Asia's second largest rail network, the Indian Railways, has initiated a move to rope in private operators. The gargantuan network that moves 8.2 billon people annually is drawing interest, but there are enough obstacles that needs to be cleared and that can be done only when the government simplifies the way it works.
India has taken tentative steps towards privatisation of its railway routes but the challenges to awarding of contracts are as huge as the interest among investors. In a move to modernise operations, improve financial performance and service quality to passengers, the Indian Railways - Asia's second biggest after China - expects that the first steps to privatise 100 routes will set the ball rolling for more privately-run trains across its over 68,400km-long network.
Initially, as per the draft suggestions published by NITIAayog, the proposal is for 150 trains on the first 100 routes entailing an investment of Rs 225 billion, or $3.15 billion.
The draft papers published on NITIAayog's website proposes offering full ownership of trains to operators and the flexibility to offer varied services. The paper points out that this is a sizeable market opportunity for investors.
The 100 routes have been divided into 12 clusters, including routes such as Mumbai Central-New Delhi, New Delhi-Patna, Allahabad-Pune and Dadar-Vadodara. Once awarded a cluster, the successful bidder has to start operations within three years of the appointed date and turn fully operational on all awarded routes within five years. The concession period is for 35 years, taking into consideration the life of the rolling stock. Each train will need to have a minimum of 16 coaches and a maximum not exceeding the longest passenger train operated by the Indian Railways on the same path. The operator is free to determine the configuration of each train and if they would like to operate with two or three-tiered air-conditioned coaches, and other combinations, based on the demand.
The private operator will be responsible for financing, procuring, operating and maintaining the trains. It will need to pay the Indian Railways pre-determined charges for haulage, and for power, track maintenance, terminal access and signalling, among other charges. Operators will be penalised for non-performance. The operator needs to also make upfront expenditure on procuring rakes from either Indian Railways production units or other manufacturers. It will need to set up maintenance infrastructure for the rakes and deploy its own staff on the trains. Indian Railways staff could potentially be seconded to operators' trains. Operators will need to take insurance cover so that they can compensate passengers in case of claims.
Indian Railways is a federal government-owned entity, and this move to fully privatise a portion of its routes is its first attempt. The move comes after Indian Railways appointed its catering, tourism and online ticketing arm Indian Railways Catering and Tourism Corporation (IRCTC) to "privatise" two trains - both called Tejas Express - as a precursor. The trains are actually run by Indian Railways and IRCTC is responsible for the housekeeping, hospitality and fare setting.
The other privatisation experience related to Indian Railways is the proposed privatisation of 400 railway stations in a public-private partnership (PPP). First proposed about three years earlier, the initiative has been a non-starter with less than 10 stations awarded till date, most of these through the traditional engineering, procurement and construction (EPC) method.Inordinate delayed changes to the draft PPP concession model took over a year to be approved, scuttling the PPP process.
Market watchers say the Indian Railways is not going to be able to stick to its timeline to award the contracts by August, more so now that normal working schedules have been disrupted by COVID-19 outbreak.
The private parties have expressed reservations to the conditions in the initial set of documentation and the Railways has gone back to the drawing board, said Anand Chalwade, a Mumbai-based infrastructure expert. "With the Covid-19 outbreak, there is a disruption to normal life and working schedules and the publication of the amended draft model documents will be further delayed," he added.
Addressing reporters on January 28 in New Delhi before the Covid-19 outbreak in India, Railway Board Chairman, Vinod Kumar Yadav said that it will take at least two years for the first private train to turn operational. He added that the aim is to be able to offer trains on demand, similar to aviation. Chalwade, however, opined it is doubtful whether even this timeline for the first train to begin operations would be adhered to.
PRICING OF FARES
As was evident from the attendees at the January-end meeting in Delhi, there was no dearth of interest with investors lining up to evaluate the market opportunity. Given the market depth, finding passengers for a railway coach is not too much of a challenge, especially since the private trains are going to run on limited routes and at specified intervals. "Sixteen coaches to a train would mean around 1,000 to 1,500 people travelling between two large cities of India. This level of passenger volume should not be a challenge," says Arvind Tembhurne, a Mumbai-based infrastructure expert.
