The distance between Ahmedabad and Mumbai is not long enough for HSR to be a decidedly superior alternative for travellers. It may be very difficult to hit 40,000 daily travellers by 2023. If so, forget profits, even the revenue will not cover hedging costs
An agreement to build High Speed Rail (HSR) from Mumbai to Ahmedabad has recently been signed. A trail blazing project of this kind generally falls into a high risk, high reward category. It would be interesting to critically examine such projects. Let us first look at the project from the financial angle. The primary funding source (80%) will be a yen denominated loan at 0.1%. While this might look like easy money, there is foreign exchange (FX) risk involved. If the FX Rate moves favourably then a project can look like pure genius. On the other hand, if the FX rate moves adversely, even the most sound project can look like a financial disaster. The standard way to look at the cost of funds is to look at the cost of hedging that is take FX risk out of the equation and look at this as a rupee loan. The present cost of such a conversion is about 6% per annum (p.a.). This interest rate is lower than prevalent interest rates in India, but is nowhere as small as the headline 0.1%.
The Japan International Cooperation Agency (JICA) report estimates that 40,000 passengers will use the HSR daily in 2023. With an average revenue per user around the Rs3,000 mark, total revenue will be Rs4,000 crore in the first year of operations. Considering a project cost of Rs1 lakh crore, the interest/ hedging amounts to about Rs6,000 crore per year. Including operational costs will add to expenses. So in pure financial terms, this project is not viable over the medium-term. Longer-term inflation and increasing passenger numbers should help in getting to the breakeven point.
However, projects of this nature are seldom profitable. There are other indirect economic benefits that accrue due to infrastructure projects.
The quantification of these benefits is more of an art than science. A small change in assumptions will lead to a large variation in these benefits. A key metric to look for economic benefits would be the number of passengers utilising HSR, so we will scrutinise this number further.
At present, about 6,000 passengers travel daily in the AC chair car category on the Mumbai-Ahmedabad corridor. This number does not include overnight passengers traveling in AC classes. Fare from Mumbai to Ahmedabad in AC Chair car is Rs660. Fare for Shatabdi Express, which includes a surcharge and catering charges, is Rs955. While it is difficult to predict what fares will be eight years down the line, at present the fares are a fraction of the expected HSR fare for this sector. Thus, it will be a challenge to convert these passengers to HSR consistently.
About 7,000 air passengers also travel on the Mumbai-Ahmedabad/Vadodara route daily. These will be key passengers for HSR. However, even here, a significant number of these passengers are transit passengers who use Mumbai as a transit point for onward travel - both domestic and international. This sub category of air passengers will probably continue flying as it will make their transit in Mumbai easier affecting the number that can be moved to HSR.
There is another unique factor, which needs to be looked at closely. The Mumbai suburb of Borivali in particular and the Western suburbs in general have a high concentration of Gujaratis. Thus, residents of these localities will be important customers for an HSR that connects main cities of Gujarat with Mumbai. The planned HSR route however starts from Bandra Kurla Complex (BKC) and continues to Thane and Virar and misses Borivali completely. A passenger, say from Vadodara will have a choice of taking a normal train and reach Borivali in four to five hours. Alternately, she can take the HSR from Vadodara that will take two hours to reach Virar and take an additional hour to transfer and travel to Borivali on a Mumbai suburban local. Many passengers will take the former option. This option is compelling with little difference in travel times for all stations along the HSR except maybe Ahmedabad.
The same situation though to a lesser extent applies to Mumbai Central and BKC. While BKC has grown significantly in a short period, South Mumbai continues to be a major commercial destination and Mumbai Central - the current end point for trains seems to be more conveniently located. Thus, the patronage of customers will be divided.
While overall passenger numbers will rise with time, the possibility of this number to be anywhere near 40,000 daily by 2023 looks difficult. Getting to these numbers will be a key challenge for the project.
A successful implementation of the Mumbai-Ahmedabad HSR will open up the possibility of HSRs on other sectors, somewhat similar to what Delhi Metro did to Metros around the country. Conversely, an HSR service looking for passengers will have a negative effect on other HSR projects in the country.
Please note that in absence of concrete data, some of the numbers are qualified guesses.
