Financing the Indian Railways Infrastructure

Transcription

1 Financing the Indian Railways Infrastructure Ms. V. Viswanathan Former Financial Commissioner, Indian Railways & ex-officio Secretary, Government of India. Prologue The Indian Railways plan to invest around 14,00,000 cr. in the next decade which is three and a half times the present investment level. The financing and funding of such magnitude need innovative and out of the box thinking and planning. The Author, who has been the Railways Financial Commissioner for quite sometime, has brought out in her Paper the various financing sources and the mechanisms that can be considered for such massive investments. One does hope that in the years to come it will become a reality. - Editor Vision 2020 document of the Indian Railways declares that the Ministry s focus will be on efficient, affordable, customer-oriented, environmentally sustainable and integrated transport solutions. The emphasis is on better connectivity across the country, continuous expansion and improvement and integrated logistics solutions, deploying cutting-edge technology with a stress on inclusive growth. It is an established and well-known fact that Railways are the back bone of the country s transport system and still a preferred mode of choice for long distance passenger travel. Despite the declining share in the total freight traffic (35% of freight output in terms of tonne kms), the major infrastructure industries such as coal, fertilizer, steel and cement depend on the Railways for movement of raw materials and finished products and contribute a much higher share. Indian Railways carried 71% of the quantity of coal required for thermal stations during Movement of finished steel and pig iron by rail hovered around 50%. Fertilizer is yet another industry, which, with a handsome contribution and a share of 76%, stresses the importance of rail connectivity for this vital sector for agricultural growth. Cement industry with significant annual growth of 8% moves nearly 43% of its output by rail. RITES Journal 16.1 July 2010

2 16.2 Financing the Indian Railways Infrastructure The vision document estimates the likely originating traffic as 1850 million tonnes and freight output as 1203 billion NTKM, for the year This scenario implies a cumulative annual growth rate of 8%. With a higher growth strategy as the goal and assuming a 10% growth, the originating loading expected is 2165 million tonnes and freight output 1407 billion NTKM for Passenger business has been showing a healthy growth with originating passengers reaching a figure of 6524 million in from 5112 million in and revenues showing a jump from Rs cr. to Rs cr. for the same period. This achievement has to be seen in the light of no-fare increase budgets presented successively over the last 8 years. Railways anticipate 8% growth in passenger segment and the projection for 2020 is million passengers. Railways have set for themselves the following specific goals in their Vision Expand the network at the rate of 2500 km per annum. Target 25,000 km. Convert the entire system into uni-gauge (broad gauge) barring hill and heritage railways. Target 12,000 km. Segregate corridors for freight and passenger as well as main line and commuter traffic through doubling/multiple lines. Target 12,000 kms. Electrify all routes connecting metros and busy corridors. Target 14,000 km. Complete high speed corridors covering a length of 2000 km. The high growth strategy which the railways have adopted envisages massive capacity creation, network expansion and upgradation. The gigantic proportions envisioned in the document can be gauged from the following facts and figures. The estimated investment of Rs. 14, 00,000 cr. over a decade, implies a 3.5 times increase over the amount of Rs. 40,000 cr. planned for The budgetary support has to be raised three-fold from around Rs cr in to Rs. 28,000 cr. to conform to the share of 36%. Internal revenues should show a quantum jump, again over three times from Rs. 28,000 cr to Rs. 92,000 cr. Considering that the vision is built around a higher growth and high market share strategy and Railways hope to consign to history the shortage syndrome; the focus is capacity creation through network expansion, gauge conversion and multiple lines, including segregation of corridors. This grandiose plan calls for a well-thought out investment strategy. The strategy proposed for adoption has been delineated by the ministry as under: Set up a non-lapsable dedicated fund. Mobilize the financial support of the state government for metropolitan transport projects as well as new lines and evolve a mechanism for sharing operational loss.

