Project Finance

Redevelopment of Lucknow – Charbagh Station by NBCC India Ltd.

Submitted to Dr. Anupam Rastogi

Crew 7
Palash Shah
Poorvali Sharma
Prakhar Gupta
Omkar Yadwadkar

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Contents
An Overview of Indian Railways................................................................................................................ 3
New Services by Indian Railways .............................................................................................................. 4
Financing of Indian Railways ..................................................................................................................... 5
Public Investments .................................................................................................................................... 5
Private Sector Participation ...................................................................................................................... 6
PPP Development of Railways Sector ....................................................................................................... 7
Railway Redevelopment Programme ....................................................................................................... 9
The Habibganj Project ............................................................................................................................. 10
Development of Gandhinagar Railway Station ....................................................................................... 11
Lucknow Charbagh Station Redevelopment Project .............................................................................. 12
Demand Assessment at Charbagh .......................................................................................................... 12
Assumptions............................................................................................................................................ 13
Deal Structure ......................................................................................................................................... 14
Financial Projections ............................................................................................................................... 16
Risk faced by the project......................................................................................................................... 17
Term Sheet .............................................................................................................................................. 18

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An Overview of Indian Railways
Indian Railways is the world’s third largest rail network. They have over 12,617 passenger trains
used by a 23 million people on a daily basis. Indian Railways has two major segments - Passenger
trains and Freight trains.

On a Daily basis, 23 Million passengers travel

Passenger
by trains
Railways
In FY17, 1110.95 million tonnes of freight was
Freight
transported using trains

The Passenger Segment of Indian Railways has grown at a CAGR of 9.88% from FY07 to FY18.
Whereas, the revenues from Freight segment of Indian Railways has shown a growth of 3.71%.

Revenue break-up by segment (FY18)

Freight

Passenger

Other
Coaching
Sundry

Freight is the biggest source of revenues for Railways, providing 65% of total revenues. Profits
from Freight are used to cross-subsidize the passenger segment. Increasing carrying capacity,
improving cost-effectiveness, better service and quality will lead to a growth of Freight in Indian
Railways. Iron Ore, Food Grains, Coal, Steel, fertilizers, and petroleum products are the biggest
supporters of Freight.

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For a majority of Indians, Railways is the preferred mode of transport for long distance. As the
Income levels and standard of living in India are increasing the demand for passenger trains is
also increasing. Through technological advances, Railways is planning to increase the speed of
travel from 110 kmph - 130 kmph currently to 160 to 200 kmph by 2020. The Alternate Train
Accommodation Scheme which confirms berths of waitlisted passengers in alternate trains on
the same route is expected to improve the experience of the passengers and thus boost the
revenues for Railways.
The Government of India is focusing on infrastructural development with a high focus on capacity
creation in Railways. Further, Freight traffic is expected to increase due to industrialization. The
Passenger segment is also expected to grow in revenue due to an increase in rising demand for
urban mass transportation.
Railways has adopted many new strategies, keeping in mind the expected increase in demand
over the next few years. The fares for premium classes have been reduced to compete with the
airlines and other premium modes of travel. The length of trains used most frequently and highly
in demand, have been increased from 16-18 coaches to 24-26 coaches. Use of Information
Technology has been increased to provide a better and smooth experience to the customers for
booking of tickets. Similar to airlines, an upgradation from lower to higher class has also been
introduced.

New Services by Indian Railways

From superfast trains to numerous new Railway lines and stations, Indian Railways is planning
many new services in the coming years. In March 2018, The Prime Minister has launched the
Third Mahamana Express, a Super fast train, from Varanasi to Patna. The distance covered is 234
KM.
33 new Express trains were also announced a few years back. These trains make fewer stops,
thus providing a better consumer experience. As per the Union Budget, 600 stations will be
redeveloped in the financial year and 7000 stations will be fed with solar power as proposed by
the Railway budget 2017-18 in the medium term. Apart from these a number of new studies are
also taking place for introducing bullet trains along the diamond quadrilateral. Developments are
also taking place for growth of Freight trains. The PCET (Parcel Cargo Express Train) commenced

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operations in May 2018, connecting North-Eastern region with the coast as its initial and
penultimate stops are New Guwahati in Assam and Kalyan in Maharashtra.

