Not easy being the first PPP project

Implementing the first PPP in rail couldn’t have been easy. While he prepares to enter into more JVs with the rail ministry, Pankaj Malviya, MD, Pipavav Railway Corporation Ltd (PRCL), explains to Shilpi Aggarwal how a clause helped bring down operational costs from nearly 100 per cent to just over 50 per cent

Pipavav Railway was the first PPP project of IR. How has the journey been so far?
It is not easy to be first mover in any space! The project so far has been full of challenges. Our key challenge was to improve the financial health of the company when I assumed charge in January, 2008. The reconciliation of revenues accrued to the company was in arrears and the system of regular flow of our apportioned earnings was not in place. Also, the charges to be paid by the Company for maintenance of assets and operation of freight trains on the Company’s line were not assessed in accordance with the agreement. There was an amount of traffic guarantee, which was to be paid by the other shareholder Gujarat Pipavav Port Ltd (GPPL) but had been pending for five years. These three factors materially affected the cash position of the Company.

We have been taking up these issues with Western Railway (WR), the Railway Board and in the company’s Board of Directors meeting since 2008. Our operations started in April 2003 but the issues remained unresolved. Some of the issues are partly resolved since.

Where does the problem lie?
The company has been discussing regularly this issue with WR and resolving the issues such as timely payment of revenue and correct levy of operations and maintenance (O&M) charges as per the agreement.

WR collects the revenue and apportion it to us and pays the SPV after deduction of O&M charges; for example, fixed maintenance charges. Western Railway has assumed 2009-10 as a benchmark year and maintai¡ned a separate account on what is spent on PRCL section. The fixed maintenance charges levied as Rs 5.85 crore for 2009-10, Western Railway has finally settled the jointly agreed figures of Rs 2.03 crore for that year. This has happened on account of proper implementation of the provisions of O&M agreement signed between PRCL and the Railways, and because of correct accounting of charges done by WR.

The resolution of O&M charges related issues have brought down the operational cost of the company from 97 per cent of the revenue accrued to about 54 per cent.

What is the operational model on which the rail project works?
Under the construction, operation and maintenance arrangement, WR maintains our tracks and we pay them maintenance charges for infrastructure. We also pay operational cost for freight train services including wagon and loco hire charges. Staff deployed on our tracks also belongs to the Railways but we pay staff cost. The SPV pays lease charges to the Railways, and that is our key source of revenue. The company has become profitable over the last three financial years. We are proposing to pay maiden dividend to our shareholders now.

What factor would you attribute to the turnaround of the company?
A clause of traffic guarantee in the agreement has saved us from FY2008-09 onwards. Under which, GPPL had to provide us minimum annual aggregate quantity of freight traffic to ensure viability of the project. In the event of shortfall of traffic, they were to pay an amount taking the average prevailing rate of freight per tonne km on IR, along with any interest due.

For the initial years, they didn’t pay us any amount for not achieving the volumes and coupled with low volumes our financials went haywire. It became difficult for the company to meet with its debt obligations. Those were very difficult times for the management.

PRCL took Rs 173 crore as debt from banks and financial institutions for the project. Although debt had to be restructured initially, there was no default in debt servicing. GPPL paid the arrears of traffic guarantee charges from 2008-09 onwards which enabled us to remain afloat till mid-2010.

The Ministry assisted us by deferring the payment of O&M charges for two years. From financial year 2009- 10, our traffic volumes picked up. We also paid lot of attention to marketing. Our efforts toward marketing along with GPPL made our revenue soar and we managed to pay back our bank loans. Our debt was fully paid back with interest in December 2011, 27 months before due date. The company saved an interest of Rs 9 crore approximately on prepayments of debts.

Overall, how has your experience with the Railways been as a partner in the SPV?
Indian Railways is a 50 percent shareholder in the SPV, which is registered under Company laws. But the nuances of the functioning of the company are not adequately clear to the officials.

When we first established our agreement under this model, not all eventualities in the functioning of the SPV, future economic environment and requirements could be taken into account. The agreements need to be modified following the numerous new economic and policy changes. But with the lengthy procedures required to be followed, it doesn’t seem an easy task.

The spirit and essence of PPP model has not percolated down to all levels, therefore staff at the lower rungs often cannot appreciate the constraints, requirements and repercussions of their interpretation of rules. The mindset of lower level officials needs a change through requisite training and exposure to corporate laws and functioning of companies. Investment in PPP in railways, particularly in infrastructure projects like port connectivity, will grow substantially if the constraints and requirements of the private player who has invested funds, are well understood. This will enable the SPV to function smoothly and will bring in huge investment in railway projects.

Would you like to enter into more JVs with the MoR?
The company would like to expand its territory depending on availability of funds, only after the infrastructure needs of the present line is catered to and certain changes in the agreements, which by our experience, are required to be modified.