Passenger trains in India have been running at an average speed of 50-60 kmph with the exception of a few at an average speed of 80-90 kmph. For the first time, India would witness High Speed Rail (HSR), which can go at an average speed of about 240 kmph (with a maximum speed of 320 kmph) covering 500 km distance in about two hours.

Compared to road projects, rail projects — whether freight corridor or metro or HSR — have been notorious as the cost of investment is huge in the beginning and the return on investment (RoI) could trickle through over a long period of time.

In the current scenario, there are no mechanisms to get such a huge funding, which could be repaid over a long period of time, preferably with a moratorium for a reasonable period of time.

A big deal This is where the deal signed between India and Japan for the development of HSR system is path breaking. The economic cooperation between India and Japan has been new.

Many metro rail projects in India, including the Delhi Metro, have been financed by Japan International Cooperation Agency (JICA) at a low interest rate of about 1.5 per cent. In addition, Japan has lent on many other economic and social projects.

However, the striking difference in this pact is that about 80 per cent of the development cost of HSR would come as loan at an interest rate of 0.1, with a moratorium of 15 years for the staggering repayment and repayment of principal and interest up to 50 years from initiation of the project.

There are superior merits in this deal. Although other countries have shown enormous interest in selling their HSR system in India, they have not come with such a pleasantly surprised deal. Shinkansen, the HSR of Japan, has seen terrific improvements over last 50 years, and it is one of the best wheel-and-rail HSR system in the world with excellent safety record.

The investment for an HSR project is as much as foreign relations as economic cooperation and technology transfer. The powers-that-be knew very well that the Japanese have remained trustworthy, although they cannot openly say so due to diplomatic reasons.

Many gains It is true that Japanese too had some compulsions as the competition they face in promoting their HSR technology with other countries now has become intense.

Those who have been following the economic cooperation of India and Japan for a quiet some time would have easily predicted that the first HSR project would be implemented by Japan.

More than the growing aspirations of faster and comfortable travel along with rising incomes of Indians, the nitty-gritty of the loan made the first HSR project a financially viable project.

The construction cost would be about ₹98,000 crore. And the operation and maintenance (O&M) costs would be about ₹4,400 crore for 75 round trips between Ahmedabad and Mumbai every day in 2024, the first year of HSR operation.

The passenger fare of ₹2,700 per passenger between Ahmedabad and Mumbai (₹5.20 per km) is assumed.

The fare is comparable to air fare varying between ₹2,000 to ₹4,000, bus luxury fare varying between ₹1,500 to ₹2,000, Rail AC fare varying between ₹9,00 to ₹1,900.

In addition, the travel time is about two hours, which would enable people to make the to and fro travel in Ahmedabad — Mumbai corridor a daily travel All the costs and prices are at 2015 price level.

It is assumed that the first year of HSR operation would begin in 2024. The end-to-end ridership refers to a trip either from Ahmedabad to Mumbai or Mumbai to Ahmedabad or combinations of trips that would be equal to one end to end trip.

In the absence of Japanese aid, let us assume that investors and lenders would expect at least 10 per cent as real Return on Investment (RoI).

The RoI itself would be ₹9,800 crore and added with O&M costs, the fare box revenue has to be at least ₹14,200 crore, for which the end to end ridership has to be 1.40 lakh passengers per day in 2024.

With the Japanese aid, 80 per cent of the total cost comes with an interest rate of 0.1 per cent and the remaining comes with 10 per cent real RoI, making the weighted average cost of capital as 2.51 per cent. With the RoI remaining at 10 per cent and for the same O&M expenses, the fare box collection has to be at least ₹6,900 crore, for which the end to end ridership has to be 67,600 passengers per day in 2024.

The moratorium of 15 years would reduce the ridership requirement to 61,800 passengers per day in 2014.

A viable plan The pre-feasibility study submitted by RITES, Systra and Italfer consortium in 2010, a doctoral thesis from IIM-Ahmedabad and feasibility study carried out by JICA consortium in 2015 estimated that the end to end passengers for Ahmedabad-Mumbai HSR would be 34,410, 1,07,000 and 40,000 respectively, which averages out to 60,470, very close to the ridership that is needed for financial viability.

With Japanese aid, the project would become financially self-sustaining. In general, rail projects require ramp up time of three to five years to reach its full capacity utilisation. In the absence of moratorium for repayment, the financial sustainability of the project becomes tricky.

There is a caveat. The aid remains attractive only if India ensures that our currency does not depreciate further in the international arena.

Although the lending was at an interest rate of 1.5 per cent for our metro projects, we had to pay more due to depreciation of our currency.

Otherwise, this deal would remain in the history of India one of the windfall aid that we got for developing a state-of-the-art rail transport system.

The writer holds a doctorate in public systems from IIM-A. The views are personal

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