The initial tirade against the proposed K-Rail was majorly because of the lack of transparency of the project. The most important document of K-Rail project viz Detailed Project Report (DPR) was available only in bits and pieces in its website initially. However, following the hue and cry from all quarters, K-Rail has now placed the full version of DPR in Legislative Assembly website and the same is accessible to anybody now.
The average passenger trip length is assumed at 200 km (Page no 19-181) in 2025-26. What is the rationale in assuming it as a constant for all the years viz. from the first year to 50th year? The average passenger trip length, being a component in the calculation of yearly revenue, has major relevance in reckoning the yearly income. The repayment of the loan is indirectly based on this assumption as well
The present version of DPR is quite bulky and has VI volumes, each volume containing many chapters. Volume II has 4 parts (each part containing many chapters) and Volume IV has two parts. The most important aspect of any project viz. the financial viability is dealt with in Volume II. If ‘bulk’ is the criterion for accepting a DPR, the one submitted by Systra would easily match the criterion. However, the loose ends and inconsistencies in the report indicate lack of professionalism in the DPR of such a colossal project. Whether the funding agencies would go by this DPR is something to be seen. Let us analyse:
1. The DPR (page 74 Executive Summary Vol I) says that the average passenger fare is at Rs 2.75/km whereas the average fare appears to be @Rs3.90/km (Table 19.34 Page 19-34). In Page no 19 (under para 5.4.2), it is mentioned that the maximum fare slab is Rs 2.50/km – Rs 3/km. The optimum fare for Silver Line is assessed at Rs 2.75 per km (Page 19-181 Vol II). The average fare at Rs 3.90/km is way above even the maximum slab. The total revenue in 2025-26 should be Rs 1,605 crore, if the fare is at Rs 2.75/km (79,934 x 200 x Rs 2.75 x 365 days) whereas the total revenue is reckoned at Rs 2,276 crore (79,934x200x Rs3.90 x 365 days). This deviation is not explained in DPR.
The calculation of revenue from RORO also appears to be baffling. Page no 13-391(Vol II) indicates that there could be 445 trucks daily in RORO. Page no 75 (Executive Summary Vol I) says that the per-km rate is at Rs 25 and average RORO trip is at 392 km. If so, the total revenue in a year in the best scenario should be Rs 159 crore (365 days x 392 km x Rs 25 x 445 trucks). However, the revenue flow from RORO is reckoned at Rs 237 crore in 2025-26 (page no 19-184). Even if the full trip (covering over 530 km) fare at Rs 13,536 per truck is taken, the total revenue per annum would be only Rs 220 crore (Rs 13,536 x 445 trucks x 365 days). This must be explained
2. The logic for increase (per annum) in the revenue from the passenger travel (fare box revenue) is not clear. It is shown as Rs 2,276 crore in 2026 based on the fare at Rs 3.90/km in 2026 and the fare is expected to increase by 6% every year (page 74 Executive summary Vol I & page 19-181 of Vol II). Next year the revenue is at Rs 2,517 crore (fare at Rs 4.13/km after 6% hike from Rs 3.90/km) and in the third year at Rs 2,783 crore (fare at Rs 4.38/km after 6% hike from Rs 4.13/km) and so on. While doing the cost estimation (item no iv in page 15-22 Vol II), the escalation is reckoned at 5%. What is the logic in taking the escalation in revenue at 6% and escalation of cost at 5%? This has to be explained. If inflation pa at 5% is taken as the yard stick for estimating the cost escalation, then the same parameter should be applicable for revenue as well. Similarly the passenger increase pa is taken at 4.31%, the logic of which also requires some clarification.
3. The average passenger trip length is assumed at 200 km (Page no 19-181) in 2025-26. What is the rationale in assuming it as a constant for all the years viz. from the first year to 50th year? The average passenger trip length, being a component in the calculation of yearly revenue, has major relevance in reckoning the yearly income. The repayment of the loan is indirectly based on this assumption as well.
4. The revenue from the RORO (Roll On Roll Off) is reckoned at yearly escalation at 6% whereas the annual escalation in revenue from advertisement, station naming rights, rental from KIOSKS & ATMs, etc., are reckoned at 5%. The escalation in cost in respect of all items viz. civil, electrical, signaling and train control and communication, ticketing and fare collection and rolling stock, etc., at March 2020 level is escalated at 5% (page 15-27 Vol II). What is the explanation?
5. The calculation of revenue from RORO also appears to be baffling. Page no 13-391(Vol II) indicates that there could be 445 trucks daily in RORO. Page no 75 (Executive Summary Vol I) says that the per-km rate is at Rs 25 and average RORO trip is at 392 km. If so, the total revenue in a year in the best scenario should be Rs 159 crore (365 days x 392 km x Rs25 x 445 trucks). However, the revenue flow from RORO is reckoned at Rs 237 crore in 2025-26 (page no 19-184). Even if the full trip (covering over 530 km) fare at Rs 13,536 per truck is taken, the total revenue per annum would be only Rs 220crore (Rs 13,536 x 445 trucks x 365 days). This must be explained.
