IMPORTANCE OF PPP FOR INDIAN RAILWAYSWith 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 Railways’ 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.

Railways’ 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

wouldn’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.

A Brief History of Indian Railways

The first Indian train to be introduced between Bombay

and Thane in 1853

The year 1832 marked the inception of railways in India. At least a decade later,i.e in 1844,Lord Hardinge, the Governor General of India at the time made way for private entrepreneurs to venture into Railways in India.The East India Company took up the task of successfully setting up two railway companies in India. The growing interest of investors in England led to a sporadic rise in the rail system in India during the next few years.

On April 16th, 1853 ,the first railway on Indian subcontinent ran over a stretch of 21 miles,from Bombay to Thane. India started building its own locomotives in 1895. Soon after,each statehood started its own rail system and the Indian Railways network spread far and wide. In the year 1907 for the first time in its history, the Railways began to make a tidy profit and almost all the rail companies were taken over by the government. In 1952 total of six zones came under Indian Railway. As India improved its economy almost all railway production units were indigenised. During 1985, steam locomotives were phased out in favour of diesel and electric locomotives. In 1995 railway reservation system was streamlined with Computerization.

Public Private Partnership 

PPP Project means a long term project based on a contract or concession agreement, between the Government or statutory entity on one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges. Typically, a private sector consortium forms a special company called a special purpose vehicle (SPV) to build and maintain the asset. The consortium is usually made up of a building contractor, a maintenance company and a bank lender. It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. Risk sharing is one of the most important features of a PPP. The PPPs most likely to succeed incorporate a risk mitigation framework that apportions risk in terms of capacity to bear. The risk mitigation framework is addressed through a bankable concession agreement that clearly delineates project risks and responsibilities.

The Government of India has invested heavily to improve railway infrastructure, by relaxing norms and making appropriate policies. Over FY 2008–2012, foreign direct investment (FDI) participation increased steadily. From April 2000–August 2013, cumulative FDI inflows totalled US$ 366.3 million. Private sector companies are today encouraged to take part in rail projects, which is helped largely by the Cabinet’s approval of a policy in December 2012 which allowed for private ownership of some railway lines. As of 31 March 2012, 390 PPP projects have been approved involving an investment of `305010 crore. According to a report published by the World Bank, India has been the top recipient of PPP investment since 2006 and has accounted for almost half of the investment in new PPP projects implemented in the first half of 2011 in developing countries. An Asian Development Bank report states that India stands in the same league as developed economies like South Korea and Japan on implementation of PPP projects and the Model Concession Agreements prepared in India and used in our PPP projects have also been commended Dedicated Freight Corridor Corporation of India Limited (DFCCIL) has been set up for implementing the dedicated freight project and the Ministry of Railways would explore the possibilities of attracting private investments in some segments of this project. Indian Railways has decided to

redevelop 50 railway stations in metro cities and major tourist centres like Delhi, Jaipur, Chandigarh, Patna, Bypanahalli, Bhubaneswar, Mumbai CS, Howrah and so on as world class stations through PPP. The proposal to set up production units for manufacturing of electric and diesel locomotives at Madhepura and Marhowra respectively, and passenger coaches at Kanchrapara through PPP has already been approved. Further, movement of container trains has already been opened to the private sector. This has acquired more than 25% of the market share. Construction of an elevated metro rail project in Mumbai is being undertaken through PPP with Reliance Energy Limited, Veolia Transport and Mumbai Metropolitan Region Development Authority (MMRDA) holding equity stakes of 69%, 5% and 26% respectively.