Can Prabhu bring Indian Railways on track?

Despite having the second largest rail network in the world, Indian Railways (IR) has not been able to bring it on growth trajectory. The rail sector is infested with challenges like snail´s pace expansion and modernisation, poor customer service, delayed transportation, lack of modernisation, etc. All this has led to a dismal growth of IR in national freight and passenger traffic. The underlying reason behind the status of IR today is largely due to chronic underinvestment. In the recent Budget, Union Railway Minister Suresh Prabhu has announced a slew of investment plans for enhancing IR´s capacity. However, are these plans adequate enough to bring railways on track?

India´s rail network is the largest in Asia and the second largest in the world, after the US. Yet the productivity of Indian Railways (IR) does not match up with other countries. The reasons are not hard to find – oversaturated networks, slow pace of expansion and modernisation, comparatively higher freight tariffs, long and uncertain transit times, poor quality service, etc.

All this has led to an erosion of IR´s share in national freight and passenger traffic. Currently IR moves around 35 per cent of India´s total cargo, while 65 per cent moves by road. Although the traffic density on IR is quite high as per world standards, the growth of the network is not commensurate with the traffic growth. This has resulted in large scale congestion, inability to accommodate more trains and increase in the speed of the trains.

IR´s share even in the containerised cargo has been dismal. ¨In India around 50 per cent of cargo is containerised and the railways share of it is around 20 per cent. The main reasons behind this low share are higher rail transportation cost and quicker turnaround of containers when they are handled at port side CFS (Container Freight Station). To increase the rail share, the issues of cost and transit time have to be addressed,¨ avers Anil Kumar Gupta, Chairman & Managing Director, Container Corporation of India Ltd (CONCOR).

The underlying cause behind this sad status of IR today is largely due to underinvestment. Railway expenditure as percentage of transport sector expenditure has declined to 30 per cent in the 11th Plan (2007-12) from 56 per cent in the 7th Plan (1985-90). In the last few years, the Indian Government has come to recognise the existing infrastructure gaps and capacity constraints in the rail system and has been planning large scale investment and has also introduced some new policies measures. Allowing 100 per cent Foreign Direct Investment (FDI) in railway infrastructure, barring operations, via the automatic route, has been one such step. Many more plans and programmes are on the cards, including building high-speed rail corridors, more city metros, dedicated freight corridors, setting up manufacturing units for rolling stocks, redeveloping existing railway stations, building logistics parks, warehouses, etc.

Given the magnitude of financial, technological and managerial resources required for these infrastructure up-gradation and modernisation, private sector participation has become not only essential but inevitable. More so, with IR´s constrained internal fund generation, limited government resources and restricted budgetary support due to competing needs.

Investment inflow
The National Transport Development Policy Committee (NTDPC) estimated that Indian Railways should invest Rs 900 billion in the 12th Plan, Rs 1.9 trillion in the 13th Plan and Rs 4.6 trillion in the 15th Plan, to regain its lost share in the transport sector. The government is no doubt trying to attract investments through various models; one of them being the FDI, which is expected to be a game changer. The response from international community, since the sector was opened to FDI last August, has been encouraging so far.

¨There have been MoUs signed between nine countries and India for the railways sector. JICA (Japan International Cooperation Agency) is funding a study related to Mumbai- Ahmedabad high speed corridor. Chinese entities are conducting studies on Delhi- Chennai high speed corridor and are also involved in the project related to increasing speed of trains to 160 kmph on select routes,¨ reveals Rajaji Meshram, Director, Advisory Infrastructure, KPMG India.

But for sustained FDI inflow, a consistent and sound investment policy is a must, aver some industry pundits. ¨Foreign investment will freely flow into a country when there is a sound, stable and predictable investment policy. Frequent changes in policies will be irritants for investors. FDI in railways is an investment for a long period of time and developers, be it foreign or domestic, would seek government guarantee for their investments and returns before entering into a venture,¨ states SN Subrahmanyan, Member L&T Board and Senior Executive Vice-President (Infrastructure & Construction), Larsen & Toubro (L&T). ¨Though government guarantee for private investment is not a preferred option from a fiscal perspective, transparent policies and guidelines towards government guarantee will provide clear perceptions and encourage investors to participate in PPP even in risky areas of investment,¨ he elaborates. Involved in the development of rail infrastructure for over three decades, L&T has till date, executed over 7,500 track km of railway electrification, 30 traction sub-stations, India´s first 2×25 kV system, 700 track-km of track construction, signalling and telecom systems for over 85 stations, 220 km of bridges and viaducts of various kinds and 30 km of tunnel in varying ground conditions.

