14 August, 2015
Often a subject of derision, due to its never ending woes, Indian Railways remains an irreplaceable national asset with a total network of 65,000 km that connects far flung areas of the country. It runs 12,000 passenger trains connecting around 8,000 stations spread across the country and carries over 23 million passengers per day. It runs more than 7,000 freight trains per day carrying about 3 million tonnes of freight.
India has the world’s fourth largest web of railway track and is considered second largest by usage carrying 8.4 billion people annually in 2014-15.
Notwithstanding the massive size, scale and glory of Indian Railways, the overall rail network remains in a decrepit condition owing to a variety of reasons but largely due to a lack of funds. India’s political realities have ensured that rail fares have not kept pace with annual inflation thereby creating a wide revenue deficit leading to a poor operating ratio.
The lack of funds stemming from low revenue has hindered expansion and modernisation plans. As a result of poor financial health, India’s high speed network comprises a few routes such as the Rajdhani, Shatabdi, Duronto, Garib Rath Express that run at a top speed of 130kmh.
High speed rail projects have been a financing nightmare globally, and India is no exception. The magnitude of the funding challenge can be demonstrated by the fact that the cost of laying a metro is three times higher than that of a regular rail line while a high speed rail project requires six times more investment than what is required to build a regular rail line. That Indian Railways has not been able to replicate China’s modernisation and expansion of its network is evidence of India’s resource shortfall.
Significance of high speed rail for India
Clearly, the lack of long-term capital is holding up India’s high speed rail plans. However, given India’s position as one of the fastest growing economies in the world and the growing needs of its businesses and aspirations of its people, the question now is not whether India can afford a high speed rail system but for how long can India afford not to have it.
Implementing the HSR network would lead to the upgrade of policies, procedures, human resources and organisational restructuring that is essential to run a modern railway system. If implemented in a planned and precise manner the spin-off effects of HSR trains on the economy can be very significant. It is an established fact that high speed rail spurs the revitalisation of cities by encouraging high density, mixed-use real estate development around the stations. It also fosters economic development in secondtier cities along train routes by linking cities together into integrated regions that can then function as a single stronger economy. Reduced travel time, increases in employment and industrial shipments, energy efficiency and low carbon emissions are some of the many known benefits of a high speed rail system.
Making high speed rail a reality
In light of this financial constraint, the government has permitted 100% foreign direct investment in railway infrastructure that includes high speed rail, thereby opening the railway sector to investment by international rail companies, foreign governments, pension funds, insurance funds and bilateral and multilateral funding agencies. In the Union Budget 2015-16, the government announced its decision to embark on an ambitious Diamond Quadrilateral Network of high speed rail, connecting major metros and growth centres of the country.
High speed rail – Indian and Global perspective
Below is a snapshot of various models of high speed rail employed by other countries:
- Dedicated: Japan’s Shinkansen is an example of a dedicated high speed rail system with separate and exclusive high speed tracks. The system was developed because the existing rail network which was already congested with passenger and freight trains could not support the new high speed trains
- Mixed high speed: France’s TGV (Train à Grande Vitesse) is an example of this model that includes both dedicated and high speed tracks that serve only high speed trains and upgraded, conventional tracks that serve both high speed and conventional trains
- Mixed conventional: Spain’s AVE (Alta Velocidad Española) has dedicated, high speed, standard-gauge tracks that serve both high speed and conventional trains equipped with a gauge-changing system, and conventional, nonstandard gauge tracks that serve only conventional trains
- Fully mixed: In this model, exemplified by Germany’s ICE (Inter-City Express), most of the tracks are compatible with all high speed, conventional passenger and freight trains
In the Indian context, the speed of semi- high speed systems will range from 160- 200kmh and high speed rail will range from 250-350kmh. The high speed corridors identified for the purpose of carrying out feasibility studies are Mumbai-Ahmedabad, Delhi-Chandigarh-Amritsar, Delhi-Chennai and Chennai-Bengaluru-Mysore. High speed trains with speeds of more than 160kmh would run on normal conventional tracks. Nine corridors, Delhi-Agra, Delhi-Chandigarh, Delhi-Kanpur, Nagpur-Bilaspur, Mysore-Bengaluru-Chennai, Mumbai-Goa, Mumbai-Ahmedabad, Chennai-Hyderabad and Nagpur-Secunderabad, have been identified for passenger trains with speeds of 160-200 kmh. The first passenger train at 160 kmh will run from New Delhi to Agra.
Financing
The following financing models are likely to be adopted.
- Budgetary funding where Indian Railways retains the full control on construction, operation and maintenance of the HSR system
- PPP wherein financing, construction, O&M and revenue risks are transferred to the private sector
- Multilateral funding through soft loans
- Government to government co-operation during construction and PPP model for operation and maintenance
Key determinants of an HSR project in India
The success of high speed rail projects in India is heavily contingent on the following factors:
- Land acquisition: In 2014, almost 189 transport projects worth Rs 1,800 billion were held up due to problems with land acquisition. High speed rail tracks are typically laid in a straight-line so flexibility over land acquisition is limited
- Environmental clearances: In India 40% of the 419 infrastructure projects worth Rs 20,000 billion are held up due to delay in project clearance. A delay in obtaining environmental clearances can have a knock on effect on the programme and costs
- Financial feasibility: While evaluating the financial feasibility of the project, factors such as the anticipated revenue of the project and the availability of long-term finance should be taken into account based on current realities
- Risk allocation: Risk allocation in large infrastructure projects in India, in its present form, is heavily skewed against the private sector. It has been seen that the private sector is often left grappling with risks that it is ill-equipped to handle. The government should, in the interest of the project, adopt the cardinal rule of risk allocation that the risk should be allocated to the party which is best suited to manage that risk
- Other key aspects: In addition to the above, other factors which would play a major role before an HSR project is set up in India are as below:
- Decision on the speed – whether 250, 300 or 350kmh
- Acquiring the requisite technology
- Corporate structure – to be a part of railways or be an independent organisation
- Ownership – fully private or public private partnership
- Appropriate financial incentives
Investment by the government
The Railway Minister informed Lok Sabha in March this year that laying high speed rail track will cost India Rs. 1-1.4 billion per km. Considering the staggering cost involved in HSR projects, all major high speed rail systems have been funded in part by government investment. Even projects like the UK’s High Speed 1 line and Taiwan’s high speed rail system, that were initially intended to be fully privately financed, ultimately benefited from heavy government investments in the form of loan guarantees and the purchase of ownership of the companies that built the rail lines. Some other instances where the government invested in high speed rail projects are as below:
- The Netherlands’ HSL-Zuid line, which links Amsterdam and Rotterdam, relied on the public sector for 86 % of its cost
- The Perpignan-Figueres high speed rail connection between France and Spain benefited from a public investment of 57 % of project costs
- Portugal’s high speed rail network is projected to be built with 55 % of its budget coming from public sources.
- Tours-Bordeaux high speed rail line in France will be built with 50% public investment from France and the European Union
- The Japanese Shinkansen high speed rail network, the only HSR System to break even, was built by Japan National Railways. It has been privatised, with six large, regional, privately-owned companies responsible for operating high speed rail service
Conclusion
It may still be early days for high speed rail construction in India but the government’s allocation of vast funds for studying railway schemes speaks volumes for its determination. In addition, the presence of some of the best known engineering firms in India suggests that the government’s message is not going unheeded.
For further information, please contact:
Vineet Aneja, Partner, Clasis Law
vineet.aneja@clasislaw.com
