Traction Ahead!

The Railways has sizeable capex plans for the five year period 2015-19 involving a capital outlay of Rs.8.56 trillion. The annual capital outlay for FY2016-18 was increased significantly to meet the five-year targets. NITI Aayog has also finalised the three year action agenda (2018-20). As per the document, the budgetary allocation for capital expenditure in the railway sector will increase from around Rs.0.4 trillion in FY2016 to about Rs.1.18 trillion by FY2020, thereby increasing its share of total expenditure from 2.3 per cent to 4.3 per cent.<br />
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The Indian Railways is estimated to transport over 1.14 trillion passenger km and 682 billion net tonne km&nbsp; of cargo – the highest passenger and fourth highest freight transporting railway system globally. The Indian rail network is also one of the largest in the world with 66,000 route km. However, transport of goods through roadways have grown at a faster pace resulting in the share of railways in the total surface freight declining from 86.2 per cent in 1950-51 to 35.5 per cent in 2011-12. While railways transportation is more environment-friendly and economical, the reason for this shift is due to capacity constraint in railway infrastructure and high freight fares to cross subsidise the passenger segment. Considering the need for upgrading rail infrastructure, NITI Aayog has suggested increasing the rail network to 80,000 route km by 2032. <br />
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<span style="font-weight: bold;">Large capex proposed during five year period (2015-19)</span><br />
A majority of the capex planned is towards decongestion and expansion of the existing network, as well as creation of new lines, including dedicated freight corridors. These projects are aimed at significant capacity enhancements and network decongestion. Major new line capex is towards ongoing dedicated freight corridor (DFC) projects, as well as on parts of the additional freight corridors proposed like Delhi to Chennai (north-south), Kharagpur to Mumbai (east-west) and Kharagpur to Vijayawada (east coast). The two ongoing DFC (eastern and western) projects by themselves are worth Rs 0.8 trillion. The Railways is also working on proposals for other freight corridors on similar lines; however, they will take time to materialise. The other major capex planned is towards station modernisation and development, which are proposed to be undertaken on a public private partnership (PPP) model. The railways is also working on making the high speed rail (HSR) corridor or bullet train a reality. <br />
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Increased capex plans need to be supported by corresponding financing plans. The Indian Railways is primarily financed through: (i) gross budgetary support (GBS) from the central government, (ii) its own internal resources, such as freight and passenger revenue and leasing of railway land and (iii) extra budgetary resources, such as market borrowings, institutional financing, PPPs and joint ventures (JVs). To keep pace with the higher capex plan, the budget for the last three years had increased plan outlay for the railways from Rs 1.2 trillion in FY2017 to Rs 1.31 trillion in FY2018 and from Rs 0.67 trillion in FY2015 to Rs 1.0 trillion in FY2016 (actual for FY16 is estimated at Rs 0.85 trillion). Most extra budgetary resources come in the form of market borrowings from the Indian Railways Finance Corporation (IRFC). Indian Railways has also received commitment from Life Insurance Corporation of India (LIC) for the funding of Rs 1.5 trillion in tranches over five years. <br />
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Given that a bulk of the funding will be in the form of debt, this would increase the reliance on borrowings. However, sizeable borrowing is project-specific and involves low interest rates like funding from multilateral bodies, such as Japan International Cooperation Agency (JICA) and the World Bank for DFCs and high speed rail. <br />
Railways is also looking to reduce the funding requirement by forming JVs with states and PSUs for projects worth Rs 1.2 trillion. <br />
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Apart from the regular capex for the doubling or renewals of tracks, DFCs are among the key capex undertaken by the Railways. Railways is also looking to modernise about 400 railway stations through the PPP mode and start the bullet train and high speed rail corridor project. <br />
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<span style="font-weight: bold;">Key capex projects planned and undertaken by the railways are as follows:<br />
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DFC:</span><br />
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<li>Completing ongoing freight corridor capex – eastern and western freight corridors</li>
<li>Developing additional freight corridors – Delhi to Chennai, Kharagpur to Mumbai and Kharagpur to Vijayawada</li>
<li>400 stations redeveloped through PPP, entailing higher participation from state governments</li>
<li>High speed rail corridor project</li></ul><span style="font-weight: bold;">Dedicated freight corridor project</span><br />
The DFC is one of the largest infrastructure projects in the country. Currently, two DFC projects – Eastern Dedicated Freight Corridor (EDFC) and Western Dedicated Freight Corridor (WDFC) are in the implementation phase, while proposals for four other DFCs are under consideration. The EDFC and WDFC encompass over 3,360 km of length and a major part of the project is being developed on engineering procurement and construction (EPC) mode, with the project divided into multiple phases, depending on the stretch. The land for the project is majorly acquired and funding is in place with debt tied up from the World Bank and Japan International Cooperation Agency (JICA). Contracts worth over Rs 480 billion have been awarded under the two projects and execution has commenced. Large construction and infrastructure players like L&amp;T, Tata Group and GMR Group have been awarded contracts in consortium. Excluding a part of the project which is to be developed under the PPP mode (~538 km), a major part of the remaining DFC is planned to become operational by 2019-20.<br />
