PUBLIC PRIVATE PARTNERSHIP IN RAILWAYS

Public-Private Partnership in Railways
Public-Private Partnership in Railways: A New Approach:
The existing literature on public private partnership (PPP) is largely project-centric and deals mainly with non-railway transport infrastructure. The railway is different from other modes of transport because of the strong interrelationship that exists between railway projects and the existing network/system in matters of operation, maintenance, etc and not much PPP literature exists in this area. The current approach to private participation in railways is a reform oriented policy approach that dwells on restructuring, privatizing, licensing, unbundling and deregulating the existing set up. This could be termed as a top-down approach. In contrast, the evolution of private partnership in the Indian Railways (IR) is a bottom-up phenomenon – incremental, multidimensional and without any change in the existing set up. A different framework is required to capture this evolution.
This paper is based on research carried out on the Indian Railways, in which seven railway companies were studied. These companies either came into being as part of private partnerships or used varied forms of private partnerships. The views of thirty key people associated with such partnerships were collected through interviews. PPP in IR has evolved over the last two decades in response to a strong need for increasing investment, prioritising projects, allocating dedicated funds, and reducing losses in peripheral services. An alternative two-dimensional three level framework for PPP in the railways has been developed, which not only captures private partnership in IR but also facilitates the development of strategies and vision for the future. The framework may help in laying down future goals for encouraging PPP at three levels – project level, organisation level and sector level – and shows interlinkages among the three for achieving the goals. It also represents an alternative approach to railway privatization with better social and political acceptance, which will encounter less resistance to change within the government organisation. (Volume 20, Number 1 Article by Anil Kumar Gupta & Shyamal Roy March, 2008) Courtesy: IIM Bangalore website.

The Railway Minister Lalu Prasad has given a hint to open Indian railway for Private companies in the name of Public Private Partnership (PPP). He was delivering his speech at the Conference on Public Private Partnership (PPP) I n Indian Railways. The FICCI had organized the conference. He disclosed the truth from the same podium that he did not ever want the post of Railway Ministry. He was asking for some other ministry. He encouraged the industry people to invest through PPP in Indian Railways. He said that Private sectors might help for modernization of railway stations to excellent standards. Indian Railway is planning to set up agricultural outlets on 7,000 railway stations across the country and the minister asked for private sector to join hands with Indian Railways.
The other areas where PPP might work are construction of sidings and logistic parks, wagon manufacturing, port-connectivity through railways, and constructing the Freight Corridor. It will help railway to stay with the need of modern India that is showing more hunger for development.
The Indian Railways are prima facie encouraging Public-Private Partnership in the capacity enhancing and modernizing exercise. Projects through the PPP model have been started in a few sectors and envisaged in few other areas. This paper is an attempt to assess the degree to which PPP has penetrated the Indian Railways.
The Indian Railways operates the world’s second largest rail network under a single management. 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.

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.
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 Railway Act: The Indian Railways Act stipulates that no private sector participation can be invited in the operations of the trains. Hence, the same is not open to the private sector.
Model Concession Agreemen:The detailed modalities of the contract between the private player and the Government are specified in the document called Model Concession Agreement (MCA). This document plays a pivotal role in the implementation of the project. It clearly delineates the risks to be shared by the private player and the government and spells out the formula of sharing of the revenue among other important details. .
Types of PPP
PPP Model can be adopted through various ways. Maintenance Management Contract, Turnkey, Operate and management, ROT and BOT are few ways in which PPP can be adopted. BOT is the most preferred model for PPP in IR.
Viability Gap Funding
The money given by the government to the private player to make the project viable is called Viability Gap Funding. Support under this scheme would be available only for infrastructure projects where private sector sponsors are selected through a process of competitive bidding by offering grant assistance of up to 20% of the project costs, the Government will be able to use its scarce budgetary resources to leverage a much larger pool of private capital.
The Government of India has decided to put into effect the following scheme for providing financial support to bridge the viability gap of infrastructure projects undertaken through Public Private Partnerships.
