METRONOMICS

Urban infra projects have to move from being mere welfare measures to sustainable business ventures. Metro rail projects are a case in point.

Dynamic Market for Metro Rail
It was with the inauguration of the Kolkata Metro in 1984 that India got its first metro rail system. Although the project was sanctioned in 1972, a host of challenges such as shortage of funds, differences of opinion between the federal government and the state government of West Bengal, issues pertaining to right of way and innumerable court cases ensured that it would take nearly 12 years to complete the first ten kilometres of the project.

The experience left the planners wiser. And this was evident in the 65 kilometres of the first phase of the ambitious Delhi Metro Project getting completed a full two years nine months ahead of schedule in 2005, in a period of a little over eight years. Today, other than Kolkata and Delhi, the steel wheels of the modern metro railway are already servicing the cities of Bangalore, Gurugram, Mumbai, Jaipur and Chennai. Similar projects are in advanced stages of construction in Hyderabad, Kochi, Lucknow, Noida, Navi Mumbai, Nagpur, and the twin cities of Ahmedabad and Gandhinagar. Projects are also in various stages of planning in 19 more cities. At a future date, metro rail systems are also proposed in places such as Surat, Nasik and Srinagar.

According to the 2011 census, 31.16 per cent of India´s population resides in urban areas. According to a 2007 survey by the UN State of the World Population Report, by 2030, 40.76 per cent of the country´s population is expected to reside in cities. As per the World Bank, India, together with China, Indonesia, Nigeria, and the US, will lead the increase in the world´s urban population by 2050.

Therefore, in a society that is urbanizing at a very rapid clip, metro railway is expected to play an important role in ensuring planned development of the country´s cities. Or as Manish Agarwal, Partner and Leader, Infrastructure, PwC India puts it, ´Metro railway projects will act as the transport skeleton for managing the growth process in the desired direction. If properly combined with land use planning, and feeder networks of complementing transport modes, the metro railway can help development of cities where most commutes are of short distances, and where public transport is the preferred choice of citizens.´

California-based Urban Planning Consultant Bharat Singh opines, ´There is tremendous scope of developing and growing a mass rapid transit system (MRTS) in cities that come under Tier I and II categories, with over more than a million population, primarily to maximize the locational efficiencies of economic engines or employment centres. Commute times are a drag on economic output; therefore, reducing travel times should be a primary goal for all sectors of city and regional governance. MRTS is one such tool that can help in this. Secondly, India in general, and urban India in particular, has scarce available land. Therefore, using urban land for widening existing and new roads is not the most cost effective way to move people. The automobile is a very inefficient mode of transportation. It is used sparingly during commute times, and takes up two significant sized spaces in a 24-hour cycle that could have been put to better use. Bringing MRTS to Indian cities can help free land for more productive uses.´

The investment requirement estimated for public transport in the 12th Five Year Plan was over Rs.2 lakh crore, with 65 per cent of that estimated for metro rail. In the past ten years, metro rail kilometres have grown from around 65 kilometres to over 300 kilometres. Based on projects under construction, this will double to over 600 kilometres by the end of 2017, covering ten cities. Several more cities that will likely exceed the two million population mark by 2020, are already in various stages of planning their metro rail systems. That makes India a large and expanding market for metro rail projects.

Flip Side
There is always a flip side to euphoria. Consider this. Cost overruns of over 100 per cent and more. Traffic and ridership estimates considerably lower than forecasts. Sound familiar? No, we aren´t talking with specific reference to India.

The results from a study in the US by the Transport and Road Research Laboratory of 21 rail transit systems in developing and newly industrialized nations revealed an interesting fact. Costs are under-estimated by 20 to 100 per cent and ridership overestimated by 25 to 225 per cent in the majority of cases, resulting in actual viability being substantially lower than forecast viability. Only three out of the eleven transit systems for which costs and revenues could be calculated showed a surplus: Hong Kong, Seoul and Singapore. This was despite the fact that during planning of the transit systems in question, most governments were led to believe that the systems would be financially viable. One explanation of the difference between actual and forecast viability identified by the study was ´over-optimism in the planning phases.´ Surely, the last thing that developing nations like India need are projects that detract from economic development through negative viability.

Interestingly, the World Bank has called for not only more accuracy in estimates of viability, but also more honesty.

Cost overruns of 50 per cent to 100 per cent are common in real terms are common, and overruns above 100 per cent are not uncommon. Similar figures hold for other types of projects, not only transport projects. Demand forecasts that are wrong by 20 per cent to 70 per cent compared with actual development are common. Forecasts for rail appear to be particularly prone to large overestimates of traffic, often beyond 100 per cent in the cases for which data is available.