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<span style="font-weight: bold;">Station modernisation and redevelopment</span><br />
With plans of upgrading close to 400 railway stations in metros and major cities, modernisation and redevelopment is another focus area for railways. The Indian Railways plans to achieve this through PPP. Under this model, private players would design and develop the stations alongside the commercial development of real estate, based on the principles of transit-oriented development. Station redevelopment will be on a self-financing mechanism as the capital and operational costs will be raised through commercial development of railway land at stations. The developer will fund the development using revenues from real estate. The developer will also transfer the station assets to the railways and operate the station for 15 years through an operation and maintenance (O&amp;M) contract. Before completion of station development, the developer will not be permitted to earn revenues from real estate.<br />
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Towards this effort, Ircon International (a Government of India undertaking) and the Rail Land Development Authority (statutory authority under Ministry of Railways) formed a joint venture company called Indian Railway Stations Development Corporation Ltd (IRSDC). IRSDC was entrusted with eight stations on pilot basis for undertaking station redevelopment at Habibganj (Bhopal), Chandigarh, Shivaji Nagar (Pune), Bijwasan (New Delhi), Anand Vihar (New Delhi), Surat (Gujarat), SAS Nagar (Mohali) and Gandhi Nagar (Gujarat). Subsequently, another five stations – Amritsar, Gandhinagar (Jaipur), Gwalior, Nagpur and Baiyyappanahalli (Bengaluru) – have been assigned to IRSDC for redevelopment. A few stations have been chosen to start with and the contract for one station at Habibganj (Bhopal) has been awarded in July 2016.<br />
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<span style="font-weight: bold;">Challenges</span><br />
The land for real estate development is provided on lease for 50 years only, which can be a constraint for private sector interest on real estate. Also, redevelopment of existing high traffic stations, which will be of much interest to private players will be difficult to execute given the limited scope of additional land available around these stations and the challenges of managing passenger traffic during the construction phase.<br />
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<span style="font-weight: bold;">High speed rail corridor project</span><br />
The other big ticket project planned by railways is the HSR corridor or bullet train project. During 2008-09, the Ministry of Railways had initiated a feasibility study for HSR corridors in six routes. In January 2016, the Ministry of Railways speeded up the project and established a special purpose vehicle (SPV) named the National High Speed Rail Corporation Limited (NHSRC) to build and operate the corridor. The Mumbai-Ahmedabad route has been selected to be developed as the first high speed rail corridor, also known as the bullet train project. The Mumbai-Ahmedabad High Speed Rail (MAHSR) project which is expected to cost Rs 1.1 trillion will be majorly (~81 per cent) funded by low cost debt (0.1 per cent per annum) from Japan. The loan is to be repaid in 50 years, including 15 years of moratorium period. An MoU was signed by the governments of India and Japan on December 12, 2015. The remaining project cost will be borne by the state governments of Maharashtra and Gujarat. The work started in September 2017 and is scheduled for completion by August 2022. <br />
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<span style="font-weight: bold;">FDI in railways</span><br />
In August 2014, the Cabinet approved a proposal to open up the Railways to foreign investment by allowing 100 per cent FDI in rail infrastructure. In October 2015, the government had increased the FDI limit in select railways verticals. So far, two locomotive factories at Madhepura (electric) and Marhowra (diesel) costing about Rs 26 billion entailing FDI inflow in rolling stock manufacturing have already been awarded to Alstom and General Electric (GE) respectively in 2015.<br />
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<span style="font-weight: bold;">Public private partnership (PPP) in railways</span><br />
The railways sector in India has so far witnessed limited private sector participation with successful projects being implemented on rail connectivity of ports and mines. The Indian Railways has undertaken a majority of projects under joint venture, under which the Ministry of Railways (MoR) holds a part of the shareholding of the SPV implementing the project, while the remaining is held by a private partner. Under the joint venture model, the MoR holds a minimum of 26 per cent equity. These are primarily ports, mines and industries connectivity projects. <br />
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<span style="font-weight: bold;">Concluding remarks</span><br />
The railways has significant capex plans over the medium term. This would result in large funding requirement. While the budgetary allocation is planned to be increased significantly, increased participation from private sector could help in speeding up the developmental capex. Among the key constraints, land acquisition is the key bottleneck for development of laying down of new rail lines. The sizeable capex to be undertaken by the railways will provide large-scale opportunities for the construction sector.<br />
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<span style="font-weight: bold;">- Abhishek Gupta, Assistant Vice President, Corporate Ratings, ICRA Ltd</span><br />