Lone private bidder for operating trains has reservations but is committed

The initial proposal to allow private parties to operate trains was met with an encouraging response, but since then, this has been repeatedly postponed due to COVID-19 and with prospective bidders seeking more time to study the bid conditions. (Representative Image: Reuters)

The sole private company that’s expressed interest in operating trains said it submitted bids even though the Indian Railways hadn’t addressed concerns over certain aspects of the programme.

“We expressed certain concerns regarding the shortcomings, risks and financial structuring of the transaction for train operation by private entities,” Ramesh V Penumaka, CEO – corporate strategy & management group at Megha Engineering & Infrastructures Ltd., told Moneycontrol. “Notwithstanding the fact that these concerns were not resolved, we submitted bids for only two of the 12 clusters as a mark of our commitment to partner with the government and the Indian Railways.”

The first round of bidding in July received a lukewarm response, with only two entities coming forward: the Indian Railway Catering and Tourism Corporation (IRCTC) and Hyderabad-based Megha Engineering. IRCTC is considered an extension of the Indian Railways so in effect, only one private party showed interest.

Additionally, bids were received for only three of the 12 train clusters, among them, one cluster saw only a single bid – by IRCTC. Megha Engineering bid for the Delhi 1 and Delhi 2 clusters. Penumaka said there’s been no communication from the Indian Railways “on the outcome of the transaction.”

Given the poor response, railway officials are said to be talking about drawing up a new tender with relaxed bidding conditions. If no new tender is floated, the Union Cabinet may need to approve allotment in the cluster that received one bid.

The initial proposal of the Indian Railways in 2020 to allow private parties to operate trains for the first time met with an encouraging response, with 15 applicants qualifying. Since then, the bid deadline was repeatedly postponed with the resurgence of COVID-19 earlier this year and prospective bidders seeking more time to study the bid conditions.

Issues faced globally

“The Indian Railways is a monopoly and is allowing entry of the private sector in a very limited way – track, rolling stock and manpower will be its own. This restricts the role private parties can play,” said a person tracking the bidding process. “Globally, too, involving private parties in train operations has not been as encouraging as one would expect. Apart from Japan – where again, out of seven private operators, only one makes a profit and that too not from operating trains but from real estate – other privatisation models have faced issues.”

In the case of the Indian Railways, certain rigid conditions have proved to be deterrents, among them competition and train timings. A private company can operate a train only on the allotted track and during the specified time band, which may not be as convenient for passengers as an Indian Railways-operated train.

If occupancy in a private train reaches 90 percent, the Indian Railways can run additional trains on the same route. It can also start any number of trains from a station 20 km away, within an hour of the private train.

Another issue is the trains that private operators are required to bring in, which is a way of getting the latest technology without the Indian Railways incurring a large capex. However, the specs are tough to match. Private operators are expected to bring in trains that can run at 180 kmph and accelerate from zero to 180 kmph in 140 seconds, said one of the bidders.

“If I cannot operate trains on Indian tracks beyond 80 kmph due to the condition of tracks and other inherent systemic issues, why should the trains have such tough acceleration specs? If the specs were eased, the cost of acquiring these trains can fall by up to a third,” the bidder said.

Financial hurdles

The biggest hurdles are the financial terms. A cluster will be awarded to the bidder offering the highest revenue share. Additionally, there is a ‘haulage charge’ to cover the use of infrastructure such as the tracks, which is indexed to inflation and will increase at an average of at least 6 percent annually, according to the Indian Railways’ own estimates.

Income from non-train activities such as picking up passengers from home and providing them last-mile drop at their destination will be included while calculating revenue.

Private entities were invited to bid to operate trains on 109 pairs of routes in 12 clusters, where demand was higher than the current capacity. Their participation was aimed at generating additional funds for the Indian Railways while expanding the current passenger-carrying capacity on these routes.

Private trains will start operating tentatively in 2023 and the total investment envisaged for such operations was pegged at about Rs 30,000 crore. While that plan now hinges on what the Indian Railways does next, Penumaka of Megha Engineering is clear that private investment in the Indian Railways is critical for the nation’s development, especially in the light of the technological changes taking place globally.

“This should include not only the operation of passenger trains but a range of other areas that offer the space to private players. For a win-win partnership, there is a need for sustained consultations with all stakeholders to identify appropriate areas, structure and institutional mechanisms for the partnership,” he said.