Many people have criticized the proposed bullet train ("Shinkansen", in Japanese) link between Mumbai and Ahmedabad without going into the details. Newspapers scream " Can India afford to spend 90000 crores on bullet trains? For this money, why don't we feed the mouths of the poor for free?" . Other "intellectuals" opine that instead of spending money on bullet trains, the Railways should spend on improving safety of Railways and reduce the number of accidents. In short, "expert opinions" from one and all, range from "concerns" on it's economics, to plain socialistic rhetoric, without going into perspectives.
I say perspectives, because full details are yet to emerge, in public domain. But let me try and interpret the various facets of the arguments, first, as a Finance professional, and then, as a Railwayman's son, who has grown up looking at rail tracks practically every day of my school life.
Before I start, let me also make a caveat. Whether Bullet trains are economically viable or not, has been a debate in every country, including the mother of them all, Japan. The fact is that bullet trains operate in many countries as on date - the Eurozone, Japan, Korea, China, and Taiwan , to name a few. They have faced this question at varying points of time, and their responses have been very different.
I am not going to make a conclusion on whether bullet trains are right for India or not. I leave it to you to decide. Hopefully my perspectives will help come to some conclusions.
Firstly, the "award". The shrills in the media seem to insinuate that Japan has been "favoured" without "tendering", or without feasibility studies. So untrue. Japan had tabled a feasibility report, per an Economic Times news in July 2015.
http://articles.economictimes.indiatimes.com/2015-07-20/news/64638750_1_bullet-train-train-fare-jica
It may also be recalled that China and France also had bid for this., though not in the form of tender. The fact is that this project was one of the promises made by this government when they were voted to power in 2014, and within 18 months, they have taken the first concrete step to fulfil this. People , who are so used to decisions pending in the corridors of Rail Bhavan, waiting for bribes to be settled before awarding projects, in the past, are perhaps unable to digest the fact that a project of this magnitude can be decided in only 18 months. As a flashback, I was witness to the Madurai-Dindugal-Karur Broad gauge Railway project, a motley 150 km stretch, taking 7 years from allocation of funds for feasibility study, to approval... and another 13 years to build, of which the first three years' funds were spent, building new staff quarters with that project money!! Those were the heady 80s. It is also worth mentioning here that this project was actually mooted firstly during the tenure of Lallu Prasad Yadav as Railway minister, and also during the MMS period. Feasibility studies were conducted even then, but socialism (read: electoral prospects) prevailed then.
Secondly, the economics. Sketchy information available in public domain at this point , point to a cost of Rs.90,000 crores, on an average. I assume that this covers the complete Capital expenditure, ranging from land to laying of tracks, to rolling stock and related infrastructure. Of this, roughly 80% is going to to be funded by Japan. The balance 20%, I expect, would come mainly from assessed commercial value of land - both acquired as well as that of Govt, as well as related infra costs. Let us leave this portion for the moment ( approx Rs.18,000 crores). Japan has agreed to this make this a long term loan of 50 years, at 0.5% interest. If you do even a simple EMI loan calculation, this works out to a repayment of Rs.136 crores per month over 50 years ( fixed rate)!!! And, how does one fund the 136 crores per month in EMI? Simple. Through ticket sales, and commercial exploitation. Big deal for an aspiring super power?? You decide. Contrast that with China's bid. Assuming the project cost was the same, the interest at 1.5% for the same tenure, would have resulted in additional interest burden of Rs.16,000 crores that we have now managed to avoid.
Thirdly, why Mumbai-Ahmedabad? Why not any other sector? The answers are manifold. One, this is one of the busiest sectors of the Indian Railways for passenger traffic. Two, affordability of fares ( expected to be the same as first class sleeper fares) in one of the best, in this sector. Three, the region is comparatively safer, seismically, with no mountains to content with. Four, Gujarat has proven time and again that it is one of the easiest states for land acquisition for such projects. You dont want the pilot bullet train project in the country to be mired in land acquisition delays, do you?
