL, as DMRC had persistently failed to cure the substantial defects in the civil struc-ture designed and built by DMRC, within the period prescribed under the CA (Reliance In-frastructure Limited 2013).

11 DMRC: Airport Express Line, viewed on 4 September 2013, http://www.delhimetrorail.com/Check-in-facility.aspx

12 For example, Dash (2013).

References

CAG (2013): Implementation of Airport Metro Ex-press Line Project through Public Private Part-nership, Chapter XV: Ministry of Urban Devel-opment, Report of the Comptroller and Auditor General of India on Compliance Audit Observa-tions, Report no 13 of 2013, Union Government (Commercial), viewed on 30 August 2013, http://saiindia.gov.in/english/home/Our_Products/Audit_Report/Government_Wise/union_audit/recent_reports/union_compliance/2013/Commercial/Report_13/chap_15.pdf

Dash, Dipak Kumar (2013): Airport Metro Express Line May Become Part of Alwar Link, The Times of India, 4 September, viewed on 4 Sep-tember 2013, http://timesofi ndia.indiatimes.com/india/Airport-Metro-Express-line-may-become-part-of-A lwar-l ink/art ic leshow/ 22276530.cms

DMRC (2012): Annual Report 2011-12, viewed on 31 August 2013, http://www.delhimetrorail.com/annual_report.aspx

Guasch, J Luis (2004): Granting and Renegotiating Infrastructure Concessions: Doing It Right (Washington DC: The World Bank).

Neufville, Richard de and Amedeo Odini (2013): Airport Systems: Planning, Design and Manage-ment (USA: McGraw Hill Education).

Planning Commission (2009): Model Concession Agreement for Urban Rail Transit Systems, Planning Commission, Government of India, New Delhi.

Pratap, Kumar V (2011): Sustaining Privatization, PhD dissertation, University of Maryland, Col-lege Park, USA, viewed on 15 July 2013, http://drum.lib.umd.edu/bitstream/1903/11549/1/Pratap_umd_0117E_12145.pdf

Reliance Infrastructure Limited (2013): RInfras SPV DAMEPL Exits Delhi Airport Metro Opera-tion, Media Release, 1 July, viewed on 3 Sep-tember 2013, http://www.rinfra.com/pdf/pressreleases/Media_Release_RInfras_SPV_DAMEPL_Exits_Delhi_metro.pdf

The Economic Times (2013): DMRC Encashes Bank Guarantee Given by DAMEPL, 5 July, viewed on 18 July 2013, http://articles.economictimes.indiatimes.com/2013-07-05/news/40392194_ 1_bank-guarantee-metro-express-private-lim-ited-airport-metro

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