Private proposition
There are no two opinions on the importance of private sector participation in rail infrastructure among the industry professionals, who, however, think that some measures are necessary to make it attractive and viable for private players. ¨Unlike China, Dubai, and Singapore, wherein governments invest money for critical infrastructure, India´s demography and resource limitations make it difficult for the government to fund critical infrastructure. Thus, PPP is the most suitable model, but it has to be holistic in nature, keeping in the macroeconomic objects India needs to achieve,¨ says Adarsh Hegde, Executive Director, All Cargo Logistics Ltd. The share of private investment in railways has not been very encouraging in the past as compared to other sectors like ports, telecom, power, airports and roads. There have been a few success stories under the Public Private Partnership (PPP) model like the establishment of Konkan Railway Corporation to build the coastal rail connectivity between Mumbai and Mangalore, Pipavav Railway Corporation to provide rail link to Port of Pipavav, Hassan-Mangalore Rail Development Company to convert the metre gauge line between Hassan and Mangalore into a broad gauge line and provide connectivity to New Mangalore port, etc – all of which adopted either the joint venture (JV) or special purpose vehicle (SPV) route. At the other end, there have been many unsuccessful cases too like wagon investment scheme, private freight terminals, modernisation of railway stations, etc.

¨Privatising container train operations has been one of the largest PPP initiatives in the railways sector in the past. Various schemes were tried out to attract private sector investment in railway wagons like, Own Your Wagon Scheme, Wagon Investment Scheme and Liberalised Wagon Investment scheme. However, none of these schemes led to large private sector investments in railway rolling stock,¨ says Meshram.

High costs and low returns, inappropriate risk allocation, improper project appraisal, procedural issues, cost and time overruns, absence of a regulator to create a level playing field, lack of incentives have been cited as some of the major reasons behind the abysmal private participation. While elaborating on some of these issues, Subrahmanyan lists out the measures to be taken and says, ¨Projects in any infrastructure sector, including railways, involve huge investments and long execution period and are prone to various risks including construction, finance, performance, demand, and residual value risks. These risks have to be allocated appropriately among the constituents, as otherwise it would affect the cost and progress of the project and lead to unnecessary litigations. A clear appraisal of the project before its execution, including its technicality, its soundness, viability and returns, will likewise prevent several litigations. Regulatory independence is vital as at times, delays are caused due to disagreements between the regulatory authorities. To reduce the risk of arbitrary and ad-hoc policy interventions due to such disagreements, principles on key issues need to be specified upfront in sufficient detail. In addition, an appropriate institutional framework is a prerequisite for the success of the PPP mode due to the size, investment requirements, structure, and dimensions.¨

Meshram also recommends the creation of a dedicated organisation and states, ¨To increase private sector participation, one should create a dedicated organisation like the NHAI (National Highways Authority of India) in the road sector and entrust it with the responsibility of implementing all BOT or Annuity projects. IR has started following this philosophy by forming entities such as DFCCIL (The Dedicated Freight Corridor Corporation of India Limited), HSRC (High Speed Rail Corporation of India Limited), and IRSDC (Indian Railway Station Development Corporation Limited) to focus on specific projects.¨

In fact, the Railway Ministry´s Vision 2020 document also emphasises the importance of PPP and dedicated entities. An extract from the document: ¨The challenge of project execution and efficient provision of service cannot be accomplished without involving private sector in a big way. However, the activities and projects to be opened for private participation have to be carefully selected and structured for their amenability to market-based incentives and smooth execution. Several areas currently identified for execution through PPP would need to be developed and awarded on a mission mode. To be able to do so, railways would have to set up dedicated project organisations who would work with model documents and streamlined procedure within the framework determined by the Government of India.¨

Opportunities overview
Evidently, the opportunities for private players in railways are all set to take a quantum leap. Several segments in the sector have been earmarked for development under PPP mode including container operation, dedicated freight corridors, high speed passenger corridors, port connectivity, redevelopment of existing railway stations, creation of integrated logistic depots and warehouses, etc. While some projects like the Dedicated Freight Corridor (DFC) between Delhi and Mumbai are underway, there are several others in the offing.

