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Mumbai-Ahmedabad High Speed Rail: Will the revenues cover even cost of hedging the Yen loan?

The distance between Ahmedabad and Mumbai is not long enough for HSR to be a decidedly superior alternative for travellers. It may be very difficult to hit 40,000 daily travellers by 2023. If so, forget profits, even the revenue will not cover hedging costs

NEMI JAIN | 17/12/2015 04:22 PM |   

An agreement to build High Speed Rail (HSR) from Mumbai to Ahmedabad has recently been signed. A trail blazing project of this kind generally falls into a high risk, high reward category. It would be interesting to critically examine such projects. Let us first look at the project from the financial angle. The primary funding source (80%) will be a yen denominated loan at 0.1%. While this might look like easy money, there is foreign exchange (FX) risk involved. If the FX Rate moves favourably then a project can look like pure genius. On the other hand, if the FX rate moves adversely, even the most sound project can look like a financial disaster. The standard way to look at the cost of funds is to look at the cost of hedging that is take FX risk out of the equation and look at this as a rupee loan. The present cost of such a conversion is about 6% per annum (p.a.). This interest rate is lower than prevalent interest rates in India, but is nowhere as small as the headline 0.1%.
The Japan International Cooperation Agency (JICA) report estimates that 40,000 passengers will use the HSR daily in 2023. With an average revenue per user around the Rs3,000 mark, total revenue will be Rs4,000 crore in the first year of operations. Considering a project cost of Rs1 lakh crore, the interest/ hedging amounts to about Rs6,000 crore per year. Including operational costs will add to expenses. So in pure financial terms, this project is not viable over the medium-term. Longer-term inflation and increasing passenger numbers should help in getting to the breakeven point.
However, projects of this nature are seldom profitable. There are other indirect economic benefits that accrue due to infrastructure projects.
The quantification of these benefits is more of an art than science. A small change in assumptions will lead to a large variation in these benefits. A key metric to look for economic benefits would be the number of passengers utilising HSR, so we will scrutinise this number further.
At present, about 6,000 passengers travel daily in the AC chair car category on the Mumbai-Ahmedabad corridor. This number does not include overnight passengers traveling in AC classes. Fare from Mumbai to Ahmedabad in AC Chair car is Rs660. Fare for Shatabdi Express, which includes a surcharge and catering charges, is Rs955. While it is difficult to predict what fares will be eight years down the line, at present the fares are a fraction of the expected HSR fare for this sector. Thus, it will be a challenge to convert these passengers to HSR consistently.
About 7,000 air passengers also travel on the Mumbai-Ahmedabad/Vadodara route daily. These will be key passengers for HSR. However, even here, a significant number of these passengers are transit passengers who use Mumbai as a transit point for onward travel – both domestic and international. This sub category of air passengers will probably continue flying as it will make their transit in Mumbai easier affecting the number that can be moved to HSR.
There is another unique factor, which needs to be looked at closely. The Mumbai suburb of Borivali in particular and the Western suburbs in general have a high concentration of Gujaratis. Thus, residents of these localities will be important customers for an HSR that connects main cities of Gujarat with Mumbai. The planned HSR route however starts from Bandra Kurla Complex (BKC) and continues to Thane and Virar and misses Borivali completely. A passenger, say from Vadodara will have a choice of taking a normal train and reach Borivali in four to five hours. Alternately, she can take the HSR from Vadodara that will take two hours to reach Virar and take an additional hour to transfer and travel to Borivali on a Mumbai suburban local. Many passengers will take the former option. This option is compelling with little difference in travel times for all stations along the HSR except maybe Ahmedabad.
The same situation though to a lesser extent applies to Mumbai Central and BKC. While BKC has grown significantly in a short period, South Mumbai continues to be a major commercial destination and Mumbai Central – the current end point for trains seems to be more conveniently located. Thus, the patronage of customers will be divided.
While overall passenger numbers will rise with time, the possibility of this number to be anywhere near 40,000 daily by 2023 looks difficult. Getting to these numbers will be a key challenge for the project.
A successful implementation of the Mumbai-Ahmedabad HSR will open up the possibility of HSRs on other sectors, somewhat similar to what Delhi Metro did to Metros around the country. Conversely, an HSR service looking for passengers will have a negative effect on other HSR projects in the country.
Please note that in absence of concrete data, some of the numbers are qualified guesses.
(Nemi Jain studied Engineering at IIT Bombay. He has spent a major part of his career working in banks)

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