Analysis of rail Project selection Bias with Principal-Agent Model

A case of Delhi,,Mumbai, and Chennai

Vinod Rathod Background  Urban Metro Projects have proven to be very useful in decongesting large cities.  148 cities around the world had Metro System.  In World Metro systems carry 150 million passengers per day.

In , many cities are now considering the Metro system as an alternative The 12th fifth year plan Urban Transport group has recommended, Metro is only one of the Options for decongestion.

Growth of Metro rail system Growth of Metro rail system in India 300 250 200 150 kms 100 50 0 2002 2004 2006 2008 2010 2012 2014 2016 (Canavan, 2015) UnderConstruction (in Kms) Operational (in Kms) Background

Metro rail Transit is attached with the High capital and operating costs. It found that most of the metro systems around the world are not financially viable.

Public investment in rail transit has long been controversial (Wenling, 2006)

Failures of rail projects to materialize the targeted performance in terms of ridership speed, operating costs, and development benefits, on which grounds they had been justified

(Pickrell ,1989)

Anticipated project objectives are moderately met but at very high costs.

Under-investment on low-cost and more cost-effective transit alternatives, such as the conventional bus or Bus (BRT), because resources are often allocated to investments. (Wenling, 2006) Need of Study

Why Such a huge Capital Intensive Project ??? Analysis of Metro Rail Project Selection Bias with Aim Principal agent Problem model

To Analyze performance of metro rail project investments in terms of Objective objective, ridership, revenue, and capital cost To identifying the causes of metro rail forecast errors and its sources Test the hypothesis through the application of the Principal-agent problem to Metro rail funding process Methodology Identification of 1.Literature Review 2.Need for the study Metro rail failure reason

Reviewing papers and Metro rail Identification of policy different actor (s) role in Identification of Metro rail 3.Process decision Operation Indicators process.

Decision Making Concept 1.Data Collection (Economic Behaviour Theory) (Metro DPRs & Policy documents) Data 2.Converting raw data into graphs

How to measure Public Transport 1.Delhphi Method Operation Performance ? 2.Interview with Experts Secondar Primary 3.Schedule of Survey and y What Sampling method can be Analyzing the questionnaire used? prepared . What is impact of principal-agent problem on decision making process. Methodology

4.Comparative Analysis 5.Conclusion & Suggestion

Preliminary analysis of data

Study the Operation Performance of Metro rail Project (Forecast versus Actual

Study the forecast errors

Application of Principal-agent model on Metro rail funding policy Literature Review Various Researchers > Developed and used Public transport Operation Indictors to measure performance Daily ridership, Passenger per Two broad Indicators categories for PublicOperation transport measurementkms ;

Performance Measures Average Quality System Fare box of Manage Speed, Average revenue Service Metro rail ment Headway Operation User Perception PerformanceOperation based based Indicators

Passenger trips per Operation cost per Service Cost kms, Cost capita, Passenger Supply Efficiency revenue per contingencies, Revenue hour, Average Trip length per kms, Cost overrun Literature Review

Forecast errors in metro rail are attached as followed

 Ridership: In Baltimore and Portland, it ranges from 66% to 85% below the original forecasted. (Don H, 1990)

 Capital Outlay: The project cost at ’s light rail project were actually 11% below as their actual forecast value, whereas Sacramento’s light rail and Miami metro project is 13% and 106% less than forecast. (Don H, 1990)

 Operating Expenses: In case of Buffo’s Light rail (12%), Washington (200%), Atlanta (200%) and Miami’s metro project (84%) above their foreseen level. (Don H, 1990)

 Cost-Effectiveness: In case of Zeytinburnu-˘gcılar Tramway cost effectiveness 58% higher than estimated. (Ozge, 2011).

 Contingency allowance to cover cost escalation: The contingency allowance for -rail project is ranging from 5 to 10% of estimated project costs. (Don H, 1990) Application of Organisation theories on Research

Theory Strengths (Regarding the Research Weaknesses (Regarding the Problem) Research Problem) Game Theory Mathematical derivation of recommendations • Highly restricted viewpoint regarding interdependent choices and requires scenario modelling actions,

Institutional Theory Defines coercive, normative and mimetic • Lack of understanding of non- pressures that lead to the sustainable conforming organizational behaviour of organizations behaviour • provides no explanations for incentive mechanism design

Network Theory Descriptive character that may be used to • Lack of theoretical foundation map the interplay between MoUD and Local and explanatory power of authority regarding sustainable funding mapped interplay mechanisms

Resource-Based Insights into the capabilities and resources • Lack of explanatory power View that are required to achieve competitive. regarding incentive mechanisms Theory Strengths (Regarding the Research Weaknesses (Regarding the Problem) Research Problem) Transaction Cost Concerns internal and external costs that result • Dominance of transaction Economics from the sustainable behaviour of local costs authority • No explanations for incentive mechanism design

