The metro rail system has arrived after so much delay for Chennai, along with the demand that as the fares are high, especially when compared to other metros, there should be a reduction. Essentially, metro rail systems are very costly to build, maintain and operate as the transport infrastructure is developed only after the urban space is in place. Still, metro rail systems are constructed as it provides fast, comfortable, safe, oil-independent and least-polluting travel option for urban commuters. When it was planned, Chennai metro was expected to cost Rs 14,600 crore and it is now expected that it may cost Rs 6,000 crores more by the time the project is completed. For a 45-km stretch, it could cost about Rs 460 crores per km. A key advantage of having a metro rail is that the service speed would be scaled up with faster trains, unlike travel by road.
The overall success of metro rail system comes from multiple contradicting successes. It also depends on its financial success and durability. The equity constituted 41 per cent, where the state and union governments contributed 21 per cent and 20 per cent respectively and the remaining 59 per cent is loan provided by the Japan International Corporation Agency (JICA). To repay the interest and loan principal and to receive a reasonable and moderate rate of return, the fare may be hiked as high as Rs 10 per km. The economical success may be achieved if all the negative externalities of all the transport modes are fully incorporated in the cost of travel. India still has to go a long way in achieving that and till then, the financial success is virtually impossible.
Next comes the durability success. Here, it is assumed that the equity on the part of government expects zero return on the investment. But, the operating expenses, interest payment and principal repayment have to be recovered from operating revenues. Failure to recover operating expenses and loan repayment by operating revenues would result in cash loss, which has to be compensated by the government if the trains have to operate without disruption, possibly making the project a white elephant. To avoid economic distortion, commuters have to pay for availing of the services, at least to recover the cash loss. Otherwise, it is the tax payers’ money that would go into not only the equity provided by the government but also the operating subsidy, resulting in severe distortion.
In the absence of continued subsidy from the governments in a metro project that failed to achieve durability success, the system may have to shut down at some point. The policy of introducing metro rail project is to create a positive economic, social, developmental and environmental impact. The project achieves policy success if it could serve the larger interests of the people in that area. For this, it is imperative to wean commuters away from road and push them into metro as much as possible. However, the shift to metro from road not only depends on the travel fare, time and discomfort and inconvenience associated with metro but also on travel cost, time and penalty in the form of discomfort and inconvenience of competing modes.
Given the fact that financial failure is a fait accompli in a metro rail project, fares have to be fixed in such a way that they strike a balance between durability and policy successes. The fare fixation for metro has been tricky all over the world because of its two sides. The first one is the durability success where there is no cash loss. The second is to achieve policy success based on affordability and the willingness to pay for metro travel by the commuters in relation with other modes. These two have to be balanced to obtain maximum benefits. The equilibrium fare that would achieve durability success and policy success would evolve only over a period of time with experimentation with fare fixation like promotional fares, differential fares between peak and lean hours and increase or decrease in fares.
The Chennai Metro Rail Corporation has enough expertise to understand the economics behind fare fixation and behavioural aspects of commuters. However, they need time to experiment with it over a period of time to arrive at the price elasticity of the city commuters and then optimise the fare. It is not fair to compare the Chennai metro rail fares to Delhi metro’s as the latter have not been revised since 2009. When Delhi metro fares go for a revision, they will be on par with or even higher than that of Chennai’s. Any interference in the fare policy, by the government or political parties, would mean failure to achieve balance on the tightrope walk.
ramakrishnan@iimahd.ernet.in