(
Nemi Jain studied Engineering at IIT Bombay. He has spent a major part of his career working in banks)
The yen loan is over 35 years and repayment of roughly 2.8% of loan or Rs 2,240 Cr. Whilst rupee depreciates against the yen, it also loses value due to inflation. As rupee inflation is higher than rupee depreciation vs yen (hedged), the net effect is a NEGATIVE REAL INTEREST RATE.
PS. Use last 10 years as a reference. Rs: Yen depreciation was 3.5%. Hedged is 4%. Rs inflation was 6-7%. If future inflation is 4%, then Rs will also be much stronger. A case of Make in India built into the scheme also helps.
The Indian Railways makes a loss on passenger service, because of very low fares, and because it runs uneconomical routes and does populist schemes. Here the route is a profitable one and the operations are more profit-orientated (more Delhi Metro than IR).
The fares will be 5-8 times higher. Whilst there is higher maintenance and better services, the system is more man-power efficient. It doesnt even require drivers and there is less crowd control issues. Also there is scope to add premium freight. The operating surplus could be as high as 50% (excluding the lease payments for traction equipment?).
The net requirement for revenue to cover repayments would be Rs 4480 Cr. This is in line with projections made by writer.
Of course profit surpluses in the first few years can be retained for operational use or used to payback GOI equity.
The yen loan is over 35 years and repayment of roughly 2.8% of loan or Rs 2,240 Cr. Whilst rupee depreciates against the yen, it also loses value due to inflation. As rupee inflation is higher than rupee depreciation vs yen (hedged), the net effect is a NEGATIVE REAL INTEREST RATE.
PS. Use last 10 years as a reference. Rs: Yen depreciation was 3.5%. Hedged is 4%. Rs inflation was 6-7%. If future inflation is 4%, then Rs will also be much stronger. A case of Make in India built into the scheme also helps.
The Indian Railways makes a loss on passenger service, because of very low fares, and because it runs uneconomical routes and does populist schemes. Here the route is a profitable one and the operations are more profit-orientated (more Delhi Metro than IR).
The fares will be 5-8 times higher. Whilst there is higher maintenance and better services, the system is more man-power efficient. It doesnt even require drivers and there is less crowd control issues. Also there is scope to add premium freight. The operating surplus could be as high as 50% (excluding the lease payments for traction equipment?).
The net requirement for revenue to cover repayments would be Rs 4480 Cr. This is in line with projections made by writer.
Of course profit surpluses in the first few years can be retained for operational use or used to payback GOI equity.
What you want to say based on it? is india Has to pay more or less
a) There is a 15-year moratorium. How does hedging start before that?
b) If there is a 50-year repayment, why does the entire amount have to be hedged every year?
Deepak K Mehta
This train was a few minutes late. My friend went to the counter to collect his money. He soon walked away, embarrassed. The only two people in the queue were Indians!
My friend also had this to say. He met an old man on the train. The person was stitching a torn seat. It turned out that it was not a railway employee but a passenger. The man explained that he always carried a needle and thread and would repair any seat that needed it. After all, he had so much time on his hands.
Do we have that culture?
In fact, in the olden days, the green rexine seat covers had the following seal embossed on them; "STOLEN FROM I R".
Sad, but true.
Do you feel assured that Japanese Management can run/maintain, IN INDIAN CONDITIONS? What about additional costs for this?
Why do you think Indians will NOT be able to run/maintain? Please give 2/3 important reasons you visualize.
1. Mindset: Japs are traditionally trained from childhood to perform tasks to perfection. Indians "as long as chalta hai quick fixes". Further loyalty of Japs is still very fierce both for their Employer as well as to their Country. Dispute resolution from family to Industry is mostly mutual and amicable.
2. Many times Senior Mgt.used to say privately that Indian labour laws, land laws and extreme red tape, corruption are preventing them to invest aggressively. So they are mostly resorting to CKD and using India just do screw driver technology. They also said if there was a real political will like in China, Singapore then foreign investment will automatically flow. Till then they see India as consuming market.
3. As far as Shinkansen is concerned the Technology is constantly being upgraded and large number of subcontractors are involved. From rails to electrical/control systems and even daily external washing requires army like discipline to maintain highest quality. I think India is way behind.
Public transportation rarely is in profit unless the SPV has other sources of income.
In such cases there are other intangible factors to be taken into account such as the pride that the citizens would feel and the prestige that India will get.
I was with an American when a US citizen landed on the Moon. I could see the sense of pride bordering on superiority complex that he was displaying in the conversation.