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India on track for partial privatization of national rail system

Alstom and Bombardier show interest in landmark modernization push

India's national railway system is badly in need of an upgrade, but Indian Railways lacks the financial resources.   © Reuters

NEW DELHI -- In the first initiative of its kind concerning India's aging national railway system, the government of Prime Minister Narendra Modi is seeking to allow private sector participation.

Among companies that have shown interest during the pre-application process despite the ongoing pandemic are French train maker Alstom, Canadian maker Bombardier and India-based developer GMR Infrastructure.

Under the proposed public-private partnership, 151 privately-operated trains will be introduced in phases starting in 2023. The trains will complement over 13,000 trains that state-owned Indian Railways currently operate on its 68,000-km network. The government expects the investment to total about 300 billion rupees ($4 billion).

The private entities to be selected will be responsible for financing, procuring, operation and maintenance of the new trains, a majority of which will be manufactured in India and designed for a maximum speed of 160 kph, according to the Ministry of Railways.

It will be a significant change for the country's railway system, which first started operation in 1853 during the British colonial era, and requires a massive upgrade in terms of infrastructure, customer satisfaction and new technologies.

A train produced by Bombardier seen in Switzerland. The Indian government revealed that the Canadian maker expressed interest in the proposed public-private project.   © Reuters

"It is estimated that Indian Railways would need a capital investment of 50 trillion rupees up to the year 2030 for network expansion and capacity augmentation, rolling stock induction and other modernization works," Railways Minister Piyush Goyal told Parliament on Sept. 16.

Cash-strapped Indian Railways does not have the money for such a large investment, hence the government turning to the private sector for help.

"This is a paradigm shift in what [Indian] Railways has been doing," said Amitabh Kant, CEO of NITI Aayog, a government think tank. "This creates a win-win situation for Indian Railways as well as investors by tapping into the potential of the huge unmet demand in passenger business."

New operators will be chosen via a two-stage bidding process: the first stage for submitting qualifications, which closes on Oct. 7, and the second stage for submitting bids.

According to V.K. Yadav, chairman and CEO of the governmental advisory body Railway Board, the bidding process will end in February 2021. After that, it will take about two years to get the domestically manufactured high-tech trains up and running. The contract period will be 35 years.

Train operators will have to pay fixed haulage charges and energy-usage fees. They will also have to fork over a part of their gross revenue to Indian Railways, which will be responsible for providing track access, infrastructure and drivers.

Rescue workers search for survivors after a passenger train derailed in the state of Bihar in February 2019. The age of India's railways has often been blamed for major accidents.   © Reuters

Analysts acknowledge that the public-private railway model could improve efficiency and service, but also warn against being too optimistic about the overall success.

"Well-drafted contractual agreements and adequate clarity in the sharing of risks will be important to sustain this initiative," Acuite Ratings & Research said in a note.

Pointing out that the private players will have to bear the costs of haulage, energy and maintenance, as well as the capital outlays to purchase the train coaches, Ajay Shukla, a former Railway Board member, told a program on ET Now channel: "I do not imagine any private company coming in under the present situation unless they are able to [set] their fares very high."

Many see freedom to set fares as the key to luring private companies.

For decades, governments have remained focused on keeping railway fares low and on offering highly subsidized fares to senior citizens, families of army veterans and others, thus preventing Indian Railways from profiting on its passenger train operations. This has been a politically sensitive issue in India, where the poorest of poor rely on the state-run network for transportation.

In the fiscal year ended March 2018, Indian Railways suffered a loss of 311.28 billion rupees in passenger business "on account of pricing of passenger fares below cost of operations," according to official data submitted to Parliament. Indian Railways has long covered its losses in passenger services with profits from its freight business.

Government policy regarding the freedom to set fares is clear.

"[The] concessionaire will be free to charge a market-linked fare to passengers [of the privately run trains] and will be providing value-added services for food, comfort and entertainment for individualized and enhanced passenger experience," NITI Aayog's Kant said.

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