3 Ms. V. Viswanathan 16.3 Optimal mix of internal, budgetary and extra-budgetary resources. Segregation between commuter and non-commuter lines in partnership with state govt. and city authorities in metros. Public-Private Partnership for efficient execution of projects, especially in areas like construction of world class stations, multi-modal logistics parks, cold-chain facilities and connectivity to ports. Setting up of production units for diesel/electric locomotives as well as coach manufacturing units to be done through private sector participation by special purpose vehicles or joint venture route. Each of the identified strategy has to be followed up in a systematic and efficient manner, if the desired goals are to be achieved. State Government Support for Investment Railway ministry felt even earlier that projects which are socially desirable, but financially unrenumerative, needed a different approach for speedy implementation. Railway Minister in his budget speech for (while presenting the interim budget) announced a new scheme known as Remote Area Rail Sampark Yojana. The intention was to complete all rail projects which would provide connectivity to remote areas within a time frame of five years. The outlay required for completion of these projects was estimated at approximately Rs.17,000 crore. While concurring with the scheme, Finance Ministry stipulated that railways should identify innovative ways of funding, apart from budgetary support. The scheme was to cover a length of about 5000 km of new broad gauge line and conversion of over 3300 km of metre gauge line into broad gauge. The main criterion for selection was the need for connecting remote and rural areas, notwithstanding the fact that these projects do not meet the norms fixed for financial viability. These socially desirable projects would act as engines of growth, spin economic activity and generate employment. Railway projects, it is well known, require huge investments and government subsidy, with long gestation time-frame and pay-back periods. Naturally, it becomes government s responsibility to undertake such investment for want of private initiative. If one looks back into the history of Railway network evolution in our country under British rule, there was government s assurance of guaranteed returns to woo private investment. Incidentally, such a procedure led to over capitalization of the system as the companies were confident of getting their returns. Since there was reluctance on the part of private investors, public funding was the sole means to create rail infrastructure after independence. In this background, there was a necessity for a new strategy to involve the beneficiaries of such projects, taken up on socio-economic considerations. Railway Ministry s Remote Area Rail Sampark Yojana contemplated state participation, being

4 16.4 Financing the Indian Railways Infrastructure its beneficiary, in project financing. There is an increased awareness about the necessity to explore the revenue potential through integrated property development on the route of rail network. Land as a resource for financing infrastructure projects has assumed importance due to successful experiments witnessed the world over. The alternatives for raising resources can be classified into four main categories: Impact fee or development charge. Area linked development charge. Betterment levy or land value increase tax (LVIT). Sale of development rights. US courts have upheld the rational nexus between the cost of providing infrastructure and the fees charged for the same. Betterment levy or LVIT is a levy on the land owners to recoup from them a part of the land value gains or unearned income which results from public investment in infrastructure. Rail connectivity invariably leads to an upward trend in land values. Maharashtra government, through various enactments, has levied a betterment charge. The underlying principle in all these acts is that any improvement and creation of assets by public authority towards infrastructure development, enhances the value of the land and the benefit of incremental monetary advantage has to be shared between the land owner and public authority. In all the Maharashtra acts there is a provision for resources to the extent of half of the increase in value. The Mumbai Highways Act 1955, offers the owner an option of paying the betterment charge in kind by relinquishing land equal to the value of the betterment charge. Notwithstanding the none too encouraging experience, the state governments should go in for legislative measures through this mechanism and create a ring fenced fund to finance infrastructure projects. India Infrastructure Report 2009, attempts a comparison of the various methods in regard to legal feasibility, tax base, administrative complexity and revenue potential. While betterment levy has legal support in many of the existing acts, sale of development rights requires nationalization, before the same could be exploited. Area or value linked development charge is already provided for in states like Maharashtra. Impact fee or development charge exists in US and Canada in the form of explicit assessment of incremental investment in off-site infrastructure. But in our country there is no legal support for this. This has to be studied further. The state governments can explore the legal feasibility of imposing any of these tax levies for development of rail infrastructure based on revenue potential. The entire proceeds should be credited to a separate Fund and used for financing the new lines sanctioned for the state, which are socially desirable but not viable. A moderate contribution of one-third of the cost of the project through this mechanism of state participation should be insisted upon for all such projects. Yet another resource potential for rail projects is diesel cess, a share of which is passed on to the state governments for road development. An amendment to the existing Central Road Fund Act to facilitate financing of rail projects, by both the