Financing of Indian Railways

Indian Railways has been playing an important role in the economic growth of the country but
the investments made in the rail sector have been below-par. Thus, enhancement of investments
is important not only for the new projects but also for the old projects which have been stalled
due to the lack of requisite funds. New ways of generating investments also support the vision of
modernisation and redevelopment of existing railway stations.
Various models used by Indian Railways for financing can be divided into two categories namely
(a) Public investment and market borrowings; and (b) Private Investment

Public Investments
Public investments usually include market borrowings of Railway Public Sector Units (PSUs) and
Indian Railway Finance Corporation (IRFC) and contribution from State Governments, Coal India
Limited (CIL), Steel Authority of India Limited (SAIL) and other bulk users. Viability gap, if any, can
be provided through budgetary support or by concerned States or bulk users. Initiatives under
public investments are as follows:
Financing of viable projects by IRFC
IRFC should fund the viable projects approved by Expanded Railway Board based on the project
report prepared by the committee.
Railway electrification from IRFC borrowings
Electrification of railways is an important component of modernisation and is also cost saver for
the railways when compared to using other fuels for the engines. IRFC can finance this investment
through market borrowings and use the savings in investing in other projects.
Railway signaling from IRFC borrowings
Modernisation of signaling to be undertaken based on the financial viability of the project. Since
signaling pays for itself by increase in line capacity, market borrowings can be used to finance the
project and the original fund allocation can be directed to other projects.
Dedicated Freight Corridors

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Indian Railways has setup Dedicated Freight Corridor Corporation of India Limited (DFCCIL) for
construction and operation of western and eastern corridors. Western corridor is being financed
by Japan International Cooperation Agency (JICA) and a part of Eastern corridor is financed
through World Bank funding.
JVs with State Governments/PSU
Railways can enter into a joint venture with state governments/ PSUs/ Port companies/ private
sector where Railways will have an equity subjected to maximum of 49% but not less than 26%

Private Sector Participation

Redevelopment of Railway Stations
This includes redevelopment of railway stations including development of real estate in nearby
land parcels as well as operation and maintenance of railway stations. The proposed model
involves selection of a private concessionaire through a process of transparent and competitive
bidding. A concession period of about 45 years would be provided to enable the concessionaire
to recover its investment with a reasonable rate of return.
Construction of new lines and gauge conversion
For the construction of new lines and gauge conversion, a PPP (DBFOT) model has been
recommended. This DBFOT model is used to finance, build and maintain railway projects with an
IRR of more than 5%, which can be made viable by providing viability gap funding (VGF). The
selected projects are offered to the private sector on DBFOT mode and the bidder requiring the
least VGF support is the preferred bidder.
Power Generation
Indian Railways set up power plants on the basis of standard bidding to generate power on a PPP
basis. This ensures long term availability of power at competitive rates.
Construction of new lines through PPP (Annuity) projects
Under this model, the private sector partner is selected through transparent and competitive
bidding to design, build, finance and maintain the project for a period of 10 years on the basis of
minimum annuity demanded by the concessionaire. The railways pay 50% of the capital cost
during the construction period and the balance in the form of annuity over a 10 year period. A

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part of the revenue finances the annuity payments while the balance annuity payments are
financed through budgetary support and internal generation.

PPP Development of Railways Sector

Over the past decade, IR has experimented with various PPP schemes to attract private investors
in setting up rail lines, connecting ports, privatizing container trains, deploying dedicated parcel
trains and introducing the Wagon Investment scheme — luxury trains as well as tourist lodges.
There has been direct involvement of IR in some PPP projects directly and in some through its
agencies, such as Rail Vikas Nigam Limited (RVNL) and Indian Railway Catering and Tourism
Corporation (IRCTC). For IR, the PPP experience has delivered mixed results with success in
projects where there was clear demarcation of responsibilities, like the last mile port connectivity
and delay in projects related to rolling stock and locomotives.
In the Twelfth Five Year Plan (FYP) now replaced by Niti Aayog, the Planning Commission
projected an investment of INR52000 crore for the railways, which is approximately 130% over
the previous plan. Out of the total investment, around 80% (INR42000 crore) is expected to come
from Central Government and the remaining 20% (INR10000 crore) to be raised through the
private sector.
PPP is rapidly becoming an effective tool in urban rail development. Redevelopment of railway
stations into smart railway stations is one such example where the government is trying to lure
the private players into investing in the railway infrastructure. Development of metro networks
is another important example where PPP model is being used on a large scale. Multiple metro
and monorail projects are being planned across the country, most of which will be on PPP basis.
However, PPP projects which are based only on fares as revenues are not viable as the capital
cost involved is huge. Thus, in order to make these projects financially viable and attractive to
the investors, PPP contracts are expected to include real estate development rights as is being
done in the Rail redevelopment program.
In the past, there have been inconsistencies in the execution of some PPP projects undertaken
by IR ranging from loopholes in the contractual agreements, irregularities in estimating the rate
of return and traffic numbers and a weak monitoring mechanism. There was no uniformity in the
model concession agreement for PPP projects. Approval for agreements was provided by the

