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EDITORIAL ANALYSIS

Why private firms are being invited to run trains in India, how the model will work?


The Editorial covers GS paper 3[Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.]

Context

  • To upgrade the country’s railway system, the NDA government has laid the roadmap for long-term partnerships with the private sector.

  • The government envisages around Rs 50 lakh crore of investment in rail projects up to 2030, but as per the Union Budget 2019, only a part of it can be financed through government coffers, and public-private partnerships are needed for faster development. 

  • The decision to allow private players to run passenger trains stems from that policy.

What is the need for private players?

  • It is estimated that almost 70 percent of freight trains, which now jostle for space with passenger trains on the overcrowded Indian Railway network, will shift to the two upcoming Dedicated Freight Corridors from December 2021. 

  • This will free up a lot of capacity to introduce more passenger trains with better services and higher speeds.

  • In the normal course, demand for train seats is much more than available, on all busy routes. 

  • The result – waiting lists, overcrowded trains, and even losing business to other modes like air and road.

  • Introducing new, modern trains requires heavy investment in rolling stock like coaches and engines. 

  • And then there is the cost of operations, which includes electricity, manpower and all other paraphernalia.

  • In such a scenario, giving upgraded facilities, such as better onboard services and faster trains, would entail a huge modernisation expense for Indian Railways.

  • As it is, running of passenger trains is a loss-making business for Indian Railways. 

  • It recovers only around 57 per cent of the cost through tickets on an average. 

  • The rest is cross-subsidised through earnings from its freight operations.

  • In this context, to cut its losses and convert that opportunity into a money-making enterprise, the government has decided that some of the trains to be introduced in the future will be run by private companies, in a business model never tried in India before.

  • This move envisages a total investment of around Rs 30,000 crore into the railway system through rolling stock and other expenditure, to be borne by the private players.

  • The only precondition is that the trains introduced by private players are a definite upgrade from what Indian Railways offers. 

  • The idea is to give passengers an option of superior train services without the Railways having to spend any money for it.

How was the move rolled out?

  • Last year, an empowered group of secretaries headed by NITI Aayog CEO Amitabh Kant presided over this subject to expedite the process. 

  • The Chairman Railway Board, Secretaries of Department of Economic Affairs, Housing and Urban Affairs and Railway Board Financial Commissioner were other members of the panel.

  • Railway Board’s Member (Engineering) and Member (Traffic) were co-opted in the committee as the two subjects are the domains of the two Board Members. 

  • The panel also looked into the redevelopment of railway stations through private participation.

How many trains will private players operate and when?

  • The government has identified 109 busy routes across India to run 151 private trains for 35 years. These are routes with huge waiting lists and offer a potential to earn. 

  • The 151 trains represent only around 5 per cent of total trains run in India.

  • For the project, the routes are divided into 12 clusters based out of major city centres, such as Patna, Secundrabad, Bengaluru, Jaipur, Prayagraj, Howrah, Chennai, Chandigarh, and two each for Delhi and Mumbai. 

  • In other words, trains to and from Mumbai, Chandigarh and the like.

  • Each cluster is an independent business project, inviting a private player to manage. 

  • The indicative project cost of the Delhi-2 cluster is Rs 2,329 crore. 

  • It has 12 origin-destination pairs as routes, and the average distance of the routes is around 925 km. 

  • Each cluster has an indicative project cost and average train distance of 900-1052km.

  • The contract period of 35 years is based on the fact that trains and engines are usually in service for around three decades.

  • The bidding process will conclude by the end of this financial year. 

  • After that, the first set of 12 trains is estimated to roll out by 2022-23, thereafter 45 trains in 2023-2024, 50 in 2025-26, and finally the remainder 44 in 2026-27.

 

Conclusion

 

As per internal studies by Railways, private investors may see between 17 and 27 per cent Equity Internal Rate of Return (IRR), translating into very healthy profits. The project IRR is between 14 and 20 per cent, signifying a moderate to high feasibility. This is because it is estimated that the operators will be free to fix their fares and non-fare revenue models, and fares of these trains are expected to be higher than conventional trains, as they will offer better services.

However, investors do their own calculations, and experts have said that any company venturing into this new business will have to have some risk appetite.

 

Source: Indian Express.



 
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