PPP in Passenger Trains: A Business Opportunity for Private Parties?

PPP Plan in Passenger Trains

In India, almost all the modes of transport have private participation leaving a major one. There lies an exciting opportunity for the ones whose pulse is operating a train as Indian Railways is set to allow private operations for its passenger transit. With an objective of inducting modern technology,

·  Indian Railways has proposed to open 109 pair of routes in 12 clusters (https://pib.gov.in/PressReleseDetailm.aspx?PRID=1637428).

· Requiring additional 151 modern trains of the existing capacity (https://pib.gov.in/PressReleseDetailm.aspx?PRID=1637428).

·         In order to reduce the travel time, entry of private parties will help the Indian Railways to reach a target speed of 160Km/hour and take a quantum jump as quoted by Railway Board Chairman VK Yadav.

·         This speed potential would be achieved with the private party undertaking financial & operational responsibilities.

·         The demand supply deficit is one of the existing problems. For the year 2019-2020, the Indian Railways carried 8.9 billion passengers out of which 5 crore passengers got dropped in waiting. The non-confirmed reservation ranges between 5.1% & 13.3%. The private party will operate only on 5% of its existing 2800 Mail Express rakes (Misra, 2020).

·         Indian Railways’ first passenger transport PPP model will be decided in two stages that is Request for Qualification (RFQ) followed by Request for Proposal (RFP).

·         The winning bidder will be the concessionaire for a period of 35 years to operate the passenger coaches; also required paying fixed haulage charges per km and share of the gross revenues generated.

      Therefore, the objective of Railways is to provide train on demand to each & every passenger. The Private investment is expected to be around 30,000 crore rupees to run these modern coaches safely and conveniently. The question to be assessed is the rationale for a private party in considering it as a business opportunity. 

Public Private Partnership Railway models in India

The railways in India were developed through private enterprise and continued to do so until the recommendation of 1921, Acworth Committee recommending the state to manage the railway system (Raghuram & Gangwar, 2010). After independence, India inherited the nationalized railway system. The liberalization of Indian economy paved the way for PPP model in the railways. The first involvement from outside IR was by City Industrial and Development Corporation (CIDCO) of the Maharashtra Government followed by Konkan Railway Corporation (Raghuram & Gangwar, 2010). After this many such partnerships were established. Activities like catering services, cleaning of coaches were also outsourced. Various other planned PPPs in the pipeline were Rolling Stock Manufacturing, World Class Railway Stations, Multi Modal Logistics Parks (MMLPs), High Speed Corridors, Special Freight Train Operator (SFTO) Scheme (2010), Private Freight Terminal (PFT) Scheme (2010), Development of Automobile and Ancillary Hub (2010). Further, policy of the Indian Government such as R3i policy was introduced with an objective to attract private sector participation in rail connectivity projects and add to rail transport capacity (Raghuram & Gangwar, 2010).

The present government’s willingness to develop Railway projects requires huge investment for which it looks to rely on external participation. The railways catering to a huge Indian population is the safest mode of transport and needs to grow at a rapid pace requiring privatization.

Present Scenario of Indian Railway

It is important to understand the broad framework and structuring of the passenger movements through Indian Railways. Parameters such as Electrified and Route Kilometres, Locomotive units, Operating Expense Ratio of Indian Railways, Revenue Segmentation, Passenger Revenue and Total Gross Receipts of Indian Railways, Average Passenger Lead (in Kms.), Number of Passengers originating in A.C. Class gives a fair idea of the present scenario and business potential in passenger transit.   

Electrified and Route Kilometres (1950-2019)

                                                                                           Figure 1

Figure 1 indicates that over the years Indian railway has increased train electrification. Currently, 50% of total Rail route is electrified and its share is on increasing trend. The reason of electrifying Indian railway is to reduce the dependence on Fuel prices as Locomotives has high fuel consumption every year and reduction of Carbon dioxide emission. Additionally, it leads to savings in cost of energy consumption as electricity units’ cost is lesser than cost of diesel fuel. Moreover, this also reduces risk of increase in fuel prices, Dependency on crude imports etc. Indian railways have to suffer loss due to incremental cost of fuel.

