Passenger Train Operations || Indian Railways' Tryst With PPP

IR's tryst with the Public Private Partnership (PPP) model has, historically, been limited to non-core areas (railway station redevelopment, railway infrastructure procurement, support services like catering etc) and has, hence, yielded only modest results so far. One key contributing factor of the lukewarm response from the private sector lies in the fact that the more economically-remunerative domains of the Indian Railways, like passenger train operations, rolling stock, railway electrification etc, have been out of bounds for the private sector participants.

The Annual Union Budget (FY 2019-20) acknowledged the pivotal role of private sector participation and stressed upon asset monetisation and inviting global and long-term investors to the country as well as proposed a development financial institution for infrastructure^[3]. With the eventual aim of bridging the demand-supply deficit through capacity augmentation, the MoR is looking at a quantum jump in technology and provision of high service quality through the private sector participation and, hence, in collaboration with the National Institution for Transforming India (NITI) Aayog, Government of India (NITI Aayog), is spearheading the foray of Indian Railways in the private sector for Passenger Train Operation services.

Glimpses

IR has identified around 100 origin-destination pairs for operation of the Passenger trains by the private entities. These origin-destination pairs have been grouped into 12 clusters such that each cluster requires operation of about a minimum of 12 Trains. IR has decided to undertake operation of passenger trains on selected routes forming part of these identified 12 Clusters through PPP on DBFO basis. The 2-stage Bidding Process for all 12-Clusters (with 109 origin-destination pairs & 151 modern trains), commenced simultaneously under the aegis of Railway Board, GoI on July 1, 2020, through which bids for Passenger Train Operations have been invited on the basis of premium in the form of share in gross revenue offered by the Bidder to IR for award of the concession on a 35-years lease^[4].

In fact, towards ensuring that the Bid-packages translate to an economically viable & sustainable business-model, a 'composite & fixed haulage charge' mechanism for accessibility to common railway infrastructure (track, signalling, terminals) has been structured, whereby the amount of monthly payments are agreed upfront and contractually incorporated to be payable upon commercial operations^[5]. Being hailed as 'a watershed moment in the history of the national transporter' by the Hon'ble Chairman of the Railway Board, Shri. Vinod Yadav, the project is hopeful of commencement of commercial operations by 2023. Post conclusion of the Bidding process in the current Financial Year across all the 12 Clusters, the first set of 12 trains is estimated to roll out by 2022-23, thereafter 45 trains in 2023-2024, 50 in 2025-26, and finally the remainder 44 in 2026-27.

This initiative of IR has been met with a warm response from the Investor community, both domestic & off-shore, and has evinced keen interests of renowned Global Brands like Hyundai, Hitachi, Mitsui, Bombardier, Alstom, Macquarie and Siemens, CAF India, CRRC ZELC, GATX among others. The Indian majors like Tata Realty, Adani Ports, Bharat Forge, KEC International, Essel Group, and PSUs like IRCTC and BEML are also exploring the possibilities of their entry into the Railway sector. In fact, in course of the 2nd Pre-Application Virtual Conference held by the MoR & NITI Aayog on August 12, 2020, which witnessed an interactive & overwhelming participation by 23 renowned global & Indian companies (including some PSUs)^[6], the MoR has done away with the existing restriction under the Tender documents of 3-project clusters/bidder and clarified that the private sector has absolute flexibility in procurement of rolling stock – which can either be purchased or taken on a leasehold basis.

Quite apparently, the earnest response from the global & domestic participants is fuelled by and attributable to a multitude of factors which, in summation, is being lauded as a perspective departure from the conventional mode of structuring PPP projects in India over the past couple of decades.

Usage of the Existing IR Network Facilities & Non-discriminatory access

The Passenger Train Operations by the Private Sector Participants (PSPs) are proposed to be operated on the existing routes & track-network of IR where at present both passenger and freight trains operated by IR on the common track. Further, the private train operations would be provided non-discriminatory access in terms of Schedule of departures till the capacity utilization of 80% in previous 3 months – no scheduled departures in the same origin-destination route-pair within 60 minutes. The PSP is also permitted to use the existing Passenger Reservation System of IR for booking of tickets.

Independence in Rolling Stock procurement & Earmarked Maintenance Facilities

The PSP has been given the requisite flexibility to identify its Source for procuring trains & locomotives for the operations, though, with prescribed specifications & standards (sourcing via domestic production is also being considered) as well as decide on the technological configuration of its Train coaches. The validation of the procured Rolling Stock for the project will be done by Accredited Independent Safety Assessor (ISA) on IR track. Quite importantly, though the O&M obligations of the Private Trains & Rolling Stock are cast on the PSP, the berths/spaces and washing-lines in the existing maintenance depots of IR would be provisioned for the private trains; alternatively, IR may also provide a space in a proximate area for up-gradation or setting up the maintenance depot and use of the same by PSP.