Firstly, where the Government of India recognizes that there is significant deficit in the availability of physical infrastructure across different sectors and that this is hindering economic development
Secondly, where the development of infrastructure requires large investments that cannot be undertaken out of public financing alone, and that in order to attract private capital as well as the techno-managerial efficiencies associated with it, the Government 4 Guidelines Financial Support to Public Private Partnerships in Infrastructure 2006 published by the Secretariat for the Committee on Infrastructure Planning Commission. Further information on the same can be accessed from this report is committed to promoting Public Private Partnerships (PPPs) in infrastructure development
Thirdly, where the Government of India recognizes that infrastructure projects may not always be financially viable because of long gestation periods and limited financial returns, and that financial viability of such projects can be improved through Government support.
Projects through the PPP Model
In the past Indian Railways had made several attempts to rope in private participation in areas such as catering, wagon ownership and leasing and joint ventures for rail infrastructure projects. These efforts were, however, limited in scale and scope. The current strategy is to leverage private capital through PPPs to the maximum extent in areas which are amenable to PPPs to improve efficiencies and control costs.
1. Operation of container trains and Construction of Private sidings, ICDs and rail side warehouses IR has awarded licenses for container operations to 14 private sector companies, thus, ending the monopoly of Container Corporation of India (CCI) in this area. Most of the current parties are likely to use the operations for their internal use but dedicated third-party container operation providers might also emerge later to compete directly with CCI. These companies are involved in every step of the container business, from booking of traffic to aggregating the goods to distributing them at the destination by arranging transport. These companies would also pump in 2,000 crore to overhaul the terminals and purchase wagons.

740 crore was taken from these 14 players in license fees. In addition, Ministry of Railways intends to partner with State Governments, private logistics operators and infrastructure providers to establish multi modal logistic parks equipped with rail sidings with sheds, large inland container depots, warehouses for storage, office buildings for logistics operators, highway connectivity, and smaller assembly units for processing imported raw materials for export. Such Parks could either 11 be built independently at strategic locations or could be built in a Special Economic Zones (SEZs).
2. Construction of Dedicated Freight Corridor (Delhi-Mumbai and Delhi- Howrah) with a large component of PPP
It has been planned to construct a new Dedicated Freight Corridor (DFC), initially covering about 2700 route kms equivalent to around 5000 track kilometers at an approximate cost of Rs.28000 crores (US$6 billion) linking the ports of western India and the ports and mines of Eastern India to Delhi and Punjab. It will ensure multi-modal logistic connectivity and will also significantly enhance railway freight capacity to handle the large volumes anticipated from the ports on the eastern and western coasts. The construction of this corridor will be implemented through an SPV being created for the purpose through a mix of Engineering Procurement and Construction (EPC) and PPP methods.
The proposed corporate entity would provide the rail infrastructure, but would not engage in freight business itself, thus providing nondiscriminatory track access on payment of haulage charges by train operators. This approach would herald large-scale private investment and competition in freight operations. This underlying separation of rail from wheels would also mark a paradigm shift in the functioning of Indian Railways. Ministry of Railways is in the process of selecting a global consultant to advise on the concession agreement, principles of track access charges and other financing and bidding issues. The concessionaire could also tap additional ancillary revenue streams through commercial exploitation of land, construction of freight terminal/logistic park/ICDs etc. Further, after firming up wagon designs for DFC, private investment for its manufacture would be encouraged. Four more Dedicated Freight Corridors are being planned for which feasibility studies are being awarded.
3. High Speed Corridors
Plans are also afoot to study the feasibility of high speed passenger rail link between major metropolises to improve connectivity and slash travel time for distances of 600-1000 km to within 2 ½ to 4 hours..
4. World Class Railway Stations, Passenger amenities and Commercial utilization of land Metro City Railway Stations like Delhi, Mumbai need to be modernized to provide world – class passenger amenities and services to the large multitude of passengers using these stations. IR is planning to do so by attracting private investments in the area by allowing the areas around the stations and the air space above platform to be commercially developed while operational/passenger – handling areas are separated from such commercial areas as in case of airports. The concessionaire would be expected to construct and maintain the operational and passenger areas free of cost, share the revenue earned from the real-estate created and hand over the same after the concession period. The pilot project for New Delhi Station is on the anvil. Altogether 19 stations have been identified at the first stage. These are CST Mumbai (Carnac Bunder), Pune, Howrah (Kolkata), Lucknow, New Delhi, Anand Vihar and Bijwasan at Delhi, Amritsar, Chandigarh, Varanasi, Chennai, Thiruvananthapuram, Secunderabad, Ahmedabad, Patna, Bhubaneshwar, Mathura Bangalore and Bhopal. Development of other stations green field passenger terminals would also be taken up in a similar manner.