In addition, IR is also planning to commercially exploit over 43,000 hectares of its vacant land, located largely alongside the tracks around railway stations, and in railway colonies through a newly set up body- Rail Land Development Authority. ¨The Railway Ministry plans to invite private sector investment in select railway line construction projects on a BOT or Annuity basis. These will need to be bid out by the railways and the related process is going on. As per a recent RFP (Request For Proposal) issued by the Ministry, Nagpur, Wardha third line, a project of around Rs 300 crore seems to be the first project that would be bid out. Also there are opportunities related to station redevelopment. Habibganj station is under the process of bidding currently. Five more stations will come out for bidding in the near future,¨ reveals Meshram.

Opportunities are galore, concurs Subrahmanyan and further states, ¨As an EPC contractor, L&T sees considerable opportunities for building new infrastructure in the form of high-speed lines, freight lines, and establishing production facilities for rolling stock manufacturing.¨ Currently, L&T is executing a 626 km stretch of the Western Dedicated Freight Corridor (DFC) featuring 110 major bridges and 1188 minor bridges and India´s largest 2x25kV electrification project for about 915 km.

The railways have identified an indicative list of projects that will be implemented only when found financially viable under FDI/domestic investments in various sectors including suburban corridors, high speed corridors, freight lines, rolling stocks, railway electrification, signalling systems, passenger terminals, etc. These include CSTM-Panvel suburban corridor, Mumbai-Ahmedabad, Chennai-Banglore-Mysore High Speed Corridors, 3 new freight lines, and 13 passenger terminals among others. In addition, IR also has plans for augmenting rail-road connectivity with ports, as also infrastructure development for carriage of bulk commodities through private participation. For instance, Coal India Ltd (CIL) is exploring avenues for a comprehensive revenue-based partnership with IR in a bid to create mega infrastructure consisting of about 50 rail projects to move coal across the country. Avenues have also opened up for other stakeholders like technology providers as technology is making inroads into this sector. ¨New technologies have come in almost all areas of rail infrastructure development such as energy efficient trains, communication based signalling systems, etc. Our projects use state-of-the-art technologies in train sets, signalling and communication system, and station design,¨ reveals Mukund Sapre, Chief Executive Officer, IL&FS and Executive Director, Il&FS Transportation Networks Ltd. IL&FS, through its subsidy IL&FS Rail Ltd, has been involved in developing rail projects since 2008. The company executed the Rapid Metro project in Gurgaon, first fully privately financed metro project in the country. Currently, the company is developing an extension to this metro line.

However, the technology adoption is slow, says Sandeep Fuller, Managing Director, Kalindee Rail Nirman (Engineers) Ltd and further adds, ¨In India, we adopt a cautious, tried and tested approach to adopt new technology and construction techniques. One such technique being implemented in India is mechanised track laying which is being prescribed in DFCC or DFC projects. This method ensures speedy and accurate track laying.¨ Kalindee has executed over 100 rail projects in its four decades of association with Indian Railways and currently has 12 major and 12 minor ongoing projects.