5 Ms. V. Viswanathan 16.5 state governments and Railways, is required. At present the provisions of the Act allow use of the allocated funds for road over and under bridges and other road related projects. Since rail connectivity in remote, rural areas will supplement the road networks in many places and may even serve as the only means of communication where kachcha roads exist, such an amendment will speed up execution of rail projects in a time-bound manner. Public Private Partnerships Ministry of Finance in a discussion note presents an overview of the definition of Public Private Partnerships (PPPs) and brings out the common and core elements that define PPPs. The note also offers a possible definition of PPPs that could be relevant for India. Common defining elements include the existence of a contract or an arrangement between the government and a private entity and provision of public infrastructure or services through the private sector with substantial risk transfer to meet government or social needs. An important factor to note is that none of the definitions have specified what remuneration to private sector or PPP will necessarily be through user charges. In fact, in many countries like UK the majority of investors are provided payments by government agencies. The current thinking on PPPs is reflected in countries like UK, South Africa and Australia. They view PPPs as an alternative form of public procurement whereby public infrastructure and/or public services are procured through private sector. They consider efficient delivery of services as the key driver of PPP (as opposed to merely substituting private investment for public capital expenditure) through substantial risk transfer and output based remuneration. Based on a detailed analysis, an umbrella definition proposed by the Government of India runs as under: PPP means an arrangement between a government or statutory entity or government owned entity on one side and a private sector entity on the other, for the provision of public assets and /or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified time period, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards. Public Private Partnerships attempt a trade-off between different goals by minimizing the outflows and maximizing performance. PPPs are rarely a simple and mechanical exercise. They require a keen understanding of the sector, diligent planning, rapid and flexible decision making besides transparency and accountability. The government entity attempting PPPs should be empowered suitably and equipped adequately. Railways have to keep in mind these important parameters if their attempts to woo private sector for a greater share in meeting the challenging goals of connectivity

6 16.6 Financing the Indian Railways Infrastructure and network expansion to the far-flung areas to promote economic growth and inclusive development, are to bear fruit. Lessons from NHDP Experience National Highways Development Programme (NHDP) of the Government offers valuable insights into the dos and don ts for the success of private sector participation in infrastructure investment. The Golden Quadrilateral project Phase I of NHDP connecting Delhi-Kolkata-Chennai-Mumbai-Delhi covering a distance of 5846 kms at an estimated cost of Rs cr. was completed by But the other phases of NHDP are not so fortunate. North-South and East-West corridors connecting Srinagar to Kanyakumari and Silchar to Porbandar respectively for a length of 6647 km at an anticipated cost of Rs 30,000 cr was to have been completed by But by end- Feb. 2009, 4351 km had been completed and tenders were to be awarded for nearly 609 km. For phase III for 4/6 laning of a stretch of km tenders are yet to be awarded for 6707 km. Momentum is slightly to pick-up in and Connectivity likely to be achieved was put at 7000 km. A study of the road sector experiment in public-private partnership over the last decade reveals a mixed picture. The heady success in the initial period leading to the slogan India Shining and sharp decline in the recent years throws up useful lessons for transport analysts. The contributory factors for the grand success in the first phase of the project can be traced to a number of government initiatives, apart from a generally conducive economic environment. The Government announced a slew of concessions on the tax-front which stimulated the investment. These included: Customs duty exemption for road building equipment which was not being produced in the country. Clear identification of 21 such items benefitted the industry. Income tax exemption for 10 years from NHDP earnings acted as an incentive for investment. Grants upto 40% for BOT projects were also available. NHAI bonds have been exempted from capital gains tax. Railways do not have such fiscal concessions to spur private investment. This issue has to be addressed urgently. Road sector followed up the above concessions by suitable legislative amendments to finalize private investment as shown below: Comprehensive guidelines issued for private participation. Legislative support through amendments to National Highways Act 1956.

7 Ms. V. Viswanathan 16.7 Finalization of model concession agreements for projects costing Rs. 100 cr. as well as smaller projects. Published model concession agreements for annuity based projects to have a clear understanding of the risks and responsibilities. The road sector also derived the advantage of institutional investors willingness to lend for these projects. Annuity based projects which insulated the operator from the uncertainties of traffic risks, was a major plus factor. Aided by consistently falling interest rates and buoyant debt market, the sector attracted private investment. NHAI taking up 30% equity in BOT projects helped accelerate the entire programme. The Internal Rate of Return (IRR) put at 14% was also comfortable for both the developer and the lender. The decline in investment and slower progress in the last 3-4 years can be attributed to several sector specific issues, apart from the recession and financial crisis witnessed world over. Government s handling of the qualification norms for bidding process, fixing a cap on the number of projects, industry s resistance, poor response and withdrawal of the qualification norms later on, led to a situation wherein finalization of contracts became difficult, leading to delays. High interest regime and liquidity crunch took a heavy toll on the private sector s ability to undertake these projects. Stringent penalty clauses for delays in completion proved the last straw on the camel s back. The highways sector s private partners had cash flow problems and shortage of skilled manpower. Apart from the above sector specific issues, all infrastructure projects for connectivity suffer from delays in land acquisition, obtaining clearances from the multifarious agencies, slow dispute resolution mechanism and lack of coordination between different government agencies. BOT projects for any infrastructure sector, be it roads or railways, can be a potent option only if adequate care and attention are paid to these aspects. While road projects have at least met with partial success, railway s track record in this regard is not something to envy about. This calls for some introspection into the causes of inability to initiate rectification measures in view of the planned commitment of Railways to rope in private players for Railway expansion and capacity building in a big way. Complex Issues relating to Railways Railway projects, apart from being capital intensive, with long gestation periods, also sometimes get affected due to uncertainties in attaining the traffic potential projected and sticking to the cost estimation perhaps due to inadequate detailing at the time of the project preparation. The cost profile of a BOT project has also to build cushion for additional elements such as interest on loans, loan itself, dividend on

