Delhi Airport Metro Fiasco…Lessons and Way forward

Kumar V Pratap of Planning Commission writes a nice case study on Delhi airport metro fiasco:

The latest public-private partnership project to fall through, the Delhi Airport Metro Express, brings to light flaws 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.

In most infrastructure PPP projects, the key reasons  for failure are nearly similar- overbidding, overestimation of traffic flows and confusion over responsibilities. These reasons were responsible for failure of Delhi Metro Airport line too.

The main reason for the private sector exiting from the PPP project was that it was a loss-making proposition owing to actual traffic being much less than the projected traffic – 17,000 passengers per day compared to the projected 42,500 passengers per day.7 As a result, the expected non-fare revenue from advertisements, lease of commercial space built along the rail infrastructure, and from vending machines and retail outlets at metro stations did not materialise.8 Consequently, the project lost money every month (operational losses estimated at Rs 4 crore per month),9 and thus had become financially unsustainable. Consequently, the private party had to find alibis (like non-fulfilment of the contractual obligations by the public partner, DMRC10) to exit the project.

Demand overestimation is a common problem in greenfield projects like DAMEPL. Worldwide, many rail connections to airports have a small market share (for example, Washington/Reagan (14% market share), Boston/Logan (6%)). 

It is an accepted principle that risk should be assigned to the party that has more control over the risk factor. Thus, in general, commercial, operational and maintenance risks should be allocated to the private party, while political risk, including expropriation, should be assigned to the public party. As per the CA, responsibility 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.

Metro rail operations 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). DAMEPL’s bid was on the higher side (and thus financially unsustainable) and included a Rs 51 crore per annum concession 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 subsidy of Rs 346 crore, or an interest-free loan of Rs 1,440 crore for a longer term. A possible reason for the private sector bidding aggressively is the famous jugaad principle in India, the idea being to first bag the projects and renegotiate later.

He says the project should be re-bid with clear risk allocation..

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: