Railways focus on reviving PPP augurs well for increasing capex, adequate risk-reward balancing is important: ICRA

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New Delhi, 25 Mar 2021: The Indian Railways is set for a major capex programme and has formulated a long-term plan document called National Rail Plan (NRP). The NRP target is to increase railway’s freight share to 45% by way of developing/augmenting rail infrastructure capacity along with other strategies. For this, infrastructure development pace has to improve as well as become more efficient; and increasing private sector participation can help in this aspect.

 

Indian Railways has three key areas of capex – track infrastructure, terminal infrastructure, and rolling stocks.  Track infrastructure comprises of Dedicated Freight Corridors (DFC), high speed rail (HSR), besides the regular core track infrastructure development like doubling, signalling, electrification works, along with construction of flyover and bypasses, terminal infrastructure (like private freight terminals, passenger railway stations, etc.) and rolling stock (wagons, coaches, and locomotives). In total, investment of Rs. 38.2 lakh crore is envisaged for the Indian Railways by 2051 under the NRP.

 

Indian Railways has three key funding sources – Gross Budgetary Support (GBS or Budgetary allocations provided by the Central Government), internal accruals from operations, and extra-budgetary resources (comprising bank borrowings, institutional financing, and public private partnerships, joint ventures, etc). Railways have been looking to attract private investment towards infrastructure development. In the past, it had formulated various public private partnership (PPP) models for rail connectivity projects, though, it achieved some success. About 3,000 km of track infrastructure, with a project cost of Rs. 41,695 crore, has been created using PPPs. However, the PPPs in rail infrastructure have been mostly in the port or mine connectivity projects.

 

According to Mr. Shubham Jain, Senior Vice-President and Group-Head, Corporate Ratings, ICRA, Given the increased funding requirements, besides higher GBS, other avenues like JVs with the state government, sourcing funds from multilateral financing institutions, and attracting private sector investment will be important. Railways is also exploring various modes of PPP including for creation of infrastructure, operations and maintenance, monetisation of operating assets, etc. If appropriate risk-reward balancing is done in these projects, private sector participation can help increase funding options.

 

One key infrastructure area where PPP can increase considerably is the redevelopment of railway stations. There are over 8000 passenger railway stations with almost all of these owned and operated by Indian Railways. Railways have explored the PPP route for redevelopment of some key stations in the past however only one project (Habibganj in Bhopal) could be awarded on the PPP mode. Subsequently, participation from private players for these projects was muted.

 

However, recently, certain modifications were undertaken in the PPP model to make it more attractive for private sector participation. The key changes include an additional revenue stream in the form of user fees, besides increasing the lease period for commercial/residential real estate development. With these changes, it is expected that private player’s interest in such projects will increase. Recently bids were invited for the New Delhi Railway Station redevelopment project and the participation in first round was healthy. Besides the improved PPP model, the high footfalls and premium location of this railway station is also a reason for better participation. Nevertheless, if successful, this could pave the way for faster pace of station redevelopment.

 

“Overall, the IR is looking at various modes of PPP model for attracting private sector participation in various railway infrastructure projects. If adequate risk-reward balancing is achieved, the PPP in railways could achieve significant success and help IR improve the pace of infrastructure development,” added Mr. Jain.