The Delhi Metro started with one line running between Shahdara and Tis Hazari. Today it stands as one of the most lucrative metro systems in India, aspiring to 12 lines covering 230 km and 160 stations. This is nothing short of commendable. However, one must wonder — what does it take to build a system that works better than all other available public utilities and how sustainable is this venture? The Delhi Metro Rail has faced a series of obstacles, including a low rate of return and massive debt, yet it has been successful in providing quality services.

Big plans require big money

The growth that the DMRC (Delhi Metro Railways Corporation) has made is nothing short of brilliant. Where is the funding for this coming from?

The total cost incurred for the metro ranged from Rs. 10,571 crores in Phase I to Rs. 41,079 crores in Phase III. Needless to say, this puts a massive debt burden on the DMRC.

According to DMRC reports, a large part of the funding came in the form of loans from the Japanese Government. The Japan Bank for International Cooperation (JBIC), now called the Japan International Cooperation Agency (JICA), gave soft loans, which are usually given to developing countries on easy terms of repayment. These loans accounted for approximately 60% of the total funding in Phase I and 48% in Phase III.

28% of the funding comes from equity shares contributed by both the Government of India and the state government GNCTD, as well as the interest-free subordinate debt of approximately 5%. The remaining 7% for Phase I came from property development such as food outlets, ATMs, kiosks, and other ventures.

In Phase II, the DMRC made an attempt to bring in public-private partnerships (PPPs). For the construction of the Airport Express link, the Government of India and Delhi contributed 39% of the funding and the concessionaires Reliance Infrastructure and CAF Spain contributed 46%. The private partners, however, abandoned the project a year into the construction as the rate of return was very low (about 0.5%). The private partners required a return of at least 15% to recover just the loan liability. This led E. Shreedharan, a key figure in the development of the Delhi Metro Rail and the Konkan Railway, to believe that the metro system in India is not a profitable venture for BOTs (Build Operate Transfer) or PPPs.

Why does the Delhi Metro operate at such a low rate of return?

The Delhi Metro is very popular, so why is its rate of return so low? There are three main reasons: low fares, high initial costs, and land acquisition delays.

First, the fares for the metro’s Airport Express link were slashed from Rs. 30 to Rs. 20 as the minimum fare and from Rs. 180 to Rs. 100 as the maximum fare. This, no doubt, boosted ridership by a large extent, but it also left the metro with little chance of recovering its capital investment.

Second, the rate of return on investment is low despite high ridership because of high costs incurred in the initial construction stage. The cost of fixed assets, such as building the stations and the trains, is high for the metro industry. Hence, the Delhi Metro’s fixed capital investment turned out to be a large sum that was difficult to recover. Moreover, most DMRC projects are running behind schedule. These delays and poor planning resulted in even higher initial costs, which are difficult to recover. All of these factors left the DMRC with a large amount of fixed capital and lower operational returns in comparison.

Third, acquisition of land was difficult because of the new Land Acquisition Act, which makes it difficult to get permission from the residents or landowners being relocated. Several plots of land delayed construction work due to difficulty in relocating jhuggis. These delays further increased the metro’s operating and construction costs.

These three factors together impeded the progress being made by the Metro Rail in expanding and generating a high rate of return, even though revenue from daily operations is high.

The DMRC faces a big problem — the easiest way to increase its rate of return is to further increase fares. However, the DMRC cannot state its fare as more than double of that of other modes of public transport, since that would deter people from using the metro. This leaves the DMRC with a slight chance of recovering its losses.

The Delhi Metro’s debt

delhi metroIn March 2014, the total pending amount of the JICA loan stood at Rs. 18,324.80 crores. The DMRC’s Managing Director, Mr. Mangu Singh, expressed deep concerns over the DMRC’s ability to pay off this debt. In the 2013-14 fiscal year, the Delhi Metro ran at an operating profit but still made a net loss of nearly Rs. 100 crore. Coupled with hikes in the electricity tariff and an ever-increasing operating ratio, this leaves the DMRC in quite a fix.

A success story despite the obstacles

Despite the dismal picture painted by DMRC finances, the Delhi Metro still emerges as a hope in the maze of late mornings and frustrating traffic. The fact that the DMRC is very reliable and efficient cannot be ignored; credit must be given where it is due.

The Delhi Metro has seen an enormous increase in ridership over the last 13 years and currently holds a record of the highest-ever ridership this year — about 25 lakh people in a single day. This is commendable and indicates that people prefer to take the metro over other means of public transport. Why would they not, with a punctuality rate of 99.9% and increasing technological advancements like mechanized ticket booths. Women have their own compartment to travel in, which adds to the metro’s appeal in a city that is often seen as unsafe for women.

The popularity of DMRC was evident when the Delhi Metro ranked 2nd of 18 international metro railway systems across the world in customer satisfaction in a survey conducted by Global Metro Benchmarking Groups “NOVA” and “COMET”. The Delhi Metro was dubbed “most reliable and available”.

Since business ventures around the world are heavily dependent on natural resources, they are accountable for producing about 67% of greenhouse gas (GHG) emissions. The Delhi Metro has made a laudable attempt at reducing these emissions. The efforts of the DMRC has led to a reduction of 57,000 t CO2 E greenhouse gas emissions per day. As a result, the Delhi Metro became the first to receive carbon credits for reducing GHG emissions and reducing pollution levels in the city.

“ The Delhi Metro Rail Corporation has been certified by the United Nations as the First Metro Rail and Rail based system in the world which will get carbon Credits for reducing Green House Gas Emissions as it has helped to reduce pollution levels in the city by 6.3 lakh tons every year thus helping in reducing global warming.” -DMRC

An initiative to be proud of

The Delhi Metro has proved to be a reliable and easy mode of transport. Despite major financial hurdles, it has come a long way in providing an excellent service to the city. Being a model metro railway system, the DMRC has been assigned the task of planning and executing construction of metro systems in many states in the country.

The one thing that DMRC needs to seriously consider is reducing lags in construction, which can be easily tackled by planning and executing construction better. This would attract private partners to invest in the DMRC, since the interest already exists and just needs to be nurtured through higher rates of return. If fixed costs are reduced and rates of return are increased, it would invariably reduce the debt burden on the metro system and increase profitability.

Let’s see how far this journey takes the Delhi Metro!

Source: All data from Annual Report 2013-14, Delhi Metro Rail Corporation.