The math behind Railways' privatisation project

The Indian Railways (IR) is on track to award bids for private passenger train operations on select routes, for the first time ever.

This project has attracted significant interest from potential bidders as nearly two dozen companies attended the second pre-bid conference hosted by the IR last week.

On offer are 151 trains grouped into 12 clusters, on routes where the existing IR network is already over-saturated while demand for seats continues to increase.

Better coaches and engines

The need for involving private operators to run trains arises from two factors: getting access to better technology rolling stock and need to offer premium services to the passengers.

Rolling stock in railway parlance means locomotives and coaches among other things. By involving private parties the railway expects them to invest in new technologies and provide better engines and coaches to the passengers.

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The railways feel that by offering improved services it can get premium customers who are willing to pay. This, in turn, would also result in improving the earnings of the railways.

The cumulative annual growth rate of ‘Ordinary Class’ travel between the financial years 2013 and 2018 has been negative. The growth rates of the previous two years of this block were only marginally positive. But on the other hand, between the financial years 2011 and 2018, the ‘Upper Class’ growth has been 7.5%— a clear indication that passengers prefer to travel in the Upper Class which offers better amenities than the ordinary classes. Obviously, they do not mind paying a premium for better travel.

Private comforts

There are several factors that may bring gains to concessionaires such as the prospect of weaning away passengers from buses and air travel on these routes through premium offerings; projected revenues versus projected costs and freedom to offer fares without regulation. The private trains can run at a high speed of 160 kmph, reducing travel time compared to IR trains on the same route. Besides, strict KPIs (key performance parameters) would ensure the punctuality and reliability of private train operations.

The maths

The draft concession agreement for private train operations has been designed by the IR in such a way that the bidder offering the highest share in gross revenue shall win the bid for each cluster.

A study conducted jointly by RITES and Deloitte Touche Tohamatsu India has shown the math of such private operations.

1. Road, Rail, or air?: As per IR data, 4.7 lakh passengers travelled between January and December last year on the Bengaluru-Guwahati route. This could be called as one train cluster. Almost 50,000 passengers were waitlisted on this route.As opposed to this the traffic projections for roadways (mainly buses) and air, it is clear that the concessionaire could potentially wean away a large share from these two modes of transport if it can offer value for money and comfort.

   The two-way bus passengers on the same route were over 26.3 lakh while the number of two-way air passengers was a little more than 51 lakh. So only about 5% of the total traffic on the route could travel on a train last year.

2. Earnings versus cost: The math done by the consultants for the concessionaire in the Bengaluru cluster shows that revenue could exceed operating costs by the third year of operations.The operating cost in 2023, the first year of the project, has been calculated at ₹53 crore while revenue has been pegged at ₹41 crore. But in 2026, revenue at ₹1,025 crore is well above the projected cost at ₹749 crore. Thereafter, for every five year period, revenue has been shown to be much higher than the operating cost.

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   Since the concessionaire will have to commit to a percentage share of gross revenue before the start of the project and will also have to pay a haulage charge for services provided by the IR, there is no clarity on when the services are projected to break even. Other possible payouts by the concessionaire include penalties for delays etc.

3. Projected fares: The consultants have assumed the starting occupancy of the trains on the Bengaluru–Guwahati route to be 70% and estimated the second AC weighted fare at just below ₹3,000 while the weighted fare for the chair car in AC 3 tier a little over ₹2,000. This should compare favourably with airfares (before COVID-19) on the route.

The operators wish list:

Meanwhile, prospective bidders have expressed a gamut of concerns over the bid conditions to the IR. Till now, they have posed as many as 222 queries. Their principal worries are on how to fund the project, whether the 35 year concession period will be extended, what constitutes ‘O&M’ (operation and management) experience, and under what conditions can the same bidder place a bid for multiple train clusters.

While the Indian Railways has clarified that there will be no upper limit on fares nor will there be a cap on train stoppages etc, there is the threat of constant inspection and oversight as the IR can depute its officials to oversee the concessionaire. Finally, the draft concession agreement defines gross revenue of the concessionaire to include the amount printed on ticket-fare, the amount from preferred seat options, baggage/ luggage, cargo/ parcel, and the amount from on-board services such as catering, bedroll, etc.

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World over, non-fare revenue comprises at least a third of the total revenue of an operator. Such non-fare revenue is earned through myriad station activities. Since the IR has clarified that no space would be provided to the concessionaire on stations etc, the potential of earning non-fare revenue seems limited at present.

The potential bidders have also sought to double the time between the arrival of a private train at a platform and an IR operated train, which is currently one hour. One operator has sought “full flexibility” to schedule trains or schedule them within pre-defined time slots; another has asked for an extension of a 35-year concession period while a third wanted to know whether the revenue share percentage would be fixed for the entire concession period.