Saturday, June 02, 2007

The Cost of Not Doing IT.....!

First of all, thanks for all your continued support, we have crossed 4000 views. I guess it may sound silly that I count down all these as if they represented a steadily climbing bank balance, but in a world where no one has time to spare, this lil' statistic means a lot to me!

On the subject of numbers, I had been thinking of an interesting tactic often used in consulting engagement and how it could be applied to the actions of Governments. A common recommendation that consultants make to client top managements is that "you should do X, and thus gain Y million bucks". Unfortunately, often this is met with "but what if it costs more than Y to do it, what if it takes too long....what if the Sun rises in the West? etcetera etcetera. A quick and wily way of flipping this over is to say, " if you didn't do X, you would loose Y million bucks". Suddenly one sees CEOs wondering, CFOs reaching for their bean counters and COOs breaking into a cold sweat. What will the shareholders think if they got to know we wasted an opportunity to earn more dividends for them? Maybe they won't take it too kindly at the next Annual General body Meeting or even send the stock prices plummeting. Imagine all those millions in e-sops vanishing.....a scary thought indeed, and quite effective at prodding the C-suite (as the CXOs are collectively called) in to action. Well, atleast if it is a professionally run firm, that is. Promoter owned firms (a.k.a. "Lala companies") may care less or more. Pretty effective, I would say, for a slight rewording at the end of endless pages of painstaking analysis and high-quality presentation (that's what a consultant euphemistically refers to his work as). Well CEOs concerned about the ever present and vigilant shareholder are something, the world of mantris and babus is quite another, but maybe this tactic will work there as well.

Let's take the Trivandrum City Road Improvement Project (TCRIP), synonymous with Punj Lloyd lately and the subject of much delay and debate. The good news is that GoK has decided to go ahead with Punj Lloyd to finish the work, the bad news is nearly two full years have been wasted due to delays in land acquisition.

Now, we may dismiss this delay as one not affecting our daily lives - so what if we have a couple of flyovers less or narrow roads? But in our mind of minds, we know that delay to TCRIP means more congestion, more traffic jams and more fuel burnt. Well and good. But do we know what this means in money terms? Here is a brief analysis, using sample numbers to illustrate that.

Let's us assume Trivandrum City has 400,000 vehicles at any given point of time (RTO statistics point to a figure close to this). On average , they may travel 8,000 kilometres a year on city roads. (Some travel more, some less)

So that is a total of 400,000 X 8,000 = 32, 000 lakh kilometres = 320 Crore kilometres

Now, assume a fuel efficiency of 34 Kms/L (light vehicles average more, heavier ones less - trucks & buses - 7.5% of total @ 3.5 Kmpl; cars& LCVs - 22.5% of total @ 10 Kmpl; 2 wheelers - 70% of total @ 45 Kmpl)

That means, every year, approximately - 320/34 = 9.41 Crore Litres of fuel are used by vehicles in the city every year.

If 60% of fuel used is petrol and 40% diesel (CNG/LPG is yet to make a major appearance), the weighted average cost of a litre of fuel would be Rs 41.6/litre

So the total cost of fuel used in the city is 41.6 X 9.41 = Rs 391 Crores!

Yeap, the city's fuel bill is about 400 Crores and climbing. Now, if the range of improvements promised by TCRIP - wider, better roads, grade separators, automatic signalling, better lighting and so on, can save us 5-10% of that bill (that is, you take 5 minutes less to commute each day), this could save a whopping Rs 20-40 Crores a year! And this rises year on year as more vehicles hit the road (10-15% more each year) and more fuel is guzzled. And not to mention the intangible and tangible (damages, repairs, insurance etc) of the countless accidents that better roads can prevent.

This is the cost of the delay in the project. Makes more sense and lends more urgency? Hope GoK sees it the same way.

Another project that is seldom in the news and often out of our sights and minds is the Phases II and III expansion of Technopark. Both Phases has been delayed for 3-4 years apiece. It is an inside page item most of the time, except for the odd bit of front page news when a company like Infosys inaugurates its campus construction (thank god the media woke up!) or when there is some agitation against land acquisition (oops....the Govt. forgot to put a zero or two in the check!) or to decry the reclamation of paddy fields (of course, one needs to find a real old-timer or an archaeologist to confirm they were indeed paddy fields!). Lol, most of the headlines are devoted to random arrivals and departures of certain "Smart" sheikhs or the inter-party squabbles of all and sundry, and the like.

