Lack of exclusivity pose higher risk to private passenger train concessions: India Ratings

The absence of exclusivity clause that prohibits competition will cast higher uncertainty on revenues as the volume/demand risk is fully on the private passenger train operators, rating agency India Ratings & Research has said.

The private entity winning the bid to operate passenger trains on a cluster will get a non-exclusive right to procure, operate and maintain the trains for 35 years, according to the Railway Ministry.

Railways’ right

The Indian Railways, though, has the right to operate its own trains or give to any third party, the concession to operate trains on the same routes, through competitive bidding and the existing concessionaire (private operator) shall have the right to participate in such competitive bidding.

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The Railways will, however, ensure that the existing concessionaire shall have an exclusive right to operate the trains on the paths and no new similar train shall originate from the originating railway station for the same destination station either one hour prior to or post the departure of such train(s) on the respective paths.

The exceptions

This restriction will not apply when the capacity utilisation of the train is more than 80 per cent in the previous three months and for running special trains to clear sudden surge in demand for events including public rallies and Kumbh Mela which will be limited to 10 days in a year for each train, according to the draft model concession agreement for private participation in running passenger trains.

“While demand risk also exists in other sectors, the introduction of competition elevates the risk in this model. In other sectors, there are some exclusivity clause prohibiting competition. Absence of this clause (in private passenger train concessions) casts higher uncertainty on revenues,” Ind-Ra said.

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Non-competing clause

While the operator’s autonomy to fix tariffs lends strength to its credit profile, the absence of a non-competing clause for the route amplifies the cash flow risks, it stated.

“In the Railway concession framework, not only the long concession period of 35 years but also the full exposure to demand risk poses an elevated risk for the project. The corridor demand/traffic risk combined with competition from existing trains would influence developers’ return expectations,” Ind-Ra said.

The absence of limitations for developers to win more than one route concession opens-up the opportunity to blend multiple projects to raise funding. However, Ind-Ra expects demand risks could outweigh the benefits of pooling in the event of incorrect demand risk forecasting, it added.

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