Railways take a cue from AAI; no single bidder can bag all deals

The Indian Railways (IR) seems to have taken some learnings from the hiccups faced by Airports Authority of India (AAI) in privatising airports, by barring a single bidder from bagging all the deals, while inviting bids by private parties to operate select passenger trains. As per the RFQ (Request for Proposal) document for the Mumbai cluster put out by IR, a single bidder cannot bag more than three clusters.

Last year, when AAI put up six airports for bids by private parties for operation and management, the criteria for bidders had no clause on how many airports could be won by the same bidder. So it came as no surprise that the Adani Group emerged as the successful bidder for all the six airports. This happened despite the Adani group having no previous experience in operating or managing airports. And this was the result of the criterion for selecting the successful bidder: highest revenue share. The Adani group offered the highest revenue share per passenger for all these six airports and was declared the winner.

Since then of course, wary of Opposition cries of crony capitalism, the government has spoken of amending the bidding criteria for future airport bids, by restricting the number of airports which can be won by a single bidder to two.

Lessons from aviation sector

Following in AAI’s footsteps, the railways has now decided that no bidder will be awarded more than three clusters.

“Generally, the highest bidder shall be the selected bidder for the respective cluster. No bidder shall be awarded more than three clusters. In the event of any bidder becoming the highest bidder for more than three clusters, the particular bidder shall be awarded the clusters in which the bidder has offered highest premium and for the remaining clusters, bidders other than the highest bidder for the respective cluster shall be kept in reserve and may, in accordance with the process specified in clause 1.2.12, be invited to match the bid submitted by the highest bidder for the respective cluster,” the RFQ said.

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Manish Agarwal, Partner at PwC said that the recent airport privatisation experience may have been a driver for the decision of the IR to cap clusters for one bidder to three. “And this is good from the bidders’ perspective since chances of succeeding at a bid increase”.

Not only has the IR seemingly taken cues from airport privatisation in restricting the number of clusters a single bidder can bag, the criterion for a bidder to win – highest revenue share – also likely came from there. The RFQ document says highest revenue share by any bidder – which needs to be promised at the bidding stage – will be the sole criterion for selecting the successful bidder.

Agarwal pointed out that if highest revenue share is indeed the sole criterion for winning bids, “it places a premium on aggressive passenger and cost targets”. Put simply, this means the private operator will have to envisage an aggressive and likely impossible passenger revenue target to let this project remain viable. The RFQ document put out by the IR makes it clear that the private operator is entitled to collect fare from passengers, indicating that the myriad concessions the IR itself provides to passengers will be missing from private trains.

Railways’ roadmap

The IR has divided the routes which it will offer to private parties into 12 clusters. So the recent condition essentially means only a fourth of the private train network can be bagged by a single private bidder. The RFQ for private parties to Design, Build, Finance and Operate (DBFO) trains is part of the IR’s efforts to induct modern technology and some additional revenue into the network. Chairman of the Railway Board, VK Yadav, had said in an interaction last week that the trains being offered to private players constitute just about 5 per cent of the IR’s total network and the Railways will continue to operate its scheduled services on these routes even after private trains begin running.

Yadav had also said that the IR will collect a pre-determined haulage charge from the private operator apart from a share of gross revenue from operation of these trains.

The IR has identified around 100 origin-destination train pairs for operation by private entities. These origin-destination train pairs have been grouped into 12 clusters such that each cluster requires operation of about a minimum of 12 trains.

Newbies welcomed

Another interesting parallel with airport privatisation is the lack of any restriction on bidders who have absolutely no previous experience in operating trains. The RFQ document said that if the applicant did have the requisite experience of maintaining the railway rolling stock (trains) including locomotives, trains, electric multiple units, diesel multiple units, “it shall either enter into an agreement, for a period of five years from commercial operation date of the project with an entity having the aforesaid experience relating to the performance of O&M obligations, or engage experienced and qualified personnel for discharging its O&M obligations in accordance with the provisions of the concession agreement, failing which the concession agreement shall be liable to termination.”

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While airport privatisation may have been a reference for the IR, the middling success of the former should serve as a warning to the Railways, which has embarked on its most ambitious privatisation drive ever. Of the first lot of six airports, the handover of only three has been approved by the Union Cabinet and these too have not been taken over by the Adani group till now.