Principal-Agent • Structure of the design of incentive • Restricted view on static Theory / Agency mechanisms regarding information MoUD and local authority Theory asymmetries and agency problems (ex-ante relationships terminate of and ex-post contract) efficiency objectives and • Derivation of recommendations for incentive opportunistic behaviour that design with respect to the suggestions of may conflict with legitimacy- agency theory driven sustainable behaviour

Strategic Choice Insights into the development of • Dominance of strategic Theory interorganizational sustainability strategies decisions • No explanations for incentive mechanism design Stakeholder Explanatory theory that maps the interplay of No explanations for incentive Theory markets and resources , explains sustainable mechanism design behaviour as a consequence of stakeholder pressures Analysis

1st Objective: To Analyze performance of metro rail project investments in terms of objective, ridership, revenue, and capital cost

Case study : Delhi,Bangalore,Mumbai ,Jaipur and Chennai

2nd Objective :To identifying the causes of metro rail forecast errors and its sources rail project-Brief Delhi MRTS objective was provide non-polluting, efficient and affordable rail based MRTS ,duly integratedForecast with other ridership modes of Transport Metro Network  YearThe first section2016 of phase2021-1 was opened2026 in 20022031 and Currently 193.20 Km (in 2016) of Metro Phaserail networkRidership is operatingRidership Ridership Ridership Phase-1 589234 696458 814698 948988 Phase-2 1505038 1835994 2146550 2472714 Phase-3 18556426 2300542 2719146 3141264 Total 3950698 4832994 5680394 6562966 Developed Network Phase Lines Name Length in Km 25.1 Phase-1 Yellow Line 44.9 (3) 49.9 Blue Line (4) 8.7 Phase-2 18.5 Violet Line 23.4 Orange Line (Airport Phase-3 22.7 Express) Source: The Metro Guys Total 193.2 Forecast versusOpex Actual versus Ridership Revenue 3000 250 Projected Projec Actual Actual Achieved 2500City ridership ted ridership ridershi 200 Ridership 2000 pax/day Year pax/day p Year 150 1500 100 (in lakh) Delhi1000 27,68,420 2016 29,10,000 2016 105.11% 500 50 Metro System PHPDT (in 2016) (in kms) Network 0 0 Delhi Forecast Outcomes 200220032004200520062007200820092010201120122013201420152016 Phase-1 133234 114337 Phase-2 18798 14439 Metro Network (in Kms) Operation cost per kms Passenger revenue per kms Phase-3 10813 11624 Estimate versus Actual project cost Operating400.00 Cost Estimate •Opex per kms is and Revenue per kms is 300.00 Rs in 24.86 Cr Rs.21.37 Cr. Cost per •Average per kms 200.00 fare Rs . 0.5 kms(In Cr)

ProjectIn Cr. Cost Actual Cost •Estimate100.00 Cost for Phase-1 (as per 2011) : Rs. 4859 Cr. per kms(In •Actual0.00 Completion cost of Phase-1 (as per 2011) : Rs.10571 (118% difference)Cr) Delhi Phase-1 Delhi Phase-2 Delhi Phase-3 rail project-Brief The objective of Forecastedthe metro system Ridership was to achieve affordable, safe andMetro environmentally Network free public transport system. The first section of phase-1 was openedHourly in 2014 and Currently 11.4 Km (in 2016) of Metro rail network is operatingYear Daily Ridership Ridership PHPDT 2008 475046 38004 17356 2011 513338 41067 18580 2021 664703 53176 23321 2031 882533 70603 30491 Developed Network Corridor Length (Km) Vesova-Andheri-Gahtkopar 15 Colaba-Mahim-Charkop 36 Mahim-Munkhurd 12.8 Charkop-Dahisar (east) 7.5 Ghatkopar-Mulund 12.4 BKC to kanjurmarg cia Airport 19.5 Andheri(east)-Dahisar(east) 18 Hutatma Chowk-Ghatkopar 21.8 Line -1 | Line -2 | Line-3 | Line -4 | Line -5 | Sewri-Prabhadevi 3.5 Line -6 | Line -7 ForecastOpex versusversus RevenueActual Ridership 5000.00 Actual Achieve 12 Projected ridershi Actual d 4000.00 10 ridership Projecte p ridershi Ridershi 8 City3000.00pax/day d Year pax/day p Year p 6 2000.00 4 kms) (in Mumbai 5,13,338 2011 2,60,000 2015 50.65% 1000.00 2 Metro System0.00 PHPDT (in 2016) 0 Mumbai 2014 Forecast 2015 Outcomes2016 Operation Cost per Kilometer(In Lakh) Revenue per Kilometer(In lakh) Phase-1 28518 14444 Metro Network Operating Cost •Annual earning cross Rs 135 Cr. still in loss (opex per kms Rs 44.41 Cr and Revenue per kms Rs 19.25 Cr) •Fuel and Electricity cost is higher compare to other metro system •Average per kms fare Rs.3.9 Project Cost •Estimate `Cost for Line-1 (as per 2011) : Rs.2356 Cr. •Actual Completion of Line-1 (as per 2011) : Rs.4151 Cr. (85% difference) Jaipur Metro rail project-Brief  The objective for metro systemForecast is to provideRidership fast, safe and haste free movement ofMetro the public Network in the city. Sectional Daily The first section of phase-1 was opened in 2015 and Currently 9.3 Km (in 2016) of Metro rail Year Corridor Load(PHPD Riders (in network is operating T) lakhs) 2014 -Badi Chaupar 11264 2.1