Freedom in determination of Fare & other ancillary Revenue sources

Significantly, the PSP is entitled to a complete flexibility in determining the Fare to be charged from the Users, including its incidental components like seat options, luggage cargo etc. Also, the rights of advertising & branding have been vested in the PSP and the same forms a part of its 'Gross Revenues'; however, station User Fees levied & collected are to singularly accrue to PSP. In addition, revenue-sources for the PSP have also been extended to value added/ differentiated customer services including food, beverages, linen, infotainment and generate rental income from use of commercial or other spaces and advertisements on the trains.

Competitive Bidding Criteria

The eligibility parameters for the project are designed to ensure maximum participation whilst ensuring committed private sector participation – the Technical Criteria is not limited to the 'parent' sector, but is broadened to include experience in construction, development and/ or operation of eligible projects (railways, travel and tourism, highways, power, telecom, industrial parks, etc). The Financial criteria have ensured participation by alternative investment fund (AIFs) or a foreign investment fund with a minimum investible fund capacity.

Absence of Land & Environment pre-requisites

For any PPP project in India in the core or quasi-sectors of Infrastructure, the facets of land acquisition and Environment & Forest clearances has, quite often than not, determined its commercial viability & operational sustainability and has plagued the Investors' sentiments through protracted litigations. The conclusive and existing presence of these key requirements for and in respect of the IR Network in the Country lends a huge comfort to the PSP/investors initiatives and interests in this area of Passenger Train Operations under the PPP mode.

Freight-traffic to be off-loaded to the Dedicated Freight Corridor (DFC)

In the existing scheme of things, the major trunk routes of the Indian Railways are saturated and operate at near full capacity whilst catering to both passenger & freight traffic. The Dedicated Freight Corridors (DFC)^[7], one of the most ambitious rail infrastructure projects undertaken by the Government of India, is tentatively scheduled to commission by December 2021 and, hopefully, with its scheduled commissioning the existing routes would witness considerable de-congestion from the freight traffic. The planned commissioning of the DFCs might not only open the possibility to operate additional services utilizing private trains, but also assist in better management of passenger-traffic along the routes comprising the identified 12-Clusters under the current proposal of the MoR.

Challenges

Given this paradigm shift in the policy for undertaking the Passenger Train Operations in the country, it is quite likely to have its fair share of challenges along the way. In the context, it might be imperative to note that current legislations and FDI policy^[8] are silent on participation of private players (and foreign investors) in passenger trains operations in India. The current legislation^[9] assumes that passenger trains will only be operated by IR and, hence, a suitable legislative framework for operation of private passenger trains in India may be considered. Also, a time bound single-window clearance mechanism covering all applicable permits and licenses for the project might also be a welcome step.

As quite suitably hinted by the NITI Aayog CEO, Shri. Amitabh Kant^[10], the 'pricing strategy has to remain competitive, yet stay profitable given the competition through air, road, and to some extent, water transport'. Hence, the PSP shall be expected to structure a fine balance amongst viable commercial interests & sustainable implementation of the projects. The Debroy committee^[11] had, in its Report (2015), identified that the vesting of the key functions of Indian Railways - policy making, the regulatory function, and operations, in the Railway Board, is susceptible to create bureaucratic hassles in course of any engagement with the private sector for implementation of projects. The constitution of an Independent regulator/body for adjudication of disputes would, to start with, give the requisite comfort towards equitable treatment of Investors' interests. It is also significant that necessary steps be, in parallel, taken to ensure that the PPP in Passenger Train Operations are duly complemented by state-of-the-art Railways infrastructure and Junctions - which would act as gateways to the PSP's offering of world-class Passenger Train facilities.

The CEO, NITI Aayog has appositely summarized the sincere initiative of the MoR whilst stating that - "The time has come to modernise the Indian Railways, make it world-class, and a key driver of the country's growth in the post-COVID era. The overall travel experience of the common man needs to be transformed; high-quality in-transit experience needs to be supplemented by best-in-class railway stations."^[12] As a nutshell, a detailed financial & legal diligence coupled with well-structured contractual arrangement and adequate clarity in risk-sharing will be of paramount value in sustaining this initiative of the Indian Railways in the domain of Passenger Train Operations.

Anand Srivastava is a Partner & Aditya Bhardwaj is an Associate Partner at Link Legal India Law Services. Views are personal.

[1] Only one-third of the 13000 trains running daily on IR are freight trains, but it accounts 65% of total revenue of IR [https://www.indianrailwayemployee.com/content/freight-traffic-indian-railways]