Passenger trains in India have been running at an average speed of 50-60km per hour (kmph) with the exception of a few trains at an average speed of 80-90kmph since 1950. For the first time, India will witness high-speed rail (HSR), which can travel at an average speed of about 240kmph (with a maximum speed of 320 kmph), covering 500km in about two hours.

Compared with road projects, rail projects, especially Metro or HSR, are notorious for huge investments and trickle-through return on investment over a long period of time. In the current scenario, there are no financial institutions in India that could provide such massive funding to be repaid over a long time, preferably with a moratorium till the project ridership ramps up. This is why the deal signed between India and Japan for the development of a HSR system is path-breaking.

Economic cooperation between India and Japan is not new. A good number of city rail projects in India, including the Delhi Metro, have been financed by the Japan International Cooperation Agency (JICA) at a low interest rate of about 1.5%. In addition, Japan has been lending on many other economic and social projects. However, the striking difference in this pact is that about 80% of the development cost of HSR would come as the loan at an interest rate of 0.1%, with a moratorium of 15 years. The loan is to be repaid over 50 years.

There are many merits in this deal. Although other countries have shown enormous interest in selling their HSR systems to India, they have not come with such advantageous financial aid. Shinkansen, the Japanese HSR, has seen terrific improvements over the past 50 years; it is one of the best wheel and rail HSR systems in the world with an excellent safety record. It is true that the Japanese too had some compulsions as the competition they face in promoting their HSR technology with other countries now has become intense. However, the incessant efforts of the Indian prime minister and his Japanese counterpart for the past 18 months and the personal equation between Narendra Modi and Shinzo Abe have ensured that economic cooperation reaches new heights. This paved the way for India’s HSR bonanza.

As Indian incomes rise and aspirations for faster and comfortable travel grow, the nitty-gritties of the loan provided by Japan will make the first HSR project financially viable. By taking all the costs and prices at 2015 price level, it was estimated that the construction cost would be about 98,000 crore. Operation and maintenance costs would be about 4,400 crore (4.5% of the construction cost) for 75 round bullet train trips every day in 2024, the expected first year of HSR operation between Ahmedabad and Mumbai.

A fare of 2,700 per passenger between Ahmedabad and Mumbai ( 5.20 per km) is assumed, which is 1.5 times that of first-class travel in a Shatabdi train. The HSR fare would be comparable with air fares varying between 2,000 and 4,000, bus luxury fare varying between 1,500 and 2,000, and air-conditioned rail fare varying between 900 and 1,900.

The travel time by the HSR would be about four hours, comparable with four hours air travel time between Ahmedabad and Mumbai. Come 2024, the overnight journey by AC class rail and luxury bus would become a thing of the past, replaced by to and fro daily travel via HSR.

It is imperative to see how the loan provided by Japan would make the project financially viable. In the absence of Japanese aid, with an assumption that investors and lenders would expect at least 10% as real return on investment (RoI), the RoI would be 9,800 crore. When added to operation and maintenance costs, the fare box revenue would have been at least 14,200 crore for the project to be financially viable. It could happen only if the ridership would be about 140,000 passengers per day in 2024.

With Japanese financial aid, 80% of the total cost would come with an interest rate of 0.1% and the remaining would expect 10% real RoI, making the weighted average cost of capital (WACC) 2.51%. In this context, the fare box collection would have to be at least 6,900 crore. This could happen with an end-to-end ridership of 67,600 passengers per day in 2024. The moratorium of 15 years will reduce the ridership requirement to 61,800 passengers per day in 2024, which corresponds to an annual ridership of about 22.6 million passengers. Any HSR project that could get a ridership of 10 million in the first year of operation is considered to be a worthy project for investment.

The pre-feasibility study submitted by Rail India Technical and Economic Service, Systra and Italfer consortium in 2010, a doctoral thesis from the Indian Institute of Management Ahmedabad and a feasibility study carried out by JICA consortium in 2015 estimated the end-to-end passengers for Ahmedabad–Mumbai HSR would be 34,410, 107,000 and 40,000 respectively, which averages out to 60,470, close to the ridership that is needed for financial viability. In general, rail projects require a ramp up time of three to five years to reach their full capacity utilization. In the absence of moratorium for repayment, the financial sustainability of the project becomes tricky.

There is a caveat. The aid remains attractive only if India ensures its currency does not depreciate further in the international arena. Although the lending was at an interest rate of 1.5% for our Metro projects, we had to pay more due to depreciation of our currency. If the currency remains stable, this deal will go down in Indian history as one of the windfall aid packages that we got for developing a state-of-the-art rail transport system.

Ramakrishnan T.S. is a PhD in public systems from Indian Institute of Management, Ahmedabad. These views are personal.

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