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Cabinet which used to take a lot of time in giving its approvals. For instance, a delay in securing
the finance ministry’s approval for executing the gauge conversion project between Viramgam
and Mahesana in Gujarat by Viramgam Mahesana Pvt. Ltd (VMPL) resulted in an additional
expenditure of Rs.127.88 crore. In multiple cases, the financial projections and traffic projections
have not been realistic and projects have suffered losses due to the shortfall against these
projections. In many cases, delays in securing statutory clearances like land acquisition have led
to increase in project costs and failure to achieving financial closure.
The IR has introduced a new policy to address the key bottlenecks in the earlier Railways’
Infrastructure for Industry Initiative (R3i) policy regarding two of its aspects — change in
participative models and faster decision making. It came into effect from 10 December 2012 and
is called “Policy for participative Models in Rail Connectivity and Capacity Augmentation
Projects.” The policy has identified various models which can be adopted for private investment
in PPP.
New PPP models proposed in the new policy

 Private line model

 Joint Ventures
 Customer-funded models
 Build-operate transfer (BOT)
 SPV Model
 Capacity augmentation — Annuity model

Some of the key favourable measures under new policy include:

 In the joint venture model (JV), the cap on ROI of 14% has been eliminated for first and
last mile connectivity. Capping of returns and minimum traffic guarantee from private
players were the key factors in low private investments.
 The minimum concession period has been extended from 25 years to 35 years, in order
to make the projects attractive for the bank lenders.
 The new customer-funded model suggests that until the project investment along with
the interest as per the prevailing dividend rate being paid by railways is recovered by the

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 beneficiary, 7% of the amount invested will have to be paid by the railways through freight
rebates. This used to be 10-12%.
 The Railway Ministry will control the decision-making process. Railway board’s approval
would be enough to undertake specific projects. This will reduce the long process of
Cabinet approvals

Railway Redevelopment Programme

Indian Railways, on 8th Feb 2017 launched a ₹ 1 lakh-crore station redevelopment programme
with an aim to develop smart railway stations as a part of smart city program launched earlier.
As a part of the programme, railways has decided to take up 400 A1 and A stations for
redevelopment through Public Private Partnership (PPP). Boston Consultancy Group (BCG) has
been assigned as the strategic advisor. Under this programme, Railways has also decided to
provide unused land parcels near the railway stations on a 45 year lease to the developers for
developing commercial and retail property.
Through this programme, Indian Railways (IR) has emphasized on pursuing Public Private
Partnership (PPP) on a large scale. IR plans to exploit the commercial development of the spare
land owned by IR and use the surplus from this development to redevelop the stations. Following
modes of station redevelopment are being followed by the IR:

 Zonal Railway: Modified Bid Challenge Method

 IRSDC: SPV of IRCON and RLDA
 NBCC-RLDA JV
 G2G operation

All of the above mentioned modes are emphasizing on maximum participation from the private
sector companies.
As per the initial plan, government has decided to provide ₹ 80000 crores for the commercial
development and ₹ 35000 crores for the station development.
The main aim of the redevelopment programme is to modernise the existing rail models to keep
the railways relevant in the fast changing transportation landscape and provide amenities like
digital signage, escalators, self-ticketing counters, executive lounges, restaurants, malls, theatres,

