Project on Railway

8/9/2019 Project on Railway

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A REPORT

ON

PUBLIC PRIVATE PARTNERSHIP

IN THE RAILWAY SECTOR

BY:-

DEBMALYA BANERJEE (ISB/09/KOL/124)

ARNAB DAS (ISB/09/KOL/117)

AVI GHOSH (*) (ISB/09/KOL/120)

DIPANKAR PAUL - (ISB/09/KOL/126)

MILTON BANERJEE - (ISB/09/KOL/134)

And

ARPAN KUMAR BANERJEE (ISB/09/KOL/118)

This Report is submitted as partial fullfilment of the requirement of PGDM

programme of ISB-K

INTERNATONAL SCHOOL OF BUSINESS KOLKATA

INDISMART TOWER

EN-34, SALTLAKE CITY, SECTOR-V

KOLKATA- 700091

DATE: - 6TH August, 2010

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SL.NO. TABLE OF CONTENTS Pg.No.

1 INTRODUCTION

2 BACKGROUND 4-5

3 UNDERSTANDING PPP 5

4 STRENGTH OF PPP 5-6

5 WEAKNESS OF PPP 6-7

6 PPP IN INDIA 8

7 STRUCTURE AND ROLE OF PPP 9

8 OBJECTIVES 10

9 SECTOR ANALYSIS 11-18

10 REALITY BITES 19-22

11 BIBLIOGRAPHY 23

SL.NO. LIST OF ILLUSTRATION Pg.No.

1. STRUCTURE AND ROLE OF PPP 9

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2. STRUCTURE AND ROLE OF PPP 9

3. GROWTH TRAFFIC PROJECTION 13

4. DEMAND CURVE 14

5. GROWTH IN INFRASTRUCTURE 15

6. GROWTH IN PARCEL BUSINESS 16

7. EARNINGS OF RAILWAY IN DIFFERENT YEAR 17

8. REVENUE GENERATED 17

INTRODUCTION: -

Background: - Facts in Brief

The Indian Railways operates the worlds second largest rail network under a singlemanagement. Indian railways (IR) started its 53 km journey between Mumbai and Thane on

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April 16, 1853 and is today one of the largest Railways in the world. The railway network

invariably referred to as the lifeline of the Indian economy. is spread over 109,221 Km.

covering 6906 stations. Operating on three gauges, trains in India carry over 481 Billion Tonne

Kilometres (BTKMs) and 695 Billion Passenger Kilometres (BPKMs) of goods and passenger

traffic respectively every year. IR carries around 40% of freight traffic and 20% of the

passenger traffic in the country. It has an established route length of 62,759 km divided into

three gauges broad, metre and narrow.The functions of the Indian Railways can be divided

into core and non-core activities.The core activities comprise transportation of freight and

passengers (running of trains and owning of assets) and non-core activities comprises catering,

running schools and colleges for the children of the railway staff, medical healthcare facilities

for the railway staff, production units and workshops, protection force for the safety of railway

assets, maintenance of an exclusive telecommunications network etc.There has been a historic

turnaround in the financial situation of the Railways. The IR was in the midst of an impending

financial breakdown in 2001. The fund balances have grown to over Rs 12,000 crore in 2005-06

and internal generation, before dividend, has also reached a historic level of Rs 12,000 crore.

This is the same Indian Railways which in 2001 had deferred dividend payment, whose fund

balances had reduced to just Rs.149 crore (in 1990-2000) and which had been written off as a

bankrupt department.Indian Railways is today the second largest profit making Public Sector

Undertaking after ONGC. It achieved an operating ratio of 78.7% in 2006-07 which is

comparable to that achieved by the North American Class I railroads. IR is one of the premier

infrastructural wings of the economy combining all major functions of a conventional Railway

system. It builds and maintains infrastructure assets like Track, Electric traction, Signalling

Systems, Telecom network, Stations / Terminals etc. Apart from operating goods and passenger

trains, it operates suburban trains in various metros. It manufactures locomotives, coaching

stock, wagon and components of rolling stock like Wheel & Axle. It runs workshops to

maintain its rolling stock & is also involved in ancillary activities like catering, tourism etc. All

the above activities are managed through a strong work force of 1.41 million. The total planned

investment for the eight-year time frame (2007-2015) is tentatively in the order of Rs.3,50,000

crore. This confidence is not only due to the phenomenal improvement in the performance, but

also due to the significant growth in the last two years. IR is a department of the Government

and the Ministry of Railways functions under the guidelines of the Railways Minister assisted

by Minster of State for Railways. Indian Railways is administered by the Railway Board, which

has six members and a chairman. The Railways have been described as the lifeline of thenation, operating approximately 12,000 trains a day (of which 11,000 are passenger trains).It

