Monday, January 26, 2009

PPP in urban mass transit systems

The debate surrounding the proposal for a Metro-rail project for Kochi in Kerala has thrown up several interesting issues. None more important than whether the project should be done as a Public Private Partnership on a BOT or a as a purely government enterprise. It was originally proposed that the 25 km, Rs 3048 Cr project would be executed on PPP on a BOOT/BOT model. But now the Planning Commission of India wants it to be a PPP, while the Ministry of Urban Development prefers government funding, as a joint venture between the Central and State Governments.

The Ministry argues that a comparison of the only two PPP Metros in the country - Bombay (Reliance) and Hyderabad (Maytas) (both not yet operational, with the latter in serious dount now) - and the fully Government driven Metros - Delhi, Chennai, Calcutta, and Bangalore - shows that the latter is a more cost-effective and superior model. They rest their arguement on the grounds that the commercial viability of Metros is questionable and experience from across the world shows that such projects will need heavy Government patronage.

The Secretary, Urban Development, Government of India, has said that PPP model for Metro may fail not only because of the commercial unviability of such projects, especially in its initial years, but also because of the near certain possibility that "the terms and conditions in (any such) agreement would in all likelihood be in favour of the private firm and might not accord priority to public interest".

I am inclined to the Ministry's view that atleast the construction should be funded by the Government, for the following reasons

1. World over, including in developed economies, mass rapid transit systems, are constructed by Government funds and publicly owned, either through local governments, transit authorities or by national governments. The operation & maintenance (O&M) can be performed by the owner or entrusted to a private company through a concession agreement.

The massive up-front investments costs coupled with the complusion to keep mass transit fares cheap and affordable, means that such projects are invariably of questionable commercial viability. Further, the operational effectiveness of mass rapid transit systems depend strongly on the close co-ordination with other public transport modes, especially buses, which are run by the government in most of our cities.

2. In any case, the Indian market and its commuter base may not be able support the high user charges needed to make a BOT project viable. It is difficult and even impossible to reconcile the twin objectives of affordable fares and commercial viability in a purely BOT model. Further, the legacy of cheap public transport fares makes it a political hot potato to revise fares in any meaningful manner.

3. The cost of capital raised for infrastructure projects by the private sector is invariably more than that for the government. This assumes critical importance in view of the massive capital costs and the long term nature of such finacing. Interestingly, the US Congressional Budget Office (CBO), in a testimony before the US Congress last year, had favored raising money, mainly from the market through sovereign guarantee, and then fund public and even private investments in infrastructure.

4. The construction risks associated with transport projects, especially within cities, especially those arising from problems in land acquisition and co-ordination with various utility providers, are substantial. These problems have been the major contributors to project compeletion delays and attendant cost over-runs. Government is best positioned to bear these construction risks. It may be more effective to lease out the facility after construction.

5. PPP projects in infrastructure carry huge moral hazard concerns, in view of the precedent of re-negotiations of contracts in large numbers of such projects. The sanctity associated with contracts and concession agreements have eroded substantially due to these examples. In the circumstances, the doubts expressed by the Secretary UD is more likely to be borne out.

6. The Planning Commission's bias for PPP models is understandable given the widespread impression that private sector can play a critical role in the provision of infrastructure. While the importance of private sector in infrastructure cannot be underplayed, its utility has to be seen in the specific context.

Infrastructure is not a homogenous group. Sectors like ports, airports, and power generation, all of which involve single location activities, are inherently suited for private management. But water, sewerage, solid waste, electricity distribution and public transport services are still heavily subsidised and will continue to be so, making them more suitable for government instead of private investments.

As an afterthought, we seem to have missed another more important issue. Does Kochi really need a metro? It has a population of just 6 lakhs and a small area of 95 sqkm - not even remotely suggesting the need for a metro! A more ideal solution would appear to be to re-model, expand and make investments in the existing rail network passing through the city and connecting its suburbs and the surrounding towns. Incidentally, metros are fast becoming the new fashion (Patna is also proposing one), another example of major infrastructure white elephants.

In fact, the debate has already become a sensitive political issue, with the Kerala state government firmly pitching itself behind the Ministry of Urban Development, and making its sanction an indicator of the Central Government's commitment to the development of the State! A live example of how politics, and not more objective considerations, decide the fate of major infrastructure projects! Let us wait and watch how this climaxes.


Vachaspati said...

Thank you for a good article. I fully support your view of government funding, not only for Metros but public transport in general.

May I point out one loose point in the article about Kochi Metro. Kochi is not a city with just 600,000 people in 95 sq kms. It is only the municipal corporation area. Kochi Urban agglomeration has 1.6 million people as per 2001 census in an area of less than
200 sq km. Today it has an estimated 2.3 million
people due to the decade long boom brought in by large scale investment.

This is the context in which DMRC suggested a Metro rail. Economic feasibility was studied and confirmed by DMRC sometime in 2004.

Just to elaborate a bit, Kolkata municipal corporation area has just 4 million people, but it is the wider urban agglomeration with more than 10 million people that has been the basis for urban planning . This is because, corporation limits are tampered, gerrymandered, for political reasons by successive governments and never suit a planners requirements. For the same reason, Kochi Municipal corporation was never expanded after its formation about 45 years ago, hence remain at 95 sq kms !

Thank you again for an enlightening article, hope the govt of the day listened to this openmindedly rather than promoting blind archaic "market fundamentlism"

gulzar said...

Thanks for that. It is only by adding the urban agglomeration (UA) that Cochin became eligible for the funding under the JNNURM (which is applicable only for million plus cities).

But even with this population, an expensive Metro (it costs about Rs 150-200 Cr per km) would not be necessary. A Hyderabad (existing one) style MMTS, which leverages the existing railway lines, would more than suffice, especially given the fact that all the UA towns - Thrippunithura, Kalamassery, North Paravur, Aluva, Angamali, Perumbavoor - fall on the existing lines. And, if I am not wrong, there are already a good number of trains servicing this commuter base.

Vachaspati said...

Thank you for your comments.

A dedicated suburban rail is the natural first option. It is far cheaper to. The current double line cannot support a suburban rail hence need
more land for laying additional lines.
This is an impossible task, considering that even the land railway holds in Kochi itself is encroached is unable to reclaim.

This is why many of us who espoused suburban rail switched support to Metro.
All it requires, according to the current alignment, is 20 hectares of land - 12 of which is already in the possession of govt.
So economic viability study was required and conducted in 2001. By 2004, DMRC gave a detailed project report which states that in about 6 years the project can break even.

Let me also add that, in addition to million plus urban agglomerations, state capitals are also covered by JNNURM - Raipur, Trivandrum etc have less than a million urban agglomerations but are funded through JNNURM.

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