Public Interest   Exclusive
Mumbai-Ahmedabad High Speed Rail: Will the revenues cover even cost of hedging the Yen loan?
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)
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    COMMENTS

    PRAKASH D. BASRUR

    4 years ago

    What a tragedy that the author of this article is basically an Engineer but his article is all about financial paper acrobatics derived out of his later grooming as an MBA ! This kind of building a "paper railway" goes on and on before and after the physical railway is built by engineers like E.Shreedharan of Konkan Railway fame ! I am sure whwn the Gritish built the Mumbai-Pune rail route there was no such "paper railway" built ? See how many decades the Mumbai-Pune railway has been running and where is that "network of Paper Trail" post martem of fodder of financial jugglers with their myriad calculations of DCF / NPV et al ?

    Arvind Agarwal

    4 years ago

    The 20% funding from Indian government can come from rebates on taxes and share of land holdings. Some Rs 55,000 Cr will be spent on basic infra, which is India-based spending. This money will boost the economy and Government will get its share. I expect the 20% will be easily covered. Also it will give employment - & a boost to GDP - at no extra cost to GOI.

    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.

    Arvind Agarwal

    4 years ago

    The 20% funding from Indian government can come from rebates on taxes and share of land holdings. Some Rs 55,000 Cr will be spent on basic infra, which is India-based spending. This money will boost the economy and Government will get its share. I expect the 20% will be easily covered. Also it will give employment - & a boost to GDP - at no extra cost to GOI.

    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.

    REPLY

    Rakesh Chaurasia

    In Reply to Arvind Agarwal 8 months ago

    se 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.
    What you want to say based on it? is india Has to pay more or less

    Harsh Modi

    4 years ago

    If they can create a stop somewhere between Ahmedabad and Mumbai, and monetize using real estate, that would be terrific. They could create some daily passengers who would treat this like a daily long distance travel.

    Deepak Mehta

    4 years ago

    I did not understand.
    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



    PRAKASH D. BASRUR

    4 years ago

    Then what made Modi go in for the route ? Obviously , to make Mumbai a satellite town of Gujarat ? Is this a precursor to what Modi would be planning for the development of Gujarat as a @remote control" C.M. of Gujarat? Will such actions of Modi increase the fear of Shiv Sena ?

    Bapoo Malcolm

    4 years ago

    A close friend visited Japan some years ago. He travelled on the high speed train. The train keeps precise time. If it's late, you get a refund. It is compensation for missing a connection.

    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.

    Baskaran

    4 years ago

    Where is the need to move people at high speed in Internet age when video conferencing and data transfer will suffice.The High speed trains are meant for passenger transportation.What India needs is dedicated freight corridor with 140 KMPH goods train service.HSR and Express highways are not required.I thnink cost benefit and supporting local technology and manufacturing are more important.People should use RTI to question the Government about its authority to just like commit the country and the future generations with mounting debt.We have to spend our limited resources to improve irrigation and water shed management.

    Mohan Krishnan

    4 years ago

    I am an Engineer who had worked both in China (2yrs) and Japan (8 yrs). I can tell you confidently that India is not Technologically as well as Culturally prepared to absorb this high tech train technology. It will require Japanese Management to run/maintain these trains. Although the plan fits nicely into Japanese efforts to beat deflation it will be foolhardy for India to fall into this trap.

    REPLY

    Narendra Doshi

    In Reply to Mohan Krishnan 4 years ago

    Dear Mr. Mohan,
    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.

    Mohan Krishnan

    In Reply to Narendra Doshi 4 years ago

    Let me tell you that I am a B Tech from IIT Kharagpur. I have offered consultancy in my field as a freelance to Engg firms all over the World. During my long stint of 8 years in Japan, I had the opportunity to interact from shop floor workers to higher Management. Based on my experience I can list the following key differences between our 2 systems.
    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.

    SRM

    In Reply to Mohan Krishnan 4 years ago

    So what if u are an IITian, the esteemed renowned Shri E Sreedharan is more knowledgeable and qualified, experienced than urs. He never uttered that introducing HSR is beyond India's capacity due to its peoples mind set. He even advised the Kerala Govt to have HSR from Thiruvananthapuram to Mangalore. Every technology is new and initially will take time and also will be costly. People like u are only responsible for our countries plight and demoralizing any mega project of the nature of HSR. Even I know once upon time the introduction of metro rail was also criticized by many people. However, the esteemed Shri. E Sreedharan showed how the project could be completed in time even before time and also function in profit from the day of its operation. Now lacs of people are using the same transportation mode daily not only in Delhi but in other cities of India also. Though I respect being calling urself as IIT qualified. However, qualifying from any premier institute does not make u an expert in analysing or coming into conclusion that particular project is wastage of money or beyond the viability in Indian context etc. etc. Though HSR Bullet trains are need of the hour in our Country India and it must be implemented and everyone should cooperate for implementation of such project. SO my request is that either contribute in speedy implementing such project by selflessly serving the nation by using the your qualifications and knowledge and experience rather than criticizing any such move by the Government.

