Privatization of trains: Chop and change?

 

Ever since Indian Railways (IR) announced that bids were being called for privatization, i.e., operation of certain trains by private operators, there is a strong narrative that this would hit the common man because of increase in fares. Let me start by allaying these fears. This discourse has arisen either out of lack of information or merely as a red herring. And this not because of a clear intention but because the exercise of privatization would succeed only in segments where you have travelers willing to pay more in return for value and therefore the common lower class travellers need not have any fear; privatization of trains with a large number of lower class coaches is not going to succeed. Once a cluster/route is privatized, as it seems, IR would get adequate revenue, perhaps more than what it gets now. So the question is not whether IR would lose passengers and revenue but whether good number of investors would be attracted to the business. One aspect is clear, no concessionaire could possibly make money from the lower class travelers. A worrying aspect is whether a concessionaire would be able to charge the upper end traveler enough to make the business fruitful, particularly as there would be value only in improved services only and not in travel time and punctuality.

Intended or unintended, the common passenger is not going to be hit

After I conducted a couple of panel discussions with people knowledgeable in the field, many worthies told me that all that was an attempt to give the dog a bad name and hang it. That all the staus-quoists had grouped together to derail a game changer conceived by the ministry.

 

Far from it. I start with a clear abnegation. A caveat that in my personal view, I am in favour of privatization of IR trains, per se. In today’s world, privatization cannot be a taboo. Government is ill-equipped and usually indisposed to handle amenities and services efficiently and running of trains entails a fair share of this, like booking of tickets and reservation, dynamic pricing, cleanliness in trains, catering, Infotainment and so on. At the same time, since passenger services are subsidized in some form or the other, unlike freight services, it is difficult to have private concessionaire bring in train technology.

 

Added to that is the age-old dichotomy of running a commercial enterprise while meeting a stupendous level of social commitment, albeit misplaced at time in its various forms. An identity crisis between the so called facilitator of world-class travel on one hand and provider of an inexpensive mode of travel to our teeming millions and helper to expand the network to far-flung corners of the country on the other. Although you cannot run an oxymoronic model of business without profit, it is pretty inconceivable that these social commitments can and should be abandoned. Willy-nilly, therefore, there has to be a mix of government and private participation to improve train travel experience while enduring the pressures of inexpensive travel demand and continuing with its social and strategic outreach.

 

So, I welcome the move as such. It should improve services, it would relieve IR (Indian Railways) of a part of its investments in new trains, albeit of the existing design and if privatization is done without any loss of revenue to IR, or even a small gain in revenue, it would be good for the health of Indian Railways. Why? Because, no surprises there, when it comes to services like ticketing and on-board services, IR is not efficient as it is saddled with typical government shackles. We have an army of very highly paid staff or bloated inefficient contracts managing all this today whereas serious concessionaires can provide these services more efficiently at a lower cost. 

But there are a lot of misgivings about the model proposed as well as the timing of the project. I can understand that the timing of the project is not good as our economy struggles in the prevailing Covd-19 situation and may continue to struggle in its aftermath. But considering that the proposal was mooted much before Covid-19 struck, this is as good a time as another.

It is also relevant that, in a recent announcement, IR has clarified that while the bidding process is on, actual launch of these trains may be done only in early 2024. The announcement also talks of running 160 km/h trains and that infrastructure would be ready for private trains by early 2024 but I see it as mere posturing as nothing significant can be added to the infrastructure by that time except perhaps commissioning of the Dedicated Freight Corridors. The major trunk routes of Indian Railways, by their own admission in the Project Information Memorandum, are saturated, operating at near full capacity and it would be relieved only with the commissioning of DFCs, which are nowhere near completion and that these DFCs would relieve only the Delhi-Kolkata and Delhi-Mumbai sectors. Saturation of routes is a dampener and therefore the objective of 95% punctuality on privatized trains is too far-fetched. The investors would have to take the less costly option of purchasing existing type of trains. The entire running of trains would be in hands of IR and not the concessionaires, even if they have their own certified drivers and guards as the punctuality of trains seldom suffer due to the train running crew; it is mostly due to some capacity or infrastructural problem. So there would be no positive impact on running time and punctuality. As for capacities, since these are new trains, the intention is to add capacities but the questions would remain about IR’s ability to handle new trains in the existing system seamlessly. Since IR does keep introducing new trains, this can be done but there would definitely be some more strain on an already saturated system

 

The disastrous experience of British Rail in privatization is being quoted frequently as a forewarning. But I would use that only as a learning exercise and not a deterrent. There have been many successful experiences too of corporatization followed by privatization as in Germany and Japan. One of the safeguards would be to avert emergence of private monopolies as while privatization may be good, a private monopoly is worse than a public monopoly.

 

Coming to the bidding process itself, let us not forget that this is a first-time attempt by IR. It cannot really hope to get ahead in the game by writing a document sitting in a cocoon as if private investors are drooling all over at the prospect of running trains. I really do not know how the RFQ documents were prepared but it does not seem to have been done after wide consultation. It is all very well to say that the concerns would be addressed in pre-bid meetings but let us not forget that the initial document sets the pitch. So while the bidding process appears to be fine, the basic bid document does not seem to be investor-friendly at this stage.

 

Why do I keep saying that the investors would choose the less costly option of purchasing existing type of trains? The investment in a 16 coach AC II train, or a mix of AC II and III, or other variations of AC coaches, the cash cow for IR today except the AC 1, without any technological improvement, with one locomotive, on Power Car, Pantry/SLR etc. would be approx. Rs 55 crores. Although maintenance pit and shed would be made available by IR on chargeable basis, the concessionaire would need to some to make investments pertaining to maintenance facilities also so the total investment would be more in the range of Rs 60 crores. With an earning of 1000 km per day, the revenue would be in the range of Rs 10.5 lakhs per day with 10% hike in fare. 

