An Analysis of E-bus Procurement in India

This blog is part two of the “Embracing E-buses” series. To read part one titled “Where does India stand in its e-bus transition?”, click here.

India got its first ever e-bus in 2014. As of today, there are just about 2,000 e-buses being operated in Indian cities. The transition to e-buses in India has faced some challenges, including its procurement models, that has limited the pace and expansion of electrification. To ensure India meets the ambitious targets it has set for electric mobility, we need to review the procurement models.
Of these models, the Gross Cost Contracting (GCC) model has many advantages for cities, and some challenges. And we need to understand them if we want to overcome the challenges of operating buses—and specifically e-buses—in India.

What we need today is an improved GCC model (hereon referred to as GCC+), which can address the challenges faced under the GCC model, and help both the operators and the STUs run seamless e-bus operations.

What is the GCC model?

Indian cities either follow an owner-operator model—where the city bus agency owns and operates the buses—or outsources bus operations. This outsourcing is done primarily through one of four models, including:

In the first three models, the investment to acquire the buses is done by the operator whereas in the management contracting, the buses are provided to the operator. In India, cities have mostly used NCC and GCC contract models besides the owner-operator model.

The GCC model requires the operator to procure the e-buses as well as implement the charging infrastructure, which saves cash-starved state transport undertakings (STUs) from making the initial capital investment. For its troubles, the operator is paid based on the number of kilometres the buses are operated.

Before we go into what a GCC+ model can look like, we need to understand the challenges of the current model, starting from the beginning of e-bus procurement in Indian cities.

The beginning: E-bus procurement under FAME-I Scheme

Battery Electric Bus (e-bus) procurements in India started in earnest with the announcement of the Faster Adoption and Manufacturing of Electric Vehicles in India (FAME-I) Scheme by the Department of Heavy Industries (DHI), Government of India (GoI) and NITI Aayog in 2015. In the FAME-I scheme, cities had the option to either procure the buses outright or or procure the bus operating service via the GCC route.

10 cities applied for subsidy under FAME-I, out of which five preferred outright procurement and the remaining five opted for the GCC model. Most of these tenders were for 15-40 buses per city. All the outright procurement tenders were successfully placed, although there were delays in delivery by manufacturers as well as in arranging necessary depot and power infrastructure. But all the GCC tenders (except one—Hyderabad) were cancelled due to a variety of reasons. But simultaneously, some other cities—such as Ahmedabad and Pune—were also able to successfully procure e-buses based on a GCC tender, though this was outside the FAME scheme.

The next phase under FAME-II

FAME-II—an expanded version of the FAME scheme—was announced in 2019, envisaging procurement of 7,090 e-buses. DHI decided to allow only GCC contracts in FAME II.

Under FAME-II, GoI initially allocated 5,095 buses to 64 cities. Additionally, it also allocated 400 buses for intercity operations, and 100 buses for last-mile connectivity. By December 2021, 18 cities had awarded GCC contracts for 2,965 e-buses. But there was a lot of variation in the bids.

A few cities had to rebid the tenders due to a lack of response or bid prices higher than expected. Only one state—Uttar Pradesh—conducted a joint procurement for multiple cities, while the rest were tendered for individual STUs. A few cities received per km rates of less than ₹50 whereas some received bids more than ₹80.

The following factors can be attributed for this variation:

To bring down the per km price, the Convergence Energy Services Ltd (CESL)—an arm of the state-owned Energy Efficiency Services Ltd.—was tasked to aggregate the demand and float a combined tender on behalf of 9 eligible cities.

Why the tender by CESL was a success in reducing bus procurement cost

The Convergence Energy Services Limited (CESL) tender for 5,450 e-buses that closed in April 2022, is by far the largest tender for e-buses in India. Through a process called Grand Challenge – I (GC-I), CESL was able to homogenise the contract conditions and aggregate the requirements of five out of nine cities eligible to access the government incentives (Table 1).

The GC-1 tender resulted in prices reducing 15% to 48%, compared to prices paid in the past. In fact, the prices through this tender were lower than even those of the diesel/CNG buses.

However, almost every city preferred buses of a different specification, somewhat reducing the benefit of demand aggregation to achieve economies of scale. Reducing the number of bus categories could have increased the benefits even further, although easier said than done.

The key factors that facilitated the reduction in costs were:

One of these factors —economy of scale—is worth exploring in greater detail.

Benefit of economies of scale

Recent e-bus tenders show that bidders favoured larger procurements (seen in Table 2). Even with the same level of subsidy, a larger number of buses allows for lower per km rates.

Despite the maximum subsidy, the bid price for DIMTS tender was the highest whereas the CESL and BEST tenders received the lowest bids even though lower subsidies were offered. Similarly, the subsidy for 9m buses for Nagpur was at least as much as the subsidy available under the CESL tender and yet the bid price was much higher.

