A. Introduction:
With the objectives of improving overall travel experience, introducing next generation technology, increasing passenger growth rates and making passenger train operations financially viable and sustainable, the Indian Railways has recently rolled out a public-private partnership (PPP) scheme and invited private players to operate passenger trains on certain route clusters (the Projects). The scheme contemplates introducing 151 modern trains on 109 identified routes which have been bundled together into twelve different clusters, with each cluster being treated as a separate project.
At present, passenger trains and freight trains operate on the same rail network in India, and major routes are nearing saturation. In addition, passenger train operations are loss-making and need to be subsidised by freight train operations. However, with the planned completion of a dedicated freight corridor project by June 2022, coupled with other infrastructural improvements, it is envisaged that a significant portion of the rail network will shortly get decongested and create additional routes for operations of passenger trains by private train operators (PTOs) under the PPP scheme. It is expected that the initial twelve Projects will require private investment of approx. INR 30,000 crores (approx. USD 4 billion) in aggregate, and will commence operations in 2023.
Selection of the PTOs for each Project (which will be undertaken on a design, build, finance and operate (DBFO) basis) will be done through a two-fold competitive bidding process consisting of request for qualification (RFQ) and request for proposal (RFP) processes. At the RFQ stage, the eligibility of the bidders will be assessed, and shortlisted bidders can then offer fixed price bids at the RFP stage.
The bids will contain the share in the “gross revenue” of the Project (Premium) that the PTO is prepared to share with the Indian Railways for the award of the concession, and the concession will be awarded on the basis of the highest Premium. Each concession will be for 35 years. There is no restriction on the number of Projects for which a single bidder can bid.
As per the feasibility report provided as part of the RFQ documents, the Projects are expected to generate an equity IRR of between 17 per cent. and 27 per cent.
We set out below certain important aspects of the proposed Projects.
B. Eligibility Criteria:
The RFQs for the Projects set out certain pre-determined eligibility criteria relating to financial capability and O&M experience / arrangements for interested bidders, and, as is typical, bids can be submitted as part of a consortium arrangement. The minimum net worth requirement varies for different clusters, but the range is between INR 1,165 crore (approx. USD 155.5 million) and INR 1,600 crore (approx. USD 213 million). Alternative investment funds and foreign investment funds are also specifically permitted to participate in bids.
C. Roles and Responsibilities of the Parties:
The PTOs’ main responsibilities will include undertaking the procurement and maintenance of appropriate rolling stock and the relevant train operations. The PTOs will have the flexibility to purchase or lease the rolling stock from local as well as international vendors subject to the local content requirements (as discussed in paragraph G below).
In addition to the Premium, the PTOs will also be required to pay fixed haulage charges and energy charges to the Indian Railways.
The Indian Railways’ main responsibilities will include providing access (on a non-discriminatory basis) to its rail infrastructure and facilitating transmission of electric power to enable train operations by the PTOs. The Indian Railways is also required to provide the PTOs with unencumbered land on licence, for setting up, upgradation and operation of maintenance depots, and access to washing lines and stabling lines. This is seen as a significant and welcome step, as land acquisition issues have often been a serious impediment to infrastructure projects in India.
It is also relevant to mention that the driver and the guard for each train will be provided by the Indian Railways and will not be PTO personnel.
D. Tariff rates and the Establishment of an Independent Regulator:
At present it is contemplated that the PTOs will have operational flexibility and complete autonomy to manage traffic demand by way of setting their own fare rates and creating their own product offerings. The feasibility report states that as the Indian transportation landscape is competitive and there will be a number of choices available to travellers for alternative trains or modes of transport, this inherent competitive tension will prevent any prohibitive pricing by the PTOs. In this regard, it is relevant to note that while there will be no restriction on the Indian Railways from reducing the fares on the trains it operates, the PTOs will have the benefit of a limited “exclusivity” provision. This provision states that the Indian Railways will not deploy any new train departing from the originating station on the same origin-destination route within one hour of the scheduled departure of the PTO’s train. However, this restriction will not apply in an event where the capacity utilisation of the PTO’s train is more than 80 per cent. in the previous three months.