The ability to charge higher for better services is also attractive to investors. If private trains price their tickets about one-and-a-half times the existing railway fares, people will still be willing to pay, Tembhurne said. The option before a last-minute passenger is to either pay an exorbitant amount for an air ticket or 50 per cent more for an air-conditioned train ticket.
For long distances of over 500km, there is a dearth of quality and comfortable travel options, says Tembhurne, suggesting that the best thing for bidders would be to look at routes of over 500km."Road travel is generally not considered by people since distances of over 500km are inconvenient and since air travel will definitely be expensive closer to travel dates, the only choice left will be the railways."
Tembhurne believes bidders will do well to offer a service founded on a changed look-and-feel from the current set of Indian Railways' coaches. First, he believes a survey can find out whether passengers will be willing to pay, and based on the findings decide to procure new coaches. "The decision is with the operator whether he should get something different so that he has the ability to price it higher and brand it as a new experience in India, like a Spanish or Chinese-style coach on Indian tracks, for instance."
His suggestion is not unfounded. According to an IRCTC spokesperson, the Tejas Express which follows dynamic pricing has been running at 70 per cent occupancy. As with any investment, the financial viability of India's privatisation move will depend to a great extent on the routes themselves. "The market is a big one and, therefore, not only can it absorb fare increases but it also needs more services," says Tembhurne.
The routes proposed will not be exclusive to the winning bidder and will also be used by Indian Railways, though with a half-hour gap on either side of the departure of the private train.In operational terms, this means the modern rolling stock will need to be brought in to run between the Indian Railways' rolling stock.
"This is actually a pretty big challenge for operators as they must liaison with Indian Railways to operate their own trains in a harmonious manner," informed a senior official from one of the rolling stock manufacturers present at NITIAayog's December meeting. Operating the maintenance depot, too, could be challenging as the railway unions may want to get involved. Integrating everyone will be challenging as the unionised staff are used to working in the antiquated maintenance depots. The absence of a sector regulator is another key risk, as pointed out by potential bidders. Progress here will depend on how Indian Railways responds to bidders and addresses their concerns. At present, Indian Railways is both regulator and concession authority rolled into one. If it is successfully able to privatise its first few routes, Chalwade says the market will open up for investors due to the expected growth in passenger travel.
The Indian Railways has been historically punished for not upgrading infrastructure, increasing capacity or improving service quality.
However, there is stiff opposition among the unions. The All India Railwaymen's Federation has opposed the move, saying they are not keen on allowing private players to utilise Indian Railways manpower and infrastructure to make profits. Some of the union's representatives have met with Railways Minister Piyush Goyalas well as the Railway Board's Chairman Yadav to voice their concerns.
The move to privatise its network is by far the most far-reaching initiative to modernise the organisation that was set up in colonial times in the 19th century.Other than this, the move to usher in bullet train technology and semi high-speed trains is also in different stages of progress. Largely to be funded by multilateral financial institutions, these projects have been proposed between various cities. The most notable project is the high-speed train between Mumbai and Ahmedabad.
The National High Speed Rail Corp. Ltd (NHSRCL) is the procuring entity for the project and has been tasked with conducting preparatory studies for other high speed rail routes. NSHRCL has invited consulting bids for some of these routes. As the country eases lockdown restrictions in a calibrated manner, NHSRCL is gearing up to open all its offices and resume various on-site works like construction activity, land acquisition, consent camps and utility shifting. During the period, the agency held its first-ever online pre-bid meeting for three active tenders for construction of bridges in the state of Gujarat and the union territory of Dadra & Nagar Haveli, the agency said in an official statement.
Not only will modernisation bring in much-needed funds in the form of revenue share by private operators, the Indian Railways will be able to distance itself from the cycle of subsidies and resulting pressures on its finances thereof, leaving market pricing to the forces of demand and supply and efficient operators who can provide the kind of service that will make the it a preferable mode of transport.
- NEEYOR B. SHARMA