Limitations of the current procurement model

The CESL GC-1 tender and the BEST tender are important milestones in India’s electrification of public transport and have raised the expectations of a continued fall in e-bus per km rates similar to the solar energy price trajectory. Based on the initial success, CESL is targeting to procure 50,000 e-buses over the next 5 years. This means that many more cities will go through the next rounds of procurement. CESL must overcome the following challenges in order to aggregate the demand and achieve even lower e-bus prices:

Many cities manage and operate their own fleet and the current GCC model may not suit them.
Participating cities may have differing requirements (e.g. requirements of cities vary widely in terms of bus capacity, daily running, air-conditioning, terrain, floor height etc.). This makes it difficult for them to agree on common specifications, which is crucial for achieving economies of scale to reduce the cost of e-bus procurement.
As per the eligibility criteria stipulated for availing FAME-II subsidy, either an e-bus original equipment manufacturer (OEM) or a consortium led by an OEM should be the bidder; or the bidder must have a prior agreement with an OEM to participate in the tender wherein the OEM is required to co-sign the operating agreement afterwards. OEMs prefer to just sell buses, not operate them, since operating city buses carries substantially higher risks. Involving the OEM in operation of the e-buses in the FAME-I and FAME-II was necessary considering the lack of experience with e-buses, but the OEMs are running out of capacity to take on this additional responsibility in order to sell more buses. It is likely that they would sub-contract the operations resulting in increased contractual risks, and pricing inefficiencies. Besides, this requirement severely limits the number of bidding participants as seen in previous tenders and may prove detrimental for future tender outcomes.
With respect to GCC, cities have different levels of credibility based on their track record of working with operators on aspects like finances, contract management etc. This affects which cities OEMs want to work with. In bulk procurement, the OEMs cannot pick and choose the cities they work with. When forced to choose between working with all cities or none in a given category, OEMs may choose to work with none by not bidding at all.
E-bus operations have a very high component of fixed expenses, but the current revenue structure, based on the number of kilometres of running, is entirely variable. This creates a contractual risk for the operators since they do not have full control over actual running of the buses.

As mentioned earlier, CESL has achieved considerable optimisation in the GCC model adapted from the operation of diesel buses. What more can be done to overcome the above challenges?

GCC+ — An alternate compensation/contracting structure to further optimise the GCC Model

Revenue risks often contribute significantly to the overall risk of any business. Aligning the compensation structure to the cost drivers can overcome some of the challenges mentioned above in addition to reducing contractual risks.
This can be achieved by splitting the compensation into following components:

The Bus Availability Fee would primarily depend on the bus specifications and can be homogenised across cities. The Bus Operating Fee can be customised for each city based on local parameters, scale of operations etc.

This structure can help make the contracting process more flexible for both the STU and the operator. The bus operating component can be made optional so that the STUs who prefer to run the operations may choose only the Bus Availability component (effectively a wet-lease contract). Further, the duration of the two components can even be separate with the Bus Availability contract being of a longer duration while the Bus Operation contract is of shorter duration.

For example, a similar arrangement is seen in case of Transmilenio (Bogota) where the procurement of E-bus is split into three parts –

This structure would have many advantages, including:

Significantly lower operating risks for the bus provider – The fixed payment eliminates the operating risks to the bus provider other than equipment related risks which can be managed through a contract with the OEM. The operator may even be able to procure the bus on lease.
Maximising clean transportation – The apparent variable cost for the STUs under the proposed structure will be much lower than that of the diesel bus since the energy cost of e-bus is much lower than its diesel counterparts. This will incentivise the STUs to maximise e-bus operations.
Potential to lower the cost of funds – With a stronger payment security structure, the fixed monthly e-bus availability payments can be securitised and financed at a lower rate. For example, Solar Energy Corporation of India (SECI) in conjunction with RBI and Ministry of Power, GoI and the respective state governments has set up a facility for tapping the central devolution of funds to the states to make payment to the power producers in the event of a default by the state-owned utilities. CESL could consider the same to strengthen the payment security mechanism for the e-bus operators. Such an arrangement could actually reduce the subsidy payments from the state governments to the STUs. Another avenue for reducing risk will be to insure/guarantee termination payments.
Simplified contract administration – The bid document need not specify any minimum assured kilometres and compensation in the event of over/under achievement, thus simplifying contract administration as well as risk of STUs to pay for under-utilisation.
Simpler computation of termination payments – In case of early termination, the operator mainly loses out on the investment component for the remaining period. With the split compensation structure, a net present value of the future availability fees together with a demobilisation fee could be sufficient compensation.
Potential to lower the capacity costs – With reduced operating risks, the bus provider would be willing to enter into a longer contract period, thus reducing the annual costs further.

Risk: The above split contractual structure, the onus will be on the STUs to ensure optimum utilisation of the e-bus failing which the effective cost could be even more than the current structure. Also, there may be implications on the Goods and Services Tax (GST) payable by the operators/STUs in case bus provision and operations are contracted separately.

Summing up: Why GCC+

The GCC model of procuring and operating e-buses has some advantages and a few challenges for the cities. We can start addressing some of the challenges by creating a GCC+ model— a split compensation structure that would bring several advantages for the STUs and operators, including lower risks and costs. This will go a long way towards enabling STUs and operators to move faster towards the adoption and operation of e-buses. India is well on its way on the path to electrification of buses, and the GCC+ model can help smoothen the way.

References

Written by: Sutanu Pati
Edited by: Keshav Suryanarayanan
The opinions presented in the blog are of the author.

Sutanu Pati has over 25 years experience in the fields of transportation, e-mobility, and energy. His areas of expertise include financing, procurement, and public-private partnerships. He is currently engaged as an independent consultant with national and international organisations such as ITDP, WRI, GIZ, RITES, UMTC etc.

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