There is a concern that (as in the case of PPP greenfield airports in India), a rail regulator could be established in the future whose functions could include economic regulation by way of fare determination – which could curtail the ability of the PTOs to fix their own fares. This has not currently been addressed in the RFQ documents. The feasibility report suggests that this possibility should either be addressed in detail in the Concession Agreement (as was done with respect to the airports), or it should be clarified that fare determination for the current Projects would not fall within the purview of any such regulator. In its responses to queries raised by potential bidders at a recent pre-application conference, the Indian Railways stated that the determination of fares will be within the domain of the PTOs and clarified that any regulator would look into the “larger issues”.
Additionally, the establishment of any such regulator could impact the dispute resolution mechanism of arbitration that is currently set out in the draft Concession Agreement. The draft Concession Agreement contains an overriding provision which would kick-in if a “statutory tribunal” is set up for resolution of disputes, in which case such statutory tribunal (and not arbitration) would be the dispute resolution mechanism. If any proposed regulator is a “statutory tribunal” then the PTOs may find themselves subject to a different dispute resolution mechanism than the one they had originally agreed to.
E. KPIs:
The draft Concession Agreement sets out certain KPIs, which include:
- Punctuality: the PTO is required to ensure punctuality of each train over a period of one year at a minimum of 95 per cent.
- Reliability: the PTO is required to ensure the reliability (measured in terms of the mean distance travelled by a train in between two failures / malfunctions of the train) of each train to be at least 100,000 kilometres.
- Certification and upkeep of trains: the PTO is also required to comply with certain other KPIs, such as obtaining and maintaining ISO certification (or a suitable alternative) for the trains throughout the concession period, ensuring upkeep of trains, and providing a monthly report of its performance to the Indian Railways.
The draft Concession Agreement sets out penalties (calculable as per the metrics set out in the agreement) in case the PTO does not meet the specified KPIs and also provides for termination of the concession in the event of repeated non-performance.
The draft Concession Agreement recognises that risk sharing with the Indian Railways is necessary in some instances. It provides that where the loss of punctuality is: (i) attributable to the PTO, damages will be paid by the PTO to the Indian Railways; (ii) attributable to the Indian Railways, damages will be paid by the Indian Railways to the PTO; (iii) attributable to both, damages will be paid by the party having more than 70 per cent. contribution to the delay; and (iv) due to factors not attributable to either party (such as bad weather or public agitation), neither party will be liable to pay damages.
F. Safety Risks:
At present, safety risks have been largely allocated to the PTOs under the RFQ documents. The documents provide that in the event of an accident, the PTO will be responsible for remedying the damage to the trains and compensating users for injury or loss of life. The Indian Railways is responsible for remedying any damage to the infrastructure. The feasibility report suggests that PTOs can mitigate these risks at least in part by putting in place necessary security systems and processes, and procuring appropriate insurance, but notes that accidents may still occur due to factors such as poor track maintenance, signalling issues and sub-optimal performance by train drivers and guards, all of which fall within the purview of the Indian Railways and consequently, may not be capable of mitigation by the PTOs. It also notes that the current risk allocation is not in line with international practice.
G. Local Content Requirements:
The draft Concession Agreement provides that the PTOs can import only up to three trains (for one cluster), and the remaining trains to be used for that cluster are required to be: (a) procured from manufacturing facilities in India; (b) manufactured from the PTO’s own manufacturing facilities in India; or (c) leased from manufacturers manufacturing trains in facilities in India. In addition, these remaining trains are required to have a minimum local content of 50 per cent.
H. Conclusion:
The Indian Railways invited the RFQs for the twelve different clusters on 1 July 2020. The RFQ application window will remain open till 7 October 2020. On the basis of the RFQs, a list of shortlisted applicants is likely to be prepared by November 2020 and the financial bids will be opened by March 2021. Consequently, it is intended for the PTOs to be selected by 30 April 2021 and for the Concession Agreements to be executed by 31 May 2021. The Indian Railways intends to have twelve trains operationalised in 2023, followed by 45 trains in the succeeding year and the remaining 44 trains will commence operations by 2027.
The initial response to this PPP scheme has been enthusiastic, and reports suggest that over 20 international and domestic players have already expressed interest in the Projects, which is the first time that private sector participation has been invited in a significant aspect of India’s rail operations.
We are closely monitoring developments regarding this opportunity and if you require any further information about any aspects of the Projects, we would be happy to assist.
This material is for general information only and is not intended to provide legal advice. For further information, please contact:
Karam Daulet-Singh
Partner
Surbhi Soni
Associate
Pranjal Doshi