Did AAP govt pay surge pricing for more buses?

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Updated: April 27, 2016 8:32:32 AM

Those paying exorbitant surge prices for buses for 13 days shouldn’t object to occasional surge pricing for cabs

cab-reu-LAccording to traffic experts, pollution is down minimally (if at all) and a decline in cars on the road is more than compensated by the extra buses, and two-wheelers. (Reuters)

Like old Indian socialism, Kejriwal’s odd-even policy is meant to achieve several objectives by one single instrument. By implementing the odd-even policy, Kejriwal hopes to reduce congestion by keeping 50 % of vehicles off the road, reduce pollution by an equivalent 50 %, achieve social justice by exempting women from the hardships of odd-even, appeal to aam aadmi by exempting two wheelers, and even more by banning surge pricing and thus, protecting the inefficient, expensive (but traditional!) kaali-peeli taxicabs.

The first pre-lesson of policy making is that it is impossible for one instrument to achieve several objectives. (Jan Tinbergen got a Nobel Prize in economics for pointing this out). And the results point to the odd-even policy being a monumental failure, at least as far as reducing congestion or pollution is concerned. According to traffic experts, pollution is down minimally (if at all) and a decline in cars on the road is more than compensated by the extra buses, and two-wheelers. So if you have not seen any improvement this time around, you are not alone.

As has been pointed out by all, a necessary part of the success of the odd-even scheme is that there be enough public transport to compensate for the theoretical 50% of cars which are off the roads. There are three aspects to the public transport substitution—taxis and three-wheelers, buses, and metro. Metro is a long-run solution and does not apply with that great force to the short run. So one is pleased that Kejriwal plans to augment the metro-force, but that is not an achievement (or failure in case the metro project goes the odd-even way) by which the AAP experiment should be judged. But that is many years away, and certainly much more than the proverbial one week in politics.

For the immediate, it is worth examining what the AAP has done vis-a-vis bus transport. What should have been the number one priority has sadly not been implemented (although greatly talked about) by AAP. In the past three years, the low floor buses have remained stagnant at 3,781 buses, while the standard floor buses have risen to 680—however, it is unclear how much of this rise can be contributed to AAP.

If you listen to AAP commentators, they don’t lack in noble intentions (or even nobility, at least in terms of thought). The Delhi Budget presented on March 28, 2016 contains the following plan: (para 58):

“DTC has a fleet of 4,461 buses which includes 3,781 low floor buses and 680 standard floor buses. The Government will procure 1,000 new… Non-AC buses during 2016-17. At present, 1,490 cluster buses are operational in Delhi and it is proposed to add 1,000 new buses under cluster scheme in 2016-17. Our Government would also introduce 1,000 buses in the premium category through a purely market driven model to encourage the financially well-off to use public transport. To accommodate these new buses, bus depots will be developed at Rewla Khanpur, Dichaun Kalan, Karkari Nahar, Bawana Sector-1 and Dwarka Sector-22. I propose a plan outlay of

R325 crore for purchase of buses”.

Keeping this Budget in mind, the government did the following in preparation for the odd-even scheme implemented January 1-15:

“The government initially announced it would augment DTC’s fleet of 4,461 buses by enlisting 6,000 private buses during the implementation of the odd-even plan. Later, the number of private buses was pruned to 3,000. The response from private bus operators, however, was lukewarm; about 1,200 buses registered with DTC for the 15-day run. The government also asked schools to give their buses. Some did, many did not.” (Hardlook: How DTC Kept the Wheels Turning, Indian Express, January 18)

How much did the AAP government pay for the rental of these 1,200 buses? According to a report in the Hindustan Times, January 21, quoting a senior Delhi government official, “The Delhi Transport Corporation hired 1,200 extra buses. The agreement was to pay Rs 42 per km and the corporation was supposed to pay them for at least 225 km a day. So, for 13 days and 1,200 buses, at least

R14 crore will be paid to the private operators”.

While the Delhi Budget is on the Delhi government website, and the odd-even is the most talked about subject today, even more than sedition, Kanhaiya and Uttarakhand put together, it is strange that the AAP government has not chosen to put the payments to temporary bus operators public. So assuming the newspaper reports (cited above) and the Delhi Budget is correct, these are the facts we know:

The AAP government plans to spend Rs 325 crore for 3,000 buses ranging in quality from non-AC to premium (plus bus depots). That comes to an average price of Rs 10.8 lakh per new bus. The average rental paid by the Delhi government per bus was Rs 1.16 lakh for 13 days which turns out to be an average annual rental rate of Rs 33 lakh or three times the cost of a new bus for one year i.e. the ratio of one-year rental to cost is 3.05. Did AAP pay a normal rental price for the buses, or did AAP indulge in paying considerably more than surge prices to the (private) bus operators?

Maybe the rental market in India is very inefficient. Let us find out the average rent that you and I (in our private capacity and not trying to do good for the city or country) pay for a car in Delhi. For one 8 hour day, a sedan, which costs about Rs 7.5 lakh, rents for Rs 1,200, or Rs 36,000 for a month or Rs 4.38 lakh a year. The ratio of car rental to price is 0.57; the ratio of AAP bus rental to price is 3.05. In other words, for the same “good”, the AAP government has paid (3.05/.57) 5.4 times more than what the “market” would warrant.

Now, are the car rental and bus rental markets comparable? Of course, the entire theory of free market is based on the fact that profit margins equalize, over a period of time. Otherwise, everyone would flock towards the higher margin bus rental market! An objection to this could be that the bus rental market does not have much demand, which seems pretty unlikely for India. Assuming the markets are comparable, why did the AAP government pay 5.4 times more than the market rate? Perhaps there is an element of surge pricing involved here.

After the odd-even announcement, the bus operators would know that there was excess demand and therefore, would automatically include a surge element in their pricing. However, no one else (besides AAP) knew that an odd-even policy would be introduced. Plus, the Delhi government was a monopoly buyer in this situation. If AAP wanted to, it could have extracted a discount for the bulk order. We don’t know the details of the negotiations, but the public has a right to know. What we do know is that AAP paid 5.4 times the “market” value.

I could be wrong—in reality, perhaps AAP paid a lot less to the bus operators than the quotes from a senior Delhi government official suggest. When I mentioned this calculation on NDTV’s Left Right and Centre programme, AAP spokesperson Raghav Chadha confidently stated that “I had cooked up these numbers”. I will let that accusation pass since it seems to be a habit of politicians who either do not know the facts, or find them inconvenient. But the AAP government has to first set all speculation to rest about the surge pricing it paid, before banning “surge” pricing by Uber and Ola. The nation awaits this clarification from AAP.


The author is contributing editor, The Financial Express, and senior India analyst, The Observatory Group, a New York based macro policy advisory group. Twitter: @surjitbhalla

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