What if Bullet Train can’t beat the airlines, in terms of fares and time taken?
In December 2015, I had written earlier that the project cost of Mumbai-Ahmedabad High Speed Rail (HSR) project, India’s first bullet train, may not even cover the cost of hedging the Yen loan. We now have some more clarity on the cost which is now expected to be Rs1.10 lakh crore. Since the Japanese are funding about 80%, India has to find the other 20% or Rs22,000 crore. This is not a small amount but tends to be neglected in the bigger picture. Given the prevailing interest rates, funds for 30-year duration can be raised at 7.3% in India. In interest cost terms that will be Rs1,600 crore a year on the Rs22,000 crore Indian contribution.
 
Considering the current estimate of 40,000 passengers using the train daily, Rs1,100 will have to be claimed from each passenger to cover the interest cost of the Indian contribution alone (Rs1100 x 40,000 x 365 = Rs1,600 crore). While operational costs can be fairly variable, a ballpark figure would be around Rs1,200-Rs1,500 per passenger per trip. Thus the breakeven cost per ticket even after isolating the yen loan will be around Rs2,300-Rs2,600. This ties in well with the initially rumoured fare of Rs2,800.
 
The decline in oil price in past two-three years has made the case for HSR weaker. Most of the feasibility studies for HSR were carried out when oil prices hovered around $100-120 dollars a barrel. Today they are about half that figure. And in the short to medium term, oil prices look unlikely to rise back to $100 due to possibility of tapping abundant shale reserves. This reduction in fuel cost has brought down airfares and possibly reduced the number of passengers that will use HSR initially. The author recently checked Ahmedabad -Mumbai air fares and leaving aside the festival period and immediate travel, tickets were available starting from Rs1,500. The fares on HSR as envisaged currently are not competitive at all.
 
Whether the Rs88,000 crore Japanese loan at 0.1% is really free or expensive will only be truly known decades from now because of foreign exchange (FX) risk. The midpoint of the loan after considering moratorium period is about 30-35 years. About 30 to 35 years ago, Rs5 bought 100 yen.
 
Today, we need Rs55-60 to buy 100 yen. While past performance is not a predictor of future, any large depreciation could make all current calculations way off target. And it will be the common man that will bear the brunt of the cost. While the yen exposure can be hedged in the Forwards market, the current cost is about 5% per annum. That would make the project nonviable. A govt project with implicit state guarantees can get away with FX risks of such magnitude. However, is this advisable? As experience shows, many a corporate has gone bankrupt trying to play this unhedged exposure game.
 
The low rate should also be put in context. Japan has previously financed other rail projects including the Western Dedicated Freight Corridor (DFC) and metros at low rates. The latest tranche on DFC was also financed at 0.1 % for 40 years. However, these loans are always "tied". A certain portion is reserved to buy materials and services from Japanese suppliers, sometimes at higher prices than that available in open market. India too makes similar deals. Just recently, India opened a $4.5 billion credit line to Bangladesh at only 1% interest - the condition being a major chunk of the loan will be used to purchase Indian products and services.
 
The passenger numbers themselves deserve a closer scrutiny. Currently, around 8,000 passengers travel daily by air on the Mumbai-Ahmedabad/ Vadodara route. These include a large number of transiting passengers (both domestic and international) that will probably continue to prefer air travel due to the seamless connectivity at the airport. Excluding overnight trains, about 6,000 AC chair car seats are available on the route every day. Fares on these seats range between Rs500 and Rs1,000 - a lot cheaper than the probable HSR fares. So conversion of these passengers will be limited. Those traveling by car and buses are also unlikely to transit to HSR in large numbers - they already have mass transport alternatives available today if they wish to make a change. Throughout the world passenger numbers on HSR have been overestimated at the planning stage... and unfortunately by large margins.
 
Looking at this differently, the initial 40,000 daily passenger number implies 27 trains daily each way or a train every half an hour throughout the day. Even accounting for increase in passenger numbers in five to seven years’ time this seems like an excessive number of trains. If the assumed passenger numbers do not materialise, the breakeven ticket price quickly rises from high to absurd levels further discouraging HSR travel. The railways may be left with no choice but to subsidise heavily.
 
As India progresses economically, high speed and high capacity transport infrastructure will be eventually required on a massive scale - not just the Mumbai-Ahmedabad but all over the country. In the long term HSR will be unstoppable. The author is a railfan and hopes to see HSR speeding through the Indian countryside someday. 
 