8 16.8 Financing the Indian Railways Infrastructure profit, and income tax. Pre-bid costs towards surveys, scrutinizing the bankability, legal expenses for forming joint ventures, documentation, etc., and post-bid expenses relating to negotiations, detailed design, and legal and financial management costs should all be reckoned. Analysts estimate that cash outflow in a BOT rail project can be as high as four times that of a government funded project. Unless risks and uncertainties are reduced, through adequate project detailing and suitable financial structuring to curtail excessive cash flows devised, it will be well-nigh impossible to motivate private sector to jump into the fray. Rail projects are extremely complex, multi-disciplinary with stringent service requirements to ensure safety and reliability. Railways normally undertake detailed techno-economic surveys and it would be advisable to have detailed estimates ready before the projects are selected for BOT route, to minimize the uncertainty which may result in better and reasonable response. For the projects falling under Remote Area Rail Sampark Yojana, Railways felt that the cost of the projects should be kept low as the remunerativeness was lacking. The same norm can be applied for bankable BOT projects too, to cut out the frills and keep the project costs low. This may ensure greater participation and competitive bidding. While XI plan required infrastructure investment to the tune of US$ 504 billion the target for XII plan is likely to be $ 1 Trillion. Half of the investment is to come from private sector as against 30 percent share in XI plan. There is a feeling that this would be a difficult proposition due to various constraints. The deficiency in infrastructure in the country is not for want of capital, but due to paucity of bankable projects projects with proper identification and allocation of risks amongst various stake holders. Further, non availability of long term corporate bond market and also pure project finance of a non- recourse nature as well as mis-match between the loan period and concession duration enhances the commercial risks for private participants. On the taxation front, dividend distribution tax on infrastructure, special purpose vehicles, Minimum Alternative tax during the tax holiday period, impact the private sector. Even road sector had felt the pinch. While private investment expected was to the extent of 34 percent of the total investment of $61 billion in XI plan, the achievement will be only 16 percent, with a heavy shortfall of over fifty percent. This reflects the failure to fill the crucial gaps in planning, policies and procedures. International Scenario World Bank conducts regular analysis of privatization and Public Private Partnerships globally and maintains a private participation in infrastructure (PPI) projects data base. As per the data available, during the period , the private sector took over the operating or construction risk or both in over 2600 infrastructure projects in developing countries, attracting investment commitment of over $800 billion. The range of schemes include management contracts, concessions, disinvestment (divestitures) and green field build-operate-transfer or build-operateown projects. The following Graphs illustrates the scenario.

9 Ms. V. Viswanathan 16.9 Graph 1 : Region-wise Investment in infrastructure projects with Private Partnership (in $ billion) East Asia and Latin America are the favorite destinations Sector-wise data is presented in Graph 2. Source : World Bank and PPIAF, PPI Project Database. Graph 2 : Investment in Infrastructure Projects with Private Participation in Developing Countries by Sector ($ billion) Energy and transport dominate the number of projects Source : World Bank and PPIAF, PPI Project Database.

10 16.10 Financing the Indian Railways Infrastructure The annual investment flows to infrastructure projects with private participation grew strongly between 1990 and 1997 from $18 billion to more than $100 billion. Since then investment flows showed a gradual decline till In 2004 investment flows to infrastructure grew for the first time. However, the growth was driven by telecommunications sector. According to PPIAF s analysis, developing country investors contributed 54% investment in concessions, 44% in green field projects and 30% in divestitures during the period The private investment share in transport was 52%, and 46% in telecommunications during the same period, but only 27% in energy, and 19% in water. World Bank s comparative data base on private participation in infrastructure for transport sector and railways for the period is presented below: Featured Indicators ( ) Transport Railways Number of countries with private participation Projects reaching financial closure Region with largest industrial Latin America & Latin America & share Caribbean (41%) Caribbean (48%) Type of PPI with largest share Concession (53%) Concession (49%) in investment Type of PPI with largest share Concession (54%) Concession (63%) in projects Projects cancelled or under 67(8%) 14(14%) duress Table 1 : Region wise Private investment in Projects (US$ Million) Region Number of Projects Investment East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and North Africa South Asia 193* 26505* Sub Sahara Africa Grand Total Railroad *South Asia Railroad 4 760

