High Speed Rail: Is the deal sweet enough?

High Speed Rail: Is the deal sweet enough?

On 14th of September, Prime Minister Shinzo Abe visited India and along with Prime Minister Narendra Modi he laid the foundation stone for the first High Speed Rail network in India which will connect Ahmadabad to Mumbai. The project is going to be 508 KM long which will be mostly elevated except for the stretch extending from Thane to Virar, which will be underground. The estimated Cost of Project is INR 1.08 Lakh Crore, of which 81% will be given as a loan by Japanese International Cooperation Agency (JICA) at an interest rate of 0.1% with a moratorium period of 15 years, which amounts to INR 0.88 Lakh crore (1.50 Lakh Crore Japanese Yen ) per year. During his inauguration speech, Prime Minster Modi bragged about this low interest rate.

In last few days, a lot has been written about the project, raising questions on its viability and finances. The claims raised needs to be verified so that Ahmadabad-Mumbai High Speed Rail doesn't end up burning a hole in Government's pocket like Kochi Metro. In order to analyze the claims, a basis drill down is needed.

Japanese International Cooperation Agency has given the loan at a mere rate of 0.1%, which when calculated on the total loan value, comes around INR 88 Crores per year. This lending rate when compared with the Lending rates of China or France seems to be too low. The Agence Francaise de Developpement has given loans for Kochi Metro at rates varying from 1.4% to 1.9% per year. Even China gives billion dollar loans to Sri Lanka & Pakistan at rates varying from 1.6% to 6.5% per year. However, the major factor in lending rates from Japan is that the loan is given in Japanese Yen and not in Indian Rupee which makes it prone to Forex Fluctuation. This means that the repayment of Loan is to be done in Japanese Yen. An analysis of Exchange Rate of Yen-Rupee with past data suggests that Yen might rise for next year as the GDP rate of India is falling and GDP rate of Japan may rise. However in a longer term, Indian GDP will catch up to its previous level and the exchange rate may settle at lower than current levels once the repayment starts.

Fig: In the given comparison, it can be seen that Exchange Rate (Yen-INR) is a function of Relative GDP growth of Japan & India. In the current scenario, Exchange Rate is rising because of fall in GDP of India. However, within 3 quarters, Indian GDP is expected to growth to earlier levels, bringing the Exchange Rate down.

In 2014, World Bank had published a report on Construction Cost of High Speed Rail across the globe. It had also appreciated the comparatively low construction cost of High Speed Rail in China. This raises a question why was competitive bidding for the Ahmedabad-Mumbai project was not done. Cost of High Speed Rail in various countries as per the World Bank report are as follows:

It can be seen that had there been a competitive bidding, the construction cost of Bullet could have been saved by substantial amount. But the point to be noted here is that if, at the same price, anyone would have shared the technology with India along with a substantial amount of loan at a meagre rate of 0.1%. Even if the lowest bidder, China in this case, would have won the contract, what could have been its term for execution. Could they have been trusted, keeping in view the recently concluded Doklam Standoff and various statements made against India around it. We should not forget here that Japan has committed to utilize the local expertise and manufacture the components locally which may generate 1 lakh jobs, which is not the case with China as seen in China-Pakistan Economic Corridor. 

In the Mumbai-Ahmadabad corridor, there are 25 One-way daily flights, around 67 Trains One-way trains and around 80 One-way Buses with a capacity of moving around 70000 people. Considering both the ways, around 140000 people move between the cities to and fro, not considering the fact that people travel between the intermittent cities lying in route as well. A back work of the initial investment of 1.1 Lakh Cr. with a contingency of 10% (on account of Escalation & overshooting of construction Cost, if any), 0.1% interest on principle amount & an operation cost of 500 Cr. per year for a repayment period of 35 years (which is usually taken for most Mass Rapid Transit System) suggest that on a per day basis around 43500 persons should travel with an average tariff of INR 3000. So there seems to be a huge potential.

Bullet has been planned to have around 35 trips per day in each direction with a capacity of 750 persons per trip, which in future may be increased to 50 trips per day in each direction. Assuming an average fare of INR 3000 with an occupancy of 75% on the Total of investment and interest payable gives out a repayment period of around 26 years without considering any increment in the tariff or number of trips progressively, which is good as compared to other Mass Rapid Transit System Projects done in the country.

Further to above, if a basic analysis is done with an assumption of completion of project within budget, operational cost of 350 Cr. to 500 Cr. per year, initial occupancy of 75% and increase in revenue from Fare Box collection alone at a rate of 5% per year for 50 years, it suggests that it may give an Internal Rate of Return of 7.6% without considering a moratorium of 15 years and if moratorium is considered then an Internal Rate of Return of 8.2% can be expected. Also, if a Net Present Value analysis is done at a discount rate of 6% then the analysis, without considering moratorium for 50 years, gives a value of 0.116 Lakh Crore and a value around 0.21 Lakh Crore with moratorium period of 15 years, which is good.

Keeping in view all the above, it can as of now be said that yes, Mr Modi has all the reasons to brag about. However a close eye in the project is needed from top level of government as even a small deviation from the projected plan may change the course resulting in an eyesore as a very large sum of money is involved.