Locomotives (Units)

                                                                                        Figure 2

In the figure 2 it is showing that over the years government has shifted to electric locomotives and reduces steam based locomotives use. There are several advantages associated with electric locomotives which are given as follows:

a) Reduction in noise pollution- (from around 100dB noise to noise less)

b) Substantial reduction in emission of Carbon dioxide and NOX of around over 2500 Ton and 10Ton respectively. Hence it is more environment friendly transport.

c) Reduced Diesel Consumption leading to huge savings in operational costs to the tune of over Rs. 1100 crores per annum.

d) Reduce dependency on Diesel.

e) Mitigate risk in rise of crude oil prices in international market and currency depreciation risk.

These are few major advantages of using electric locomotives in the operation. Therefore, railway is continuously increasing its route electrification in order to provide support infrastructure for electric locomotives.

Operating Expense Ratio of Indian Railways

                                                                                      Figure 3

In the Figure 3 it is shown that railways run at very high operating ratios which remain majorly above 90%. In year 2018-19 it was 97.30%. This high cost of operation is majorly due to lesser increase in fares of ordinary mail/express train. Railway being a non-profit organisation, its goal is not to earn profit but to provide social welfare by providing low cost mode of transportation to travellers. Generally there is cross subsidisation between freight revenue and passenger cost as well as A.C. class revenue and ordinary mail/ express passenger trains.

Revenue Segmentation

In past few years Indian Railways has taken several measures to boost up its revenue. The major sources of railway revenue are:

1. Passenger Earnings – Introduction of new trains, operation and running special trains during peak season, running premium/special trains with dynamic pricing etc.

2. Freight Earnings – Reduction in distance of mini rakes, withdrawal of port congestion charge, rationalisation of Merry-go-Round policy

3. Parcel Earnings – By leasing out parcel space to private parties and liberalisation of parcel policy etc.

4. Other Earnings – By increasing advertising for brands, wrapping of trains, and right of way charges etc.

Following Fig shows revenue earning breakup of Indian Railways:

                                 Figure 4

Passenger Revenue and Total Gross Receipts of Indian Railways

                                                                               Figure 5

In above fig, it is showing percentage of Passenger revenue out of Total revenue of railways from 1950-2019. Passenger revenue generally contributes between 25-30% of Indian railways. This is due to less fare charged through passenger travellers by railways. Large part of ordinary mail/express average passenger earnings per passenger is as low as 26 paisa per passenger kilometre.

However due to rise in the population and passenger travellers we can see in the above graph its gross revenue is also increased from past decades.

Average Passenger Lead (in Kms.)

                                                                                   Figure 6

In above Figure it is shown that Average per passenger lead in kms has increased from 52 kms to 137 kms. It indicates that on an average every passenger travels around 137kms of train journey.

This average passenger travel has increased because of rise in urban population and increase in per capita income. People in India rely more on railway travel. It is preferred mode of transport in terms on cost and travel experience from any other transport mode. In future also it is projected that railway transport will further increase as urbanization increases.

Number of Passengers originating in A.C. Class

                                                                                  Figure 7

The above Fig. shows that number of A.C class travellers is increasing. This demand is also driven by rise in income of travellers and rise in urbanization. From year 2002-03, 35657000 and 1070000 passengers travelled through A.C. class (excluding A.C. 1st class) and A.C. 1st class (including executive class) respectively, which has now increased to 129305000 and 3505000 respectively. This rise suggests that people spending, demand, and preference to travel in A.C. class is increasing year on year.

Private participation in this segment will further increase demand for A.C. travellers in future assuming they will serve best travelling experience.

Revenue Analysis

The two graphs shown below indicates the collection of passenger revenues with respect to the distance travelled in all the travel classes with a separate projection of A.C. travel class.

Average Rate charged per Passenger-km

                                                                                 Figure 8 

In above Fig. it is showing that average rate per passenger km has increased over the years. This has increased 44.10 paisa in year 2018-19. This rise in rate per passenger km shows that as per capita income is increasing the willingness of people to spend on travel tickets is also going up. This indicating a positive sign for Railway earnings because this will further increase as income will rise and urbanization will grow.

Average Rate charged per passenger per kilometre (In Paise)

                                                                                 Figure 9

In above fig. it is showing the breakup of Average Rate charged per passenger per kilometre in paisa. Over the years it is increasing across all A.C class segments i.e. A.C first class, A.C. sleeper class, A.C. chair car, A.C. 3 tier train travel. This rise in Average rate charged per passenger per km from transit over the years depicts that Indian travellers are ready to offer good amount of fare to travel in A.C class as already demand is high. Therefore, it concludes that private players can utilise this opportunity to fill demand shortage gap by running new trains and charging good amount of ticket fare from travellers. This indicates that Rail travellers are willing to pay fair amount on ticket prices to get best travelling experience.

