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)