Squandering public funds for a handful of people  

October 17, 2006

The author gives statistics of the Metro Rail project in Delhi and suggests that public funds must be spent on the most cost-effective solutions benefiting the maximum number of people and not a chosen few in the capital city of Delhi.

Squandering public funds for a handful of people

Dinesh Mohan

October 07, 2006

A recent newspaper report informs us that the government of India has decided to spend Rs 16,978 crore on a rehabilitation package for farmers in the predominantly-suicide-prone districts of Andhra Pradesh, Karnataka, Kerala and Maharashtra.

Another recent report says that to implement the Central Educational Institutions (Reservation in Admission) Bill, 2006, the government plans to allocate Rs 17,200 crore over the next Five-Year Plan. This investment will expand the number of IITs and other central institutions, it is envisaged there will be a 54 per cent increase in intake over three years.

Investments of this magnitude can be justified because we expect permanent benefits for the nation and its citizens. These expenditures are also considered a "public good".

Now consider another expenditure of a similar magnitude - about Rs 11,000 crore (Rs 110 billion) - for constructing Phase 1 of the metro in Delhi. The construction and completion of the three-line system of 65 km has been rightly praised for its technological efficiency and management.

But this cannot be the only criteria for the expenditure of public funds. What we have to examine is its benefit to society, its financial viability and whether it is really  "public good" in a national sense. The economic justification for the project (when sanctioned eight years ago) was based on an expected ridership of 21.8 lakh per day in 2005.  Today the website of the Delhi Metro Rail Corporation states that "The expected ridership, in the year 2005, is 15 lakh passenger trips per day".

We are not informed where the 6.8 lakh passenger trips disappeared. Further, all newspaper reports suggest that in late 2006, the ridership of the system is between 400,000 to 500,000 passengers per day!

Let us put this in perspective of travel demands of Delhi. According to the Transport Department of Delhi, the total number of trips per day in the city total to about 1.2 crore (12 million).

This means that Delhi Metro is benefiting only 3 per cent to 4 per cent of the citizens of the city, with no benefit to anyone else in the country. If we take a modest 8 per cent as the cost of interest plus depreciation on the project's capital expenditure, we get a subsidy of Rs 35,000 per passenger per year.

This certainly cannot be justified as a public expenditure in a cash-poor society. The obvious question that arises is, why does a small minority of Delhi's population deserve such a huge national subsidy?

Metros seem to get very special treatment in the hope that they will magically solve all our urban traffic and congestion problems. But we are not alone in overestimating the benefits and underestimating the costs.

Professor Bent Flyvbjerg and his colleagues (Department of Development and Planning, Aalborg University, Denmark) studied 258 transportation infrastructure projects around the world and concluded that "the cost estimates used in public debates, media coverage, and decision-making for transport infrastructure development, are highly, systematically and significantly deceptive. So are the cost benefit analyses into which cost estimates are routinely fed to calculate the viability and ranking of projects. The misrepresentation of costs is likely to lead to the misallocation of scarce resources, which, in turn, will produce losers among those financing and using infrastructure, be they taxpayers or private investors."

They do not think these errors occur by chance and are categorical that "Cost underestimation cannot be explained by error and seems to be best explained by strategic misrepresentation, that is, lying."

They also found that these errors were the highest in metro projects. We are no different, the Kolkata metro had huge cost overruns and is today operating at ten percent projected ridership.

The original budget for the Delhi metro was less than Rs 5,000 crore, we spent more than Rs 11,000 crore and it is running at 20 per cent projected ridership. It is not too late to subject public transportation projects to much better scrutiny as well as examine and consider more cost-effective solutions to our problems.

This is not all. The finance ministry has also argued that tax exemptions to the metro project only benefits the capital and others should not bear the burden. We are told that the project is exempted from custom duty, excise duty, work tax and also has a sales tax waiver.

Just for Phase II of the project of 53 km, these exemptions amount to a whopping Rs 1,194 crore (Rs 11.94 billion). In addition, the system gets electricity at subsidised rates. Why these exemptions only for this  project? Why not for all projects that can be classified as "public goods"?

By this logic, all public hospitals, educational institutions and public transport projects should get similar exemptions. All taxis, public transport buses and rail projects should get tax waivers and electricity at reduced rates.

Dozens of cities around the world have introduced modern Bus Rapid Transit Systems incorporating the benefits of intelligent transport systems carrying similar numbers of passengers as the Indian metros, but at a fraction of the cost. Delhi, Ahmedabad, Indore and Pune in India are already in the process of building similar systems and ordering modern low-floor urban buses.

The tax exemption of Rs 1,194 crore planned for the metro in Delhi would fund a modern 200 km bus rapid transit system with the capability of transporting about 800,000 passengers a day. The policy options should be clear.

It is high time we move away from high-cost-limited-benefit projects with hidden subsidies. Public funds must be spent on the most cost-effective solutions benefiting the maximum number of people and not a chosen few in the capital city of Delhi.

The world is awash with new ideas and new technologies. These ideas and innovations must be given space and place to flower so that we use our limited time and funds to our maximum advantage.

The author is Professor and Co-ordinator, Transportation Research and Injury Prevention Programme, IIT Delhi .

http://www.rediff.com/money/2006/oct/07guest2.htm