IRCTC May Be The Reason Why Private Train Operations Are Not Taking Off

The Indian Railways’ (IR) effort to begin Private Train Operations (PTO) has not worked out the way IR expected it to, so far.

The idea behind the initiative was that private operators would operate the trains through a public-private-partnership (PPP) and pay a share of the revenue to IR along with certain other charges.

However, only three clusters received bids out of the 12 clusters for which bids were invited in July. Out of these three clusters, only two received bids from two firms while one cluster received a single bid.

The highest bidder in all three clusters was the government-run Indian Railway Catering and Tourism Corporation (IRCTC), defeating the very purpose of the entire exercise.

Initially, the PTO initiative had an enthusiastic response. IR had received request for qualifications by 16 firms with 120 applications in the 12 clusters, regardless of the Covid situation.

Out of these, eight firms were qualified to file the request for proposal. After the qualification round, each cluster still had eight to 10 potential bidders.

Despite the good start, only two bidders came forward during the July bidding. For the Delhi-1 cluster, IRCTC bid for a 15.3 per cent revenue share, while Megha Engineering and Infrastructures Limited (MEIL) bid for a 2.16 per cent revenue share.

For the Delhi-2 cluster, IRCTC bid for a share of 6.3 per cent while MEIL bid for a 0.54 per cent share.

Finally, for the Mumbai cluster, IRCTC was the sole bidder offering a revenue share of 18 per cent.

What went wrong?

The large difference between MEIL’s bids and IRCTC’s bids show that the playing field is not level for private and public players in the railway space. IRCTC has years of experience operating in the railways space and with it, the experience of being the first private operator in the railways space. Tejas Express, which was launched in October of 2019, was the first private train operated by IRCTC.

The sector is capital intensive and requires private players to invest large funds in rolling stock and operational expenses. With the current pandemic situation, lack of prior experience and the presence of a strong well-established competitor, it is likely that private players would be reluctant to participate in bids.

IRCTC operates under the aegis of IR, which could result in information asymmetry and a better understanding of the market.

Certain reports state that bidders were unhappy with the time window provided to take a decision.

The Solution:

Zero bids clearly indicate that the entire process should be reviewed before going forward with another bidding round.

First, the current model squarely places all of the risk on the new operators while allowing a rent-seeking IR to capture the upside with no risk. IR must review the entire process and bring in more stakeholder-friendly practices to encourage greater private sector participation.

Second, IRCTC has an unfair advantage over new private players. A solution to the issue, as TS Ramakrishnan has argued here, is selling the government’s stake in IRCTC and cutting it off from Indian Railways.

Not only will it result in a fair playing field, but also generate funds for the government at a high valuation.

Today, markets are starved for good companies, especially retail-technology companies. Zomato is valued at Rs one lakh crore, despite being a loss-making entity.

IRCTC is a monopoly that has demonstrated profitability and grown to be a market favourite. It was originally valued at around two to three times sales during its IPO in 2019, which has skyrocketed to around 18 times sales in 2021.

The government can use the current market optimism to offload its shares at a higher valuation.

The railways has been unable to meet the total budgeted capital expenditure for every fiscal, as it has not been able to generate the internal accruals.

Along with budgetary support, the IR depends on internal accruals to fund its operations and expansion initiatives.

With these burdens on IR’s finances, private train operations are no longer a luxury but a badly needed necessity.

IR and the government must do what they can to get this initiative going.