Metro Myths

Delhi Metro claims it’s loss­mak­ing and, hence, has to hike fares. Its bal­ance sheet re­veals that it earns cash of ` 1,000 crore a year


IN 2016-17, over a bil­lion peo­ple rode the Delhi Metro. On some days, over 3.5 mil­lion boarded the trains. Based on sim­i­lar high rid­er­ship fig­ures in 2015-16, Ra­jiv Gauba, for­mer chair­man, Delhi Metro Rail Cor­po­ra­tion (DMRC), said, “These high rid­er­ship fig­ures show the tremen­dous faith and con­fi­dence that the peo­ple of the en­tire Na­tional Cap­i­tal Re­gion have in the Delhi Metro as a safe, fast and a re­li­able means of trans­porta­tion.” He added that the Delhi Metro was “in­stru­men­tal in ush­er­ing in a new era in... mass ur­ban trans­porta­tion” in the coun­try. De­spite this suc­cess, DMRC in­curred huge losses. In 2015-16, its net loss was over 700 crore. This is the rea­son that it hiked its fare in May 2017. The max­i­mum rise was a hefty 66.66% for dis­tances over 32 km. Ac­cord­ing to DMRC’s rev­enue di­rec­tor, KK Sabar­wal, the hike “was im­por­tant in or­der to sus­tain its op­er­a­tions”. This was the sec­ond time, af­ter 2009, that the ticket prices were in­creased. In Oc­to­ber this year, the tar­iffs will rise by an­other 20%. In ef­fect, the max­i­mum fare, as ap­pli­ca­ble in Oc­to­ber, will zoom by 100%, com­pared to the pre-May rates. How­ever, there is an­other story hid­den be­hind these so-called facts. It’s a nar­ra­tive of how the DMRC is one of the most cash-rich trans­porta­tion com­pa­nies in the coun­try. It cash prof­its, i.e. op­er­at­ing prof­its are enor­mous. Its other costs are min­i­mal. The only rea­son that com­pany in­curs a net loss is not be­cause of ac­tual ex­pen­di­ture—like on salaries, op­er­a­tions and in­ter­est—but be­cause of its huge de­pre­ci­a­tion charges. For the non-ini­ti­ated, de­pre­ci­a­tion, a re­duc­tion in the value of the var­i­ous as­sets, such as trains and rails due to wear and tear, is a non-cash ex­pense. As per one for­mula, your car will de­pre­ci­ate to 50% of the value of a new one in 4-5 years. As one can see, it’s a no­tional loss. You don’t have to pay this amount to any­one; you may be able to sell the car at a higher price, if there’s a de­mand. Sim­i­larly, a com­pany doesn’t pay de­pre­ci­a­tion to any­one; there is no outgo. Here are a few ‘facts’, be­fore we delve deeper into this al­ter­na­tive nar­ra­tive. In 2015-16, Delhi Metro’s prof­its be­fore de­pre­ci­a­tion and tax were an im­pres­sive over ` 1,000 crore. The fig­ure was pos­i­tive in each of the 10 years be­tween 2006 and 2016. There is an­other as­pect to de­pre­ci­a­tion. A com­pany that has a high and grow­ing de­pre­ci­a­tion each year is ob­vi­ously on an ag­gres­sive ex­pan­sion

spree. Such growth im­plies that its an­nual rev­enues will mul­ti­ply ac­cord­ingly, as the ex­pan­sion trans­lates into newer op­er­a­tions in the near fu­ture. Once the new projects, or ex­ten­sion of the ex­ist­ing ones, are com­pleted, it will also boost the bot­tom­line of a com­pany. So, while de­pre­ci­a­tion may eat into the prof­its on pa­per— and only on pa­per—there’s no cash outgo, but im­mense prof­itabil­ity in the near fu­ture. For ef­fi­cient com­pa­nies, there are im­mense ben­e­fits. Ever since its in­cep­tion, DMRC com­pleted al­most all its projects on time, or even be­fore the sched­uled com­mis­sion­ing dates. Dur­ing his ten­ure as the DMRC’s man­ag­ing di­rec­tor be­tween 1995 and 2012, Elat­tuvalapil Sreed­ha­ran was known as the ‘Metro Man’. He en­sured that pro­cesses and sys­tems were put in place for DMRC to run ef­fi­ciently and ef­fec­tively. Hence, the fi­nan­cial ad­van­tages that will ac­crue to the com­pany be­cause of its ex­pan­sion will be higher than for other firms. One of the ways to prove this is to look at the de­pre­ci­a­tion to rev­enues ra­tio over the years. This fig­ure was a high 36 per cent in 2010-11, but it came down dra­mat­i­cally to 28 per cent within three years, by 201314. Ob­vi­ously, this was be­cause the projects that com­menced in the for­mer year were com­pleted, and led to a huge jump in the an­nual turnover. The ra­tio rose again to 36 per cent in 2014, and came down to 34 per cent in the next year. This in­di­cates that over the next 2-3 years, the ra­tio will re­duce as the new projects com­mence op­er­a­tions, and add hugely to the top-line.

