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The Times of IndiaTitle : A PROJECT THAT WAS NEVER MEANT TO BE?Author : Kingshuk NagLocation :Article Date : 09/21/2014

How Hyderabad's Metro Rail Project Is Now Teetering On The BrinkWhen a metro rail project doubles up as a real estate project, it is bound to collapse. Ramalinga Raju of Satyam learnt it the hard way and now Larsen & Toubro(L&T) is realizing this ground reality .In what is widely seen as preparing the ground for walking out of the project, L&T Metro Rail Hyderabad, which is theconcessionaire for the project, last fortnight wrote a letter blaming the division of Andhra Pradesh for affecting the “economic and political outlook of Hyderabad“and “thereby causing material adverse impact on the financial viability of the project“.

Clearly indicating that the project is viable only through exploitation of realty, the letter candidly stated: “the potential of returns from real estate in Hyderabad willget reduced due to the bifurcation of Andhra Pradesh. The position of Hyderabad in drawing investment from the central government and private sector has gotaltered.“

Presently, the cost of the metro rail project is officially stated as Rs 16,375 crore. At the time of the grant of the project in July 2010 it was Rs 12,134 crore. Theconcession agreement was signed in 2011 and the estimated cost was revised to Rs 14,132 crore. With the passage of time, the cost of the project has escalated. L&Tsays the cost goes up by Rs 2 crore with every day's delay. It is averred that L&T though it did not factor in the bifurcation of AP knew from the very beginningthat the project would collapse unless real estate values escalated, and they were taking a gamble entering into a contract to implement the project. However, it tooka calculated risk especially as the award of the contract would give them `an experience'. In the lucrative world of metro contracts, experience in landing a project isof great value this because often companies cannot bid for new metro projects without having any previous experience in the field.

In fact, Hyderabad's metro rail project was unviable from the start and those in the know of things believe that Ramalinga Raju, in his land lust, bid for the projectonly as a real estate venture. Here's how: along with the metro rail came a huge 269 acre land parcel in Hyderabad that could be commercially exploited by theproject developer. The land was to be given to whoever won the bid because a highly capital intensive project like the metro rail would be economically unviable onits own. In fact, the central government would give a huge amount as, what is called, `viability grant funding' (VGF).

When the Hyderabad metro rail project first went under the hammer in 2007, bidder Reliance Energy sought Rs 2,811 crore as VGF from the government andanother bidder, Essar, sought Rs 3,100 crore. The GVK group that had pre-qualified to bid (bids are first technically evaluated and if found okay such bidders areallowed to put in a financial bid) refused to put a financial bid.They realized that there was no way that the project would be viable. But two local companies, in theirhurry to land the project, instead of seeking VGF actually promised to pay a license fee to the government! A V Raju of Nagarjuna group promised to pay Rs 152crore and Ramalinga Raju, through a consortium led by his Maytas, promised to pay a staggering amount of Rs 1,350 crore. Raju, obviously recklessly, calculatedthat the commercial exploitation of 269 acres of land in prime areas like Punjagutta and Miyapur would help him generate enough moolah not only to pay a licensefee to the government but also to fund the capital intensive project. Thus Maytas was granted the project on August 1, 2008 and from that day Ramalinga Raju beganhis journey to doomsday . As is known, Raju went to jail after Satyam collapsed.

A few abortive attempts to resurrect Maytas later, the metro project went for a phut and was scrapped in July 2009. At this point, the powers that be should havereflected deeply on whether the metro rail project was needed for Hyderabad at all. If it was, what should be the routes; would the routes be the same as granted tothe Raju project or should the routes be recalibrated. This was especially as the projectthough promising rapid transit for passengers had raised a lot of hacklesbecause, as envisaged, it was destroying a lot of city heritage and prominent landmarks that would alter the character of the city . Many questioned the need for ametro arguing that alternate transport systems like MMTS provided a better solution. Others thought that a metro rail girdling the city was a better option.

But Indian politicians are notorious for their shortsightedness and three netas: then Union urban development minister, Jaipal Reddy, and successive chief ministers,K Rosaiah and N Kiran Kumar Reddy, failed to exercise discretion and read the signals, and, once again, promoted the project as it was. Thus, a golden chance togive Hyderabad an effective hassle-free metro rail was lost. The very same project that had collapsed was put up for bidding again, without any changes made to theroutes.When new bids were opened in July 2010, L&T came out tops and was awarded the project. The estimated cost of the project was Rs 12,134 crore. But in2011, by the time the `concession agreement' was signed, the cost had been revised to Rs 14,232 crore. L&T was granted the project with a VGF from thegovernment of Rs 1,458 crore. L&T, in turn, also raised Rs 11,478 crore as term loan from the market to finance the project and the promoters brought in equity ofRs 3,439 crore. The project was to begin rolling out from March 21, 2015 with an 8-km stretch to be opened. The project was planned to be completed on July 5,2017. Work started on July 20, 2012. L&T was allotted the same 269 acres of land for commercial exploitation as was given to Maytas.

It is not an easy task for a complex project like metro rail to be implemented, not only because of complex engineering but also due to land acquisition issues.Thosewho are to lose land (especially traders in busy established market places and residents who have lived in the area for ages) are never happy to give up their land,even if it is for a public cause or comes with a promise of hefty compensation. Naturally, there were a lot of hitches in the case of the Hyderabad metro rail too andthe delays raised the cost of the project.

With growing public protests, the state government has been chary of giving right of way (ROW) to the project everywhere.ROW implies that government agenciesclear land (and traffic) around the project corridor to enable smooth implementation.

Concerned about a lack of adequate ROW, L&T authorities started writing to the government from the time of Kiran Kumar Reddy in February 2014.Seven lettershave been written till now the last one being last fortnight. The tone of L&T is becoming more strident with each letter and now things seem to have reached a pointof snapping.

On its part, the KCR government has very little choice: besieged with appeals from activists from the time that TRS was agitating for a new state, the governmenthas to act now.The major complaints are in Corridor-II that runs through the older parts of the city including Sultan Bazar. K Chandrasekhar Rao has alreadycommitted in the Telangana assembly that he will seek realignment in this corridor. However, this will lead to a further escalation in the cost of the project. BothKCR and L&T are, clearly, caught in a devil and the deep blue sea situation.

In fact, KCR finds himself in an unenviable situation: to up proverbial last straw for the project. Of the 259 acres of real estate to be given to L&T, the companyproposes to set up three malls at Erramanzil, Punjagutta and Madhapur developing 0.5 million square feet of commercial space. In all, L&T has to develop 18.5million square feet of commercial space. But this is near impossible considering that's the total commercial space developed in the city in the last decade.

So what is the way out? That's the million dollar question. Any answers?

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