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Wi-Fi facilities, etc. to give railways a competitive edge against other modes of transportation
used in India.
Indian Railway Stations Development Corporation (IRSDC) is a Special Purpose Vehicle (SPV),
built under the joint venture of Ircon International Limited (IRCON) and Rail Land Development
Authority (RLDA). The company was incorporated in 2012 with an aim to carry out
development/redevelopment the new/existing railway stations and upgrading them to world
class amenities. Currently, IRSDC has been entrusted with the redevelopment work of 23 railway
stations of which Habibganj in Madhya Pradesh has been completed successfully.
NBCC India and RLDA have also formed a joint venture for the redevelopment of 10 railway
stations, work at Gomtinagar station has already been started and work on Charbagh station is
expect to start soon.
Here are a few cases of Railway Redevelopment where the PPP model has been used-

The Habibganj Project

23 railway stations are currently being redeveloped/developed by the Ministry of Railways
through a Special Purpose Vehicle named as ‘Indian Railway Stations Development Corporation
Limited’ (“IRSDC”). IRSDC was established under the Companies Act, 1956, with equity
participation of Ircon International Limited (IRCON) and Rail Land Development Authority (RLDA)
for undertaking the Projects. The main objectives of IRSDC are-
 To develop or redevelop existing railway stations for upgradation of facilities and for
customers. This includes redeveloping of platform, station building, and area around the
station. The purpose is to provide a higher quality service to the customers.
 To take up projects for planning, designing, development, marketing, construction,
improvement, commissioning operation, maintenance, and financing of projects for
railway stations and railway infrastructure.
 To carry on Railway Infrastructure work including development of Railway stations on
Build-Operate-Transfer (BOT), Build-Own-Operate-Transfer (BOOT), Build-Lease-Transfer
(BLT) etc. or otherwise under any other scheme.

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IRSDC sought the participation of a private party for the redevelopment of Habibganj Railway
Station including the infrastructure space development, redevelopment and station
development redevelopment and station development, as required to be undertaken on Design,
Build, Finance, Operate and Transfer (the "DBFOT") basis.
The Habibganj Railway Station lays on the main Jhansi - Bhopal - Itarsi route line therefore the
trains for all the Major Destinations are easily available. Being located near to the B.H.E.L
Township, Arera Colony,Saket Nagar and a few other localities, it is always preferred by the
people of these areas to catch trains instead of going to Main Railway Station of Bhopal City. A
total of 9 trains originate from Habibganj and 43 trains pass from and stop at Habibganj station.
To incorporate the Habibganj Project, a Special Purpose Company named Bansal Pathways
Habibganj Private Limited was incorporated. The total development and redevelopment cost for
the project was INR 122.71 Crores.
The company also took up the construction of two shopping complexes, Budget Hotel, Luxury
Hotel, Convention Halls and Hospital under infrastructure space development project adjacent
to Habibganj Railway Station on the land provided by IRSDC with capital outlay of Rs.425.29
crores.
Total Area permitted for Infrastructure space development was 113 thousand sq. m. The overall
cost estimate for the Habibganj Project was INR 584 Crores. The project cost was funded through
a mix of Equity/preference share capital / unsecured loans Contribution, advances / deposits
from customers and Term Loan.

Development of Gandhinagar Railway Station

Another example of PPP based development project in Indian Railways is the Gandhinagar station
development project in Gujarat. The Project has already commenced on 9th January, 2017. The
total cost of the project is INR 243.5 Cr. Out of this, 87 Cr. is dedicated towards station
redevelopment and 113 Cr. is dedicated towards the commercial dev elopement.
For the redevelopment of the Gandhinagar Railway station, IRSDC along with the government of
Gujarat has created a special purpose vehicle. The equity contribution of IRSDC is 24% and that
of the Government of Gujarat is 76%. The Special Purpose Vehicle will be responsible for

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operation and maintenance of station, hotel and will have revenue streams from Mahatma
Mandir and Gandhi Kuteer as well.