In the pre-bid clarifications, provisionally, the indicative access charge has been assessed as Rs.512.31 per train km for a 16 coach train for 2019-20 and it works out Rs 5.12 lakhs per day. (Indexation of the charges over the concession period shall be as pre-specified in the concession agreement; the charge will be proportionately increased for trains of longer length and the final access charge will be specified in the draft concession agreement). With committed share in gross revenue to IR, service man power and O&M costs, energy cost to be paid to IR, overheads and insurance, very little head room would be left for service of debt and return on equity, let alone profit. While debt would be difficult to raise, there may not be many to roll up with large equity. So while this makes any investment in modern trains very unattractive, the key even for deploying existing type of trains lies in how the access charges are brought down to a realistic level.

 

Then there is this business of twelve clusters. Every cluster has some routes with promise of good patronization and some without it. Why burden the investors with social obligations of IR? For economies of scale, you would like to have bigger clusters. On the other hand, we should not eat more than we can chew at this stage of initial attempt of a watershed change in train operation. It is a matter of opinion but I would have liked the clusters to be so chosen that the concessionaire would not require to deal with multiple train formations; this would help in obviating any need to regroup coaches at terminals, which otherwise could be a killer in train operations. In any case, matching rakes in diverse locations in links and also matching them with locomotive links is going to be quite a jigsaw puzzle for a concessionaire as even IR with all its massive resources is still unable to maximize utilization through optimum links.

 

The contract period of 35 years, without any flexibility, also appears to be too long and investors would not be willing to get tied to a dud contract for this long. The exit clause, on the other hand, may remain open to misuse by the investors. A more realistic time period would be in the range of 15 years with a fair exit clause.

 

At the same time, there are many votaries of train sets, not because I created the first one in India, but because train sets are inherently far more efficient and friendly to train operation and passenger amenities as compared to conventional locomotive-hauled trains; this has been proven by Train 18/Vande Bharat express already on IR. So I would have liked to throw in a mega cluster of say, Delhi-Bhopal-Jaipur-Ahmedabad-Mumbai routes to be operated with train sets such that some investments also start in train sets for a truly world-class travel experience.

 

At least one cluster must encourage deployment of train sets

There is another drawback that I see in the model. The concessionaire would quote for a share in the Gross Revenue at RFP stage, with Gross Revenue comprising amount accruing from passengers or any third party, including ticket, preferred seat, baggage and parcel tariffs, amount from on-board services like catering, bed roll, Infotainment and revenue from advertising, branding and naming rights etc. There is nothing left for the concessionaire to innovate and earn. The share in gross revenue perhaps arises from the fear of manipulation in Profit & Loss Accounting by a concessionaire but in today’s world such fears should not dictate regression to an unworkable provision. Let us look at the model in totality. Having invested hugely in rolling stock, a concessionaire would be dependent on IR essentially for the entire operational infrastructure like track, OHE, signaling, stations and operating crew as well as maintenance infrastructure and therefore fixed costs would need to be met ahead of any cash flows thereby rendering huge imbalance between the risk and the reward.

 

Private freight trains, mainly Container and some Automobile-stock trains, have been in operation on IR for more than a decade. It started with a large number of operators but today only a handful remain viable. The experience of this sector must be built into this new effort to enhance the chances of its success.

 

The extent of liabilities and penalties remain a gray area and they have to be so designed that they do not scare away investors. Accidents occur mainly due to a weakness in infrastructure or human failure on which the concessionaire would have no control. In a scenario where investments would not be easy to mobilize, mitigation of risks is even more important. Some concerns have been raised by impact on integrity and safety of railway assets when used by concessionaires but I do not foresee any problem in this utilization. On the other hand, since operation of passenger trains is a different ball game from safety standpoint, certain safeguards would definitely need to be put in the contract. But I am sure that this issue can be suitably addressed by IR.

 

The stillborn proposal to appoint an independent regulator has to be revived. With multiple interfaces and complex contracts of accessing infrastructure and revenues, the project cannot take off without an independent regulator in place.

 

The data of Tejas train run by IRCTC is not available in a transparent manner so it is difficult to comment on. It is, however, known that after the novelty of smart hostesses and add-on services wore off, the patronage had started going down before the Covid pandemic stopped all passenger train operation. The data should indeed be shared with all bidders to help them make a competent offer.

 

No rail system in the world has such heavy cross-subsidization of passenger services by freight earnings. IR earns 55 paise for every rupee spent on passenger services. No such luxury would be available to concessionaires. We must look at all these experiences and then draw a model more suited for India. I doubt if this has been done yet. There are rail travel models which have given tough competition to air, for example, Frankfurt to Köln and Madrid to Barcelona, with such travel time that flights on these routes almost disappeared. This gives the operator, be it private or state-run a good leeway to charge handsome fares and sustain itself comfortably.

 

Privatization of trains is a right step towards improving efficiencies in train-running but this right step would better be a baby step. It has unfortunately, or perhaps unwittingly, been announced by IR itself as a panacea; something that would bring in a quantum jump in technology, punctuality and services and therefore the sights have been set at an unattainable level. It appears today that IR would look after it leaps. The term world-class travel experience is being bandied about freely whereas the reality is that private trains may bring in only improved on-board and support services. But there is enough time as prospective bidders ready themselves. It is time that the issue be approached afresh in a pragmatic way such that it promises to be a win-win for IR, the prospective concessionnaires and the travelling public.