However, it is important to get the timing right. Try too early and there will be a risk of creating dead assets that have to be paid for. Given that HSR in its present form will not be competitive with air travel even after totally isolating the yen loan component, oil prices are lower, passenger numbers are uncertain and the yen loan may bite back, the best time to implement HSR needs to be revisited.
 
(Nemi Jain studied Engineering at IIT Bombay. He has spent a major part of his career working in banks)
 
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    COMMENTS

    Amit Jain

    2 years ago

    Airplanes do not start from the middle of the city. There is significant time involved in reaching an airport, checking in and waiting in the departure lounge. Besides, to say that the timing is not right seems conjectural. Given the perennial tech-deficit status of IR, the proposed project is not only a technology demonstrator with huge spin-offs, it will also go a long way in improving morale of the rail industry in general. As for viability, mass transit systems are considered acceptable even if they don't recover capex, so long as some operational profits are there. The article is an academic exercise, serving little purpose.

    REPLY

    Abhishek Singh

    In Reply to Amit Jain 2 years ago

    Ahmedabad airport is less than 10km from the railway station. Total time might be same but price is almost double (only running cost). If the project is not event able to recover the operational cost then it's definitely not a morale booster but demotivating. If you include FX risk, it's even worse. Hope you can understand.

    Sachin Purohit

    2 years ago

    Thats a very good analysis using some very fair assumptions to be called unbiased. But here are some thoughts and what if scenarios from someone who is not an expert in all this :
    1. Oil prices have stayed benign for a very long time after they peaked at about $120-130/barrel. But they are now trending up
    2. What if the railways were to convert all AC carts in Mumbai to Ahmedabad trains to sleeper carts? Also bookings for the AC carts for trains going via Ahmedabad were to be made available only for longer distance traveller and not for those who are Ahmedabad bound? (Forced conversion, if you will)!
    3. Government has come up with innovative cesses like swachta cess. What if it introduces a Carbon Footprint cess on all forms of luxury means of transportation using fossil fuel including air travel? That would be like the carbon credits system where emitting travellers will be paying the non-emitting ones.

    t j ethiraj

    2 years ago

    If the money spent on bullet train is alloted for track and coach replacement the average speed of all trains can be increased to 90 km/ hour.Inturn no of passenger travelling will increase by 100%.chennai Bangalore travel time is 6 hours and it will become 3.5 hours.with same no trains you can carry 100 %more passengers.

    Mohan Krishnan

    2 years ago

    When I was working in Japan, I used Shinkansen only when I was being reimbursed by my Company. When traveling for personal use I always used buses which were less than half the cost. Some Japs used to joke with me that Japan will not export Shinkansen to other Countries because they will earn bad name due to incompetent operations. Like giving a garland to a monkey.

    Chandragupta Acharya

    2 years ago

    True, the analysis suggests that the project is financially unviable, and would become a burden on the tax payer. One would reach the same conclusion (if similar calculations are done honestly, but for some reason we don’t ! ) with almost every infrastructure project such as the Metro Rails sprouting in every Tier I & II cities in the country today, Mono Rail, Tier II Airports, even many of the highways and normal railway track expansions to remote and under developed areas. The expectation is that these projects would lead to a whole new ecosystem being developed around them, and a higher and better standard of living, leading to benefits that go far beyond the ticketing revenues that one calculates. HSR is more a leap of faith which - if it works - can be extended to other places at significantly lower incremental cost with a very large pay off. Given that current outflows are minimal, it may just be worth a try.

    Mahendra Islaniya

    2 years ago

    First of all i would like to say a Mumbai-Ahmadabad Route selected is absolutely wrong than selection of fastest Bullet Train mode of transport which we are talking about.In most Part of the world always Political Capitol connected with their financial Capitol city but to our surprised Our PMO office selected a Financial city to Home town route? Most of the people in developed country will laugh about Priority of the poor route selection. Recently Beijing connected to shanghai & Indonesia following same logic. If Delhi Mumbai connected by Bullet train it will bring more Foreigner/Investment to this Mumbai city even for all other state b'cos of massive ready business networking connectivity from Mumbai,existing since long ! Its just 1 man 1 Party dream to make it happen,its sheer waste of Public's hard earned Tax -income Money. Even some Bhakt told me Mum-Abad route is having large industrial city & its benefit for them this route has been selected,My dear just show me SHENZHEN kind of industrial town - which area wise like size of Maharashtra,located on this route? Whatsapp Guruji & Guruma are doing good Marketing in full swing but without understanding need of the mass in this country. If Mum- Delhi Connected by Bullet train than North tourism development will be 10 fold to current level!