The only rea­son that com­pany in­curs a net loss is not be­cause of ac­tual ex­pen­di­ture—like on salaries, op­er­a­tions and in­ter­est—but be­cause of its huge de­pre­ci­a­tion charges

LET’S go back to the tale spun by DMRC that talks about its net losses, and jus­ti­fies the fare in­crease in May 2017. The com­pany’s rev­enue di­rec­tor, Sabar­wal, men­tioned four rea­sons for the losses – grow­ing in­ter­est, en­ergy ex­penses, trac­tion costs, and salaries. He added that the op­er­at­ing ra­tio, i.e. ex­penses to earn­ings one, had risen from ` 54 in 2009 to ` 84 now. What he meant was that eight years ago, DMRC spent ` 54 for ev­ery ` 100 it earned, and the ex­pen­di­ture now is ` 84 for ev­ery ` 100 earned. In the fu­ture, the ra­tio will go up. A de­tailed look at all the above­men­tioned is­sues tells a dif­fer­ent story. First, let’s take a look at the fi­nance costs. Over the last six years, be­tween 2010-11 and 201516, in­ter­est outgo went up by a

stu­pen­dous 13.66 times to ` 264 crore. The lat­ter was 6% of the rev­enues and a quar­ter of the op­er­at­ing prof­its be­fore in­ter­est, de­pre­ci­a­tion and tax. These per­cent­ages do seem higher than other ur­ban trans­porta­tion and in­fra­struc­ture com­pa­nies. But there is a huge dif­fer­ence – the size of the DMRC’s loans, and the in­ter­est rates on them.

LONG-TERM bor­row­ings of the Delhi Metro were hu­mungous ` 29,150 crore in 2015-16, or 6.7 times the an­nual rev­enues. Of this, al­most ` 3,000 crore was free of in­ter­est. This was the amount granted largely by the cen­tral gov­ern­ment and Delhi gov­ern­ment. Over ` 7,300 crore was doled out at an in­ter­est of 1.2 per cent, ` 2,900 crore at 1.3 per cent, and an­other ` 10,000 crore at 1.4 per cent. In ef­fect, these ac­counted for 80 per cent of the loans. An­other ` 2,100 crore was at a higher in­ter­est of 1.8 per cent, and ` 275 crore at 2.3 per cent. For any­one in fi­nance, these are ridicu­lously low rates. Com­pare the above to the in­ter­est paid by pri­vate firms. Larsen and Toubro, one of the largest pri­vate in­fra­struc­ture com­pa­nies, paid ` 1,318 crore as in­ter­est in 2016-17, which was al­most 12.5 per cent of its loans. One can ar­gue that the pri­vate sec­tor takes short-term loans, apart from the long-term ones, and have to pay a much higher rate on the for­mer. But even we com­pare ap­ple to ap­ple or or­ange to or­ange, i.e. DMRC’s long- term loans to pri­vate firms’ sim­i­lar bor­row­ings the dif­fer­ence in the in­ter­est rate be­tween the two is huge—five to six times. An in­sight­ful com­par­i­son of the en­ergy costs over the years in­di­cates that DMRC has man­aged to save on such ex­penses. First, be­tween 201011 and 2015-16, such ex­pen­di­ture as a per­cent­age of to­tal rev­enues inched up a lit­tle bit—from 3.67 per cent to 3.9 per cent. But in the past three years, the fig­ure came down from just over 4 per cent in 2013-14 and a high 4.8 per cent the next year. Of course, there is a dis­pute with the var­i­ous DISCOMs re­lated to elec­tric­ity tax, which re­sulted in a con­tin­gent li­a­bil­ity of ` 102 crore as on March 31, 2016. The fig­ure went up from ` 80 crore in the pre­vi­ous year. Trac­tion costs have in­deed gone up, as claimed by Sabar­wal. In terms of the per­cent­age of rev­enues too, they went up from 4.7 per cent in 2010-11 to 7.6 per cent in 2015-16, which is a huge jump. But there is still a lot of volatil­ity in these

