It’s a curious corporate case of profit and loss. It’s a company that earns huge amounts of cash, but it’s legally a loss-making firm. It’s hugely efficient, which enables it to expand furiously while grabbing lucrative and profitable projects. Thanks to this expansion and growth, it finds itself in the red.

This is the peculiar case of Delhi Metro Rail Corporation (DMRC),  which is in the middle of a furious political fight between the federal and state governments in India.

The story of public transport in India is largely one of monumental failures, but the Delhi Metro stands out as a key exception. But a recent increase in fares by the federal government sparked a spat between Delhi Chief Minister Arvind Kejriwal, founder of the Aam Aadmi Party, and the federal minister of state for urban housing, Hardeep Singh Puri, who is from the rival Bharatiya Janta Party (BJP). At the heart of the battle lies an old debate between profitability and the need for an affordable public transport system.

With a strict reading of the balance sheet, DMRC can prove that it incurs losses, and this is why it increased its fares twice, and by huge percentages, this year. Look between the numbers, however, and you will find that DMRC is one of the highest-earning companies in India. More important, given the manner in which it is hugely subsidized, it should reduce fares, not increase them.

How is this possible? How can a company be a cash generator and a loss-maker at the same time? How can it expand frenetically and still be in the red?

Notional losses

In its 2016-17 fiscal year (ended March 31), the company incurred a “total comprehensive loss” of nearly 2.5 billion rupees (US$38.5 million). That’s huge as a number, but not as grave when you consider that the figure is less than 0.5% of its annual revenues. But then there is another aspect to its profit and loss account – its cash profits.

But there was only one entry that contributed to the transformation from cash profits to net losses. This was “depreciation and  amortization” expense. If this is taken out of the calculation, DMRC earned a profit of almost 13 billion rupees. Had the depreciation not been there, it would have reported a huge profit.

There are two aspects to depreciation. It’s not an expense; it’s not paid out to anyone. It’s only a balance-sheet entry to denote the wear-and-tear on plant and machinery, and other assets of a company. It’s legitimate to the extent that equipment degenerates, and has to be written off completely over a period of time. However, the fact remains that without depreciation, DMRC makes huge profits. In terms of cash that is earned versus cash that has to be paid, it is in the black. This is clearly evident from the cash-flow statement of the company.

In 2016-17, the cash it generated from “operating activities” was a whopping 60 billion rupees. From its “financing activities”, the net cash flow for the year was another almost 60 billion rupees. It was only from the “investing activities”, which are amounts allocated for growth and expansion, that there was a net cash outflow, as should be expected, of  more than 80 billion rupees.

In Delhi Metro’s case, depreciation is so high because of its frenetic expansion, turning a cash profit into a loss on paper. Ironically, efficiency, expansion, and ability to complete most projects on schedule actually drove up its depreciation costs.

Take the worth of its assets in the form of “property, plant and equipment”, which is more than 320 billion rupees. “Capital work-in-progress” comprised another 240 billion rupees. These huge investments due to rapid expansion drive up the depreciation costs each year. So despite the cash DMRC generates, it shows a loss in the balance sheet. Ironically, DMRC’s efficiency, while winning contracts for projects outside Delhi, is also adding to its “losses” on paper, for the same reasons.

Its annual earnings from “external projects” were more than 24.5 billion rupees, or 40% higher. For example, it earned more than 10 billion rupees from Kochi Metro Rail and the government of Kerala state, and more than 4.5 billion rupees from Noida Metro Rail Corporation in the neighboring state of Uttar Pradesh. In the future, DMRC is likely to earn huge amounts from Jaipur Metro Rail Corporation and Amravati Metro Rail.

While new projects boosted DMRC’s revenues, the latter got advantages in terms of other sops and benefits. These were in the form of equity inflows, grants, and low-interest loans. For example, the state and central governments have regularly sunk in huge amounts as equity capital each year. In 2015-16, the equity inflow exceeded 20 billion rupees, which came down to 6 billion rupees in the next year. As of March 31, 2017, the total equity base of DMRC was a huge 189 billion rupees. Then there are the “monetary grants” from the various official agencies and governments, which totaled 84 billion rupees.

Not to forget that DMRC gets its loans at ridiculously low rates – from 0-1.4%. The highest interest it has paid so far, as per its 2016-17 annual report, is 2.3%. This explains why the company’s interest outflow is only 2.4 billion rupees, or less than 0.5% of the annual turnover.

Given its cash profits, which turn into notional losses only because of huge depreciation, and the grants and cheap loans, DMRC should be subsidizing its passengers, rather than raising its fares on a regular basis. One of the biggest successes of “public transport” in India should work in “public interest”, rather than attempting to become a profitable entity, which it is anyway.