Quality over subsidy: Why private trains may have a good run in India

Though a punctuality guarantee is embedded in the bids, the fact is that on-time performance is one factor that will always be outside the control of private train service providers
On October 4, 2019, Uttar Pradesh Chief Minister Yogi Adityanath flagged off the Tejas Express between Delhi and Lucknow.

Both the government and many in the media touted it as independent India’s first “private train”. In fact, the train was operated by the state-run Indian Railway Catering and Tourism Corporation (IRCTC). All the same, Tejas could be considered a prototype of what a private train will look like on Indian tracks – pretty much the first corporate-run train in the country with aircraft-like frills.

A Tejas Express ticket was priced at Rs 1,280 for an AC chair car and Rs 2,450 for an executive chair car -- significantly higher than Rs 970 and Rs 1,935 for the same categories, respectively, on an Indian Railways-run Swarn Shatabdi Express. Dynamic pricing was applicable to both trains, however.

In January 2020, IRCTC launched a second such train between Mumbai and Ahmedabad as part of the broader programme of privatisation of railway services.

With the Indian Railways set to come up with 151 private trains on 109 routes at an investment of around Rs 30,000 crore by 2023, the obvious question that arises is: Will private players be able to compete with the Indian Railways, which runs passenger services at highly subsidised rates?

The Indian Railways recovers only 57 per cent of the cost of travel in the passenger segment, and on suburban routes the recovery is around 40 per cent. Based on the latest available estimates, the Railways charge only around 36 paise per 10 km for passengers but spends around 73 paise for the same distance. This is way below the per km charge of Rs 2.5 and Rs 4.8 for the AC chair car and executive class respectively on the Delhi- Lucknow Tejas Express.

“Nowhere in the world are trains run at the rate at which the Indian Railways run,” said a senior executive from a private sector company that is likely to bids for operating private trains. “It will become difficult for the Railways to operate and pay for their employees at a higher subsidy. That is why I believe that the rates should increase in the future -- by the time private players start operations,” he added.

Last month, GMR Group, Sterlite Power, Bharat Forge, JKB Infrastructure, Medha Group, R K Associates, Bombardier, IRCTC and Bharat Heavy Electricals (BHEL) had participated in a pre-application meeting and had raised several concerns including the planned 160-kilometre per hour speed for the tracks. At present only one section is capable of clocking this speed (the Gatimaan Express between Delhi and Jhansi). Before the lockdown, the average speed of passenger trains was around 44 km per hour and of freight trains around 23 km per hour.

Viability was a major factor too. But Dinesh Kumar Kotha, co-founder and chief executive officer at Bengaluru-based ConfirmTkt, an online reservation app, thinks this shouldn’t be an issue. “The subsidy is only for the non-AC classes. Private players were also expected to run in the premium segment, where there is no subsidy,” he pointed out.

“Even in the Tatkal and dynamic pricing mechanisms, people are ready to pay the higher price. Take the case of Tejas, on routes such as Delhi and Varanasi, IRCTC has proved that profit can be made with higher prices and airlines-like facilities, he added.

The answer for pricing concerns can be had, in fact, from the Tejas Express. IRCTC earned Rs 7.73 lakh in the first month.
Tejas touched this profit mark at an average occupancy of 62 per cent during the first month. Kotha believes services are viable at this level of occupancy. “Each train will cost around Rs 150 crore. There will be also be capital and marketing costs involved, in addition to the haulage and power charges to be paid to the Railways. I believe that with 50-60 per cent occupancy, companies will be able to achieve breakeven at a trip level. A continuous occupancy between 70-80 per cent for five years will help you recover the entire investment,” he reckoned.

A senior Railway official also pointed out that demand would not be an issue. The routes selected for private trains have over 100 per cent occupancy, so adding one more train will only help decongest demand.

Dynamic pricing will also ensure viability. “I believe that there will be no upper limit for fares of such trains. At present, 30 per cent of those using the Indian Railways travel in air-conditioned classes. They are ready to pay more if they get better services from a private player,” said Subrat Nath, managing director of Spanish manufacturer Talgo's India arm.

Plus, trains have an advantage over airlines in that most stations are located in city centres, whereas airports tend to be on the outskirts, helping passengers save commute and wait times (since airlines require checking in two hours ahead of the flight).

But competition of this nature also imposes hidden costs. For example, IRCTC offers compensation on the New Delhi-Lucknow Tejas Express at Rs 100 for a delay of more than one hour and Rs 200 for a delay of more than two hours.

It will, thus, be a perennial risk factor in daily operations. April 2021, when Though a punctuality guarantee is embedded in the bids, the fact is that on-time performance is one factor that will always be outside the control of private train service providers the bids are expected to be finalised, will reveal whether the private sector thinks train services is a risk worth taking.  

The New Route
  • 151 private trains to run on 109 routes
  • Concession period: 35 years
  • Private emtity to ensure 95 per cent punctuality
  • Expected investment: Rs 30,000 crore
  • On July 1, RFQs for 12 clusters were invited
  • Financial bids to be invited by January

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