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demand for rail based transport in suburban rails systems, connectivity to ports, and

capacity addition to some routessome crucial routes

substantial reduction in o&m costs and higher efficiency in railway projectsrailway

projects Increased viability due to spreading & sharing business risksrisks

Rail Connectivity to SEZ

Logistics Hubs

Financing of remote area projects

Warehousing

ROB

Rail Connectivity to Minor Ports

Weakness of PPP: -

Promotion of PPP is therefore necessary since its the most preferred mode. Despite of its

benefits, there are some constraints too which can be summarized as:

Sufficient instruments as well as the ability to undertake long-term equity cannot beprovided by the market in the present financial scenario. Also financial liability required

by infrastructure projects would not be sufficed.

Most sectors face a lot of hindrance in enabling a regulatory framework as well as a

consolidated policy. So its important to convert such policies into PPP friendly. To

achieve the desires results, active participation of various state projects are essential.

Lack of ability of private sectors to fit into the risk of investing in diversified projects

also needs to be overcome. Modernization of new airports, transmission systems and

building power generating plants are some of the avenues which required skilled

manpower.

Ability of public institutions to manage the PPP process should also be subdued.

Maximizing the return of the stakeholders needs to be managed due to the involvement

of long term deals including the life cycle of the asset infrastructure.

Lack of credibility of bankable infrastructure projects used for financing the private

sector should also be overcome. Inconsistency is still visible in the limitations of PPP

projects, despite of continued initiatives by States and Central ministries.

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Inadequate support to enable greater acceptance of PPPs by the stakeholders forms

another source of constraint.

Massive Capacity Augmentation ahead of Demand

Resource Mobilization

Induction of appropriate technologies in Rolling Stock

Reducing Unit Cost of Operation

Need for a focused policy & approach for implementation of PPP models in dev.

of railways infrastructure

Provide for proper political will & climate

Avoid creation of private monopolies as an alternative to public monopolies

Ensure private sector participation in formulation of policy & regulations

Focus primarily of quality and return to government vs. increased

cost/concession due to reduced competition

A common problem with PPP projects is that private investors obtained a rate of

return that was higher than the governmentsbond rate, even though most or all of the

income risk associated with the project was borne by the public sector.

It is certainly the case that government debt is cheaper than the debt provided to

finance PFI projects, and cheaper still than the overall cost of finance for PFI projects,

i.e. the weighted average cost of capital (WACC). This is of course to attempt to

compare incompatible and incomplete economic circumstances.

It ignores the position of taxpayers who play the role of equity in this financing

structure.

The development of formal procedures for the assessment of PPPs in which the

central focus was on "value for money" rather than reductions in debt. The underlying

framework was one in which value for money was achieved by an appropriate allocation

of risk.

Several initiatives have been undertaken by Government of India to enable a greater PPP

framework in order to eradicate the above mentioned constraints. Various foreign as well as

private investments by waving off charges are encouraged.

PPP in India:-

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http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bond_(finance)


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Development of PPPs in India:-

Despite its status as the worlds fourth largest (and second fastest growing) economy, India

continues to experience significant gaps in the supply of essential social and economicinfrastructure and services. Water, power, roads, and ports are all in urgent need of additional

supply and upgrade. In fact, what we might refer to as the infrastructure deficit is widely

regarded as a major constraint in Indias attempts to sustain, deepen, and expand its economic

growth and competitiveness.Recent estimates suggest that the lack of quality infrastructure is

retarding Indias GDP growth by 1% and 2% each year.Moreover, the deficit in infrastructural

development is preventing the sectoral, regional, and broader socio-economic strengthening of

the economy. It is slowing the growth not only in the knowledge intensive, high-tech sectors but

also (and perhaps of greater import) in the manufacturing and agriculture sectors both sources

of jobs for the low-skilled. For example, rural roads, power grids, irrigation networks and

national highways all have the potential to link poor rural producers to markets in towns, cities,

and ports. An improved infrastructure is thus a necessary condition for both growth andpoverty

alleviation. It is no coincidence, then, that more than twothirds of the Asian Development

Banks 2006-08 assistance programmes for India, oriented to poverty reduction, is now focused

on infrastructural development.

