Mr Modi's dream project of the bullet train is finally here. Though personally I would have been happier if the existing network got faster, from the average speed of 49kmph across the various varieties of trains, and if they ran on time and without accidents.
Anyways coming to the Bullet train. Its critics have the following to say:
1. The debt will be huge and will sink the future generations of India in a Debt trap as the Yen strengthens and the Rupee Depreciates.
2. 4-5 more such projects across the country and we will be in a certified debt trap right now and not later.
3. Finally, the cost of 110000 crores for the project is the amount of money allocated in the rail budget towards expansion and safety by the NDA govt!!
Now for some numbers:
Current trains...
On an average the cost recovery from ticket sales is only 57%. What it means is that if today it costs 850 from chennai to delhi ie 2127kms, (0.4 Rs/Km) it should be raised to 0.7 Rs. km or Rs.1,491/- to recover just the cost!! - Average speed of train - 65kmph. (ie 30% premium fast train on the national average!!)
Proposed Bullet train:
Total cost - 110000000000
assuming 10:1 debt:equity we have:
INR equity - 1,10,00,00,00,000
INR Debt - 1,10,00,00,00,000
JPY Debt (INR Equiv) - 8,80,00,00,00,000
28 year historical Yen-INR movement shows a 5.85% per year CAGR depreciation of the INR. But the JPY has depreciated from .6693(aug'13) to .5786(sept'17) ever since Modi was announced as the PM candidate. This is very significant.
So the capital cost increase and the interest payment increase due to this is priced in and over the 5 year construction period the increased costs are 22,470 Cr. (It will less than half of this as i have assumed the entire JPY is drawn on day one).
Now each train can have a minimum of 8 cars and a maximum of 16 cars with 78 people or thereabouts in each car. Assuming we start with 15 trains in each direction per day and a 90% capacity utilisation we have a total of 33696 seats sold per day.
The increase due to the rupee depreciation at historical levels will require a 1.5 to 2% increase in prices every year for 50 years, which means the ticket price will double from the government launch estimate of 3300/- to 6600/-. If one adds the general price rise to this, this ticket cost will have to add another 100% ie taking it to 9900/- +
Working out the above we arrive at 2200 per seat with a 9% ROI on total cost which includes the equity, INR debt, JPY debt with interest and the expected fall in the INR vis vis the Yen. To the above we add 50% of the above cost as the cost of maintanence, staff etc etc. this results in a ticket price of 3300/- to start with for a distance of 500kms. cost per km is Rs.6.6/-
Road Comparison
Toll road costs are today at 1.25 per km. (you still have to add the cost of running the car ie 5-7/km)
comparing with the current network
Train comparison:
Chennai - delhi - Ist Ac ticket cost (current)- 6000/-
(Shinkasen)- 2127*6.6 = 14,038/-
Time current - 32hrs
Shinkasen - 13 hrs
Extra trips by shinkasen - 1 on the same asset. As asset cost is 67% of the ticket cost, the extra runs will give me a saving of 50% on the ticket costs on the same asset on the same route. so possibly this can be priced at 14038*.67*.5 = 4702 ie 9,335/-
The yearly expected increase in ticket costs will have to be 3.5% to keep up with the exchange changes and inflation costs, which may or may not happen.
So the GOI can reduce the debt burden by issuing 5% tax free bonds in India to its citizens and also issue shares on the shinkasen assets and routes. In my calculations I havent taken any income towards the 10% slack in capacity which can be exploited for carrying cargo!
So is this a good deal or not? I guess its one of those things that only time will tell. However, if one goes by what Japan and China have experienced with their bullet trains, the economy and its people have only benefited by it!!
Anyways coming to the Bullet train. Its critics have the following to say:
1. The debt will be huge and will sink the future generations of India in a Debt trap as the Yen strengthens and the Rupee Depreciates.
2. 4-5 more such projects across the country and we will be in a certified debt trap right now and not later.
3. Finally, the cost of 110000 crores for the project is the amount of money allocated in the rail budget towards expansion and safety by the NDA govt!!
Now for some numbers:
Current trains...
On an average the cost recovery from ticket sales is only 57%. What it means is that if today it costs 850 from chennai to delhi ie 2127kms, (0.4 Rs/Km) it should be raised to 0.7 Rs. km or Rs.1,491/- to recover just the cost!! - Average speed of train - 65kmph. (ie 30% premium fast train on the national average!!)
Proposed Bullet train:
Total cost - 110000000000
assuming 10:1 debt:equity we have:
INR equity - 1,10,00,00,00,000
INR Debt - 1,10,00,00,00,000
JPY Debt (INR Equiv) - 8,80,00,00,00,000
28 year historical Yen-INR movement shows a 5.85% per year CAGR depreciation of the INR. But the JPY has depreciated from .6693(aug'13) to .5786(sept'17) ever since Modi was announced as the PM candidate. This is very significant.
So the capital cost increase and the interest payment increase due to this is priced in and over the 5 year construction period the increased costs are 22,470 Cr. (It will less than half of this as i have assumed the entire JPY is drawn on day one).
Now each train can have a minimum of 8 cars and a maximum of 16 cars with 78 people or thereabouts in each car. Assuming we start with 15 trains in each direction per day and a 90% capacity utilisation we have a total of 33696 seats sold per day.
The increase due to the rupee depreciation at historical levels will require a 1.5 to 2% increase in prices every year for 50 years, which means the ticket price will double from the government launch estimate of 3300/- to 6600/-. If one adds the general price rise to this, this ticket cost will have to add another 100% ie taking it to 9900/- +
Working out the above we arrive at 2200 per seat with a 9% ROI on total cost which includes the equity, INR debt, JPY debt with interest and the expected fall in the INR vis vis the Yen. To the above we add 50% of the above cost as the cost of maintanence, staff etc etc. this results in a ticket price of 3300/- to start with for a distance of 500kms. cost per km is Rs.6.6/-
Road Comparison
Toll road costs are today at 1.25 per km. (you still have to add the cost of running the car ie 5-7/km)
comparing with the current network
Train comparison:
Chennai - delhi - Ist Ac ticket cost (current)- 6000/-
(Shinkasen)- 2127*6.6 = 14,038/-
Time current - 32hrs
Shinkasen - 13 hrs
Extra trips by shinkasen - 1 on the same asset. As asset cost is 67% of the ticket cost, the extra runs will give me a saving of 50% on the ticket costs on the same asset on the same route. so possibly this can be priced at 14038*.67*.5 = 4702 ie 9,335/-
The yearly expected increase in ticket costs will have to be 3.5% to keep up with the exchange changes and inflation costs, which may or may not happen.
So the GOI can reduce the debt burden by issuing 5% tax free bonds in India to its citizens and also issue shares on the shinkasen assets and routes. In my calculations I havent taken any income towards the 10% slack in capacity which can be exploited for carrying cargo!
So is this a good deal or not? I guess its one of those things that only time will tell. However, if one goes by what Japan and China have experienced with their bullet trains, the economy and its people have only benefited by it!!
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