Friday, May 29, 2015

A cautionary note on India's metro rail ambitions

The Government of India have declared support for metro-rail in cities with population greater than 2 million, to be constructed as joint-venture between central and state governments. Accordingly, metro-projects are on the anvil in many cities. In recent months, the government has also been courting Chinese and Japanese investments in metro and high-speed rail networks. 

Metro-rail, elevated or under-ground, is the most expensive mass transit mode. They impose massive upfront expenditures and consequent debt-financing burden, as well as high operating costs. It is therefore vital that the sustainability of each project is rigorously examined before its sanction. A failure to do so would leave local and state governments saddled with white elephants bleeding massive operating subsidies. It will also crowd-out resources from smaller transportation projects that deliver greater bang for the buck. A few considerations are therefore in order.

For a start, we need to eschew the notion of metro projects as an aspirational symbol. Our cities need good urban transit systems, not necessarily good metros. Based on traffic and distances, urban transit modes span a wide spectrum from regular bus services to bus rapid transit, and light rail to metro rail. Each city should identify the appropriate mass transit mode based on its demographics, economic activities, commute patterns, land-use density, and metropolitan configuration.

Second, evidence from across the world, developed and developing, shows that metro-rail projects, even the most efficient and with adequate traffic, are heavily subsidized. Not only do they consume massive public grants for construction, generally raised through taxes or government grants, but also their operation and maintenance (O&M) require large subsidies. In fact, the ticket collection receipts as a percentage of O&M costs, or fare-box recovery ratio, is generally much less than half the operating expenses. Even the highly acclaimed Hong Kong metro received just 28% of its income from fare-box receipts in the 2001-05 period.

Third, apart from demographic considerations, metro rail systems generally need a peak traffic of atleast 40000 passengers per direction per hour (phpdt) to make any commercial sense. Just a handful of our cities would meet this requirement, even two decades from now.

In countries like India, with fiscally strapped state and local governments and a very tariff sensitive demand-side, the risks associated with operating and maintaining good quality metro systems are considerable. State governments will find it difficult to subsidize metro rail systems for too long. Given the difficult political economy surrounding tariff increases, large volumes are the only insurance to atleast slightly mitigate commercial risks.

This assumes even greater significance since global and Indian experience show that reliable estimation of traffic is a problem with transport projects. This is no less true of our metro projects. In the anxiety to push through projects, governments and promoters make optimistic traffic forecasts – high economic growth rates, planned toll increases, unrealistic diverted traffic from other modes, and large induced traffic. Further, when the economy is on the upswing and financing is readily available, the disciplining forces of credit markets take a back seat. Post-mortems of such projects from across the world, done during their inevitable renegotiations, invariably reveal considerable optimism and froth in traffic and revenue assumptions.

Once traffic volumes fall short, governments are forced to subsidize and operators skimp on maintenance. The latter will pose considerable quality deterioration and safety risks, thereby engendering a downward spiral of lower demand, larger O&M deficits, and even more skimping. Furthermore, as these trends play out, the physical infrastructure of elevated metros, already a blight on urban form, will fall into disuse, dragging down property values in the neighborhood. It could be a very short distance from urban regeneration to urban degeneration. 

Fourth, there is more to metro railway systems than mere mobility improvements. The most successful examples of metros are those which have used it as an instrument to guide urban growth by integrating mobility with land-use. Those cities have used metros to promote transit-oriented development (TOD) by encouraging high-density mixed-use developments surrounding metro stations. They have employed proactive planning in the form of higher floor space index (FSI) in the vicinity of stations to concentrate growth.

Such policies have helped cities like Copenhagen, Stockholm, and Singapore effectively manage the spill-over growth from the main city radially outwards in a planned manner. Instead of one massive urban sprawl, these metropolitan areas are characterized by a central core connected to smaller population centers interspersed with rigidly enforced green belts.  Copenhagen has used the metro to develop a “finger plan” of radial growth of master-planned smaller towns. Singapore’s “Constellation Plan” involved the planned development of eight master-planned towns in the form of a “string of pearls” around the main city. 

Unfortunately all our metros, including Delhi, have overlooked this objective. The new metro-rail projects for Mumbai, Hyderabad, and Bangalore present a rare opportunity to recover lost ground and profoundly shape the city’s growth trajectory through a TOD plan.

Policies like higher FSI and mixed-use zoning around metro stations promote density and transit use. These policies, when supported with investments to improve infrastructure carrying capacity, will encourage consolidation of land and vertical redevelopment. Affordable housing mandates, with more zoning relaxations and transfer of development rights, should be incorporated into these redevelopments. Another requirement for TOD is for the metro corridors to emerge from the metropolitan development plan and the strict enforcement of the region’s master plan. Since all such policies take time to yield results and require painstaking co-ordination among multiple agencies, they are rarely pursued with intent.

Finally, the burden of financing such projects can be cushioned by capturing a share of the increase in property prices generated by the metro through policies like betterment fees, tax increments, and registration cess. Innovative use of zoning regulations – land use conversions and height relaxations – can also be used to capture a share of the increase in property value due to the new infrastructure.

Metro rail projects that incorporate all these considerations, instead of being mere construction projects, can be powerful catalysts for urban transformation and smart growth.

Update 1 (09.08.2015)

This Business Standard article examines the DMRC balance sheet and shows why metro rails are commercially unviable. It has this graphic about the projects currently on in India

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