WHY PUBLIC-PRIVATE PARTERSHIP IN INDIA?

The scope for making improvements on the scale suggested above is fundamentally constrained

by the state of public finances. The combined deficit of the central and state governments is

roughly 10% of GDP. Government borrowing has been capped through the Fiscal

Responsibility and Budgetary Management Act. This necessarily limits state participation in

infrastructure financing, opening the door to innovative approaches such as PPPs. Government

preserves its basic role, but it is one that shifts from provider and manager to that of enabler and

regulator of basic services. To that end, the Government of India has been encouraging private

sector investment and participation in all infrastructure sectors. As the National Development

Council has made clear: Increased private participation has now become a necessity to

mobilise the resources needed for infrastructure expansion and upgrading.

Structure and Role of PPP:-

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This chapter discusses the main PPP options available for consideration. Each presents different

characteristics to be assessed against the sector reform objectives. The basic PPP contract types

are:

Service contracts

Management contracts

Affermage or lease contracts

Build-operate-transfer (BOT) and similar arrangements

Concessions

Joint ventures.

Fig: - 1

Fig: - 2

Objectives:-

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Current Contribution to GDP is 1.2 %. Vision to take it to 3 %

Potential Growth of Rs.270000 crore.

Current lines - 64,099 kms. Planned increase of lines by 25000 kms.

More than 30,000 kms would be double/multiple lines

Maximum speed of train to be raised from 110-130 to 160-200 kmph

33000 kms to be electrified

Increase in Production Passenger coaches from 2500 per annum to 5000 per annum by

next 3 years.

High Speed rail projects to provide bullet services at 250-350 kms

Increasing freight share to 50 % from 35 %

Collaboration with premier institutes to achieve technological excellence

Projected Growth in Passenger Traffic is 8200 million by 2011-12.

Vision Statistics

SECTOR ANALYSIS:-

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Indian Railways has one of the largest and busiest rail networks in the world,

transporting 20 million passengers and more than 2 million tonnes of freight daily.

Railways were first introduced to India in 1853.

In 1951 the systems were nationalised as one unit, becoming one of the largest networks

in the world.

It is one of the world's largest commercial or utility employers, with more than

1.6 million employees.

The railways traverse the length and breadth of the country, covering 6,909 stations over

a total route length of more than 63,327 kilometres.

IR operates both long distance and suburban rail systems on a multi-gauge network of

broad, metre and narrow gauges. It also owns locomotive and coach production

facilities.

According to 2007-2008 figures, the contribution of service sector in the Indian GDP is

54 % and Transport sectors contribution to Indias GDP is approximately 7%.

Indian Railways has divided itself into 16 different zones for operation across the

country.

Indian Railways per se is considered to be a monopolistic market since it doesnt face

any direct competition though other modes of transport such as Airways compete

indirectly.

Growth Traffic

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Growth Traffic Projection

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Fig: - 3

2004 2005 2006 2007 2008 2009 2010 2011 2012

Freight In

Millions Tonnes602.12 666.51 727.75 793.89 833.31 902.4747 977.3801 1058.503 1146.358

Passengers in 10

million 547.55 583.239 633.373 664.5 704.691 748.8047 795.6798 845.4894 898.417

Demand Curve

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Fig: - 4

Growth in Infrastructure

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Fig: - 5

Growth in Rolling Stock

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Growth in Parcel Business

Fig: - 6

Earnings of Railway in Different Year

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Fig: - 7

Revenue Generated

Fig: - 8

Snippet of Budget 2010-11

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Revenue from non-core business of Railways to go up from Rs 150 crore to Rs 1,000

crore. Indian Railways has set a target to transport 944 million tons of goods in the year

beginning April 1.

Railways expect to increase earnings from non core activities. The government aims to

increase non core earnings to Rs10 billion rupees from Rs1.5 billion.

Railways expect to increase earnings from non core activities. The government aims to

increase non core earnings to Rs10 billion rupees from Rs1.5 billion.

