Reliance Airport Metro Saga – Not an end of line for PPP projects, Govt.

The stand-off over the Reliance Airport Express Line brings to fore the need for partners to put contract clauses under the microscope.

Many feel that the stand-off between Reliance Infrastructure (R-Infra) and the Delhi Metro Rail Corporation (DMRC) over the Airport Express Line could signal the end of Public Private Partnerships (PPP) in India, with some even changing the definition of PPP to perennially posing problems. Just as one swallow does not a summer make, the failure of one PPP agreement does not sound the death-knell for similar projects in India. It is unfortunate that this has happened to one of the most prestigious projects connecting the capital to the country’s truly international airport.

Delhi Airport Express Private Ltd (DAEPL) was a special purpose vehicle set up by the now-warring parties to operate and run the 22.7-km line. When conceived and awarded in 2007, a three-year drop-dead completion deadline was given to R-Infra to ensure that the line was ready for the Commonwealth Games. The partnership had had an inauspicious start with financial penalties being levied on R-Infra for four missed deadlines — this could also be one of the reasons for the subsequent trust deficit between the partners.

BUILDING BLUNDERS

The cost of building the airport line was so astronomical that DMRC knew that R-Infra would not be able to recover its full capital and operating costs from fares alone. To overcome this problem, DMRC took upon itself the responsiblity of building and financing all civil works (including the viaduct, tunnels and stations), while R-Infra would be in charge of financing only the operating systems (primarily the track, signals, power distribution system and rolling stock and for the operating expenses). But the DMRC suspected that even this contribution may not be enough to make the private concession financially viable, since the capital costs for just the operating systems was estimated at Rs 1,538 crore.

Accordingly, it invited potential concessionaires to bid, based on the additional capital subsidy they thought the Government would provide to make the concession viable, with the contract going to the company that sought the least viability gap funding from the Government. It was forecast that around 46,000 people would use the airport express every day soon after the project was commissioned in 2010 and that ridership would grow to 86,000 a day in the next 10 years.

FINANCIALLY UNVIABLE

DMRC’s forecast was based on hourly counts of passengers at the airport terminals and surveys of departing and arriving passengers who were asked where in Delhi their trip began or would end. At last count in 2013, not more than 11,000 people were using the line, which in Reliance’s view makes the project financially unviable.

Worse, it was discovered that compromises had been made in the construction of girders, which meant the train could be run at top speed. With the travel time doubling to 40 minutes, the USP of the Airport Express was gone; it would take a taxi the same time to traverse the distance.

The financial and construction problems were compounded by an administrative decision to close the Airport Express Line at 11-30 p.m. That maybe a good time to shut bars and restaurants, but not a train line to a major international airport that has international taking off and landing late into the night.

ALLOCATING RISKS

As problems mounted and became irreconcilable, R-Infra baled out. DMRC took over the operations of the line with effect from July 1 and will either run it on its own or find someone to manage it after sorting out the problems. It must necessarily do two things — one, reduce the travel time by increasing the speed of the train, and, two, operate it 24 hours.

While l’affaire Airport Express will not mean the end of all PPP projects, it will ensure that the partners will put the contractual clauses — especially the ones on risk — under a microscope and ensure that renegotiation clauses are woven in.

The Draft Policy of PPP envisioned that the Government shall identify different types and degrees of risks during the project life-cycle and configure appropriate mitigation measures. The objective would be to optimally share the project risks, rather than transfer them wholesale to the private sector.

The attempt would be to apportion risks — taking into account the legitimate concerns of the stakeholders — to the entity that is best suited to manage them. In the normal course, the public sector would not take on risks that the private sector has better ability to bear.

However, risks that the public sector is more competent of mitigating in the normal course of the business — such as ensuring availability of unencumbered land for a project or obtaining mandatory clearances of regulatory authorities before commencement of the project — would be retained by it.

DMRC and a host of other PPP players — GVK, GMR, Adani, Tata Power, Gurgaon Expressway and Delhi Airport — will no doubt want the contracts they ink to be as useful, post-implementation, as the infrastructure they helped build.

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