Indian Railways has approximately 43,000 hectares of vacant land. These are mostly alongside track in longitudinal strips, around railway stations, and in railway colonies especially in metro and other important cities/ towns with potential of being used commercially to generate revenue as well as capital for modernization and capacity addition. An authority, namely, Rail Land Development Authority (RLDA) has been set up under the Railway (Amendment) Act 2005 to pursue, inter alia, the main objectives of generating revenue, up grading railway assets and providing world-class state-of–the art passenger facilities/services at stations.
5. Pipavav Railway Corporation Limited
A Special Purpose Vehicle named PRCL (Pipavav Railway Corporation Limited) which was formed with equal equity participation from Ministry of Railways and GPPL (Gujarat Pipavav Port Limited) for construction, Operations and Maintenance of Surendranagar-Pipavav Broad Gauge line, has implemented Surendranagar - Pipavav Gauge conversion/New Line project. The construction of this line has been completed and thrown open for Goods Traffic since March 2003. Earlier, connectivity of Mundra Port on the West Coast to the Broad Gauge network of Indian Railways was completed. Gandhidham – Palanpur gauge conversion is being implemented through involvement of Kandla and Mundra ports. Kutch railway Company, SPV formed with Kandla and Mundra ports, Government of Gujarat and RVNL are equity holders.
6. K-RIDE
A Joint Venture named K-RIDE (Rail Infrastructure Development (Karnataka) Limited has been formed jointly with the State Government of Karnataka for early completion of four identified projects in the State of Karnataka. K-RIDE will execute these projects through Project Specific SPVs.
First such SPV named HMRDC (Hassan - Mangalore Rail Development Co.) has been formed with equity participation from Ministry of Railways, Government of Karnataka and K-RIDE. Strategic partners and other financial institutions will also take part in the equity contribution. Besides, Government of Karnataka has agreed for funding of three rail projects by contributing two-thirds of the cost.
7. The Wagon Investment Scheme (WIS) with provisions for freight rebate and supply of guaranteed number of rakes over periods ranging from 7-15 years for various categories of wagons has been well received. The scheme would be reviewed on the basis of feed back of the subscribers and continued further.
8. Setting up of SPV for manufacturing of locomotives/coaches/wagons with sustained economic growth and the resultant demand for rail transport, the requirement of rolling stock has increased manifold. The requirement of coaches/Electrical Multiple Units is projected at 22689-vehicle unit for the XI Five Year Plan. The gap between the requirement and the combined capacity of the two Production Units at Integral Coach Factory, Perambur and Rail Coach Factory, Kapurthala (around 2500 per annum) is planned to be bridged by augmenting the existing capacity of these Production Units and setting up a new manufacturing unit through a JV under PPP.
Similarly, the requirement of Electric and Diesel Locomotives has been projected at 1800 each during the XI Five Year Plan i.e. 360 locos per year. The existing in – house capacity for the manufacture of these locomotives is presently 150 per annum and can be augmented to 200 locos each per annum for Electric and for Diesel. The gap between the requirement and capacity is planned to be bridged by setting up two locomotive manufacturing units one each for diesel and electric locomotives through PPP. Possibility of PPP through long- term demand guarantee to prospective manufacturers of modern wagons is also being explored.
9. Parcel Services
Round-trip leasing of parcel vans in important mail/express trains is already being carried out on Indian Railways. 100 parcel vans have already been leased. A more comprehensive policy to run Express Parcel trains has been finalized. Two privately operated parcel trains are already in operation.