Fourthly, why Japan, and why not China? ( France did not qualify). One, as we saw above, financial terms are too compelling. But in my opinion, this decision to go with Japan is a masterstroke by the govt. For both financial and strategic reasons. Financially, it is now universally expected that it is a matter of time before the Yuan will become one of the de-facto currencies of the world. And with it will come appreciation of that currency. Which means we need to shell out more than the 136 crores that we expect now, and that could affect the project viability. Whereas, the Yen is expected to decline slowly. ( While confirmation is awaited, I expect this to be a Yen-denominated loan, not a US $ loan). But also, strategically, why would we want to go to bed with our "enemy no. 1" for a project of this size and magnitude? We would be much better off going with Japan, especially given that this project will not be the last of the bullet train projects in India. The stakes, diplomatically , are much higher, in favour of Japan.
Fifthly, the spurious argument "Railways should spend on safety, and not on fancy projects like this". This is flimsy. If a bank is willing to lend you 80 lakhs to build a brand new 1 crore state of the art house at 0.5% loan rate, asking you to pitch in the balance 20 lacs, would you rather focus on quickly grabbing this offer, or would you rather say " oh, but my old TV is broken and I need to fix it first before buying a new house." " I first need to fix my water pipe" etc.... ?? You decide. The other aspect to be considered is, Japan is willing to lend this soft loan only for the bullet train project. Obviously they are not doing charity work, but are putting their excess forex reserves to good commercial use, thereby helping clear up the balance sheet of the Bank of Japan to the extent of this loan. Japan as an economy has stopped growing, and by a project return on investment of even 5%, the returns can be higher for them. Apart from keeping their bullet train factories humming, of course. In short, they are willing to lend specifically for this project, and not for other purposes. It , therefore, makes eminent sense to grab the offer. And yes, if we award them, then a quid-pro-quo of safety projects are definitely possible.
Sixthly, I am sure the government will insist on a good portion of the coaches and related infra to be manufactured in India ( "Make in India") , even as Japan may insist on retaining the "strategic" portions with them. Over time, we will learn to "crack that code" too. Indians are smart in that. If in doubt, look at ISRO. This Make In India is expected create jobs, and the trickle down effect on the economy.
Lastly, why a luxury bullet train? The answer to that is simple.... why are we driving in Marutis and BMWs now, when Ambassadors and clunkers are cheaper? The world has moved on, and we need to keep pace with changing times, otherwise our aspiration as a superpower will remain just that - a promise. But leave aside this intangible for a moment. Studies in Japan have proved beyond doubt, that their Shinkansen network has resulted in companies moving away from Tokyo and Osaka Metropolitan areas, into the smaller towns, thereby giving huge economic benefits arising out of decongesting mega cities. It is common knowledge that Mumbai and Ahmedabad are already bursting at their seams. If corrective measures to decongest are not taken now, how will these cities even survive in 50 years? I have travelled in Gujarat extensively, and I can easily think of Valsad, Vapi, Surat, Bharauch, Anand and Vadodra and Ankhleshwar , as towns that will lie on this bullet train route, that can take in the decongestion of the mega cities, given that they have huge business communities that contribute a big chunk of Mumbai's financial clout. Makes sense?
So, then, what are the risks of this project succeeding ? Yes, the same as above.
I say perspectives, because full details are yet to emerge, in public domain. But let me try and interpret the various facets of the arguments, first, as a Finance professional, and then, as a Railwayman's son, who has grown up looking at rail tracks practically every day of my school life.
Before I start, let me also make a caveat. Whether Bullet trains are economically viable or not, has been a debate in every country, including the mother of them all, Japan. The fact is that bullet trains operate in many countries as on date - the Eurozone, Japan, Korea, China, and Taiwan , to name a few. They have faced this question at varying points of time, and their responses have been very different.
I am not going to make a conclusion on whether bullet trains are right for India or not. I leave it to you to decide. Hopefully my perspectives will help come to some conclusions.
