How Indian Railways will benefit from private trains; passengers to be big beneficiaries

Jagannarayan Padmanabhan & Golesh Gupta

The proposed introduction of private passenger trains on select routes can be a win-win for private players and the Indian Railways (IR) alike, provided niggling issues are addressed to clear the tracks. The proposal has garnered much attention since the government announced its plan to introduce ~156 private passenger trains on ~103 routes. The bulk of these would be on the Golden Quadrilateral, which accounts for ~52% of the total passenger traffic of IR.

As per the draft bid document released by NITI Aayog, the private players would be responsible for designing, procurement, financing, and operation and maintenance of trains for a period of 35 years. The private players would be free to demand and collect market-linked fares from users, and IR would charge haulage fees from these players. The bidding criterion would be the revenue share offered by the private parties.

Not surprisingly, several private players have shown interest in the initiative. It is expected that the initiative, if successfully scaled, could attract private investments to the tune of Rs 15,000-20,000 crore initially.

As for IR, there are several ways in which it would stand to benefit from the move. First, it would improve its financials, given the massive losses it incurs in the passenger segment. As per a NITI Aayog report, 77-80% of the total losses in the passenger segment are in the non-suburban segment, within which IR incurs losses in all classes save for 3rd AC. The proposed model, if scaled up, could help IR reduce such losses and allow it to have profitable earnings. It could also save on the capital expenditure to be incurred on its plan to replace ~40,000 outdated coaches with Linke Hofmann Busch coaches.

Second, the move would help bridge the demand-supply gap. The resultant increase in capacity would enable IR to capture passengers unserved by it, which stood at 8.85 crore in fiscal 2019. Third, it would make rail travel more competitive vis-à-vis air travel – the growing aviation sector has been weaning away passengers from the premium category, especially 2nd AC ,owing to the narrow price differential between 2nd AC tickets and air tickets of low-cost carriers.

The entry of private players is expected to lead to introduction of new-design trains with improved passenger amenities and travel comfort as well as value-added and on-demand services. Such enhancements and improved service levels, together with punctuality of trains and targeted marketing by the private players, could help the railways retain and wean back passengers.

That said, there are a few aspects private players would need to keep in mind while bidding. These include:

• Clusters to target – The indicative clusters being proposed to be tendered out have 7-14 routes each. Each cluster has a mix of short and long routes. Thus, a major consideration for a prospective bidder would be the clusters to target.
• Premium or economy services – Considering the total traffic in the non-AC segment is around 3.5 billion passengers/ annum, compared with 0.15 billion for the AC segment, prospective bidders may go beyond the AC segment and target even non-AC with basic standardised services.
• Limited competitive barrier and flexibility for operators – The draft MCA provides limited flexibility to private operators in terms of changes in operations plan. Hence, appropriate due diligence is imperative while preparing the operations plan as the operator may not be able to change it later.

Overall, the proposed initiative augurs well for the railways in India. At the very least, it would usher in competition, ultimately benefitting the customer.

Jagannarayan Padmanabhan is Director and Practice Leader & Golesh Gupta, Lead Consultant – Transport & Logistics, CRISIL Infrastructure Advisory

Source: Financial Express