So do these delays affect us, after all the land is for IT companies, not for you or me?

The answer, you guessed right, is YES! And let's see how.

Phase II and III of Technopark together account for about 186 acres of land. Going by the announced plans of companies and the long queue of firms waiting for land, an estimated 55-60,000 direct jobs in about five years or less is a likely figure.

The average gross salary of an IT professional is about Rs 3 Lakh (is that too low?). So the total pay packet we are talking about is 3 X 60,000 = 180,000 Lakhs = Rs 1800 Crores.

About 20% of that goes into the coffers of the Union Government as income taxes (or the tax man cometh!). The State gets some of that as grants and funds. Let's say 50% of it comes back.
This is Pot A = 20% X 1800 Crores X 50 % = Rs 180 Crores

Now, we know that all of us young guns are high-spenders. So, we can assume that a lion's share of the post tax 1350 Crores is spent into the local economy, say 60% of it. That means Trivandrum's economy gets an infusion of 60% X 1350 = Rs 810 Crores. To put that into perspective, it is more than 10% of the current GDP of Trivandrum district! All that money creates indirect jobs and more production. Kinda like the ol' saying - "the money that IT makes, makes more money"...errr...was that it?

Of course, the tax man cometh again and about 10% of this lands back in the coffers of the State Govt., as service tax, VAT etc etc. So roughly Rs 80 Crores makes up Pot B.

And yes, the likes of Infosys, TCS, UST, IBS, PCS, IBM, Accenture (hmmm.....knocking on wood) don't pay all that money for nothing. They are making good money too obviously. They do pay some taxes (remember that damn tax man...?). Some of this gets back as taxes. Since the current 12,000 employees of Technopark account for about Rs 1200 Crores of exports, 60,000 of their brethren could account for as much as Rs 6,000 Crores. With all the convoluted tax structures and generous tax breaks governing IT and SEZs, even if 1-3% of this gets back, it would be another Rs 60-180 Crores, making up Pot C.

So, does the delay to Technopark's expansion cost us? Damn right it does! First all of that inflow to the local economy, it means more and better jobs for people, for you and me! It means more and better stores and facilities open up as well. Add up Pots A through C, and you get anywhere between Rs 320-440 Crores of year of income to GoK, which means (hopefully) more infrastructure, better educational and health systems and a lot more!

Even if one argues that these benefits will reach maximum only after 3-5 years, it is still a huge loss every year these projects get delayed. And these are times when our cash-strapped State cannot afford to miss a single rupee. Or when we cannot miss out on a single, much-needed job.

I am sorry if I sounded like a maths teacher droning to a primary school class (atleast the maths were all primary school standard, right even if the reasoning wasn't?) But I hope it has become easier for you to understand the magnitude of the impact of seemingly unimportant delays of faraway projects on your life. The next time you hear such a project has hit a delay, try to think of how much it is going to hit you. You may not be as irritatingly thorough as me, but you will get some idea of the effect in monetary terms.

Mmmmm.....those of you in Technopark must be wondering, given the gazillions of bucks being made by GoK from it, why did it take them five years to figure out that lights needed to be installed on the bypass? Or how much has fifty years of delay to the Vizhinjam project cost me? Well, these are as good as any problem to start thinking along this track. Maybe if our elected representatives realise that their constituents are thinking like this, they will fear that a reckoning will soon come, not at the next AGM but the next General Elections! And just maybe long stalled projects may get a prod to move on!


  1. Excellent statistics Ajay, even if only tentative. Nothing like quantifying the loss incurred by Govt sitting on it's red-taped ass and procrastinating!!

  2. Hello Ajay

    excellent blog , that too considering that not much is being written about TVM .

    Please do keep it up .I hope I can catch up with you and meet you .




Thanks for your comment, I will take a look at it and put it up at the earliest.