    Mohan Krishnan

    In Reply to SRM 4 years ago

    Please don't get emotional and hit me below belt. I will be more than happy to get back all my dollars I earned for the country by sacrificing my family life and which has been misused by Govt. Time will come when we will be begging for investments from Vietnam, Cambodia, Thailand etc which are growing fast. Since 1981 so called liberalisation FDI has been poor.

    Guruprasad

    4 years ago

    The article is based on deep financial analysis. No doubt the financial analysis concentrates only on the monetary part of project viability. However, there are other serious considerations involved in this case. One such project could boost the confidence in people, improve skill sets, it can act as readily available prototype to be deployed elsewhere in the country. Why should we always assume numbers based on historic travel patterns? The very fact of traveling in this train could boost tourism. It supports lot of ancillary industries and services. One would agree that a thorough social cost benefit analysis is required besides technical and financial analysis.

    Deepak Mahulkar

    4 years ago

    I think it would be inappropriate to make cost-benefit analysis to such highly technically complex project. Do we carry out the same analysis when we develop long range missiles or sending satellite to Mars? What is the probability of using them? We have to train our engineers to build such projects. No developed country will allow our engineers to participate in their building programme. Mumbai-Ahmedabad project could be beginning. Once we are successful, government may plan to extend it beyond Ahmedabad with marginally extra cost. May be we can acquire expertise to develop similar infrastructure in other developing countries at much lower cost.

    Prasanna Rane

    4 years ago

    Bullet train only for gujaratis. Narendra modi is only PM of Gujarat.will not let this happen. Jai Maharashtra

    REPLY

    Gupta

    In Reply to Prasanna Rane 4 years ago

    You should first check your own comment. You say "Jai Maharashtra", not "Jai Hind". How do people like you have to audacity to make such comments. And by the way, for the record, the train is from Mumbai to Ahmedabad and Mumbai is part of your "Jai Maharashtra". It is narrow minded mentality like this because of which our country is in the dumps. Appalling mentality.

    Kumar Swamy

    4 years ago

    Why so negative? Why should government hedge? Have some confidence in future of India. Who knows if present policies continue, Rupee may be more valuable than Yen. Have you con sidered the possibility of NEGATIVE interest rate payment (in effect Japan giving more money to India for using its Yen?!!!!)?

    satdin.in

    4 years ago

    every one knows what is the performance of rail. now and than we heard derailment or accident at unmaned level crossing .before dreaming of bullet traing pl tell our leader to travel in a locla train or sl or general compartment of train

    Sudhir Jatar

    4 years ago

    I am sure feasibility and detailed project reports would be prepared. That will give a better idea of the NPV and economic and financial rates of return.
    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.

    For Goa, Railway Minister Suresh Prabhu is a real 'prabhu'!
    Suresh Prabhu may well be India's railways minister, but for Goa, in Chief Minister Laxmikant Parsekar's words, he is nothing short of a 'prabhu' (lord) himself, especially vis-a-vis the quantum of projects sanctioned by him for India's smallest state over the last one year.
     
    Prabhu, a son-in-law of Goa, who has made 10 official trips to the state since assuming office in November 2014, has launched a batch of new trains, started a new railway training institute and announced doubling of railway tracks - all of which, according to Parsekar, has been a godsend bonanza of sorts for Goa, which has historically been at the tail-end of railway ministry largesse.
     
    "Suresh Prabhu has given a lot to Goa over the last few months. We just say, 'Hay Prabhu (O lord) please bless us with these things'. And Prabhu immediately obliges. For Goans, Suresh Prabhu is a real prabhu," Parsekar told IANS.
     
    Barely a month after taking over, Prabhu, on his first visit to Goa, announced a holiday special from Mumbai for the popular Christmas and New Year Season. The train started within a week.
     
    A month later, Prabhu was at it again, launching the concept of a Deccan Odyssey-styled luxury train along the Konkan region with a touch of Goa to its interiors. The train is expected to start rolling out some time next year.
     
    On a request from Parsekar in May, the minister allotted to Goa its first diesel electric motor unit (DEMU) a couple of months back. Last month saw the launch of the Goa-New Delhi Rajdhani express, while the country's first double decker air-conditioned Shatabdi train was also flagged off by Prabhu from the Margao railway station earlier this month.
     
    A new train to Tirupathi in Andhra Pradesh from Margao would be started next year.
     
    The doubling of the Konkan Railway was an old proposal that never moved forward in view of the lack of government will, high costs and an environmentally fragile region.
     
    The cost of doubling the 736-km track from Roha in Maharashtra, through Goa to Mangalore in Karnataka for around Rs. 10,500 crore (over $2 billion) was cleared by the railway ministry with Prabhu at the helm, while complete electrification of the line for Rs.750 crore is also under way.
     
    In October, the Konkan Railway started the George Fernandes Institute of Tunnel Technology in Margao, which, in partnership with Goa University, will promote education and research in tunnelling technology, which the country desperately needs for creating connectivity to its remotest regions.
     