Major Estimated Expenditures for the Project

The private party enters a business to maximize its profits whereas a public entity looks to create value for its users. Both these factors go hand in hand and so it becomes important to assess the business opportunity. 

Following shall be major cash outflow to be incurred on Capex and Operating Expenses. 

 

The Estimated cost of a single Indian railway passenger train is as follows: 

·         Cost of locomotive: Rs. 15-25 crore 

·         Interiors cost: Rs. 30-55 Lakhs Per coach 

·         Cost of an LHB coach (the ones in Rajdhani and Shatabdi Express): Rs. 1.5 – 2.5 crores 

·         Assuming that on an average train has 18 coaches, the total price comes out to be: Rs. 25 cr + (18 coaches * Rs. 2.5 cr) + (25 lakh * 18 coaches) = Rs. 79.9 crore or 80 crores (approx.) 

·         Benchmark: Among the high-speed fastest trains in India, Rajdhani express trains cost around 75 crores. 

Note: Above Figures are estimated from authentic sources obtained through   Google search. 

Following shall be Major Operating Expenses:

·         Maintenance cost of coach.

·         Energy charges as per actual consumption.

·         Fixed haulage charges for using infrastructure.

·         Share in Gross Revenue as determined by transparent bidding process.

Notes: Figures for the same are not available on authentic sources.

Rationale for bidding

The Indian Railways privatization move is a ladder for private party to elevate its profits looking at the future developments in this mode of transport. There lies immense potential for the private party in transport sector, particularly the railways as the Indian Government aims at strengthening its transport infrastructure. The year 2020 Union budget allocation in this sector speaks the volumes of strong government intentions. The below listed points can be the additional factors on rationale for bidding in this project apart from the above discussed parameters.

                                                                                      Figure 10

·         Population - The Urban population in India is constantly rising which will generate more demand for urban mass transport. 

·         Per Capita Income - The rise in urban population leads to increase in per capita income resulting in higher spending power of the passengers. 

·         Economies of density - The private parties will be allocated busy routes which are high on demand to operate on, thereby creating economies of density. 

·         Non-fare Revenues: The private parties can look to generate revenues by providing best in class facilities inside the train. Advertisements, food service, etc. might increase due to privatization. 

·         Policy Support - Railway plans to invest 50 lakh crores by 2030 in infrastructure building, modernization of core assets, focus on enablers-Information and Communication Technology for operational efficiency.  

The Public Private Partnership can bring in modern technology ensuring safety, lesser transit time, low maintenance and world class travel experience to passengers as is the objective of Indian Railways.

References:

[1] Shivangani Misra: How feasible is the Railway privatisation plan, Times Now, (July 03, 2020), available at

https://www.timesnownews.com/business-economy/industry/article/how-feasible-is-the-railway-privatisation-plan/616122

[2] By IT's Video Summary Team: Public, Private Partnership In Railways, IAS Toppers, (August 01, 2019), available at

https://www.iastoppers.com/rstv-policy-watch-public-private-partnership-railways/

[3] www.ibef.org

[4] https://pib.gov.in/PressReleseDetailm.aspx?PRID=1637428

[5]AnnualReport, https://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/downloads/IRSP-2017-18/Summery%20sheet%20Annual%20Report%20English_2017-18.pdf

[6] https://24coaches.com/indian-railways-facts-and-figures/

[7] https://www.theweek.in/content/archival/news/india/railway-passenger-coaches-rs15000-cr-face-lift.html

[8] Raghuram, G., & Gangwar, R. (2010, August), Research Gate, Retrieved from researchgate.net: https://www.researchgate.net/publication/46436959_Lessons_from_PPPs_of_Indian_Railways_and_Way_Forward/link/540dea9c0cf2f2b29a3a62a5/download

Data Source:

https://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/

------------------------------------------------------------------------------

About the Authors

Nishit Bhatt

He has completed his B.E (Civil) from Gujarat Technological University. He is a volunteer at The Institution of Engineers (India), Gujarat State Centre, Ahmedabad. His interest lies in content writing. You will often find him leading in workshops and event.

---------------------------------------

Udit Sharma

He has completed his B. Com (Accounting and Finance) from Rajasthan University. He has work experience of Financial Analysis, Stocks Trading, Accounting and also done few projects on BI tools like Tableau. Earlier, He had worked in Kotak Mahindra Bank as a Credit Processing Associate for 1 years in working capital Finance and as an Accountant in MSME.