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Opening the funds tap

Opening the funds tap

A stronger thrust on PPP projects, greater FDI and steady government support can help Indian Railways, one of the world´s largest rail networks, emerge from the rut. ‘

With 21,000 trains, 8,500 stations, and a total route length of 90,000 km, Indian Railways is among the world´s largest rail networks. Yet, insufficient investments render it uncompetitive vis-a-vis other modes such as roads. The issues are multiple, including scant government investment, burgeoning social-sector obligations, cross-subsidisation of revenue, and minimal capacity enhancement. Political pressures rule out any substantive help from fare hikes.

Investments or capacity additions have not kept pace with the ever-increasing demand for rail services from individuals and industries. Sample this: while more than 13,000 kms of national highways were added between 2001 and 2011, only a little over 5,000 kms of railway tracks were laid. Recent reports however reveal that route additions have picked up in recent years, with close to 3,000 kms of tracks being laid between 2011 and 2014.

Yet, significant damage has been done. From having transported more than 70 per cent of freight traffic a couple of decades ago, the Railways has lost ground to roads. Despite being cheaper and more energy-efficient, its share in freight has declined from 65 per cent in the 1970s to 30 per cent now, the least among large economies. Successive govern¡ments have failed to invest sufficiently in railway infrastructure as they have in roads, mainly through a thrust on public-private partnership (PPP) highway projects. Thus, Railways has had to rely more on passenger traffic than freight traffic.

Railways´ cup of woes is spilling over as a slump in investments dulls service levels, impeding fare hikes and making resource mobilisation a tough ask. The institutional manner in which it runs only compounds the woes by hindering reforms and private sector participation.

A look at some of the key issues:
Social obligations:
Ironically, even as investments dry up and fare hikes seem distant, the Railways spends significantly on social obligations. In 2014-15, a whopping 16.2 per cent of total traffic earnings (Rs 25,912 crore) went into this. Not only is this the highest share in nine years, but also this outgo has grown faster than total revenue, leading to losses of Rs 34,345 crore last fiscal.
Cross-subsidisation: Political pressures prevent hikes in passenger tariffs, even as costs mount. The resulting shortfall is cross-subsidised by freight traffic. Moreover, passenger operations contribute only 25 per cent of traffic earnings, while consuming 65 per cent of track capacity. This has made Railways unattractive vis-a-vis roads, as stated before.
Capacity: Capacity additions have been dismal compared with other infrastructure sectors such as roads, power, steel and cement. Railways capex share has remained at just two per cent of government´s development expenditure (compared with 6-10 per cent for roads) and the government contribution to capital expenditure has dec¡lined to 40 per cent of total capital expen¡diture, down from 50 per cent in the 1980s. In comparison, China has incurred three times greater capital expenditure as a share of GDP.

No easy solution is in sight. Those commonly proffered – internal revenue generation, government aid, private sector investment, etc. – haven´t quite worked so far.

We examine the public-private partner¡ships in the railways sector and the ´Make in India´ programme- and conclude by discussing ongoing and other necessary reforms needed to open the fund tap for the sector.

Public-private partnership: PPP in railways have so far not been considered an attractive opportunity owing to high costs, lower returns, policy uncertainties, absence of a single regulator and a level-playing field, poor incentives for investors, and procedural or operational issues.

In the past, various PPP schemes had been launched in the sector. However, the share of private investment in railways has not been very encouraging in comparison to other sectors. There have been a few successes 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 Pipavav Port, Hassan-Mangalore Rail Development Company to convert the metre gauge line between Hassan and Mangalore into a broad gauge line.

On the other end, there have been many unsuccessful cases too. Privatising container train operations has been one of the largest PPP initiatives in the railways sector in the past. Various schemes were launched 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 led to large private sector investments in railway rolling stock. However, the thrust on PPP is expected to gain impetus in the coming years. As per the Ministry of Railways´ estimates, of the Rs 8.6 lakh crore of investments needed, Rs 1.3 lakh crore will flow in through this route.

Redevelopment of about 400 Class A1 and A stations is likely to attract close to Rs 1 lakh crore of investments through this route. This redevelopment will take place under a swiss-challenge route, i.e. a developer wishing to redevelop a station can make an offer, and if there are no counter/competing offers, then development rights would be given to the proposing developer. While this is a noble concept, there can be significant challenges in execution and some of the core characteristics of the station and its surroundings can change depending on developers´ interests.

´Make in India´ push: Railways can also significantly contribute to the government´s ´Make in India´ initiative, provided invest¡ments in technology upgradation of rolling stock, viz., locomotives, wagons, train sets, etc., are fast-tracked. Its current manu¡facturing plan includes:

  • 800 locomotives at Madhepura electric locomotive factory in Bihar;
  • 1,000 locomotives at diesel locomotive factory in Marhora, Bihar;
  • 100 locomotives for western dedicated freight corridor at Dankuni, West Bengal.

The government will now have to broad base this initiative to include other aspects such as signalling systems, safety systems, and railway electrification. These investments will account for over 50 per cent of the total investment of Rs 8.6 lakh crore.

As per Economic Survey 2014-15, every Re 1 increase in the Railways´ output can increase the output of sectors that have forward and backward linkages with it by five times. Thus, the railways will have a large role to play in the country´s manufacturing revolution if the ´Make in India´ programme is to be successful. POLICIES BEARING FRUITS In December 2014, the Railway Ministry issued frameworks for participative models of rail connectivity and domestic or foreign direct investment. It also listed areas such as:

  • Suburban corridor projects under the PPP model,

  • High-speed train projects,

  • Dedicated freight corridors,

  • Investments in rolling stock such as train sets, locomotives, coach manufacturing and maintenance facilities, railway electrification and signalling systems,

  • Freight terminals or logistics parks and passenger terminals. The government has also identified a list of projects which would be implemented if found financially viable, through domestic or foreign direct investments. These include: òThe CSTM-Panvel Suburban Corridor,

  • Mumbai-Ahmedabad Corridor,

  • Chennai-Bangalore-Mysore High Speed Corridors,

  • Three new freight lines,

  • 13 passenger terminals, among others. Further, railways plans to augment rail-road connectivity with ports, and also develop infrastructure for carrying bulk commodities through private participation. It also plans to commercially exploit over 43,000 hectares of vacant land bank, located largely alongside tracks and in railway colonies, through a new body – the Rail Land Development Authority. Further, the Ministry of Railways plans to invite private sector investment in select railway line construction projects on a build-operate-transfer or annuity basis. The results of these initiatives have been encouraging so far. Some instances are listed below:

  • Concession to build a 34 km port connectivity rail-link for Rs 7.71 billion in June 2015, signed by the JSW Group

  • Memorandums of Understanding signed with nine countries

  • A study funded by the Japan International Cooperation Agency related to the Mumbai-Ahmedabad high speed corridor.

  • Similarly, Chinese entities are conducting studies on Delhi-Chennai high speed corridor and are also involved in projects to increase train speeds to 160 kmph on select routes. REFORMS SOUGHT Railways is also in the process of reforming its accounting process, which is an impediment to planning. For raising resources, the committee has recommended a change in investment strategy through ring-fenced investment in high-yield projects and must also eye other sources such as multilateral agencies. Shifting to a project-based financing model (through special purpose vehicles or joint ventures) will also be a prudent move to raise funds for commercially viable projects. Finally, private sector interest will improve with better risk-reward balanced contracts. And the speed of implementation will be crucial. This article has been authored by Jagannarayan Padmanabhan, Director – Transport, CRISIL Infrastructure Advisory.

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