A study by Aalborg University in Denmark on cost and patronage in transport infrastructure projects revealed that urban rail projects, on average, turn out to be substantially costlier than forecast. For the 44 urban rail projects in the Aalborg sample for which data on cost overrun was available, average cost overrun was 45 per cent. For 25 per cent of the projects, cost overrun was at least 33 per cent. At the same time, the study shows urban rail achieving considerably fewer passengers than forecast and thus lower revenues. For the 22 urban rail projects in the sample for which data on forecast and actual ridership were available, actual ridership was on average 51 per cent lower than forecast. For 25 per cent of these projects, actual traffic was at least 68 per cent lower than forecast; for 75 per cent of the projects, actual traffic was at least 40 per cent lower than forecast.

Viability of urban rail is threatened on two fronts, both as regards costs and as regards revenues. Urban rail is doubly risky in economic and financial terms, and the possibilities for financing cost escalations incurred during construction through increased revenues from more passengers during operations often turn out to be limited.

In order to analyze the double risk of urban rail in a more systematic fashion, the Aalborg study identified all urban rail projects for which data were available both for the difference between forecast and actual costs and for the difference between forecast and actual ridership. The total was 12 projects.

The double risk with both cost escalation and lower-than-forecast ridership is excessively clear for these projects with an average cost escalation of 40.3 per cent combined with an actual ridership that is on average 47.8 per cent lower than forecast.

With only 12 observations, reservations must be made for small numbers. Yet, the numbers are so significant and are supported so distinctly by the larger number of observations in other parts of the analysis that the conclusion stands firm. Urban rail projects are high-risk ventures economically and financially because revenue risks augment cost risks and create projects that are risky to the second degree. Urban planning experts such as Singh, while lauding the successful execution of the Delhi Metro railway project, advise great caution. ´Delhi Metro´s success has led many to believe that it is the best option available for Indian cities. That is a grave misconception, as without proper contextual understanding of city needs, city geography and economic viability of such expensive infrastructure projects, investing in a Delhi Metro type MRTS may be a huge risk. Delhi is a unique city in India, wherein a lot of development decisions and investment comes from the federal government. Therefore, there is more at stake in Delhi Metro´s success other than just the city´s economic future. The city acts as showcase for the country, hence managing the metro, both physically and financially is of utmost interest for the federal government. That may not be the case for other cities where the local and state government may be left to their own devices in order to maintain and upgrade such transportation infrastructure.´

Experts emphasize that the decision to have an MRTS system has to be done very carefully, with a lot of technical assessments of existing and future demand, and the flow of commutes within cities and from its surrounding communities. Even then, a decision has to be made if that demand can be met with cheaper alternatives such as dedicated bus lanes or full Bus Rapid Transit (BRT) systems.

As Singh points out, ´This was exactly the case in the 1970s and 1980s in South American cities, which were faced with the steep costs of rail based MRTS, and opted for a BRT system that was exponentially cheaper to build, maintain and upgrade, and met the existing and future travel demands. In addition to the BRT alternative, one also should be considering new developments in urban transportation, such as ride aggregator systems (OLA and UBER) as well as the potential of self-driving vehicles. While self-driving vehicles are probably decades away, ride aggregating systems are already making a huge paradigm shift in urban transportation in Indian cities. GPS equipped city buses and provide real time location information to commuters that can make exiting transportation systems far more reliable and efficient. With such new technologies, one has to carefully consider whether the hugely expensive investment in urban rail based MRTS will truly be the most effective investment for a particular city.´

Best Investment Model
In India, much of the investment so far has been through the public sector, backed by borrowings from multilateral lending agencies such as Japan International Cooperation Agency (JICA) and Asian Development Bank (ADB), and to a lesser extent from domestic sources like India Infrastructure Finance Company Ltd (IIFCL) and HUDCO (Housing and Urban Development Corporation Limited) at very nominal interest rates.So what would be the best possible business model or arrangement for a proposed metro railway project?

Says Agarwal, ´Metro rail (and public transport) projects, world over, can barely cover 20-25 per cent of their project cost through their own revenues. Trying to force fit commercial viability through adding real estate does not work because the risk-return profile of the two asset classes is different. Step one is to arrive at a financing arrangement that is sensible. This would include ring-fencing non-project cash flows, which when made available to the project, can attract commercial funding. Several metro projects are doing this now, to supplement the multilateral funding and government grants. Step two would then be to induct private sector expertise within this financing framework, through performance based contracts. For example, supply and financing of rolling stock and its operation and maintenance could be bundled together. We have not seen such innovation being attempted yet.´ For his part, Singh, who has spent considerable time living in Nigeria, India and the US, makes five main recommendations to resolve what he perceives as the key challenges before a metro project:

