No non-competing clause may prove a hurdle for pvt train operators: Ind-Ra

Could amplify cash flow risks for investors

The absence of a non-competing clause in the railway contract for private trains could amplify the cash flow risks for investors. The Indian Railways plans to have 151 private trains in 109 routes by 2023.

While demand risk also exists in the other sectors, the introduction of competition elevates the risk in this model. The Railways expects an investment of around Rs 30,000 crore in these trains. 

In other sectors, there are some exclusivity clauses prohibiting competition. Absence of this clause casts higher uncertainty on revenues,” said a report by India Ratings and Research (Ind-Ra).   

The current model allows 30-minute exclusivity from the originating point which means there will be a gap of that much between running of trains. “Nevertheless, the adherence to the timeliness such as emphasis on the reaching time and performance indicators, bodes well for the concession framework,” it said.  

According to Ind-Ra, the government after learning from previous public-private partnership models has shaped a new concession framework for choosing a private railway train operator. The bid variable – revenue share – resembles ports or airports’ concession model, where the experience has been mixed for concessionaires, the report said. Additionally, the operators are required to pay haulage charges towards track maintenance, signalling, terminal cost and others on a per kilometres basis for 16-coach trains.

“With the return-guaranteed airport model, there are minimal financial losses to developers. That being said, cargo-related risks in ports and terminals are a different version of concession with a higher risk. In the railway concession framework, not only the long concession period of 35 years but also the full exposure to demand risk poses an elevated risk for the project,” it added.  The corridor demand/traffic risk combined with competition from existing trains would influence developers’ return expectations. As such, demand risk is not a new phenomenon for infrastructure assets.

Also, the absence of limitations for developers to win more than one route concession opens up the opportunity to commingle multiple projects to raise funding. However, the agency expects demand risks could outweigh the benefits of pooling in the event of incorrect demand risk forecasting. Under the current system, Indian Railways cross subsidises passengers by overcharging freight to minimise the losses generated in running passenger trains.

At least 15 private companies have participated in the bidding process for operation of passenger trains in 12 clusters. The companies include BHEL, L&T Infrastructure Development Projects, Arvind Aviation, Construcciones y Auxiliar de Ferrocarrriles, S.A, Cube Highways and Infrastructure, Gateway Rail freight, GMR Highways, Indian Railway Catering and Tourism Corporation, IRB Infrastructure Developers, Malempati Power, Megha  Engineering and Infrastructures, PNC Infratech, RK Associates and Hoteliers, Sainath sales and Services and Welspun Enterprises.