10. Catering Services, Budget Hotels and Food Plazas
Indian Railway Catering and Tourism Corporation (IRCTC) has already been mandated to develop catering services, budget hotels and food plazas at major stations through involvement of private entrepreneurs. IRCTC intends to take up around a hundred such budget hotel projects in the next five years with public Private partnership. 20 such concessions have already been awarded. The hotel will be set up under the name of Rail Ratna in five cities - Chandigarh, Sealdah (West Bengal), Madurai (Tamil Nadu), Vijayawada and Secunderabad (Andhra Pradesh) in the first phase. The IRCTC land will be leased out to the hospitality sector on behalf of the railways and finalize the bids for 30 years to construct, operate and maintain the hotel as per the terms and conditions specified in the bid document.
IRCTC is also commissioning new Food Plazas in Railway premises with private participation. The license period for food plazas is of nine years with a provision of extension of three years. Already 40 such Food Plazas have been commissioned. IR is also in the process of carrying out an examination of the scope of need- based ‘base kitchens’ and ‘launderettes’ with public private partnership to strengthen the infrastructure for on -board services.
Call centres are also being planned under PPP by IRCTC to cater to the need for information dissemination to the railway customers.
Government Policy on PPP in Indian Railways
India needs investment in infrastructure to the tune of $456 billion at current prices (more than $80 billion in Railways) during the Eleventh five year plan (2007-2012) to keep pace with the economic growth its experiencing. It must be noted that in spite of such dire need of funds in IR and the limited nature of its surplus, the IR has followed an over-cautious approach in inviting private sector participation in Indian Railways.
The reasons for the same have been identified as follows:
1. There exists no clear roadmap for implementation of PPP in IR On interaction with the senior railway officials it can be easily drawn that the IR are being forced to look outwards for finance and techno-managerial skills. What we have is a list of projects that have been selected on urgency basis but without any sound official articulation or planning.
2. Political Climate: It is evident that in our country politics dominate the decisions relating to economic policies. In the words of a senior railway official in-charge of PPP, “We live in a political economy and hence political sensitivities of the times will have a bearing on the economic policies of the time. We don’t want to hit bigger roadblocks later on in future. We must not only be transparent but also be seen transparent. No blind privatization will take place and hence private sector participation will only be invited in areas which require immediate attention and that too where the private sector is capable of reducing costs and improving the quality of service.”
3. Enforceability of the Contract: A PPP can only be successful if the government can ensure discipline on part of the private player to enforce the contract and thus result in achieving the desired objective. A senior railway official reveals the true reason, “We lack prior experience in dealing with such complex situations and hence are going very slow as we don’t want any thing to go wrong.” It is clear that the IR does not possess the requisite managerial skills that the current complex business environment calls for.
4. Threat of Private monopolies: Another reason for the slow approach is the fear of emergence of private monopolies (in the place of state monopoly) in case right policies are not adopted. In the words of a senior railway official “The characteristics of the railways are such that private monopolies will mushroom in place of state monopoly in case the right policy is not adopted.”
6. PSU Mindset: Another fact accepted by the railways is that a change in the mindset of the people from top to bottom (from the gang man to the customer) in the organization is required for mainstreaming of the PPP model. To achieve this, dedicated PPP cells have been established in every state to identify the projects that can be implemented through PPP.
The private sector participation is not a gift without a curse. It comes with its own set of problems. It has historically been proved that inviting of private sector participation in case of a government monopoly has not always led to the private sector efficiencies and modernization. On the contrary it has led to monopolization in the hands of the private sector. Therefore it is of pivotal interest that whenever private sector participation is being talked about it should always be assumed to be inviting competition as well.
Conclusion
Non-critical areas in the Indian Railways should be identified and private sector participation should be allowed in the same. The Indian Railways should focus on the core activities of running and operating the trains. The prospects remain bleak for any major policy change due to an extremely weak record of enforcement of contracts in the long run.
Corporatization of Indian Railways is the best way to take the restructuring of the Indian Railways forward. The IR should also adopt General Accepted Accounting Principles (GAAP), the role of the Indian Railways Regulatory Authority should be strengthened and it should be allowed to decide the fares to be charged from the passengers with a provision for adequate compensation from the Union Budget for keeping fares cheaper to fulfil its objective of social welfare. Manufacturing of locomotives and wagons should also be through the PPP Model.