11 Ms. V. Viswanathan It is evident that railroads all over the world have been rather slow in attracting private investment as compared to other modes of transport. Even among the regions, South Asia s performance lags behind other regions with only four projects and an investment of US $ 760 Million. The data is a clear indication that inherent weaknesses of railroad projects in meeting the financial expectations of investors as compared to roads or ports or even airports apparently outweigh the benefits. Hence, any ambitious approach and over dependence on the role of private sector has to be tempered with the stark realities of the global scenario. Key Success Factors for PPP Based on international experience, it is possible to bench-mark the key success factors. A presentation by Vickram Cuttaree of the World Bank, through case studies highlights the lessons. Hungary M1/M15 was the first toll motor way which was tendered and implemented. Construction of the motorway was finished in 1995 on schedule and within budget. Since traffic volumes were 40% lower than the forecast by independent experts, high toll rate did not cover the cost and led to litigation by dissatisfied road users. Ultimately concessionaire was unable to service the debt and government take-over at a higher cost became inevitable. Thus unrealistic estimation of revenues can spell doom for PPP route. Bolivian Government privatized the water system in Cochabamba by granting a 40 year concession to an international consortium. The hike on water rate (upto $20) resulted in wide-spread violence when groups gathered in protest. Finally the international consortium Aguas del Tunari announced its withdrawal from the project. Since assessment of willingness to pay is an essential pre-requisite, public hearing is a must before any PPP is introduced. Importance of a detailed feasibility report can not be over-emphasized. Mexico s ambitious Toll Road programme covering 52 projects was a disaster with cost overruns and revenue shortfall in all but five projects, resulting in government take over of 23 projects and a massive bail-out of $7.6 billion debt. Institutional arrangements that facilitate co-ordination, provide technical support and ensure appropriate application of checks and balances is a key-driver of PPP success. Towards this end, South Africa, established a dedicated Treasury unit to scrutinize the quality, affordability and expected fiscal cost of the PPP. Surveys of users, consultation with local and national leaders and focus groups graded concession system at 6 on a scale from 1 to 7. But Portugal s PPP unit suffered from lack of experience. Weak public sector capacity resulted in insufficient risk transfer to private sector and PPP related liability amounted to 10% of the GDP in PPP projects in infrastructure are usually complex because of the nature of risks and involvement of many stake holders such as project sponsors, lenders, government agencies, users, and regulators. The use of standard documents streamlines and expedites decision-making by the authorities in a manner that is fair,

12 16.12 Financing the Indian Railways Infrastructure transparent and competitive. The adoption of model documents such as concession agreements and other bid-documents for award of PPP projects facilitates fast track appraisal and approval. An overview of the Indian scenario may be useful at this stage. Apart from setting up committees, attempts to standardize documents are on the anvil. The Planning Commission has published the Model Concession Agreement (MCA) for Highways, Urban Rail Transit Systems, Airports, Port Terminals, Re-development of Railway Stations, etc. Similarly, bidding documents with standardized guidelines incorporating key principles and best practices relating to the bid process for PPP projects have also been approved by the committee on infrastructure and issued by the Ministry of Finance for application to all PPP projects. These include Request for Qualification (RFQ) and Request for Proposal (RFP) for PPP projects, Technical consultants and Legal advisers. Public Private Partnerships are characterized by comprehensive planning, clear contractual rules and contingencies, competitive procurement and credible contract enforcements. World experience shows that countries with strong public sector institutions have typically performed well. Government of India has taken a number of initiatives to create an enabling environment. It is now the turn of Private Sector to respond. Financial Support for Infrastructure Projects Apart from the initiatives mentioned above, success of public private partnerships hinges upon the ability of the financial system to provide capital and debt to sustain adequate cash flows for completing the project in time. One such mechanism available is Viability Gap Funding. Railways plan to exploit the PPP potential to fulfill the vision requirement depends upon the organization s ability to pose suitable proposals for funding under the Viability Gap Funding scheme. The VGF scheme aims at supporting infrastructure projects that are economically justified but fall short of financial viability. Support under this scheme would be available only for infrastructure projects where private sector sponsors are selected through a process of competitive bidding. The total Viability Gap Funding under this scheme will not exceed twenty percent of the total project cost, provided that the Government or statutory entity that owns the project may, if it so decides to, provide additional grants out of its budget, but not exceeding a further twenty percent of the total project cost. VGF under this scheme will normally be in the form of a capital grant at the stage of project construction. Proposals for any other form of assistance may be considered by the Empowered Committee and sanctioned with the approval of Finance Minister on a case-to-case basis. The grant will be released to the lead financial institution. VGF up to Rs. 100 crore for each project may be sanctioned by the Empowered Institution subject to the budgetary ceilings indicated by the Finance Ministry.