Lucknow Charbagh Station Redevelopment Project

Lucknow is situated in the Awadh region, a popular region in history of India. The city is witnessing
an economic boom and is among one of the fastest growing cities of India. Lucknow is the Capital
of Uttar Pradesh (UP). UP is one of the most highly poplulated states in India. Located on the
banks of Ganga, it is both highly and densely populated. The city of Lucknow is around 500 KM
away from New Delhi, the Capital of India.
The station is located in Charbagh. Being located in the centre of the city, it is one of the most
densely populated areas in Lucknow. The area is well connected by road as well as the Lucknow
Metro and is located in close vicinity to prominent areas of the city. The location can also be
easily accessed from the Lucknow International Airport. The total area available for new
construction is more than 48 thousand square meters.

Demand Assessment at Charbagh

The heart of all commercial activity in Lucknow lies in CBD (Hazratganj) area. With improving
connectivity and relatively less rentals, this area is highly lucrative for business activity. Charbagh
area forms part of CBD of Lucknow City with maximum supply of retail and commercial office
space in CBD area. The area accommodates sporadic retail and residential plotted developments.
This area is also connected very well through road. Therefore, commercial cum retail
development may be a viable proposition for subject site provided it has direct access to
prominent locations accommodating government establishments and institutional areas.
The possible uses of the land are Retail, Commercial and construction of Hotels.

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Over the two years, the total cost of the project is INR 660 Cr.
Assumptions
Cash flows have been forecasted for 45 years, even though 90 year lease could have been
more viable for Indian Railways
The funding required for railway station redevelopment and vacant land development must
be arranged for the two years 2019-20 and 2020-21, via sale of land pockets, not adjoining
Charbagh station
Half of the vacant railway land of approximately 12 acres, i.e. 6 acres is developed under the
project
1 acre = 43,560 sq. ft. Hence, 6 acres = 5,24,730 sq. ft
The sub-division of total built-up area into commercial and retail development is 48:52
respectively
The cost of construction for commercial, retail and basement space for 2019-20 is Rs.
2000/sq.ft, Rs. 2400/sq.ft and Rs. 1250/sq.ft respectively (including on-site development
costs)
All costs of construction on vacant land have been distributed equally across two years,
2019-20 and 2020-21
Inflation in cost of construction @ 5% p.a.
Contingency allowance @ 5% of construction cost incorporates miscellaneous expenses
EPC fee of 5% is charged by the contractor on the contract value of railway station
redevelopment and development of vacant land
An upside of 25% has been factored in the original redevelopment cost of Charbagh station
of Rs. 400 cr to cater to cost escalation due to delay. Also, comparable cost of Gomti Nagar
station is Rs. 492 cr
The breakup of the redevelopment work is 50% and 50% for 2019-20 and 2020-21
respectively
Agency fees assumed @ 7% of redevelopment cost of Charbagh station and 2% of lease
revenues
Agency fees on redevelopment cost is paid over 2 years (2019-20 and 2020-21) whereas the
same on lease revenues is paid over 45 years

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Percentage increase in rent year-on-year assumed @ 6%
There would be moratorium on principal repayment for 2019-20 and 2020-21
Since we are using FCFE method for valuing, Cost of equity is the same as WACC
Deal Structure

A MoU between Rail Land Development Authority (RLDA) and NBCC India Ltd. has been signed for the
development of Charbagh Railway station in Lucknow
As per the MoU, RLDA and NBCC will form a Special Purpose Vehicle at the national level as a
Joint Venture. The SPV in turn will enter into City Support Agreements and coordinate with the
Smart City SPVs of respective cities. This will help in aligning the redevelopment of stations and
commercial development on Railway land with the Smart City Plans of respective cities.
RLDA will lease out the land to the SPV created at a nominal token cost for development. Lease
period of up to 45 years would be provided to the SPV and NBCC will execute the project work
on behalf of the SPV as Project Management Consultant. Earnings received from the commercial
development of the land parcels will be directed towards the redevelopment of the stations for
creating better passenger amenities and necessary infrastructure. The surplus earnings will be
given to RLDA which in turn would be remitted to Zonal railways.
Project completion period has been taken as three years from the date of availability of free site
or award of works to construction agency, whichever is later.
SPV will be responsible for the upkeep and maintenance of the stations and the commercial
property. Non-fare revenues generated from the Railway station will be passed on to SPV to meet
expenditure of the redeveloped stations.

