The Bullet Train is Bad Economics

The State visit of the Japanese Prime Minister Shinzo Abe to India was historic. It marked the beginning of India’s first leg of a High Speed Rail Network, or what in lay man terms, is called a dedicated corridor for a bullet train. There has been more than hoopla about the bullet train in all forms of media. So let us get done with the facts quickly.

The train will run for 534 kilometres between Mumbai and Ahmedabad at a speed of 320 km/h. The project is an elevated (for most part) high speed train corridor that will cost INR 1.1 lakh crore, out of which 80% is financed by Japan via a soft loan, at an interest rate of 0.1%. The repayment starts from the 16th year of the receipt of the loan amount, and will go on till 50 years. The first tranche of the loan repayment is INR 6,000 crore, the rest of which has to be paid in equated instalments.

The deal includes transfer of technical know-how, surveillance and monitoring systems, training and of course the trains. The trains will initially be 10 coaches each, with a carrying capacity of 750 people. There will be 35 trips each way. These capacities will be augmented over a period of time. One kind of train will stop  at 12 stations and the other will stop at four. The former will take a little under three hours and the latter will take two hours to complete the journey, which will potentially make it a same day journey. Piyush Goyal, the Railway Minister, claimed that the tickets will be priced around 2-Tier AC prices of premium trains. For the purpose of this article, I am taking the Mumbai-New Delhi Rajdhani as the reference train. Its 2-Tier AC ticket is priced at INR 3,000 sans the dynamic pricing, and INR 4,100 with it. I choose to average it at INR 3,550. Let us now look at the services available for any passenger who wants to travel from Mumbai and Ahmedabad.

Firstly, trains. There are at least 25 services running between Mumbai and Ahmedabad, each way, daily. The average time to travel via these trains is eight to nine hours. The average price of the ticket is about INR 1,200. The IRCTC website claims that 43% of the fare is borne by the “common citizen of the country. It simply terms that the ticket is subsidized. Let us round this off to 40% and do some calculations. Assume that each service carries 750 people at 80% capacity. Every seat realizes INR 800 as everyone will not travel the entire distance that the train covers. And 40% is subsidized by the Indian Railways. This sums to a daily cost of INR 5 crore, and assuming a 360 day year, comes to INR 1,800 crore. This is of course assuming nothing changes, including the ticket prices.

Next, buses. An average bus journey takes about 10 to 11 hours, with an average ticket price of  INR 900. Obviously, doing calculation like above is difficult, but one thing for sure is that bus services will be profitable. The same price, time, and profitability conditions can be applied on cab services too.

Next, flights. An average flight ticket from Mumbai to Ahmedabad costs INR 3,500. I arrived at this figure by looking at ticket prices for tomorrow just before writing the figure down. A flight takes 1 hour 15 minutes either way. Add another 1 hour 15 minutes for all the on-boarding and off-boarding process at the airport. That makes a total of 2 hour 30 minutes. That is just 30 minutes over the faster version of the bullet train that takes four stops. Let us now compare.

Firstly, if you do not want a high speed rail network, you can do with a semi-high speed on, where trains run at 220 km/hr. That takes a lot less cost and time because you can embed it into your current route. No new railway stations, or bridges or tunnels. Just an adjustment in the train schedule, and over a period of time, all current services can be replaced with trains that run at higher speeds at a significantly lower cost. Here, you also have the advantage of keeping multiple stops, unlike flights.

Now, let us take flights. Airbus A320  family and Boeing 737 family are the most widely used aircraft types. Each one of them costs around $ 100 million. This roughly translates to INR 650 crore. Let’s say the airlines buy it and paint it and make the planes workable. That costs another INR 150 crore, taking the cost to INR 800 crore. Add three lakh rupees, to daily costs, which include fuel, salaries and everything else. These flights have 150 seats. If at INR 3,500, they fly at 80% capacity, let us do calculations to and fro. Each flight makes INR 8.5 lakh daily, to and fro combined. This translates to a revenue of little over INR 30 crore for a 360 day year. Each airline, on an average makes 8 trips each way, which means an INR 480 crore revenue from this route. Say it uses two INR 800 crore planes for the purpose, and the project becomes financially viable in four to five years. This at the cost of no extra airports. Augmentation of number of trips can further drive ticket prices down.

When the bullet train will arrive, it will not grow new passengers. It will thrive off taking passengers from the current services. It will add burden to the already loss making Indian Railways. The least subsidized higher class passengers will move to the bullet train, leaving lesser resources for the poorer passengers. Over and above this, the bullet train is projected to give a rate of return of only 2.4 % pa. This means that it will need a lot of viability gap funding in most of its initial years. The added stress on bus and cab services too, which mostly attracts passengers looking for higher comfort and are willing to pay a decent price for it, will too be unprecedented.

There are plans to augment service, both in terms of number of coaches and number of trips. Each train will the carry 1,200 passengers. Say the number of trips double to 140 daily (which translates to 1 trip every 15 minutes each way!) by the end of the 50th year, the total annual passengership at 80% capacity in a 360 day year will be 48.4 million, or 4.84 crore. It will be have to seen where all these people come from. Say we have zero inflation in ticket prices, and everyone travels 2/3rds of the route, the annual revenue will be INR 11,300 crore at the end of the 50th year. This figure is dependent on a number of factors. First, Mumbai and Ahmedabad as cities alone, cannot support the model. They are saturated cities, with very limited scope of high population increase in the coming years. As the economy matures, flight tickets will get cheaper too, so as far as I am concerned, flights will be the first option for people to take for a direct journey between the two end points.

This brings into picture the smaller cities that the train will stop at. Thane, Boisar, Vapi, Vadodara, Surat and the rest. The train might possibly spurt high growth in these places, but only time will tell how much one bullet train is able to do that. That is where people might start moving in and start economic activity. The total fixed cost for the project as divided over 50 years of repayment, interest included, works out to INR 2,300 crore per year, given zero cost escalation, at today’s prices. Of course, the loan will have to be repaid in yen, and the price volatility can be shielded from using forward contracts. Though, this does not include daily operational costs, maintenance and repair costs, and the social costs that it carries by putting bus and cab services under stress, as well as the current Indian Railway services. All in all, the bullet train is bad economics (and bloody good politics)!

For a detailed cost-benefit analysis: https://web.iima.ac.in/assets/snippets/workingpaperpdf/10701585992016-03-58.pdf     

 

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