6. The calculation of EIRR (Economic Internal Rate of Return), based on the social cost and social benefits does not appear to be convincing. The social benefits cover the travel time, VOC (Vehicle Operating Cost) savings, pollution cost savings, accident cost savings and Infra cost savings whereas under social cost, items like capital outlay, replacement cost, additional capex, and O&M expenditure are shown. Are these items relevant under social cost? Are they not actually part of the project finance cost? The social cost must be in terms of the externalities of the project viz. noise pollution, ecological damage, water pollution (especially during construction period), relocation struggle for the population, the job loss of agricultural labourers, loss to be suffered by KSEB on account of subsidised tariff for K Rail ( Page no 19-172 Vol II), loss to be suffered by other agencies of transportation including the existing railway system and KSRTC, job loss to be suffered by the employees of the existing agencies of transportation etc. In this connection, the statement “the acceptable EIRR rate for Rail projects at 14% is considered as the social cost of capital” (in page 19-165) needs clarification. The social cost of each project is different and cannot be taken as one fit for all.
7. In page no 19-193, it is mentioned that the FIRR (Financial Internal Rate of Return) is based on three major cash inflows viz. fare box return, non-fare box return and VCF (Value Capture Finance). The fare box return is itself based on certain assumptions (which requires clarification as explained above) whereas the non-fare box return and more specially the VCF are just conjectures. Loud-mouthing the FIRR as acceptable for such a high-stake project is likely to invite criticism.
Normally, all international agencies would require sovereign guarantee for such soft loans. If the Government of India is not offering the sovereign guarantee, the funding agencies may not welcome the loan proposal. The state government guarantee is not considered as sovereign guarantee
8. The proposed K-Rail (semi speed train) is estimated to take 3 hours and 56 minutes to travel a distance of around 530 km with 11 intermediate stops at 2 minutes dwell time at every intermediate station (Page 13-392 & 13-408 Vol II) . The total dwell time would be 18 minutes (2 minutes at 9 stations in between). If we reduce the dwell time from the total travel time, the actual running time would get reduced to 3 hours 38 minutes. To cover a distance of 530 km within 3 hours and 38 minutes, the average speed of the train should be 156-157 km per hour. The acceleration and deceleration involving 11 stations and the slow down on account of the remaining “sharp curves and steep gradients yielding formations and deep cuttings (Page 1-32 Vol I)” would function as a drag on the speed of the train and running the train at 156 km would be a huge challenge. Added to this, is the cushion time demanded by the engineering, electrical and signal departments in the Indian railway system. Liberal cushion time, insisted on by the above departments, is the major cause for the increased train-running time in the present railway system. Most of the trains in the existing system can save on running time, if the above departments rationalize the running time (pruning the liberal cushion time). All the above factors would pull down the speed of the K-Rail train and the USP (Unique Selling Proposition) of the project viz. faster mode of transportation, would be set at naught. It is pertinent to note that the fastest train in India viz. the Vande Bharat Express could attain just 200 km/hr and the fastest operating train viz. the Gatiman Express runs at 160 km/hour. The proposed K- Rail is a SEMI-SPEED train.
9. The loan component in the finance model is stated differently at different places. For instance, in page No 77 (Executive Summary, Vol II) and page no.17-116 (Vol II), loan from lenders is shown at 60% where as in page 19-203, it is reckoned at 52.70%. The inconsistency may be dismissed as insignificant. But this is an indication of the lack of proper diligence or seriousness in the preparation of DPR of a project of such a colossal size.
10. The much publicised aspect of the project, viz. cheaper source of funding, from international agencies (Japan International Cooperation Agency – JICA, for eg.), can be taken only with a pinch of salt. Most loans from international agencies would have ‘strings’ attached to it and JICA is no exception. JICA would want K-Rail to make purchases of major components and machinery from Japanese companies. “There is no restriction on the amount of the loan but may contain other restrictions on sourcing the material” (Page 77 Executive summary Vol I). Needless to say that K-Rail will not have the freedom to examine competitive offers. The agreement with such international agencies need thorough vetting and reading between the lines.
Normally, all international agencies would require sovereign guarantee for such soft loans. If the Government of India is not offering the sovereign guarantee, the funding agencies may not welcome the loan proposal. The state government guarantee is not considered as sovereign guarantee.
The project cost is @ Rs 63,776 crore excluding IDC (interest during construction @ Rs 164 crore) as per the DPR (Page 15-121). The cost is estimated as per the March 2020 price level. If the escalation in cost is taken at 5% pa, the project cost in 2026 (project commissioning date), would be over Rs 85,000 crore. From the past experience, we all know that projects especially under the government sector (more so, in the case of state government sector) do not get completed in time. Only knaves would be naive to think that K-Rail, with its size and complexities, would be an exception to the aforesaid observation. The rigmaroles of legal cases associated with the project would further complicate and delay the project. A minimum delay at 6 years could push up the cost beyond Rs 1 trillion (the state GDP is at Rs 9.78 trillion in 2020-21).
The aforesaid inconsistencies and loose ends indicate that the EIRR and FIRR require a reworking. The DPR also should show the workings such as breakeven point, DSCR, etc., so that the project is easily understood by all. Pertinent it is to note, at this juncture, the statement of our Chief Minister that COMMON MAN SHOULD UNDERSTAND WHAT IS HAPPENING IN THE ADMINISTARTION.
Just a peripheral study of the DPR (only Vol II) is revealing so much inconsistencies and loose ends in the report. Considering the high stakes in this much-debated project of Kerala government, the DPR needs to be vetted by an expert committee comprising experts from areas viz technology, project finance, law, environment, earth sciences, governance and human rights.
A. Purushothaman is former General Manager, SBI, Global Market, Mumbai
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