Long-term bor­row­ings of the Delhi Metro were hu­mungous ` 29,150 crore in 2015-16, or 6.7 times the an­nual rev­enues. Of this, al­most ` 3,000 crore was free of in­ter­est... Over ` 7,300 crore was doled out at an in­ter­est of 1.2 per cent, ` 2,900 crore at 1.3 per cent, and an­other ` 10,000 crore at 1.4 per cent

ex­penses. For ex­am­ple, trac­tion costs as a per­cent­age of rev­enues were 6.2 per cent in 2013-14. Ac­cord­ing to ex­perts, this may be be­cause of the com­mis­sion­ing of new projects. As this hap­pens, the trac­tion costs shoot up dur­ing the year new routes are tested and launched, and then sta­bilide af­ter sev­eral months. This is es­pe­cially true in rail trans­porta­tion. Now, we come to the salaries paid to the DMRC’s em­ploy­ees. Any com­pany that ex­pands its op­er­a­tions and ser­vices has to add new em­ploy­ees at a faster clip. So has Delhi Metro. Iron­i­cally, its an­nual salary bill as a per­cent­age of to­tal rev­enues has ac­tu­ally de­creased—from 15 per cent in 2010-11 to 12.4 per cent in 2015-16. The com­pany can ar­gue that the trend is the op­po­site when one com­pares the cost of salaries to the op­er­at­ing prof­its. Dur­ing the pe­riod men­tioned above, the per­cent­age has shot up from 43 per cent to 53 per cent, a hand­some rise of 10 per cent. How­ever, the fig­ures vary quite dra­mat­i­cally from year to year. In 2013-14, the fig­ure was 43.6 per cent, or al­most the same as 2010-11, and 48.5 per cent in the next year. This trend points to­wards a counterintuitive con­clu­sion. Dur­ing an ex­pan­sion phase, firms gen­er­ally hire most of the em­ploy­ees be­fore the new projects be­come op­er­a­tional. Hence, the salary bills look bloated un­til the cap­i­tal in­vest­ment con­verts into ac­tual re­al­iz­able rev­enues and prof­its. Thus, dur­ing the growth phase, a firm’s ex­pen­di­ture on man­power will def­i­nitely be volatile.

TWO more is­sues need to be high­lighted in the con­text of Delhi Metro’s fi­nan­cials, and its man­age­ment claim that it loses money. The first is the com­pany’s cash flows. Any com­pany with pos­i­tive cash flows is in good health, and its prob­lems are tem­po­rary. In the case of DMRC, its cash flows from the op­er­at­ing ac­tiv­i­ties were over ` 1,500 crore in 2015-16. In the same year, it gen­er­ated a ‘net cash’ of over ` 7,800 crore from its fi­nanc­ing ac­tiv­i­ties. Thus in two key ar­eas, op­er­a­tions and the abil­ity to raise funds, Delhi Metro per­formed ad­mirably. It is crucial to closely look at the ‘fi­nanc­ing ac­tiv­i­ties’. In 2015-16, DMRC raised over ` 1,200 crore as ‘grants, or in­ter­est-free loans, and al­most ` 5,000 crore as in­ter­est-bear­ing ones. In com­par­i­son, its outgo on re­pay­ing loans and pay­ing in­ter­est was less than ` 600 crore. In ad­di­tion, DMRC re­ceived a huge ` 2,250 crore as ad­di­tional eq­uity. As an­a­lyzed ear­lier, the loans are at in­cred­i­bly cheap rates and, of course, the eq­uity is free as the com­pany hasn’t paid div­i­dends to its pro­mot­ers. One can ar­gue that there is no rea­son for a pub­lic trans­port com­pany, which is get­ting such a huge largesse from the Cen­tral and State gov­ern­ments, State-owned agencies, and for­eign lend­ing agency (Ja­pan In­ter­na­tional Co­op­er­a­tion Agency), to charge com­mer­cial tar­iffs. In fact, Delhi Metro needs to be happy with mi­nor op­er­at­ing prof­its, and sub­sidise its ser­vices to woo more rid­ers.

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