The Capitalist | Mumbai’s Metro project: time for normative pricing rules?

The Capitalist | Mumbai’s Metro project: time for normative pricing rules?
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First Published: Wed, Apr 01 2009. 10 02 PM IST

Updated: Wed, Apr 01 2009. 10 02 PM IST
The construction of Metro railway in Mumbai was initially expected to cost around Rs214 crore per km. Nobody bothered about the price till media reports gave out the project cost of a consortium headed by Maytas Infra Ltd—promoted by the family of fraud-hit Satyam Computer Services Ltd founder B. Ramalinga Raju—for the Hyderabad Metro rail project.
Also See Track Record (Graphic)
It was found that Maytas’ costs were Rs174 crore per km for the Hyderabad project, much lower than the project cost of Mumbai Metro but higher than the Delhi Metro Rail Corp. Ltd’s (DMRC) Rs162 crore per km. Since Delhi was the first city rail project of its kind in India, costs were expected to be high. Experience gained from the first project always allows lower costs in subsequent projects.
Mumbai’s proposed costs were shocking. The anger and protests following Maytas’ disclosures—and Mumbai’s rip-off proposed costs—appear to have borne fruit. The costs disclosed last month by the Mumbai Metropolitan Regional Development Authority (MMRDA) for its Metro project now appear to be more reasonable than those of Maytas and lower than those of Delhi. But with steel prices having halved since then and finance costs tumbling, Mumbai’s costs should have been at least 25% lower than DMRC’s.
According to MMRDA, while the first phase has been given under the public-private partnership (PPP) scheme, the other two phases may not adopt the same route because of growing disenchantment with PPP and also because of the way it was abused in the Maytas proposal. But rejecting the PPP route may not be the best solution.
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Public utility pricing and PPP
Till now, a big champion of the PPP route has been Infrastructure Leasing and Financial Services Ltd (IL&FS), which has spearheaded private investment in infrastructure. It is backed by the Planning Commission which continues to support the PPP route for infrastructure development.
It now appears that most IL&FS-backed projects have tended to inflate costs. Disclosures about the Maytas’ Hyderabad Metro costs—coupled with news about how tenders for ambulances for the Emergency Access Foundation, also promoted by the Satyam group, were cleverly structured—have clouded perceptions about PPPs and IL&FS.
A letter written by DMRC chief E. Sreedharan to the Planning Commission, expressing grave reservations about PPP in the Hyderabad project, further aggravated the situation. True, the planning body ticked off Sreedharan for his letter, but his charges have stuck. There now appears to be a lot of soul-searching about the price state governments ought to pay for infrastructure projects.
The Hyderabad Metro project allowed for a cost of Rs174 crore per km even though it was higher than DMRC’s costs.
People close to IL&FS privately say that DMRC’s own quote for the project was around Rs240 crore per km. While this could not be independently verified, the fact is that nobody adopted a normative pricing policy. IL&FS could have done this easily, first, because it has experience in infrastructure costing, and second, because, according to submissions before the Company Law Board (CLB), IL&FS controls a 37% equity holding in Maytas, even though it directly controls just 14.4%. Not surprisingly, CLB refused to allow IL&FS a seat on Maytas’ reconstituted board on grounds that such a seat would pose a conflict of interest.
All this raises a fundamental question: Can any government award an infrastructure project to a private party merely on the basis of the bids it receives? Shouldn’t there be a ceiling price indicator based on some normative pricing parameters?
After all, infrastructure is an inescapable monopoly, and its cost is always paid by citizens through tolls, tickets and tariffs. Their interests need to be protected.
Ideally, the state should have stated that since DMRC had managed to build an excellent facility at Rs161 crore per km, the project would be offered to any party that could better this price. Now with Reliance Infrastructure Ltd quoting a lower price of Rs127 crore per km for Delhi Metro’s airport link, this should become the new normative price benchmark.
Without such a regulatory framework involving normative pricing rules and a cap on what should be charged to common folk, the entire exercise can become a collusive deal between the government and private business.
PPP is welcome. It allows for private funds to finance infrastructure building. The danger lies in (a) not adopting caps on costs, and (b) finding excuses for allowing further increases in costs after a project has been awarded. A way to counter this could be to set stiff penalties for the planners and revocation of bank guarantees for the investors if costs are upwardly revised after contracts have been awarded.
Hopefully, some PPP norms may be revised and fiscal prudence get the respect it deserves.
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Genetically distorted
Last week, the Supreme Court asked the government to explain its stand on genetically modified (GM) seeds. It wants to know how the government has allowed Maharashtra Hybrid Seeds Co. (Mahyco), a private firm under licence from a US producer of GM seeds, to start open GM rice field trials in Jharkhand instead of permitting trials only under controlled conditions.
Even as the government’s reply is awaited, there is growing resentment at the manner in which the food ministry allowed Mahyco and other companies to grow and market GM brinjal in India without releasing any of the results from field trials. There are fears of pesticides grown genetically inside the food that could be harmful for consumption.
What is equally worrisome is the government’s failure to insist that all GM food be labelled as genetically modified so that consumers can make an informed choice. It is ironic that organic food growers must follow strict guidelines before labelling their produce as organic while GM food enjoys total freedom. Is the ministry playing with human lives?
Graphics by Ahmed Raza Khan / Mint
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
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First Published: Wed, Apr 01 2009. 10 02 PM IST