Quo Vadis, Private Train? Don’t let this train derail!

 

Quo Vadis, Private Train?  Don’t let this train derail!

The last time I wrote on the subject was on 8^th November, 2020. I had written that, assuming that the entire exercise by Indian Railways (IR) was not about, first boiling the ocean and then blamestorming, but hopefully more like doing nothing by halves, certain sine qua non had to be spelt out. Summarizing, I had mentioned that it appeared that there was no risk for Indian Railways (IR), except loss of face in case of failure of the project whereas a prospective PTO (Private Train Operator) had to contend with high risks and perhaps even perpetual losses. At stake was not merely this project but long-term credibility and allure of IR, both from the standpoints of ease of doing business and long-term PPPs into the future. IR could not afford the smug luxury of a premise that it was dispensing favours, not looking for a partner in success. This privatization project was being seen as a very welcome move of IR to liberate itself from its proverbial stick-in-the-mud stance and it should not be allowed to fail due to cocksure rigidity and a flawed PPP architecture. It was time for IR to open the kimono and meet the prospective bidders halfway. So, let us review where we stand today.

This is a first step towards a viable and vibrant private train operation in India. We must remember that it is the strategic vision of entering, as early birds, in a field which holds promise for future which would drive the prospective bidders. A long wish list for making the bid documents more friendly for investment may not be of much use at this stage as IR is already too far gone with their bid documents so let us leave it at that. 

Governments are mortally afraid of windfall profit to the concessionaires as it quickly educes accusations of venal wrongdoing and therefore some reluctance to change things that would seem to benefit the bidders is natural. But it should not be allowed to wither away to paranoia. I am sure things would mature into a pragmatic model as we move along this path but at this stage, the project is obviously fraught with multiple risks and many imponderables. On the other hand, given that It is difficult to participate in this project purely on the basis of NPV/IRR calculations with so many elements of incertitude, IR must still address the main concerns of the prospective bidders. As per Corrigendum No. 1 of 30th December 2020, the bid submission due date is 31.03.2021, extended from the earlier one in end January 21. The bid documents for RFP call for commissioning of prototypes in about 31 months after appointment of the PTO, and with successive induction of rakes, completion of the entire operation in about 66 months. Well, the project timeline is fine and may even be compressed. The time available for bidding, however, which would involve working out a financing plan, selection of rolling stock and then preparing a detailed commercial analysis for submitting a competent and viable bid, is still far from adequate. Thorough analysis of each cluster requires a minimum of 3 weeks and even if a bidder quotes for, say, 4 clusters, they would run out of time before submission. IR must address this seriously as a delay of couple of months would not be as injurious as a failed or half-baked exercise.

 

Some changes have indeed been accepted by IR but that is now history. To my mind, some of the issues, inter alia, to be addressed are, 1) The contract period of 35 years is a killer. A strong pitch must be made for reduction of the project duration to 24 years. 2) The PTO should be given more freedom to choose his train’s departure or arrival time as well the origin and destination within a city based on his estimation of preferences of the passengers. 3) The documents say that obligation of the Government to provide exclusivity shall not apply once the capacity utilization of a train crosses 80%. This is like penalizing a PTO for good performance; this limit of utilisation needs to be increased to 95% for each route in all the clusters. 4) IR should allow the concessionaire to choose the routes they would like to operate anywhere between 70% and 100% of the specified routes so the risk of operation on unviable routes is mitigated and 5) The exit clauses and penalties should be re-examined as no PTO would like to exit after investing in rolling stock. After all, the rolling stock would be almost like dead assets which he would not be able to sell off like other assets and lastly but perhaps most significantly, 6) A gross revenue share of 10%, as assumed in the DFR projections has the making of a futile long walk.

 

Prospective bidders have repeatedly raised concerns about a severe impact of this on financial viability which ironically, has IR charging haulage charges (access charges, in reality) and still looking for a share in revenue. A share in profit could be somewhat more realistic but IR is, rightly or wrongly but  understandably averse to this due to apprehensions of manipulations. One way could be to consider negative bids such that while IR is relieved of any investments in unpopular sectors, the government bears a sort of subsidy burden to relieve the PTO of the risks of a seemingly unremunerative sector. The government may even consider reimagining the model by reducing the haulage charges from the gross revenue. Learning from Infrastructure, Highway and Telecom sectors, which have come a long way since the inception of their PPP models,  can come in handy to pinch the bid conditions towards something more amenable for receiving good participation.  IR must consider ameliorating this important aspect.

 

The issue of an independent regulator has been echoed by all the prospective bidders repeatedly. The document calls that the Government would appoint a consulting engineering firm to be the independent consultant under this agreement (the “Independent Engineer”). This is a clause which the prospective bidders find the most disturbing. In this environment of multiple risks and limited possibilities of risk mitigation, it is absolutely essential that an independent regulator with a mandate to adjudicate and resolve be in place.

 

As for the assessment of various clusters in terms of viability, it is also a matter of detailed study. All one can say is that each cluster has some very popular routes and some very unpopular routes. That is why the suggestion of freedom to a PTO for a min of 70% to 100% operation in a cluster.

 

I would not like to speculate on the likely outcome of bidding if the ticklish issues do not get addressed and resolved. As things stand, there should be a moderate response with some clusters getting many bids and some may even go without any bids. But whatever be the outcome, one certainly hopes that in spite of most of the prospective bidders sitting on the fence today, at the end of the day, a win-win situation would emerge.