Need to focus on projects which are remunerative

Sunil Srivastava, Managing Director, Balaji Railroad Systems Ltd, comments on the dismal state of the Indian Railways, delayed projects, and the government´s role in improving the sector.

100 per cent FDI under automatic route is permitted in Indian Railways. Do you think that this has improved the investor sentiment?
While this is a step in the right direction, I do not think there is any major change in investor sentiment yet. This does open up a large number of opportunities for global investors, but the track record of IR has not been very investor friendly. Also on a few occasions global tenders have been recalled which has further dented the image of IR in the international community. So, while the global investors are keen to get into this sector in India and are happy with this development, a lot more needs to be done by IR to actually get large investments flowing in. IR can make a beginning by having internationally accepted contract documentation in place, which will give confidence to the investor community.

In the recent budget, Union Railway Minister Suresh Prabhu announced an investment plan of Rs 8.50 lakh crore till 2019. Do you think this plan is adequate for the turnaround of the railways?
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. This amount is adequate, and is based on the funds needed for completion of the existing shelf of projects and doubling, new lines, gauge conversion, signal & telecom works, work¡shops, and electrification. However, a lot will depend on prioritisation and timely completion of projects. If this does not happen, then this amount may fall woefully short.

Recently the Modi Government has allowed the formation of an SPV for efficient rail evacuation systems to the major ports. How will it benefit IR?
The formation of a special purpose vehicle (SPV) to provide efficient rail evacuation systems to major ports willenhance their handling capacity and efficiency. Ports handle nearly 90 per cent of the EXIM trade of the country by volume and are critical to enhance competitiveness of the country in the international trade.

One of the key determinants for efficiency of the ports is evacuation and hinterland connectivity. Though the major ports and Indian Railways have taken up many connectivity projects, there is an urgent need for focussed attention and substantial allocation of resources. The government is also keen on increasing the percentage of cargo being evacuated through rail from major ports, which stands at 28 per cent now. major ports have identified a shelf of nearly 40 projects, which includes the last mile connectivity projects and internal port rail projects which would require an estimated investment of Rs 2,372 crore.

The SPV would be funded by all the 12 major ports and IR. major ports would contribute 90 per cent of the equity, with IR contributing the rest. The SPV will help IR in raising the required funds for the implementation of these projects as well as provide IR with additional traffic (which is today going by road); thereby, generating revenue and increasing IR market share in EXIM traffic.

To what degree has the ´Make in India´ campaign helped the sector?
Currently, there is no visible improvement in the sector due to the ´Make in India´ campaign. Going forward, with more clarity in the campaign and related policies, there could be a jump in the investment for manu¡facturing railway rolling stock. Personally, I am not very optimistic about this.

What are the reasons due to which many projects tend to get delayed or stalled? Is there a huge chunk of delayed projects that the sector is dealing with?
The main cause is lack of adequate funding for a large number of new lines, doubling of line, and gauge conversion. In several cases, the fault lay with the railway ministers who in their bid to appease their constituency or woo fellow parliamentarians went about announcing projects without funding and follow-up. In the recent past, i.e., last three-four years, the cost of land in most of the states has increased manifold. In addition to this, the process of acquisition has become much lengthier, and for the last two years, land acquisition has practically come to a standstill. Some of the projects are suffering due to delay in clearance from forest, wildlife, etc.

On many projects, the ban on mining and the declaration of earth as minor mineral has created severe shortage of quarry pro¡ducts, including earth work. Many projects in North Eastern Region, J&K and Naxal affected areas of Bihar, Madhya Pradesh, Andhra Pradesh, Chhattisgarh, West Bengal, Odisha, and Maharashtra are suffering on account of law & order problems.

As per a study carried out in December 2014, there were 274 projects missing completion targets. Of these 274 projects, 236 have no date of commissioning. The white paper on Indian Railways presented by Suresh Prabhu, Minister of Railways, mentions that the shelf of pending projects is estimated at Rs 491,510 crore on the basis of originally estimated costs.

What solutions would you suggest to overcome these hurdles?
There is need to focus on projects which are remunerative and yield returns to IR. For financing socially desirable projects, a separate mechanism needs to be worked out which insulates IR from losses arising on this account.

What steps do you expect from the government to make the public private partnership model viable in the sector?
For successful implementation of PPP projects, appropriate risk allocation between public and private needs to be done. Experience indicates that private sector is averse to taking all construction, financing, and traffic risks in rail infrastructure projects. The viability of the individual projects could determine the option to be exercised for arranging the necessary finances. In this regard, the Indian Railways would be required to lay down certain benchmarks for appraisal which would be acceptable to the market to enable the relevant projects to be financed. For decent rates of return, there has to be an assurance that railway projects will garner a certain amount of traffic which IR has to guarantee as they have a monopoly over rail operations.

What changes in terms of reforms or policies would you expect from the government for bringing the sector on growth path?
Indian Railways is presently organised in terms of several functional departments like civil engineering, mechanical engineering, electrical engineering, signal and telecom. It should be reorganised in terms of business lines such as infrastructure development & management; freight transportation, passenger transportation, parcel and miscellaneous activities should similarly be organised as separate profit-centres by IR. If IR is really serious about PPP, then first organisational and institutional deficiencies inhibiting PPP need to be identified and addressed, and the existing PPP policy framework should be reviewed in the light of hitherto poor response and PPP experience.

Indian Railways´ (IR) contribution to the national GDP stands at one per cent for the last five years, and it has been continuously falling, while the road sector´s share of national GDP has witnessed a jump of 4.9 per cent in 2012-13. Can you please apprise us of the reasons for the dismal growth of IR?
One of the primary reasons for the dismal performance is the projection of Indian Railways as an essential public service to be made accessible to all at subsidised rates, particularly users of lower class passenger services and suburban sections. The passenger traffic imposes an enormous burden on the railways´ earnings. While passenger services consume nearly 60 per cent of the network capacity, they contribute to only 33 per cent of the earnings. To counter the growing costs and poor passenger fare earnings, the government has frequently resorted to cross-subsidisation. Lower operational priority and over saturation have implications on the quality of service of freight trains and severely restrict IR´s ability to meet customer expectations. IR does not perceive or define the freight business in terms of delivering transport or logistics solutions. A major reason why Indian Railways has suffered a steady decline in its share in freight and passenger transport is that its network is plagued by infrastructural and carrying-capacity constraints. This has forced IR to focus on bulk cargo and forego the immense opportunity for growth in non-bulk and non-train-load segments.

Railways´ customers have negative perceptions on its handling of demurrage (detention of rolling stock at terminals) and disposal of claims. Parcel size of cargo is presently restricted between the range of 2,400 metric tonne to 3,800 metric tonne, and therefore, cuts out many customers even in the bulk cargo segment. IR does not take responsibility for last-mile connectivity, nor does it incentivise customers to invest in such facilities. There is no institutional arrangement to attract and aggregate traffic of smaller parcel sizes (less than train-loads). As a result, IR is losing out in high potential markets like fast-growing consumer durables and information technology (CDIT), fast moving consumer goods (FMCG), hazardous chemicals, bulk cement, fly ash, automobiles, and containerised cargo; where their share is low or negligible. This traffic now moves mostly by road. Despite the higher growth witnessed in freight traffic during the last decade, IR´s performance is much below the potential. The main challenges faced by IR are the constraints of infrastructure, particularly line capacity on busy routes, and terminal detentions on account of underinvestment.