13 Ms. V. Viswanathan In order to be eligible for funding under VGF scheme, a PPP project should meet the following criteria: 1. The project should be implemented i.e. developed, financed, constructed, maintained and operated for the Project Term by a Private Sector Company to be selected by the Government or a statutory entity through a process of open competitive bidding; provided that in case of railway projects that are not amenable to operation by a Private Sector Company, the Empowered Committee may relax this eligibility criterion. 2. The PPP project should be from one of the sectors mentioned below: a) roads & bridges, railways, sea ports, airports, inland waterways b) power c) urban transport, water supply, sewages, solid waste management and other physical infrastructure in urban areas. d) infrastructure projects in special economic zone. e) international convention centres and other tourism infrastructure projects. There is a demand, of late, to include social and health sectors within the ambit of Viability Gap Funding. 3. The project should provide a service against payment of a pre-determined tariff or user charge. 4. The concerned Government/Statutory entity should certify, with reasons: That the tariff/user charge cannot be increased to eliminate or reduce the viability gap of the PPP; That the Project Term cannot be increased for reducing the viability gap; and That the capital costs are reasonable and based on the standards and specifications normally applicable to such projects and that the capital costs cannot be further restricted for reducing the viability gap. Provided that the Empowered Committee may, with the approval of the Finance Minister, add or delete sectors/sub-sectors from the aforesaid list. A revolving fund of Rs. 200 crore was provided by the Finance Ministry to the Empowered Institution, designated under this scheme.

14 16.14 Financing the Indian Railways Infrastructure Development and use of PPPs for creation of infrastructure services has received emphasis over the last decade or so. A majority of projects have come into position in the last five years. While sectors like telecom, power, ports and roads have shown good progress, other sectors have not fared well. The following table gives the sector-wise break-up of PPP projects taken up in the country. Table 2 : Sector-wise Break-up of PPP Projects in India Sector Total No. Based on Between Between More than Value of of Projects Rs.100 cr cr cr. 500 cr. Contracts Airports Education Energy Ports Railways Roads Tourism Urban Dev Total Source: Public Private Partnerships in India, MOF, GOI Website database It may be observed that roads and ports have attracted Rs lakh crore worth of PPP projects accounting for nearly 75% of the investment from private sector. Railways have been able to put through four projects worth Rs.1602 cr. For assistance from Viability Gap Funds PPP projects are required; obviously railways have not been able to tap this resource. The proposal submitted by Rail Vikas Nigam Limited for a port connectivity work for Krishnapatnam seeking VGF Grant for Rs. 50 cr. appears to have been returned by the Empowered institution for revising the proposal. Similarly, Metro Rail project in Maharashtra for implementation of Versova-Andheri-Ghatkopar corridor with a proposal for VGF of Rs. 650 cr is to be supported by Urban Development Ministry under a scheme approved by it. Sector wise details of VGF so far approved, where bidding processes have been completed, are given below: Table 3 : VGF data Sector VGF Appd. No. of (Rs. in cr) Projects Highways Metro Rail Tourism Road Power Total

15 Ms. V. Viswanathan Further, in principle approval has been given for 19 highway projects and 12 road projects to the extent of Rs cr. While Viability Gap Funding is a mechanism to meet the developer s requirement for risk capital, the domestic financing institutions face formidable challenges as the appetite for debt-financing from the infrastructure provider is enormous and they feel that there is a need for innovation in the infrastructure sector debtfinancing. This is an area where some government action is called for. Commercial Exploitation of Land Whenever resource mobilization is discussed, a constant refrain heard is the enormous potential for commercial exploitation of land which the Railways should utilize to generate resources. With 4.5 lakh hectares of land and hectares of vacant land immense scope for commercial and industrial use of land exists. Due to concerted efforts in the recent past, the earnings realized from land resources have shown a steady increase. (See Table 4) Table 4 : Earnings from Railway Land Year Earnings (Rupees in crores) Source: Ministry of Railways. With the setting up of the Rail Land Development Authority, there has been a conscious shift and change in approach of the Ministry towards mobilization of nontariff resources through commercial use of vacant land. For a long time, Railways have been giving importance to afforestation schemes in collaboration with state forest departments. This has resulted in 10.5 percent of Railway land being under green cover. Recent efforts include Jatropa plantation for producing bio-diesel and experimental commercial plantation on railway land by enlisting private participation, on Northern, North-Eastern and Southern Railways for a 15 year period, with revenue sharing model. Obviously, the scope for revenue generation in this area has been negligible so far. Railways have licensed land at stations, goods sheds, and sidings, etc., as commercial plots for stacking materials, linked to traffic. Land was also licensed to bulk oil installations and retail outlets. The area under such commercial use was a meagre 3000 hectares.