Crucial challenges
No doubt the opportunities have their own challenges for all stakeholders. Some of the major challenges are stalled land acquisition, alignment changes, delayed regulatory approvals, financial constraints, law and order problems – all of which often result in cost and time overruns. Until now, over 300 projects; including new rail lines, doubling of existing lines, gauge conversion and electrification, etc.; worth crores of rupees have either been non-starters or delayed resulting in time and cost overruns. For instance, the cost of track conversion project on the Bankura-Damodar stretch in West Bengal approved in 1998 has increased over 20 times from Rs 111.9 crore to Rs 2,371.85 crore. The project, being executed by South Eastern Railways (SER), is now expected to be commissioned in 2019. Another project of SER on the Gondia-Jabalpur stretch in Madhya Pradesh, is facing a delay of 21 years with the project cost hiked to Rs 590.63 crore from the original cost of Rs 386 crore. Other delayed projects include Whitefield-Bangarpet-Kuppam rail line sanctioned in 1992-93, Bengaluru-Satyamangalam rail line project sanctioned in 1996-97, the Kotipalli-Narsapur rail line project sanctioned in 2010-11 and Tumakuru-Rayadurga line conceptualised in 2007.

Even the Dedicated Freight Corridors (DFC), covering about 2700 route km across 10 states in both the western and eastern sector, has been facing several hurdles from land acquisition, environment and forest clearances, lack of bids from both Japanese and Indian companies for the western corridor funded by Japan International Cooperation Agency (JICA), etc.

Subrahmanyan lists out some of the private sector challenges in these areas. ¨In projects that involve new lines, like in the case of the DFC, availability of acquired land before commencement of execution is crucial. Delays in design approvals and environmental clearances for ballast quarrying are other reasons that could result in project delays. In projects like the Western Dedicated Freight Corridor that run parallel to the existing railways mainline, various activities that are in the scope of the IR need time bound action like construction of RoBs (Rail over Bridges) and RuBs (Rail under Bridges) so that Mechanised Track linking in the new dedicated freight line is not affected. These gaps in project co-ordination can affect the EPC contractor significantly exposing them to large-scale risks of delays and cost overruns.¨

Sapre further adds, ¨The key bottleneck is funding. Rail projects are highly capital-intensive and low cost financing is needed to make the projects financially viable. Other critical issues are land acquisition and shifting of utilities which need to be addressed.¨

The Metro rail projects too have their own challenges as evinced by Fuller and says, ¨Some of the major challenges are proper co-ordination between the implementing agency and local bodies in order to make land available for optimum alignment, constraints due to congested urban setting which inhibits speedy movement of construction equipment and materials, and prohibition on working during night hours due to noise pollution.¨

For the container operators, the major issues are related to imbalances in imports and exports, which is primarily responsible for low inland penetration of containers into hinterland, avers Gupta and points out, ¨There are also other contributory factors related to overall transaction costs on various counts including incorrect interpretation of service tax laws, and discrimination in levy of service tax between rail and road transportation, etc,¨ he adds.

Another key issue for the private container train operators, is the frequency and unpredictability of haulage charge changes. ¨The Ministry of Railways is working on the framework for railway tariff regulation and once the framework is evolved and implemented, this will be a positive step to address this issue,¨ points out Meshram. ¨IR too no doubt has challenging times ahead. One major challenge for IR is lack of funds to invest in critical line construction, doubling, gauge conversion projects, etc. This is being addressed and the Ministry of Railways has recently signed a MoU with LIC (Life Insurance Corporation) under which LIC will provide IR funds to the tune of Rs 1.5 lakh crore under a loan agreement.¨

All stakeholders coming together is the only way to address the challenges in the industry, says Hegde and elaborates, ¨All the existing challenges need to be discussed amongst the industry stakeholders, private as well as public companies, to arrive at suitable solutions and provide seamless movements of goods.¨

Developing a clear roadmap for implementation of PPP in IR, creating a regulatory framework, restructuring of IR through corporatisation, setting up a single authority, and single window clearance are some of the other measures put forward by industry pundits for placing railway infrastructure on fast track.

No doubt the road ahead is challenging. But several measures, as suggested by industry experts, can make the journey smoother and rewarding for all the stakeholders and beneficiaries and leapfrog IR to a new trajectory of development.

Indian Railways (IR) – Facts & Figures

• India´s rail network is the largest in Asia and the second largest in the world
• IR runs 7,000 freight trains per day and 12,000 trains carrying over 23 million passengers per day
• Has a total route network of about 65,000 km spread across about 8,000 stations spread across the sub-continent
• IR entered the Billion Club in freight loading in 2012-13 by achieving 1,008

Source : Indian Railways White Paper 2015