IMPORTANCE OF PPP FOR INDIAN RAILWAYS

With 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 wouldnt
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 20082012, foreign direct
investment (FDI) participation increased steadily. From April 2000August 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
Cabinets 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.