16 16.16 Financing the Indian Railways Infrastructure Commercial exploitation of land is a thrust area for Railways after Railways armed itself with suitable amendment to Section 11 of the Railways Act 1989 which permitted commercial use of railway land. With Rail Land Development Authority becoming functional from January 2007, there is a glimmer of hope for resource generation in this non-traditional sector. Railway Board has entrusted RLDA with 110 sites aggregating to 700 ha for commercial exploitation. These sites include prime locations at New Delhi, Mumbai, Chennai, Hyderabad/Secunderabad, Bangalore and Kolkata. The revenue models adopted by RLDA include: 1) Leasing out of land with upfront payment of lease charges and nominal annual land rent for the entire lease period. 2) Joint venture with the developer and a mix of upfront payment and revenue share. In both these models, the lease periods may range from 30 to 90 years depending upon the type of development, without any outright sale or possibility of conversion to freehold land. Based on budget pronouncements made in , colony developments through PPP route is also contemplated. The developers are expected to bring in modern design of housing concepts and in return they are allowed to develop commercial real estate such as office space, commercial malls etc. Sarai Rohilla in Delhi is one of the 10 sites identified, where 700 staff quarters will be rebuilt with modern layout and specifications through the developer at no cost to Indian Railways. Other initiatives for optimal use of land include setting up of logistics parks, development of world class stations, inland container depots and installation of ATMs etc. Land related initiatives always run into difficulties due to lurking suspicion in the minds of authorities of the loss of the area itself and long drawn and vexatious procedures for reclaiming the land, failure on the part of the parties to fulfill the contractual conditions of payment and reluctance of the state and local governments to fully support such ventures. It is therefore anybody s guess that herculean efforts are required to transform such attempts into financially attractive ventures, for the benefit of railways. It is worthwhile to study in depth the Hong Kong as well Japanese East Railway models, which show-case the rich potential of land exploitation for revenue generation. Strategy for Railways Relying on past experience and experiments Railways should evolve a clearcut policy framework for execution of projects as under: (1) For socially desirable but financially unremunerative projects state government participation should be insisted upon. State governments should explore the possibility of raising resources through suitable levy as discussed earlier.

17 Ms. V. Viswanathan (2) Rail Vikas Nigam Limited may be entrusted with bankable projects for execution under PPP route. RVNL has positioned itself as a key developer of projects in PPP format. RVNL had completed 419 kms of doubling 1230 kms of Gauge conversion, 176 kms of new lines and 1060 kms of Railway electrification up to March The MOU for the year fixes targets for doubling at 219 kms, gauge conversion 256 kms, Railway electrification 115 kms and new line 8 kms. RVNL s track record in promoting Public Private Partnership is fairly good as reflected by the formation of five special purpose vehicles. Kutch Railway Company Limited the first SPV of RVNL carried out gauge conversion work of Gandhidham-Palanpur new line and showed a profit in Krishnapatnam Railway company Limited has commissioned the first portion of the line facilitating movement of traffic to the port. Bharuch-Dahej Railway Company Limited will complete the gauge conversion of the line between Bharuch and Dahej by December Angul-Sukinda Railway Limited has been formed to execute the new line project. Other project specific SPVs having equity participation by both strategic and financial investors as well as debt include Haridaspur-Paradip Railway Company Limited ( a new line and Railway electrification), Surat-Hazira new line and Arsikere-Hassan- Mangalore Gauge conversion through K-RIDE which has been commissioned. (3) Yet another model adopted by RVNL is Build-Own-Transfer Route on payment of charge to the developer for a fixed period of time. EPC contracts are also contemplated. RVNL has identified 28 such projects. (4) RVNL s basket of projects includes a private port Railway in Kerala and 11 projects funded by ADB loan. RVNL has acquired considerable domain expertise in implementation of large and difficult projects which had prompted the Ministry of Railways to transfer five additional projects entailing a capital expenditure of Rs crores in These include development of a logistics park at Boraki and multi-modal riverside terminal at Shelvona; uncharted territories for the organization. (5) RVNL is executing ADB funded projects and as per Chairman s address in the Annual Report for it has completed the bankability studies including economic, social and environmental analysis of the five projects which have been proposed for funding through the second ADB loan, which is expected to be around $500 million. Execution of projects under multilateral funding requires sound knowledge of the procedures for procurement of civil and consultancy contracts and ensuring resettlement and rehabilitation of project affected persons displaced by the land acquisition. RVNL is the only PSU with requisite skills and experience in this regard and this is a great strength of the