    Nemi Jain

    2 years ago

    On stops enroute...

    Indian railways even today do not want halts at smaller stations due to limited number of passengers. Leave alone AC classes, even in Sleeper class the passenger numbers are not enough to justify a halt.. Most trains start with minimal halts. Eventually the number of halts go up due to political pressure.

    As far as bigger cities on the route go, Vadodara already has mutiple flights to Mumbai and Ahmedabad is only 100kms away. Surat may benefit but the distances are on the lower side - 270 km from Mumbai and only 230 kms from Ahmedabad. High fares will dissuade passengers (Rs 1100 per passenger just to cover interest costs on the Indian portion), so once again we are back to subsidising passengers heavily.

    When I claim there is a weak economic case even with the questionable number of 40,000 passengers daily, how do I justify the economics for a minuscle number of passengers that may benefit from stops enroute?

    Anand Vaidya

    2 years ago

    1) It is possible that oil prices may go up again, electricity prices can only go down - especially the solar/wind/renewables.
    2) HSR can be operated on subsidy basis for a while - reduces oil bill & forex, so the savings are multidimensional.
    3) The first one is more of a technology demonstrator & lets Indians/Railways learn the tech/op skills. The subsequent lines might be rolled out at a much lower cost. Possible?
    4) Today Rs2800 may look expensive but will it look as expensive 10 years hence? (inflation)

    REPLY

    Nemi Jain

    In Reply to Anand Vaidya 2 years ago

    Why not operate on subsidy while the passenger numbers build up and save forex on oil?Why should the common man subsidise heavily a project that will cater to a very small segment? It would be better to wait for passenger numbers to build up(which they eventually will) and then implement. On forex spend on oil, we have a comfortable forex position, so spending on oil isn't as critical as it used to be. If we end up in a current account crisis then it may become important, but that looks unlikely.
    Follow up HSRs may be cheaper. However, a corollary to this point would be initial projects rarely come under budget and are more expensive than anticipated! What if the project comes in at more than 1,10,000 crores? I recently read a report quoting a senior retired railway official arguing that costs cannot be less than 1,50,000 crores by comparing costs of elevated sections with the costs on current elevated sections on metros(Sorry, can't remember source.)
    Agree that fares today are not srictly comparable to fares 5 years down the line. However, Inflation affects every thing. Both air fares and operational costs on HSR will go up.

    c babu challa

    2 years ago

    good article. If the HSR cost has to be highly subsidized to make it viable, then it is against the present government policy which is aimed at removing subsidies. Then the project has to be cancelled, even if money has been spent and no more money should be spent. A stich in time saves nine. Even if it is being made viable, it is totally non-priority item for the present situation of the country, where most of the colleges and universities are groaning under lack of funds, misuse of funds, lack of lectures, under paid faculty, etc. Education is very important and building the nation, bullet train is a small part of the nation, is paramount.

    Dharmesh Bhuta

    2 years ago

    Two points not factored.
    1. Bullet train will also cater to multiple stops between mumbai and ahmedabad , not possible by flights
    2. New Technology and experience in india
    3. In case Air route has reached full utilisation? Bullet train will give another option to people.
    3.

    Mrinal Kanti Ganguly

    2 years ago

    What about passangers enroute, where airports are not there and
    who may be travelling to Mumbai or Ahmedabad by road?

    Veeresh Malik

    2 years ago

    With all due respects, the way Mumbai's present airport is performing and the new future airport is nowhere on the horizon, it might just become more feasible to fly to Ahmedabad from wherever and then take the High Speed Train to Mumbai.

    Tata Teleservices to merge with Bharti Airtel
    The Tata Group has decided to merge its telecom business with Bharti Airtel Ltd on a debt-free and cash-free basis. Tata Teleservices Ltd (TTSL) and Tata Teleservices Maharashtra Ltd (TTML) would merge their consumer mobile businesses (CMB) with Bharti Airtel. While the Tata group has settled all past liabilities and dues of Tata Teleservices, Bharti Airtel will assume a small portion of Tata's unpaid spectrum liability towards Department of Telecom (DoT), as per the agreement. Separately, Tata Group says it is also exploring combining businesses of Tata Communication and Tata Sky.
     