Despite slowdown, Railways to exceed freight loading target by eight million tonnes

during 2009-10. Freight loading target for 2010-11 fixed at 944 million tonnes, 54

million tonnes more than the current year's revised target. Gross traffic receipt for 2010-

11 pegged at Rs94, 765 crore.

Indian Railways plans to keep rail freight rates unchanged

Railways to set up mobile e-ticketing centres at hospitals, universities, courts, IITs,

IIMs, district headquarters and village panchayats. All 13,000 unmanned level crossings

to be manned in the next five years.

Railways to enhance contribution to central staff benefit fund. Centre for Railway

Research to be set up at IIT-Kharagpur. Chittaranjan Locomotive Works capacity to be

augmented from 200 to 275 engines a year

0.2 Billion ($1.97 billion) from the market in 2010-11.

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Reality Bites: -

1) PIPVAV RAILWAY CORPORATION LIMITED (PRCL)

While Konkan Railway Corporation was the first public - public partnership project,

Pipavav Railway Corporation Ltd. also nicknamed PRCL was the first special purpose

vehicle under public - private partnership. PRCL was constituted to provide B.G. rail

link to Port of Pipavav in the State of Gujarat. The SPV was to undertake execution of

gauge conversion and new line extension from Surendranagar - Rajula City - Pipavav

Port (270 kms.). While the gauge conversion project was already sanctioned, the work

was moving very slowly due to paucity of funds. Since Gujarat Pipavav Port Ltd.

(GPPL) wanted an urgent connectivity to the port, they approached Railway Ministry

for a joint venture with 50:50 partnerships. Both the partners to SPV i.e. Ministry of

Railways and GPPL contributed Rs. 100 crores each towards equity and balance Rs.173

crores was raised by PRCL through a non-recourse debt. The SPV not only constructed

the line but was given mandate to operate and maintain the line like a Non-GovernmentRailway for the concession period of 33 years. While the Port guaranteed minimum.

aggregate quantity of traffic, Railways also committed sufficient number of rakes for

cargo evacuation from the port. The initiative of this SPV resulted in advantages to both

Railways and GPPL such as:

FOR RAILWAYS

Implementation of uni-gauge project of sanctioned work through PPP. Railways saved

capital expenditure of Rs.233 crores (Project cost of Rs.333 crores less equity

participation by Railways Rs.100 crores).Project completed within 18 months as against

anticipated completion of similar project of 6 - 7 years due to paucity of funds.Saving on

cost of staff as against 1900 existing staff, SPV deployed only 667 staff for O & M.With

full marketing efforts of GPPL, IR got incremental inward and outward traffic.The

annual losses of Rs.22 crores per annum for operating the erstwhile uneconomic branch

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line were fully wiped off.Railways earned from passenger services on this section

without passing on any share to GPPL.

FOR GPPL

The port connectivity through Rail provided another cost effective transportation

option.PRCL became the catalyst for growth of the port with containerization as a major

activity.GPPL may, in the long run; with substantial container traffic at its command

begin CONCOR like operations.As regards the risk profile of the SPV, there was hardly

any construction risk as Western Railway did work at its own pre-estimated cost. The

project company was guaranteed 1 million tonne from first year, 2 million tonne from

second year and 3 million tonne from their year of operation onwards. PRCL procured

all material required for construction and handed it over to Western Railway and the

Railway is carrying out O & M of this line at mutually agreed cost on fully recoverable

basis. Thus the project line became fully dependent on the port for freight traffic. While

MOR regulates tariff fixing, the same is collected by Railways and apportioned to the

project company on standard apportionment rules.

SUCCESS/ FAILURES

While the project was completed and commissioned in time, the port development got

delayed by almost three years with the result that committed minimum traffic could not

be achieved. During the first year, company could generate less than half a million tonne

and it almost doubled in the second year to 1 million tonne. Against Rs.22 crores

required for debt servicing and Rs.12 crores for O & M, Project Company could

generate Rs.5 crores in the first year and Rs.9 crores in the second year. Company

defaulted on its debt servicing due from April, 2005. Traffic guarantee of GPPL was not

encashed by the Railways due to future potential of traffic expected after

modernization.

