Financing Mass Transit Projects Through All Beneficiaries, And Not Just Users

For some time now, there has been an ongoing tussle between the Government of Delhi and the National Ministry of Housing and Urban Affairs about increasing fares for the Delhi metro. Under the existing law, a fare fixation committee reviews the fares for the Delhi metro and periodically suggest revisions. This committee is an apolitical body, includes representatives from the Ministry of Housing and Urban Affairs and the Delhi government and is, typically, chaired by a retired judge. It considers the operating costs, possible revenues at different fare levels, and then makes recommendations on fares. In October this year, the committee proposed a fare increase.

The Government of Delhi objected to this increase and were unwilling to allow its implementation. The Minister for Housing and Urban Affairs, rightfully, asked the Delhi Government to be prepared to pay an amount of INR 3600 crore to the Delhi metro if they did not want the fares to be hiked. The fare increase has since been implemented, but the Delhi government has now stated that there is a significant drop in ridership due to the fare increase.

This dispute warrants a closer look at how the operating costs of any metro system need to be recovered. Globally, there are very few metro systems that recover their operating costs entirely from fare revenues. While Hong Kong, Singapore and London recover the full operating costs, most others don’t. Paris recovers only around 30 percent, Chicago 42 percent, Boston 40 percent, Madrid 41 percent, Beijing 59 percent, and Vancouver 28 percent. A look at the Delhi metro’s annual accounts for 2016-17 shows that fare revenues were around 60 percent of the operating costs. This means that metro rail systems need other forms of revenue to break even.

Who Benefits from a City’s Metro System?

There are two very different issues that are getting mixed up in the current war of words. On the one hand, there is a cost incurred in operating the metro system and the operator needs to be compensated this amount. On the other hand, there is a fare that a user needs to pay.

The key question is this: are the users of the metro system its only beneficiaries, and should the cost of operating the system be recovered solely from them? If fares were the primary source of revenue to pay for the operation of the metro system, it would imply that users are the only beneficiaries of the metro system. However, this is not true. There are several others who benefit from the system, even if they don’t use it, and therefore, should also pay for it.

For example, people who use cars benefit from reduced congestion on the roads; people who own property near metro system benefit from increased property values; and employers benefit from having employees with easy access to work. Unfortunately, under the present arrangement these beneficiaries do not contribute to the operating cost of the metro.

It needs to be recognized that fares cannot be fixed in such a manner as to pay for the cost of operations. An exercise of fixing fares needs to consider many other factors including the ability to pay, benefits accrued to non-users and the contributions they need to make, and the benefits accrued to society by way of decreased vehicular congestion, cleaner air, and savings in the use of non-renewable fuels.

Several cities around the world have adopted a system whereby revenue from non-user beneficiaries contribute to the cost of metro operations. High fuel taxes, a tax on the wage bill, land value capture are some examples of additional revenues from non-user beneficiaries that can contribute to the operation of a metro.

Cost Sharing Via Positive Policy Action

The operating cost is a technical issue which is determined by factors like the cost of energy, the fuel efficiency of the engine, and staff salaries. The role of the fare fixation committee needs to be redefined such that they are able to determine fair operating costs, after considering operating efficiencies and input costs. Thereafter, public policy should determine how to allocate these costs to different beneficiaries.

It is for this reason that the Minister of Housing and Urban Affairs was absolutely right in advising the Government of Delhi that they need to pay INR 3600 crore, if they do not want to implement the fare increase. In effect, this action would force them to think about who else should contribute to the costs.

Fares are a public policy issue which is to be determined based on political considerations of who should pay for the metro. It would be perfectly legitimate to say that all beneficiaries, and not just users, should pay for the metro. Public policy would determine who pays what share of the costs, provided the operator is reimbursed the full cost of operations.