“Family Silver” at risk on Hyderabad metro project

At last a top official has spoken out about a possible land scam, blowing a whistle (almost) before it allegedly happens. The Economic Times reported on September 21 that E. Sreedharan, md of the Delhi Metro , has alleged that there is a possible land scam on the proposed Hyderabad Metro railway project. He also expressed concern about the slow progress of the Mumbai metro.

Both projects are build-operate-transfer (BOT) partnerships with private sector companies. In a letter earlier this month to Montek Singh Ahluwalia, deputy chairman of Planning Commission, Mr Sreedharan (seen below right) cautions against using the BOT deals for building metro railways.

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On a BOT project, the developer bids for and obtains land for the project, which he then builds and operates, usually for about 30-35 years, and then transfers ownership back to the government.

Update September 23 2008: The Andhra Pradesh State government has refuted Mr Sreedharan’s allegations about the Hyderabad Metro. It has demanded an apology and threatened legal action. But local community groups and some politicians have supported Mr Sreedharan and repeated the charges. Mr Sreedharan’s Delhi Metro has been a consultant on the project but that ended on Sept 23.

The problem – illustrated by Mr Sreedharan’s allegations – is that developers frequently ask for far more land than is needed for a project so that they can make massive profits out of land development and speculation, cashing in as the project pushes up surrounding land values. That was clearly why so many companies were interested in developing Delhi and Mumbai airports, and why so many rushed last year into Special Economic Zones (SEZs).

The Economic Times quoted Mr Sreedharan’s letter:

“The Hyderabad Metro project is being cited as a successful example of BOT approach. Here, I would like to caution that the example of Hyderabad Metro is quite misleading as the negative viability gap funding has resulted solely on account of 296 acres of prime land being made available to the BOT operator for commercial exploitation.

“This is like selling family silver. Apart from the fact that this might lead to a big political scandal sometime later, it is apparent that the BOT operator has a hidden agenda which appears to be to extend the metro network to a large tract of his private land holdings so as to reap a windfall profit of four to five times the land price”.

He also criticised the Mumbai Metro for “moving at an extremely slow pace” – a hint that the developer is not primarily interested in building a railway:

“World-wide the experience has been that no metro project has succeeded so far on BOT basis. …Our sole example of Mumbai Metro-I has not given us the required confidence in the BOT route”.

The Mumbai Metro is a joint venture between Reliance Infrastructure, controlled by Anil Ambani, and the state-owned Mumbai Metropolitan Regional Development Authority (MMRDA).

The Hyderabad project has been won by a consortium led by Maytas Infrastructure of Hyderabad, with the state government only having an 11% stake. The formal concession agreement was signed last Friday . It seems to have been a controversial decision, with Mytas and its partners defeating foreign companies that have vast metro experience.

Update December 26, 2008:  Maytas is controlled by the Raju family, which also controls Satyam, a leading software company. The Rajus  have run into corporate governance trouble for trying to get Satyam to take over Maytas (Satyam spelt backwards).

Update July 8, 2009:  Maytas Metro contract cancelled following fraud scandal collapse of Satyam in January 2009 .

Mr Sreedharan speaks with authority, having built and run the fast-expanding Delhi Metro on time and within budget. That is a wholly government-controlled project, and it shows what governments can achieve if they hire efficient and non-corrupt top officials.

Let’s hope Mr Alhuwalia, who has special responsibility for infrastructure development, listens to him, and looks into projects where more “family silver” may be lost.