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LESSONS LEARNT FROM PRCL EXPERIENCE

For port linking project, there is a need to coordinate port development with the rail link.Debt servicing of almost Rs. 29 crores by PRCL in the very first year was over

ambitious. There is thus a need to provide a minimum gestation period of four to five

years without any debt servicing liability, for such developing projects. Alternately a

ballooning of repayments should be considered.

2) RAIL VIKAS NIGAM LIMITED (RVNL)

With a view to cope with the increasing demand of traffic, the Government of India

framed and approved National Rail Vikas Yojana (NRVY) on 15th August, 2002 with

an estimated investment of Rs.15, 000 crores. The investment was proposed for Port

connectivity works and improvement of the Golden Quadrilateral (GQ) for meeting

future transportation needs. For this purpose, Ministry of Railways created a Special

Purpose Vehicle (SPV), the Rail Vikas Nigam Limited (RVNL) to undertake project

development, mobilization of financial resources and implementation of selected

Railway Projects on fast track basis.RVNLs vision has been to make Indian Railway

network free of capacity constraints and to generate transport capacity ahead of demand.

RVNL has an Authorised capital of Rs.3, 000 crores and paid up capital of Rs.950

crores. The broad identification of financial models for implementing the projects are as

follows:-

For the Golden Quadrilateral project, out of required investment of approx. Rs.8,000 crores,

Government of India will provide budgetary support of Rs.1,500 crores, another Rs.1,500 crores

through Railway Sector loan from ADB and balance Rs.5,000 crores to be mobilized from the

market. Port connectivity projects are being implemented in PPP format by setting up of

project specific SPVs in which RVNL will hold a minimum of 26% of the equity. The

financial resources from the market are planned by implementing the projects through

Build, Own, Transfer (BOT) route, which means that the entire capital expenditure on

the project would be arranged by the BOT concessionaire. The Company is also

planning to have rail linkages to private ports on the lines of Kutch Railway Company

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Ltd with entire capital investment made by the Ports. Some of project specific SPVs for

which Memorandum of Understanding (MOUs) have been executed with the strategic

partners are listed below:-

Surat - Hazira New Line (RVNL, Government of Gujarat, Hazira Port Pvt. Ltd. & Essar

Steel Limited).

Bharuch - Dahej Gauge Conversion Project (RVNL, Government of Gujarat, Gujarat

Adani Port Ltd., Welspun Ltd.)

Bhildi - Samadari Gauge Conversion (RVNL, Government of Gujarat, Gujarat Adani

Port Ltd., Kandla Port Trust)

Haridaspur - Paradip New Line (RVNL, Government of Orissa, Paradip Port, Jindal

Steel & Power, ESSEL Mining Industries & Rungta Mines Ltd.)

RVNL is presently having 55 projects broadly classified under two heads as under:

Strengthening of Golden Quadrilateral and Diagonals - 29 projects

Provision of Port connectivity and corridors to hinterland - 26 projects

The locations of these projects have been distributed throughout the country and hence

RVNL has established Project Implementation Units (PIUs) in various state capitals /

important cities viz. Secunderabad, Bhubaneswar, Bilaspur, Bhopal and Jaipur.

During the financial year, 74.28 Km of Doubling, 103 Km of Gauge Conversion & 53

Km of Railway Electrification, have been completed. RVNL has till now completed 155

Kms. of new lines, 898 Kms. of gauge conversion 350 Kms. of doubling and

1007NKms. of Railway Electrification, Thus as on 31.03.08, approx 36% of the total

length (6686 km) of 55 projects assigned to RVNL, have been completed.

The status of 55 projects is as under:

Projects completed upto March 31, 2008 -- 16

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Projects under implementation -- 31

Projects under sanction -- 8

WORKING:

RVNL had a paid up equity capital of Rs 2015 crores and Net Worth of Rs 2119 crores

as on March 31, 2008. The entire equity is held by GOI. It earned EBIDT of Rs 47

crores and PBT of Rs 34 crores for FY -08. It paid a nominal dividend in FY -08

SUCCESS/ FAILURE:

One conclusion that can be drawn is that the system of umbrella SPV is an efficient and

faster mode of executing PPP projects in the context of IR.

BIBLIOGRAPHY: -

www.pppinindia.com

www.irfca.org

www.hammurabisolomon.in

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http://www.pppinindia.com/http://www.irfca.org/http://www.pppinindia.com/http://www.irfca.org/

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