Firstly, the "award". The shrills in the media seem to insinuate that Japan has been "favoured" without "tendering", or without feasibility studies. So untrue. Japan had tabled a feasibility report, per an Economic Times news in July 2015.
http://articles.economictimes.indiatimes.com/2015-07-20/news/64638750_1_bullet-train-train-fare-jica
It may also be recalled that China and France also had bid for this., though not in the form of tender. The fact is that this project was one of the promises made by this government when they were voted to power in 2014, and within 18 months, they have taken the first concrete step to fulfil this. People , who are so used to decisions pending in the corridors of Rail Bhavan, waiting for bribes to be settled before awarding projects, in the past, are perhaps unable to digest the fact that a project of this magnitude can be decided in only 18 months. As a flashback, I was witness to the Madurai-Dindugal-Karur Broad gauge Railway project, a motley 150 km stretch, taking 7 years from allocation of funds for feasibility study, to approval... and another 13 years to build, of which the first three years' funds were spent, building new staff quarters with that project money!! Those were the heady 80s. It is also worth mentioning here that this project was actually mooted firstly during the tenure of Lallu Prasad Yadav as Railway minister, and also during the MMS period. Feasibility studies were conducted even then, but socialism (read: electoral prospects) prevailed then.
Secondly, the economics. Sketchy information available in public domain at this point , point to a cost of Rs.90,000 crores, on an average. I assume that this covers the complete Capital expenditure, ranging from land to laying of tracks, to rolling stock and related infrastructure. Of this, roughly 80% is going to to be funded by Japan. The balance 20%, I expect, would come mainly from assessed commercial value of land - both acquired as well as that of Govt, as well as related infra costs. Let us leave this portion for the moment ( approx Rs.18,000 crores). Japan has agreed to this make this a long term loan of 50 years, at 0.5% interest. If you do even a simple EMI loan calculation, this works out to a repayment of Rs.136 crores per month over 50 years ( fixed rate)!!! And, how does one fund the 136 crores per month in EMI? Simple. Through ticket sales, and commercial exploitation. Big deal for an aspiring super power?? You decide. Contrast that with China's bid. Assuming the project cost was the same, the interest at 1.5% for the same tenure, would have resulted in additional interest burden of Rs.16,000 crores that we have now managed to avoid.
Thirdly, why Mumbai-Ahmedabad? Why not any other sector? The answers are manifold. One, this is one of the busiest sectors of the Indian Railways for passenger traffic. Two, affordability of fares ( expected to be the same as first class sleeper fares) in one of the best, in this sector. Three, the region is comparatively safer, seismically, with no mountains to content with. Four, Gujarat has proven time and again that it is one of the easiest states for land acquisition for such projects. You dont want the pilot bullet train project in the country to be mired in land acquisition delays, do you?
Fourthly, why Japan, and why not China? ( France did not qualify). One, as we saw above, financial terms are too compelling. But in my opinion, this decision to go with Japan is a masterstroke by the govt. For both financial and strategic reasons. Financially, it is now universally expected that it is a matter of time before the Yuan will become one of the de-facto currencies of the world. And with it will come appreciation of that currency. Which means we need to shell out more than the 136 crores that we expect now, and that could affect the project viability. Whereas, the Yen is expected to decline slowly. ( While confirmation is awaited, I expect this to be a Yen-denominated loan, not a US $ loan). But also, strategically, why would we want to go to bed with our "enemy no. 1" for a project of this size and magnitude? We would be much better off going with Japan, especially given that this project will not be the last of the bullet train projects in India. The stakes, diplomatically , are much higher, in favour of Japan.