2021 Mansarovar-Badi Chaupar 16376 2.9

2031 Mansarovar-Badi Chaupar 27750 4.2 2014 Sitapura Industrial Area-Ambabari 12901 3.2 2021 Sitapura Industrial Area-Ambabari 18683 4.9 2031 Sitapura Industrial Area-Ambabari 22429 6.8 Developed Network Undergroun Elevated Total Description d (km) (km) (km) E-W Mansarovar to Badi 2.789 9.278 12.067 Chaupar Phase-1 Sitapura Industrial Area to 5.095 18.004 23.099 Phase -2 c Ambabari Operating Cost1400.00 Operation versus Revenue 12 •Opex per kms Rs12.21 Cr and Revenue per kms Rs 2.83 Cr Operation Projected Actual Actual •Fuel and Electricity1200.00 cost is higher compare to other cost 10 Cost per ridership Projected ridership ridership Kilometer(InAchieved •Average per kms1000.00fare Rs.1.6 City pax/day Year pax/day Year8 Lakh)Ridership Project Cost 800.00 Passenger •Estimate Cost for Phase-1A (as per 2011) : Rs.3149 Cr. 6

kms revenue per •Actual Completion600.00 cost of Phase-1A (as per 2011) : Rs.5000 Cr (59% difference) Jaipur 2,10,000 2014 25,486 2016 Kilometer(In12.14% 4 400.00 lakh) 2 Metro Metro System200.00 PHPDT (in 2016 ) Network(in 0.00 0 kms) Jaipur Forecast Outcomes 2015 2016 Phase-1 13125 1850 Estimate versus Actual project cost 6000 5000 4000 Estimated 3000 Cost at 2000 April 2011 1000 (in Cr.) 0 2012-13 2013-14 2014-15 2015-16 2016-17 Comparison of five metro rail performance Forecast versus Actual ridership 3,500,000 250 Operationa 3,000,000 l 200 Network(in 2,500,000 Kms) 150 2,000,000 Projected 1,500,000 100 (in Kms) ridership pax/day

Ridership 1,000,000 50 500,000 Actual - 0 ridership Delhi Bangalore Jaipur Mumbai Chennai pax/day

Passenger Per km 25,000 20,000 15,000 10,000 5,000 - Delhi Bangalore Mumbai Jaipur Chennai Comparison of five metro rail performance Ridership Comparison No. of Average Quartiles Standard Project (Country) projects difference deviation (N) (25/50/75%) (%) India (2016) 5 -49/-88/-93 -58.56 39.34 Europe (2007) 6 -29/-4/45 -20.7 77.30 North America (2007) 10 -69/-63/-53 -60.0 17.0 Metro rail Operation Cost 7000.00 350.00 6000.00 300.00 5000.00 250.00 4000.00 200.00 3000.00 150.00 (in lakh) 2000.00 100.00 (in lakh) 1000.00 50.00 0.00 0.00 DMRC BMRCL JMRCL CMRL MMRC Operational Cost (in lakh) Employ expence (in lakh) Other Expence (in lakh) Fuel & Electricity cost (in lakh) Facilities Managment Services (in lakh) Comparison of five metro rail performance 450.00 140 400.00 120 350.00 100 300.00 250.00 80 200.00 60 150.00 (inKms) 40 100.00 50.00 20 0.00 0 Delhi Delhi Delhi Bangalore Mumbai Chennai Jaipur Phase-1 Phase-2 Phase-3 Phase-1 Network (in Kms) Estimate Cost per Kilometer(In Cr) Actual Cost Per Kilometer (In Cr)

No. of projects Quartiles Average Standard Project (Country) (N) (25/50/75%) difference (%) deviation India (2016) 5 33/51/70 30.21 25.18 Europe (2008) 6 39/45/57 43.30 21.30 North America (2008) 10 33/42/54 35.80 30.40 3rd Objective: Test the hypothesis through the application of the Principal-agent problem to Metro rail funding process Principal –Agent problem Model Why Principal –agent model ? Structure information asymmetries and principal-agent problem that inherent the inter relationship between the state and centralPrincipal government–agent problem regarding the metro rail project selection. It applied when the private information of agent creates a problem for the Principal.

