India's Mega E-Bus Plan Runs Into Same Old Problem

The central government's ambitious plan to electrify India's public bus fleets faces multiple challenges, from raising huge sums of money and building critical infrastructure to risking disruption in cash flows.

And all of it rounds up to one big weakness in the system—the poor financial health of the state transport undertakings, the entities responsible for operating the public buses.

The National Electric Bus Programme, which aims to deploy 50,000 e-buses across the country, is envisioned to aggregate demand from state transport units.

Under the new gross-cost-contract model, the bus manufacturers winning the tenders will deliver, operate and maintain the buses for 12 years. For their troubles, the STUs will pay the companies on the number of kilometres the buses cover.

This allows the cash-starved STUs to deploy buses without spending huge cash as initial investment.

To fully benefit from this model, Convergence Energy Services Ltd.—green energy-focused venture under the Ministry of Power, New and Renewable Energy—is aggregating demand from different states.

The firm has already floated two tenders of over 11,000 buses, touted to be the biggest tenders for electric buses globally.

But companies have raised concerns that these state units may miss making regular payments due to their poor finances.

"There are three kinds of risks here—operating risk, balance sheet risk and cash flow risk," PB Balaji, group chief financial officer at Tata Motors Ltd., said in a media call to discuss third-quarter earnings of the company.

While the company is comfortable with the operating risk and balance sheet risk to a certain extent, credit risk or the collection risk is something that no one wants in any case, Balaji said.

The company, which won the first tender for the buses, said it is looking to address the collection risk through a payment security mechanism, which will make the entire project bankable.

Tata Motors didn’t participate in the second tender of over 6,400 buses, which was won by Switch Mobility Pvt., the electric mobility arm of Ashok Leyland Ltd.

This has led to concerns of reduced participation of companies in the future tenders.

"We're up to our appetite with respect to the balance sheet position that we can take," Balaji said.

For subsequent tenders, the industry needs to get the payment security mechanism in place and take this risk off the books, he said.

Company executives believe this payment guarantee will be critical for the massive investments needed for the programme.

Mahesh Babu, the global CEO of Switch Mobility, estimates that the industry will need an annual investment of Rs 18,000–20,000 crore for deployment of 10,000 buses every year.

It means electric bus makers will have to invest Rs 1 lakh crore over the next five years. That includes bus manufacturing capacity, charging infrastructure, depot development and capital investment for operations before companies start collecting revenue from the STUs.

To fund this, companies will need funding from banks, which are likely to remain at the margins until a consistent revenue stream is ensured.

"Equity is not going to be 100%, but 30–40%. Remaining is going to be funded by banks and they will definitely look for a payment security mechanism," Babu said.

"And hence, if we want to really scale this up to a large number, we should look at payment security mechanism."

Tata Motors Ltd. echoed the sentiment.

"And that’s (payment security) something critical to ensure for the industry itself, given the size of the balance sheet will go up. We need to be careful on that front," Balaji said.

While all bus makers may not participate in every tender, some executives believe the competition will remain healthy.

The original equipment manufacturers will continue to participate in tenders because there is a strong demand from the STUs, Satish Jain, chairman of PMI Electro Mobility Solutions Pvt., told BQ Prime.

The STUs also understand that running electric buses reduces operating costs by 30% as compared to a diesel bus, Jain said.

Although sustained payments from the STUs is a challenge, they have operated in this fashion since long, even with the bus fleet having internal combustion engines, he added.

The issue has not discouraged government businesses or the bus makers to supply to the STUs because at the end of the day, it's a fixed revenue business, Jain said.

The cautious approach by banks has kept the smaller players at bay as they rely more heavily on these funds.   

"Public sector banks, barring State Bank of India, are unwilling to provide loans. For large auto companies with deep pockets, funding is not a problem, but for startups it becomes a challenge," Jain said.

The two tender wins by Tata Motors and Ashok Leyland's arm—two of the biggest commercial vehicle makers in India—also underline the same issue.

Jain said the government should consider bringing the EV industry under priority-sector lending to ensure dedicated loans for the smaller players at lower interest rates.

The private bus operators, which make up nearly 80% of India's bus fleet, will also demand electric buses in the next few years, expanding the market significantly.

Currently, the penetration of electric buses is in single digits, but executives believe it will climb rapidly in the next few years as the costs come down.

According to the Bus and Car Operators Confederation of India, there are more than 20,000 private bus operators in the country. It anticipates that 5% of the total count of private buses will be electric in the next five to seven years. 

But the government's plan to put 50,000 electric buses on Indian roads will pave the way for it and may prove decisive in what direction the industry takes.

Reports of a payment security mechanism being already in the works surfaced before the budget and an announcement may be just around the corner.

Tata Motors' Balaji is optimistic.

"I’m sure there’ll be a solution to this pretty soon," he said in the media call.