    For his part, Prabhu, whose wife Uma hails from the village of Ribander on the outskirts of Panaji, believes that the potential of Goa, which receives nearly three million visitors annually, as a tourist destination can be furthered by increasing connectivity with the rest of India through the railway network.
     
    "Goa has its own identity and created a niche for it in the tourism world. It is difficult to say no to Goa," Prabhu has said, making a case for pushing for the series of state-related projects.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
  • User

    COMMENTS

    Jyoti Dua

    4 years ago

    Excellent. A Institute of Tunnel Technology is a great idea.

    E NASSER

    4 years ago

    all ministers - whether from congress or BJP do all tricks to please their voters without looking into the economic feasibility of the railway line sanctioned or projects awarded

    Anand Vaidya

    4 years ago

    Are you insinuating that Suresh Prabhu is doing all these because he has married a Goan?

    Considering the amount of work he has done (even for long neglected NE India), this is very unfair remark

    REPLY

    dvn

    In Reply to Anand Vaidya 4 years ago

    Anand I agree with you

    Aamcha Sexun Nahi!
    There is what is called jurisdiction. It means the area over which a court of law has the authority to hold sway
     
    Many of our readers, their friends, clients or acquaintances, must have heard this line. Translated into acceptable English from Marathi, it means, ‘not our Section’. In other words, ‘Get lost. You have come to the wrong place’. Many a poor folk takes this response as the final answer. Unfortunately, it is not only the police who mouth this famous phrase. Many litigants also find solace, or rather loopholes, and exploit them. How does that work?
     
    There is what is called jurisdiction. It means the area over which a court of law has the authority to hold sway. The correct appellation is ‘Territorial Jurisdiction’, as opposed to ‘Pecuniary Jurisdiction’. Territorial Jurisdiction demarcates an area where one can file a case. The guiding principle is called ‘the cause of action’, the cause being the legal problem that has been created by someone for the person affected. The origin of the problem is the place that determines the correct court, jurisdiction-wise.
     
    There is a book of rules for lawyers, called The Code of Civil Procedure, 1908. Or simply the CPC. It contains a Section on the subject of jurisdiction. The subject matter has to be of a civil nature, a determination of the rights of the parties, maybe on land ownership, use, or maybe on monies owed.
    There is another Code. The Code of Criminal Procedure, 1973. The Code is much older but the revision date holds good. It deals with crime. From simple abusing, to heinous murder, rape or genocide. Here, again, jurisdiction is important.
     
    You be the judge.
     
    A) Mr A buys a refrigerator from a shop in a small town. The shop is a branch of a very big concern having its head office in Mumbai. There is some dispute and the company files a suit in Mumbai. Is it right in doing so?
     
    B) Mr B steals money from an ATM in Mumbai; next, he robs another ATM, of the same bank, in a town in Gujarat. Next, he breaks into an ATM in a village near Delhi. He is caught and found to be a resident of the village. Where can the bank institute criminal proceedings? The village, Delhi, Gujarat or Mumbai?
    C) A woman from Telangana is married in Punjab where her husband has a home. The marriage takes place in Punjab. Things sour; she returns to her native place. The husband then files for divorce, in Punjab. Is he right in doing so?
     
    The answer to A) is determined by the convenience to Mr A. Since he bought the refrigerator from a shop in his town, and which town has a branch of the plaintiff, the correct court of jurisdiction will be nearest the town, not Mumbai. The poor man cannot be put to loss of time, money and energy. A recent judgement of the Supreme Court in IPRS vs Sanjay Dalia, makes interesting reading on this point.
     
    The thief, in his escapade from Mumbai to his native muluk, can be charged in any of the places mentioned; but convicted for all robberies on separate counts.
     
    The estranged wife has an option. The husband, in spite of the fact that the marriage took place in Punjab, would have to go to Telangana; if his wife sought him to. This bending of the jurisdictional rule is to ensure less harassment for women. We believe it is correct.
     
    Inter-country jurisdictions have a life of their own and would be too extensive to discuss here. Suffice it to say that the question of jurisdiction is important.
     
    Then, there is the aspect about the court of lowest jurisdiction. It means that one has to approach the subordinate trial courts first, whenever possible, especially in terms of pecuniary jurisdiction. For example, the Bombay High Court now entertains suits of over Rs1 crore. For less than that, one needs to approach the city civil court. Similarly, for criminal matters, different courts have varying authority, depending on the gravity of the crime.
     
    So, check the jurisdiction first. Do not rush to the High Court, no matter what the advice. You will be asked to take your papers elsewhere.
     
    (Bapoo Malcolm is a practising lawyer in Mumbai. Please email your comments to [email protected])
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    COMMENTS

    Meenal Mamdani

    4 years ago

    The author is to be commended for clarifying a point of law. As he points out, often this reply suggests callous disregard of the complaining party. This explanation will help plaintiffs understand the validity of the response.
    All the same, the same reply can be given in a more sympathetic manner, with an easy to understand explanation, assuaging the feeling of rejection and despondency of the plaintiff. But officialdom rarely bothers to exert charm for a non-VIP.

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