NBCC will inject an initial investment of up to 5% of project cost and will charge an interest at the
rate not exceeding 12% per year. NBCC will charge 4% of project cost as PMC charges, 3% of cost
for preparing Detailed Project Reports and 2% of lease revenue for marketing and other services.
Since the railway redevelopment project is a self-financing one, the remaining 95% of the costs
will be received through equity infused by RLDC using its own funds. However, since the cash
reserves are low for RLDC, this 95% would be provided from the proceeds of selling the land
owned by RLDC in Lucknow region. In this manner, the model is self-financing through land

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monetization. This will help the SPV in its debt free growth. RLDA will be responsible for
appointing the Chairman of the SPV while NBCC will be selecting the Chief Executive Officer.

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Financial Projections

 SPV

 NBCC
From NBCC point of view this project looks feasible for a 45 period land lease as the NPV
calculated is INR 29.4 crores

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  RLDC

For a 45 year lease period and the assumptions taken, the project doesn’t look viable for RLDC
as the NPV comes out to be negative. However, if the lease period is increased to 90 years,
the financials may improve for RLDC

Risk faced by the project

 Pre -completion Risk
 Timing and Delay risk- There can be delay in redevelopment of Lucknow Station
because of the ineffectiveness of the EPC contractor. This risk will be borne by SPV
and time buffer will be kept to mitigate this delay in construction.
 Force Majeure- This is the risk which is not under any body control which is borne
by insurance companies.
 Environmental Risk- Project may fail to comply with national environmental
regulations so in order to mitigate this government would have to give clearances
to EPC.
 Post Completion Risk
 Market Risk (Quality): The project may face traffic risk if the demand for amenities
at the Station falls. So, keeping this in mind only half the land is developed keeping
in mind demand supply scenario.
 Market Risk (lease): The project may face a risk that vacant land may not be able
lease which may affect the cash flows.

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  Inflation Risk: Higher inflation can increase the cost of the project resulting in
lower revenues for Railways. So, this risk is already incorporated in the revenues
and cost.

Term Sheet
Borrower: SPV, owned by Indian Railways
Use of Proceeds: Redevelopment of Charbagh Railway Station and construction on the
surrounding areas
Project Cost: Rs. 660 Cr.
Debt Contribution: 0%
Equity Contribution: 5% (preferred equity) by NBCC and 95% equity by RLDC
Agency Cost: NBCC takes 7% on railway redevelopment and 2% on lease revenues
Interest Rate: 12% on 5% NBCC preferred equity
Distributions of Operating Cash Flows: The cash flows will be taken by RLDC after payment of
dividend Preference Shares as they have an equity stake and it will be given to Indian Railways.
Conditions Precedent:
NBCC should have full authority to market the plots adjoining railway station to the prospective
clients
NBCC should submit construction status reports to clients and take up completion risk (to ensure
completion of construction in stipulated time)

References
1. https://economictimes.indiatimes.com/industry/transportation/railways/2020-deadline-to-
redevelop-10-railway-stations-with-airport-like-amenities/articleshow/61620486.cms
2. https://economictimes.indiatimes.com/industry/transportation/railways/indian-railways-to-
revamp-68-major-stations-on-its-own-under-epc-model/articleshow/63423034.cms
3. https://www.livemint.com/Politics/B2Zeo4pq5E3XANlJJHskiK/NBCC-expects-5000-crore-
revenue-from-redevelopment-of-rai.html
4. https://timesofindia.indiatimes.com/city/lucknow/grand-revamp-plan-chugs-in-for-charbagh-
rly-station/articleshow/65959505.cms
5. https://www.thestatesman.com/india/railways-proposing-change-ppp-model-redeveloping-
stations-1502642336.html
6. https://economictimes.indiatimes.com/news/economy/policy/irfc-in-talks-with-government-
for-sovereign-guarantee-to-bonds/articleshow/63456418.cms

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7. https://indianexpress.com/article/india/railways-to-look-for-innovative-ways-to-finance-future-
projects-4688094/
8. http://blogs.worldbank.org/ppps/innovative-financing-case-india-infrastructure-finance-
company
9. http://pib.nic.in/newsite/PrintRelease.aspx?relid=167045
10. https://www.irastimes.org/Article_pdf/Presentation%20on%20RLDA.pdf
11. http://rlda.indianrailways.gov.in/works/uploads/File/faq.pdf

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