Evincing Interest

Focus on the PPP experience in railways

The Indian railway sector has seen an increase in private investment in the past few years, specifically in the form of public-private partnerships (PPPs). Overall, the PPP experience of different stakeholders in the sector has been largely positive, with support being extended by the central and state governments to projects.

Some of the successful operational PPP projects in the sector are the Kutch, Bharuch Dahej, Hassan-Mangalore, and Krishnapatnam port railway projects. Some of the key upcoming PPP projects are the Haridaspur-Paradip and Angul-Sukinda railway line projects in Odisha. Most of these projects have opted for the PPP mode of implementation owing to the large funding requirement. At the same time, the provision of land by Indian Railways (IR) has gone a long way in aiding the implementation of most of these projects.

Projects related to the creation of infrastructure for the passenger and freight segments, and those for capacity augmentation have proved to be highly amenable to PPPs. Developers do not feel any pressing need to opt for the engineering, procurement and construction or annuity model for these projects.

One of the key areas identified by players for the proper execution of PPP projects is ensuring that project documents, such as tender documents, are structured properly. Due emphasis needs to be laid on conducting stakeholder analysis and discussions to come up with a robust project bid document. For instance, the Madhepura project which involved the procurement of locomotives on a PPP basis, is being executed on the back of an efficient project bid. Meanwhile, a strong focus on outcomes, the ability to address failures and meet maintenance parameters can also assist in better project execution.

At the same time, procurement projects based on a PPP model have faced some implementation issues. For instance, as these are projects for procurement, advance payments are not made to contractors (unlike in the case of other PPP projects). However, if contractors are paid a part of the project implementation cost upfront, it could go a long way in reducing the cost of procurement for the railways. This is owing to the fact that the opportunity cost of capital tends to be higher for private players than for the government. Thus, it is imperative that even in procurement projects which are based on a PPP model, the early risk of the project is shared between all parties. Advance payments should be considered not just for ensuring the interest of the contractor but also as a method to share early project risks. This will ensure that projects are not merely output-driven but also outcome-driven.

On the other hand, the PPP experience of private container train operators has not been very promising. To encourage more investment by them, revenue and cost estimates of projects need to be more accurate. At the same time, it has been difficult to attract private players for undertaking new line works. Given that revenues from new lines depend on the entire network (which is built by other contractors), the revenue and commercial risks for the investor tend to be high. Further, new line projects often do not offer significant return on investments. Thus, private investors are more keen on opting for an annuity model rather than the PPP mode for implementing such projects. At the same time, IR too has been somewhat reluctant to bid out line maintenance projects on a PPP basis.

Another trend in the sector has been the fairly low private interest for the build-operate-transfer (BOT) model of project implementation. One of the main reasons for this has been IR’s weak regulatory and legal framework. To this end, the establishment of a railway regulatory authority may be beneficial for the sector. Meanwhile, IR has expressed its willingness to restart shelved BOT projects if private players come forward to take them up. IR is also considering opting for the Swiss Challenge method for bidding out BOT projects.

Going forward, IR is planning to take up PPP projects in new areas such as the operation of private trains, upgradation, operations and maintenance of brownfield freight terminals, and inter-line operations. While the Participative Policy, 2012, has made significant changes in the way PPP projects are implemented in the sector, the overall investor environment has to be made more robust to encourage private sector participation. The private sector should focus on bringing in greater efficiency by looking at the entire life cycle costs of projects and technological innovations. At the same time, IR has to aim to build the right sort of partnerships. While the attitude change required on the part of the government has started to take place, it needs to pick up pace.

Based on a panel discussion among Abhaya Krishna Agarwal, partner, infrastructure and PPP, government transaction advisory services, EY; Dr S.K. Ahriwar, director, Railway Board; A.P. Mishra, managing director (MD), Kutch Railway Company; and Bharat Salhotra, MD, Alstom Transport, at a recent India Infrastructure conference

 

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