    Sunil Bharti Mittal, Chairman of Bharti Airtel, said, "This is a significant development towards further consolidation in the Indian mobile industry and reinforces our commitment to lead India's digital revolution by offering world-class and affordable telecom services through a robust technology and solid spectrum portfolio." 
     
    As part of the Agreement, Bharti Airtel will absorb Tata Teleservices' operations across the country in 19 circles, 17 under TTSL and two under TTML. The merger will also enable Bharti Airtel to further bolster its strong spectrum foot-print with the addition of 178.5 MHz spectrum (of which 71.3 MHz is liberalised) in the 850, 1800 and 2100 MHz bands. 
     
    Over 40 million customers of Tata Teleservices will join Bharti Airtel and benefit from 4G mobile network with fall back on 3G and 2G ecosystem. Tata Teleservices' operations and services will continue as normal until the completion of the transaction.
     
    Separately, the Tata group says it is also in initial stages of exploring combination of its enterprise business with Tata Communications and its retail fixed line and broadband business with Tata Sky.
     
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    Mahesh S Bhatt

    2 years ago

    Beauty of Management Finances/Audits/Accounts/Costing is still Telecom sector has Rs800000 NPA's which also has additional RJio Rs 80000 cr debt. No measurement techniques for scale of billion Subscribers who likes Banks are overbilled & poorly served & made feel they are getting cheapest services God Bless Mahesh Bhatt

    Mahesh S Bhatt

    2 years ago

    Better M & A rules be changed asap in view of abnormal Policy cheating at Finance/Telecom/Consumer Affairs Ministry levels jointly resulted in 173000 cr CAG ESTIMATED loss to exchequer.What about loss of Business Investments of DoCoMo ( invested $31 bill fighting for $16bill at International Courts Tata/RBI not allowing).Etisalat/Telenor/Uninor/ Loop Videocon +123 operators investment all went bad because of good management by Ambani/Tata/Bharti & BSNL etc.
    Coming to Telecom Industry only Vodafone has survived AT & T too quit. DoCoMo & NTT etal are coming Data-way offering Datacentric services. Loss of many jobs is immeasurable So good news Mahesh Bhatt

    B. Yerram Raju

    2 years ago

    Monopsonies in mobile and telecommunication could hurt consumers if the regulator is not alert. Airtel is already fleecing its customers!! On top, call drops are galore.

    2 years ago

    What will happen to VSNL internet service and Tata walky subscribers ?

    Infosys makes public offer to buyback shares
    Software major Infosys Ltd on Tuesday made a public offer to buyback 11.3 crore equity shares of Rs 5 face value at Rs 1,150 per share on proportionate basis through the tender offer route.
     
    "Kotak Mahindra Capital Company Ltd and J.P. Morgan India Ltd have been appointed as managers to the offer," said the IT major in a regulatory filing on the BSE.
     
    The public offer came a day after the company announced on Monday results of the postal ballot and electronic voting on the buyback resolution of its Board.
     
    As per the results, 16,814 members voted in favour of the resolution, with 4,873 through postal ballot and 11,941 by electronic mode, representing 97.64 per cent of votes. 
     
    The month-long voting was held from September 8 to October 7.
     
    The offer size is 20.51 per cent of the total paid-up capital and free reserves, aggregating up to 11.3-crore shares or 4.92 per cent of the total shares for an amount not exceeding Rs 13,000 crore.
     
    According to the shareholding pattern, the promoters group, comprising co-founders and their families hold 12.92 per cent of the shares, Foreign Institutional Investors & Foreign Portfolio Investors 37.33 per cent, Indian retail, corporate and other investors 23.08 per cent, Indian FIs, Banks and Mutual Funds 9.63 per cent, American Depository Receipts 16.69 per cent and Non-Resident Indians 0.52 per cent.
     
    The promoters, including co-founders N.R. Narayana Murthy and Nandan Nilekani have offered to sell 1.77 crore shares - valued at Rs 2,038 crore in the Rs 13,000 crore buyback offer.
     
    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.
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    Suketu Shah

    2 years ago

    Wonderful,looking forward.

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