18 16.18 Financing the Indian Railways Infrastructure organization. Railway Ministry must take steps to negotiate the promised second loan quickly. ADB s earlier loan of US $ Million comes under the category of Railway sector improvement project with the thematic classification of economic growth and governance. The project outcome was aimed at improved efficiency and effectiveness of Indian Railways with increased capacity, improved services, improved financial sustainability and improved productivity and efficiency. It is desirable that RVNL s experience is utilized for executing ADB loan projects. (6) Multilateral Funding and Japanese assistance Dedicated Freight Corridors (both eastern and western) require funds to the tune of Rs 40,000 crores as per latest estimates. The projects are proposed to be funded by a combination of debt from bilateral/ multilateral agencies and equity from Ministry of Railways with a debtequity ratio of 2:1. Western corridor will receive Japanese assistance in the form of a soft loan for a period of forty years with a moratorium of 10 years and will meet about 67% of the construction cost. It is envisaged that a STEP (Special Term of Economic Partnership) loan of Y 450,000 million will be provided by the Government of Japan to finance western DFC between Rewari and Vadodara as well as meet the locomotive requirements of Ministry of Railways. The Eastern Corridor is proposed for funding from multilateral agencies such as the World Bank and the Asian Development Bank. Since Dedicated Freight Corridors are crucial for the country s economic growth, the Ministry s efforts to get the loans from multilateral agencies are commendable. But as sanction process from these agencies is a long drawn one, special steps are required to negotiate the loans and put the projects on a fast track. (7) Private Participation under R3i initiatives With a view to attract private sector participation in rail connectivity projects and also to retain and increase rail share in freight, Railway Board has issued a draft policy known as R3i-Railways Infrastructure for industry Initiative. The policy as circulated for discussion with stake holders proposes four models as below: Cost sharing freight rebate model Full contribution apportioned earning model Special purpose vehicle model Private line model

19 Ms. V. Viswanathan The policy is not applicable to lines intending to provide connectivity to iron ore or coal mines directly or indirectly. A comparative table of salient features of the models is presented below: I II III IV Land acquisition By IR By IR By IR Party Railways share Not less than Nil 26% Nil in the cost 50% Concession Freight rebate Apportioned Apportioned Apportioned of 10-12% earnings earnings earnings Period 10 years or till 25 years 25 years 30 years full recovery of cost whichever is earlier Ownership Railways from Railways from Railways from Private party the beginning the beginning the beginning Operation and Railways from Railways 2% Railways at Railways at Maintenance its own cost levy from the SPV s Cost Party s cost applicant s share for 10 years and 4% thereafter Railways propose to finalize the model concession agreements and advise the Zonal Railways for entering into agreement with the applicant. Ministry has also identified the projects for such Private participation. Railway Ministry has to spell out the models it proposes to adopt for its ambitious investment programme in sufficient details well before the next budget, as a follow-up of the Vision document. Conclusion Railways have shown time and again that the organization has immense technical capability, resilience and willingness to reinvent itself through path-breaking initiatives, thanks to a committed, dedicated and skilled work-force, which has faith in corporate goals and a devoted and competent team of officers whose passion for excellence is phenomenal. Time has come again for this great outfit to prove its

20 16.20 Financing the Indian Railways Infrastructure mettle and thereby be a strategic partner in the country s double-digit economic growth. References 1. Indian Railways Vision 2020, Ministry of Railways, December India Infrastructure Report 2008, Business Models of the Future, 3i Network, Oxford University Press. 3. India Infrastructure Report 2009, 3i Network, Oxford University Press. 4. World Bank PPI data base. 5. Public Private Partnership Handbook, World Bank. 6. Annual Report Rail Vikas Nigam Limited Private Participation in Infrastructure, Planning commission, Schemes and Guidelines for Financial support to Public Private Partnerships in Infrastructure Viability Gap Funding. 9. Railway Board s Draft Policy R3i Policy. 10. GOI website on Public Private Partnerships in India. ***** A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. - Winston Churchill Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted. - Albert Einstein