COMMENTARY

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

18
Delhi Airport Metro Fiasco
What 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 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.
T
he 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 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 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 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 cancellations
5
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, 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 rst year of opera-
tion, with the concession fee increasing
5% every year; (b) revenue share start-
ing from 1% of gross revenue from rst to
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 trafc being much less than the
projected trafc 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 nancially unsustainable. Conse-
quently, the private party had to nd ali-
bis (like non-fullment of the contractu-
al obligations by the public partner,
DMRC
10
) to exit the project.
Demand overestimation is a common
problem in greeneld 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 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 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 rst bag the projects and renegotiate
later. Thus, Guasch (2004) talks about
the following equation:
R = PQ OC T D = rKi,
where R is Prots, 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 difcult
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-
es the issues that caused contractual
difculties, 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 trafc projections.
It is generally believed that the private
sector is more efcient 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 trafc 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. Specically, 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 browneld project,
as against being a greeneld project
earlier, the risk of the project has come
down, in that trafc 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 Weekly
20
have been largely addressed. In addi-
tion, with the public sector DMRC operat-
ing the DAME project now, public sector
benchmarks about the ridership, prota-
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 trafc on DAME, but their
nancial viability would have to be
studied more rigorously.
Recent newspaper reports
12
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 unjustied 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 rst deadline of 31 August
2010, and the second deadline of 30 September
2010, which was three days before the Common-
wealth Games. DAME 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 trafc.
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://timesondia.indiatimes.
com/india/Airport-Metro-Express-line-may-
become-part- of-Alwar-l i nk/art icleshow/
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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