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Why It Will Be A Challenge For Private Trains To Operate In India

Private trains in India: Revenue-sharing clause, sheer level of investment required, competition from airlines could prove to be stumbling blocks

Jul 22, 2020 / 02:13 PM IST

The world’s largest transporter of passengers is preparing to change the way Indians travel. For the first time in 167 years, Indian Railways (IR) has begun the journey to allow private parties to operate trains.

On the anvil is a two-stage bidding process to award 12 rail clusters. The selection criterion is a simple one: whichever qualified bidder offers the highest share in gross revenue to Indian Railways for a cluster wins the bid. The bidder is free to fix fares as per the concession agreement and levy other charges normally seen in air travel, such as those for preferred seats, luggage etc.

Indian Railways has said that private operators will be running trains only on about 5 per cent of its vast network, at 151 trains. IR’s own trains, with subsidised fares, will continue to run on these routes alongside the private trains. The entire process is geared to provide passengers better services and enable induction of new technology into the railway network.

16 prospective bidders

In the first pre-bid conference hosted by Indian Railways on Tuesday, 16 prospective bidders showed up. The list of those who evinced interest makes for interesting reading; according to sources, there were a few public sector majors, at least one catering company, a domestic freight train operator and a home-grown airport operator besides some entities within the IR network.

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In short, many of those who showed up have little previous experience in operating trains.

A large Indian conglomerate that operates ports and now airports, did not turn up despite showing interest in the process earlier. Another large business house also gave the conference a miss.

Not attractive enough

So, are the conditions envisaged in the RFQ (request for quotation) document attractive enough for private entities to participate, if large prospective bidders are giving the action a miss?

The bid for any cluster will be awarded to the entity that promises the highest share in gross revenue. “Generally, the highest bidder shall be the selected bidder for the respective cluster,” says the document. It defines gross revenue as any amount accruing to the concessionaire from passengers or any third party from ticket fare; charges for preferred seats, baggage/luggage etc; and charges for on-board services such as catering, bed roll, and wi-fi.

This condition, where the concessionaire must offer the highest share in gross revenue, could prove to be a stumbling block.

Sudhanshu Mani, former GM of the Integral Coach Factory, Chennai, told Moneycontrol that while he supported privatisation of train operations, several modifications could be made in the terms to make them more attractive for bidders. Take the access charge or money the private operator will have to pay IR to use the latter’s tracks and other services (this is in addition to the share in gross revenue). “This charge must be kept at a reasonable level,” Mani said, referring to an earlier document from IR, where it was fixed at Rs 668 per km. Also, instead of demanding a share in gross revenue, Indian Railways could look out for a share in profits.

Huge investments needed

Another big stumbling block for any interested bidder could be the sheer quantum of investment needed in rolling stock. Experts point out that the cost of getting the latest coaches fitted with modern technology — which would offer enhanced comfort to passengers besides also enabling better train speeds — could be significantly high and this will chip away at the meagre profit any operator may hope to make on even those routes that witness high demand.

Indian Railways has envisaged an investment of Rs 30,000 crore for the entire project. The first private trains could become operational in 2024.

Subrat Nath, Managing Director of Talgo India, the Indian unit of the Spanish train manufacturer, said it was a good idea for Indian Railways to offer some train routes to private operators since passenger numbers will increase on the already congested IR network in the next few years. He pointed out that almost one in three rail passengers were anyway buying tickets for AC travel and were willing to offer double the prevailing fares for enhanced comfort. So, higher fares should not pose any worries for bidders. Talgo is preparing to begin manufacturing trains in India.

Challenge in the air

But a former senior IR official pointed out that the scope for the private operator to significantly raise fares was limited. He said second class AC fares were comparable to those for air travel and the fares for AC first class were already more than airfares on the same route. So, any prospective bidder would not like to price even the second AC segment out of the market. The consensus among IR experts is that any private operator may be able to charge only 10-15 percent premium on fares on any route.

In any case, privatisation of rail networks across the world has been a mixed affair. If even the viability of the project is in doubt at the bidding stage, Indian Railways could find it rather difficult to attract bidders willing to endure the long haul with wafer-thin margins, while operating on India’s congested rail network at over 95 percent punctuality.

Sindhu Bhattacharya is a journalist based in Delhi who writes on a range of topics in business and economy.
Sindhu Bhattacharya
first published: Jul 22, 2020 02:13 pm
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