Three ways in which private train operations will benefit Indian Railways

These three issues would also be key concerns for bidders, whose interest after the shortlisting stage will depend on how much assurance Indian Railways is able to provide on these

The recent announcement regarding private train operations has received mixed reactions. Private train operations can have a significant impact on Indian Railways, though the reasons may not be obvious. Scepticism regarding the success of the initiative is natural, given Indian Railways’ patchy track record with the private sector – in private container train operations and on the four models of public-private partnership (PPP) in building railway lines.

Allowing the private sector to operate trains that will service the highest-end traveller segment will add some rolling stock capacity but would not have a direct impact on the key challenges faced by the Railways. Private trains are not expected to enhance the overall operational efficiency of the Railways or bring in investments for expansion and upgrade of the railway network. However, there are three possible benefits that can be expected when private trains become operational.

Firstly, the private sector’s success will depend critically on track operations and station access granted by the Railways. Bidders for private train operations are likely to insist on clear operating procedures, responsibility allocation and high penalties for non-performance by the Railways. The last clause (compensation for non-performance of authority) has been a weak link in PPP contracts in India. If the ultimatum of penalties acts as a deterrent, the Railways could be compelled to use superior technology to bring in higher levels of discipline in scheduling. Disciplined scheduling would lead to better track utilisation and benefit all types of operations.

Secondly, track access charges will be the key to viability of operations. The Railways will need to transparently allocate its capital and operating costs for various activities to enable a clear determination of components of network costs. The process of transparent cost allocation will help highlight hidden inefficiencies, which can be addressed in the form of separate projects undertaken by the Railways.

Thirdly, having determined the full cost of tracks, the key question would be how much of the track access charge can be levied on private train operators as a fixed cost. Revenues from train operations rarely cover full costs. In this case, any view on traffic and revenue would be highly speculative and high fixed payments to the Railways would render the private projects unviable. A close understanding of unit economics related to train operations would be required in setting up the bidding terms. More importantly, planning and operations by the private sector will help in understanding price elasticity of demand and affordability of different technology and service levels. Hopefully, data obtained from operating these trains could also shed some light on the debate on affordability of fare increases.

The above issues – enforcement of Railway’s performance, the extent of fixed costs to be committed, and the high risk associated with traffic and revenue guesstimates – would also be key concerns for bidders. The extent of bidder interest after the shortlisting stage will depend on how much assurance the Railways is able to provide on these factors (among others). Addressing these concerns is essential for successful transactions. The additional benefits of more disciplined operations and better understanding of economics of serving different traveller segments would also have a large impact on the journey towards reforming the rail sector.

The author is partner (infrastructure) at PwC India

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.