1.Financing Construction & Maintenance: While financing may happen through bonds and soft loans from the Central government and international sources, maintenance is often funded by local sources. With our property and income tax bases not being very organized, the possibility of raising municipal bonds to finance upkeep, maintenance and expansion for less prominent cities will be a significant hurdle. The project proponents have to be proactive in establishing future revenue and financing sources from the get go so that cities aren´t left holding the bag.
2.Strong local/regional governance of an MRTS corporation: It is imperative that the governing body/board of an MRTS corporation include a majority of locally elected representatives in order to keep the corporation in tune with local economic and social changes. As it is, in India, local urban governance (municipal corporations) do not have much resources or authority to truly address the needs of the Indian city. While some states have divested powers to urban development authorities to urban local bodies under the 73rd/74th amendments, this has been very uneven with many northern states woefully lagging on the implementation of these amendments. Using this opportunity, urban local bodies could be given a stronger say on their cities´ futures.
3.Singular transportation agency: As is quite evident in Delhi, the urban transportation system despite the Delhi Metro leaves much to be desired. With the Delhi Metro, the State Transportation Department and the Delhi Traffic Police answering to very different bosses, coordination between modes of transportation is woefully inadequate. Such is the lack of coordination that a simple exercise of crossing the street from the Anand Vihar Railway station in Delhi, to get to the other side of the street to Kaushambi in Ghaziabad, has become a parkour-like endeavor for a citizen, simply because different transportation entities could not coordinate planning and implementation of their respective projects. Most metropolitan areas in the developed and emerging economies have a singular agency to manage all aspects of public transportation, making the change of modes as seamless as it can be.
4.Integrated land use and transportation policy: In order to make public transit the travel mode of choice, cities have to work to make is spatial allocation of land uses fit, or retrofit, into the planned MRTS or public transportation system. While Delhi Metro has been operational for over 15 years, the City of Delhi has only just notified its transit oriented development (TOD) policy. Indian cities can learn from these lapses in planning, and develop their own land use policy updates as they plan out the MRTS projects, making sure that the right urban development policies are in place when the systems become operational.
5.Facilitating removal of private vehicles: Any public transit system is doomed to fail if urban leaders continue to build new, or widen existing, roads. In addition, maintaining excessive parking requirements for urban land uses further encourages citizens to drive rather than take public transit. Therefore, as MRTS systems are being planned, cities should also develop new parking regulations and public parking policies that discourage the use of private cars. Numerous studies have shown that the most significant shift of commuters from private cars to public transit, is the low availability of parking at their places of work or recreation.

Course Correction
Talking to Infrastructure Today, Public-Private Partnership (PPP) Expert and OSD to MUINFRA, Ajay Saxena recommends, ´One option is to increase the user charges, which is not possible and the other to create a fund in a manner to recover some part of the investment from direct beneficiaries, other than the direct users. If we are able to identify all the stakeholders and beneficiaries correctly and charge them appropriately, even the high capital intensive projects would be beneficial from an operational perspective on a PPP basis. Unfortunately, in India, when PPPs were written, it was done only from the point of view of user charges. Anything else was considered outside the scheme. Although of late some efforts have been done by including land parcels etc but these are either very small or get challenged or the main project objective gets affected. I believe this needs to be corrected.´

However, increasing user charges is not always preferred as even a marginal increase in ticket prices might not go down very well with riders, who also form an important political constituency. For instance, Mumbai Metro One Pvt Ltd (MMOPL), which is operated by Reliance Infrastructure, could be headed towards a crisis owing to an ongoing court case over revision of fares and lack of financial commitment from the Maharashtra state government. This despite a decent rise in ridership to over 3,00,000 in June 2016 from 2,79,000 a year ago. Similarly, sceptics justifiably point out that the Delhi Metro system today realizes a significant part of its revenue from not ridership but by providing consulting services to upcoming projects in India and overseas. They warn that this dependence on such alternative modes of revenue might not augur well for a humongous metro network of Delhi´s size. Recent news reports have indicated that on instructions from the Prime Minister´s office, work is underway on a policy draft on value capture financing (VCF). The VCF proposes to help in recovery of some of the premium that investments in public infrastructure projects such as airports, highways and metro rail generate for private landowners. This model of public financing is based on the premise that the investments made by the government in developing public infrastructure not only provides impetus to economic activity but also results in increasing land prices.

Till such time the government will continue to be an important stakeholder in all infrastructure projects, irrespective of private sector ownership and operations. Adds PwC´s Manish, ´More so, in the case of metro rail, considering the range of government agencies that need to coordinate for success. As metro rail corporations stabilize, there will be need for mechanisms to better integrate them into other planning and operating institutions in the city. Kochi is already attempting this at the first level, with respect to other forms of public transport. So are Chennai and Jaipur, to some extent, with respect to transit oriented development. In cities like Singapore and Tokyo, the land development and transport planning are tightly integrated into the same ministry.´

The challenge before India, therefore, is not only to create world-class but also viable urban infrastructure projects to ensure they remain sustainable in the long-term. This is an essential component for only then will future expansion or improvement to them will be possible.

– Manish Pant, with inputs from Rouhan Sharma