Fifthly, the spurious argument "Railways should spend on safety, and not on fancy projects like this". This is flimsy. If a bank is willing to lend you 80 lakhs to build a brand new 1 crore state of the art house at 0.5% loan rate, asking you to pitch in the balance 20 lacs, would you rather focus on quickly grabbing this offer, or would you rather say " oh, but my old TV is broken and I need to fix it first before buying a new house." " I first need to fix my water pipe" etc.... ?? You decide. The other aspect to be considered is, Japan is willing to lend this soft loan only for the bullet train project. Obviously they are not doing charity work, but are putting their excess forex reserves to good commercial use, thereby helping clear up the balance sheet of the Bank of Japan to the extent of this loan. Japan as an economy has stopped growing, and by a project return on investment of even 5%, the returns can be higher for them. Apart from keeping their bullet train factories humming, of course. In short, they are willing to lend specifically for this project, and not for other purposes. It , therefore, makes eminent sense to grab the offer. And yes, if we award them, then a quid-pro-quo of safety projects are definitely possible.
Sixthly, I am sure the government will insist on a good portion of the coaches and related infra to be manufactured in India ( "Make in India") , even as Japan may insist on retaining the "strategic" portions with them. Over time, we will learn to "crack that code" too. Indians are smart in that. If in doubt, look at ISRO. This Make In India is expected create jobs, and the trickle down effect on the economy.
Lastly, why a luxury bullet train? The answer to that is simple.... why are we driving in Marutis and BMWs now, when Ambassadors and clunkers are cheaper? The world has moved on, and we need to keep pace with changing times, otherwise our aspiration as a superpower will remain just that - a promise. But leave aside this intangible for a moment. Studies in Japan have proved beyond doubt, that their Shinkansen network has resulted in companies moving away from Tokyo and Osaka Metropolitan areas, into the smaller towns, thereby giving huge economic benefits arising out of decongesting mega cities. It is common knowledge that Mumbai and Ahmedabad are already bursting at their seams. If corrective measures to decongest are not taken now, how will these cities even survive in 50 years? I have travelled in Gujarat extensively, and I can easily think of Valsad, Vapi, Surat, Bharauch, Anand and Vadodra and Ankhleshwar , as towns that will lie on this bullet train route, that can take in the decongestion of the mega cities, given that they have huge business communities that contribute a big chunk of Mumbai's financial clout. Makes sense?
So, then, what are the risks of this project succeeding ? Yes, the same as above.
- Unexpected strengthening of the Yen- unlikely, but possible.
- Possible failure of India to quickly indigenized. - If we did it with Maruti, why not here.
- Will this become a Financial white elephant? - Unlikely, as long as 136 crores per month cash is generated in the route.
- Will it not impact the profitability of traditional rail route, now that a big chunk of passenger are expected to switch over? - On the contrary, I am convinced that this will improve the profitability of the existing routes. Because, the Railway makes money moving goods, and loses money at prevailing ticket prices and a 97% operating ratio. By moving passenger away from traditional routes, the number of passenger trains in those tracks can be reduced make it now possible to move more goods, and thereby, earning more money. And who knows, it may save the costs of quadrupling those tracks in 50 years! That alone can pay for the Rs.18,000 crores that the government has to fund for this project as part of the 20% project finance.
- In Project Financing parlance, failure of speedy Financial Closure, will impact ROI and therefore, the viability- Possible
- Delay in land acquisition - possible, but then low probability.
- The other 20% project cost is not accounted for. - Well, think of the possible increase in cars and that will ply between these cities to cater to growing population, which will now be avoided. Think of the additional goods that will be moved by rail now, relieving the congestion in the roads ( by way of truck movements). Think of the economic costs avoided here.... that alone will be sufficient to pay for this project equity.
- Oh, there is undue haste in decision-making. Maybe some kickbacks, who knows? - Until any information emerges to the contrary, I would like to believe that this has been a fair and transparent deal.
- Security threat to the lines - this could be for real, and this is where one of the biggest challenges for the Railways will come from. There are enough jealous eyes around the world waiting to see India implode, and there are enough stupid people in country who could end up inadvertently aiding that.
So, my own take on the project?
As a 5th grader, I had watched "The Bullet Train" in Madurai's Regal theatre. I had then wondered " when will we get such dream trains in India?". That dream may well soon be seeing the light of the day, and I am massively excited. I want my India to move on, into the modern world, and not get entangled in socialistic anachronisms.
As for you, I leave it to your wise counsel.
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