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Importance of PPP for Indian Railways

Importance of PPP for Indian Railways

With the Indian Economy still being in growth trajectory, the country faces acute gridlock in its rail transport. The massive upgradation and expansion of railways is not only critical input needed to stay at the desired growth but the act of massive investment in railways itself will be a propellant for further uplifting the inclusive growth of the economy, writes Mohit Sinha.

The new line construction envisaged in the Vision 2020 statement, calls for the addition of 25,000 km at 2,500 km/annum in 10 years which is in vast contrast to the actual delivery of 11,864 kms since Independence. And the critical aspect of this vision is a totally inclusive approach towards the execution which is dependent on unprecedented impetus from the corporate sector. It is not only the financing which has to be differently procured but it requires a whole change of paradigm.

The vision apart, the actual delivery on the premise of Rs. 233,289 crore XI Five year Plan (FYP) has been far from satisfactory. The performance of the XI FYP is provided below:

The plan size of the XII FYP is Rs 519,221 crore and ~20 per cent of the same is to come from the private sector. During the XII FYP, projects worth Rs 100,000 crore approximately are selected to be implemented on PPP.

Indian RailwaysÂ’ Tryst with PPP

IR has tried to implement numerous projects through PPP during the last decade. The success has been few and far between. Some of the policies, through which IR sought private investment, are discussed below:

Container Train Operations (CTOs)

IR announced its new container train policy in 2006 after two failed attempts. The policy garnered substantial interest from the private sector and in the first round, 14 companies signed the agreement to become CTO. To date, about 17 such licenses have been granted.

The problems faced by CTOs are delays in obtaining approvals; IR being the fare regulator, administrator as well as shareholder of CONCOR; frequent tariff changes; different policy for handling CONCOR.

RailwaysÂ’ Infrastructure for Industry Initiative

IR under took seven projects under the Special Purpose Vehicle (SPV) route and the same had been partially successful. Looking at the success of these projects, several companies approached IR to undertake projects. However, IR decided to come up with a new policy known as R3I.

The last version of the policy was released in July, 2010. This policy was meant for attracting private sector partnership in rail connectivity so that additional rail capacity can be created. For the last three years, the policy remains to complete non-starter. IR came out with a draft PSP policy in 2012 and had sought comments frmo stakeholders. The policy had envisaged six development options. The policy was open in nature and skewed towards IR and if the same had been implemented, it wouldnÂ’t have been able to attract PSP.

Other Initiatives

Other initiatives of IR in obtaining PSP include Private Freight Terminal (PFT), Freight Train Operator (AFTO/SFTO) and Liberalised Wagon Investment Scheme (LWIS), R2CI. Some of these policies particularly LWIS & PFT have seen the private sector taking interest.

“Approval of 53 rakes given under LWIS, three rakes approval given under SFO, notification for eight PFTs have been issued.”

Participative models for Rail Connectivity and Capacity Augmentation Projects

IR recently came out with this policy. The models for participation provided are:

Non-Government Railway Model: Applicable to first/last mile connectivity projects. The development, funding and maintenance will be undertaken by the developer. The operations and revenue collection shall be undertaken by IR. Apportioned share of 95 per cent freight computed on the basis of extant rules of IR, net of fees shall be payable to the Developer. The concession period is not defined; concession will end only upon violation of the conditions or as mutually agreed.

JV Model for ‘operationally necessary/bankable project’: Applicable for New Line and Gauge Conversion projects with identifiable stakeholders. Project shall be developed by IR and funding shall be undertaken by JV where IR will hold an equity stake of 26 per cent. Operations for line shall be undertaken by IR; however maintenance can be undertaken by JV. Revenue from the project line will accrue to the JV as per extant rules. Concession period will be for 30 years subject to shortfall/excess in traffic.

Railway projects on BOT awarded through competitive bidding: Applicable for sanctioned projects where it is not possible to identify stakeholders. The projects would be awarded on design, build, finance, maintain and transfer. IR will approve the design. The fee to be paid by IR will be 50 per cent of the apportioned freight. Operations shall be undertaken by the IR. Concession period shall be fixed for 25 years subject to shortfall/excess in traffic.

Capacity augmentation with funding provided by customers: Applicable to projects where someone is beneficiary to the augmentation. The project shall be constructed, operated and maintained by the IR. Partial/full funding will be given by the beneficiary. In return of funding, IR will pay up to seven per cent of the amount invested through freight rebates on freight volumes every year till the funds provided by the beneficiary are recovered with interest.

Capacity Augmentation: Annuity Model Applicable to projects where beneficiaries are not identifiable. IR will prepare the project and shall carry out the bidding process. Developer shall be responsible for design, financing and construction. In lieu of its investment, Developer will be paid fixed annuity determined by the bid. Under the new policy, 100 per cent FDI has been permitted under the approval (FIPB) route.

Conclusions

If we look at the performance of IR in the PPP domain in respect to the other infrastructure sector, it is pretty abysmal. During the XI FYP, the share of the private investment in major infrastructure sectors is: electricity (44%), telecom (82%), roads (16%), ports (80%) and airports (64%). In contrast, share of the private investment in railways has been negligible (4%).
However, looking at the huge infrastructure deficit in railways, a massive investment shall be required in the years to come. If we examine the various sources through which IR needs to fund its massive outlay, Internal Generation is constrained by the factors such as capacity and huge wage bill, similarly the Gross Budgetary Support shall also be limited in view of the competing needs and the limited resources of the Government. In view of the same, IR needs to get its act together and needs to heavily rely on private sector investments. IR will have to do away with problems such as adhering to the proposed timelines, accountability to the private sector, removing of fiefdom mindset etc.

I do believe that there are huge problems in the implementation of PPP projects in railways, but not insurmountable. My optimistic mindset wants to believe that, as the last decade was the decade for highway development, this decade will be for railway devel­opments.

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