What private passenger trains need to succeed

September 09, 2021 6:00 AM

To start with, an independent regulator is needed. There is also a need for flexibility when it comes to business plans of private players

Privatising train operations is one of them.Privatising train operations is one of them.

By Vinayak Chatterjee & Abhilesh Babel

Indian Railways (IR) operates 13,000 passenger-trains, transporting 24 million passengers daily. In 2019, IR carried approximately 9.5 million non-suburban (or long-distance) passengers everyday, of which about 0.5 million (or 5.2% of long-distance passengers) traveled in AC coaches. And this AC set is growing at around 9% annually.

But affordable air-travel is snapping at the heels of this segment. The domestic civil aviation market in 2019 was around 0.38 million per day and growing at 14% per annum. It is likely that domestic aviation would double by 2027 and would outpace AC rail travel. Much of Europe’s dense inter-city network, and China’s high-speed network, allow inter-city rail travel to be preferred over the hassles of taking a flight. Japan demonstrated this decades ago with its high-speed Shinkansen “bullet trains.”

The improved conditions of highways and inter-city luxury coaches also offer travelers more choice. It is, therefore, a sensible strategy for IR to take on this competition by providing a superior level of service. The station upgradation programme is expected to help.

The recently-released draft National Rail Plan (NRP) sets out the roadmap to 2050. It points out that 64% of passenger traffic is concentrated across just 20-odd high-density routes. It also highlights that a significant chunk of the financing requirement is to be met by mobilising private capital; that calls for major reforms. Privatising train operations is one of them.

Given its many constraints, and the role it plays as a national transporter with social objectives, IR has reached a situation where inviting private sector capital and expertise to run premium trains appears both necessary and urgent. So, under an envisaged PPP framework, the private partner is supposed to procure, operate and maintain the rolling stock for 35 years and provide in-train services. It will set fares, bear all running costs whilst paying IR haulage charges and revenue share. IR is to provide all fixed infrastructure and staff to haul the rake.

Execution of this PPP strategy began a year ago, with IR inviting bids for 12 clusters of passenger-train operations. It sought to create additional capacity of 60-65 million passengers annually with expected capital investments of ₹25,000 crore. It generated significant initial interest and 103 parties were qualified to submit their bids. But a detailed examination of the bid conditions and PPP framework gave most bidders cold feet; and finally, on August 2021, only two players participated, that too for just 3 of 12 clusters: the government-owned IRCTC and one private player, Megha Engineering.

So, what went wrong, and what are the learnings. Clearly, IR’s mindset must change. The overall impression is that the “command and control mindset” continues, with scope for heavy-handed interference across dimensions. Inflexible scheduling, positioning private trains at satellite stations, penalties for late arrival, no commitment on non-interference on fares, structure of haulage charges, have all led to the perception among potential bidders that “everything is stacked against us.”

The need for of an independent sector regulator is once again felt, emphatically this time. IR needs to demonstrate and maintain a level-playing field to protect the nascent private sector from its own dominant position as owner, de facto regulator and competitor.

Specifically, haulage charges have led to disquiet. Haulage charges relate to use of IR assets (tracks, signaling, electrification, stations, depots, etc). Private bidders believe that the haulage charges are bloated, and pass on the inefficiencies of the system. The formula for escalation is also felt to be unreasonable, with the overall effect that haulage costs (as a share of overall costs) keep ballooning over time.

Flexibility of business plans is a felt need. Different players may be allowed to target different customer segments and have different approaches. Decisions on pricing, services, technology, terminating stations, schedules, seasonal adjustments, frequencies, etc, should be left to the private sector. That is the very purpose of a PPP framework—to allow the private sector flexibility and creativity in responding to a market.

Arising from the recognition of allowing for business flexibility, an open access policy can be considered. Originating and terminating stations can be categorised by demand-levels and licences given. The proposed Independent Rail Regulator could be empowered to issue such licences, on satisfaction of various qualifying criteria, as RBI does for fresh banking licences. A simple PPP framework could be a combination of just three parameters—a licence fee, haulage charges and a percent share of revenue.

Getting PPP frameworks absolutely right the first time is never easy. On May 20, 2021, the UK PM announced the “re-nationalisation” of British Rail, after a 25-year run, on what was believed to be an iconic PPP structure. IR must introspect on the long-term benefits and sustainability of the PPP structure, and respond with interventions that will make private investors enthusiastic about “partnership”.

The authors are respectively, co-founder and CEO, Feedback Infra

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