What is Principal–agent problem ? Conflict objective Adverse selection Moral hazard Principal-agent Model-A case of Delhi Metro

Assurance or MoUD DDA Principal Uncertainty Agent Honesty CONFLICT ADVERSE MORAL OBJECTIVE SELECTION HAZARD Lack of DPR report by DDA proposed coordination RITES (data not Dwaraka sector-21 Delhi between the DMRC cross check by DDA) corridor (DMRC Metro rail and DDA regarding Forecast and Actual refuse, Traffic the metro route result of metro is study result not selection biased “ The fact that supported for Master plan was transport modelling MRTS) not referred by for ridership was not Forecast DMRC (In 1st phase) carried out ridership changed Tassel for Metro accurately by 3 times route alignment RITES” Two metro The statement of corridor was ridership projection is closed (ridership very high in Delhi result was not Hidden agenda efficient) Manifesto of P liti i Principal-agent Model-A case of Mumbai Metro Funding Problem (VGF controversy) MoUD MMRDA Principal Agent Hidden Agenda, Over estimation of Fare and Cost CONFLICT ADVERSE MORAL HAZARD OBJECTIVE SELECTION Weightage Multiple Agency Legal Controversy Metro route had produced Traffic base of Metro act and Mumbai selection data (All private act Metro rail Absence of Consults) Diffused in Fare Social concern Overlapping decision process in Metro route Information Argument raised by selection process Traffic data was not the private company cross check by (MMOPL) that, the MMRDA project completion Master Plan was cost reached up to not preferred in 4321 Cr.whereas the Phase-1 original cost estimated in DPR was 2356 Cr. Absence of transparency in Project Cost Principal-agent Model-A case of Jaipur Metro Controversy for MoUD Funding JDA Principal Agent Political Pressure, Refused for JV model CONFLICT ADVERSE SELECTION OBJECTIVE Modern Technology Absence of Alternative for Traffic solution Transport Plan (Prepaid by Wilbur rather than adopting smith Associates) No coordination between the Jaipur hierarchy of Metro rail Transport mode as JMRCL and JDA regarding the per requirement Metro route selection Political promise No Master Plan and JDA and Biased for Mass involved in MRTS route selection transit system process Client Based Two different approaches for Consults, e.g Inflated Traffic Management by JDA and Ridership and less JMRCL (Asymmetric Information) capital investment (e.g during the construction of Metro board phase-1, There are historical chairmanship conflict monuments were found while drillings. This study was not capture in DPR) Overview of Principal agent problem

Lack of power Absence of Different Objective Committee Hidden Information Fare change (client based consults)

Lack of Absence of mass Coordination bwt transit alternative Local authority & Leapfrog hierarchy SPV Manifesto of politician Absence of Land use transport integration Cross check result Lack of governance structure Conflict in power Lack of Capacity building Lack of initiative to Absence of committee explore other mode to review pre and post of funding performance More depending on JV model Conclusion

Metro Rail

Transportation Plan

Principal –Agent Problem

Next Waiting line for Metro Rail Project Suggestion

Preparation of Design a contract in such way that the objective of principal and agents are Traffic and while designing the funding agreement. CMP study incorporated

scheme should be design for the truthful information. It Identification Revelation of principal; of Mass transit may penalty or rewards rates, as per the revelation of Information .The rewards (penalty) would be decided based on the performance.(e.g. operation Alternative performance) NUTP review committee should formulate certain indicators to evaluate mass Mass transit analysis transit option for different size of cities.

Preparation Special committee formulate under the power of NUTP, who can analyze all of DPR & report produced during the mass project selection. (Feasibility, Technical, Social Review & Economic, and EIA report). Increased the capacity building of staff in NUTP committee. Involved different field of Expert in NUTP committee.  The MoUD (principal) need to provide minimum level of incentives in Corridor terms of funds .Due to minimum incentive State(agent) are willing to Selection participated in the contract game mechanisms. The minimum incentive should be worked based on the objective functions of State (agents)  If the projects are developed as state sector project MoUD may contribute by way of grant equivalent ,as VGF in a PPP project  Projects which are viable with admissible VGF without providing real estate rights to the concessionaire may be taken under PPP.  Failure in awarding bid should result in project being taken in government sector.

Establishment  If central projects being developed under government sector (due to of SPV requisite autonomy in decision making) it provides, 50:50 JV .  During shareholder agreement, liability of GoI would be limited to equity and sub-ordinate debt agreed at the time of formation of JV.  JV may provide within the ambit of transparency bodies and would be audited by Comptroller and Auditor General  Metro board chairmanship should be under Central Government Thank You