Innovative Models

IR’s financing plans and strategies

India has the fourth largest railway network in the world after the US, China and Russia, spanning a total length of 68,000 km. It is the second largest system to be operated under a single management. It carries close to 8.29 billion passengers and over 1 billion tonnes of freight traffic annually. Currently, Indian Railways (IR) operates about 22,000 trains on a daily basis.

Over the years, IR has taken several measures to increase investments in the sector. Despite these efforts, IR has been grappling with the issue of cross-subsidisation. In order to support the masses, IR has continued to provide subsidised fares for passenger operations, and tried to balance this through higher freight charges. As a result, the modal share of IR in total freight transportation is as low as 27 per cent.

New initiatives

In 2015, IR formulated a five-year investment plan with a total investment requirement of Rs 8.56 trillion for 2015-20. This medium-term plan was initiated with an expectation to source funds through public-private partnerships (PPPs). The focus of the plan was on the completion of the dedicated freight corridors (DFCs) and projects for line doubling, passenger safety, station redevelopment and development of logistic parks.

Besides, IR has taken a series of initiatives aimed at infrastructure creation and network expansion. These include the upgradation of signalling systems, station redevelopment, and the development of DFCs, high speed rail and private freight terminals. Moreover, IR has ramped up its capital expenditure by more than 3.5 times (Rs 1,465 billion in 2018-19) from the 2009-10 level (Rs 396.72 billion), of which a significant portion is being financed through extrabudgetary resources.

Financing models

Historically, public funds comprising budgetary support from the central government and IR’s internal resources have been the main sources of funds for railway projects except for rolling stock which has been procured through market borrowings for the past 30 years. Since 2015-16, remunerative projects are also being financed through borrowed funds.

Apart from the traditional models, IR is also exploring new and innovative financial models for funding infrastructure and network expansion projects. To this end, model concession agreements (MCAs) have been finalised under the Policy for Participative Models for Rail Connectivity and Capacity Augmentation Projects. The five models adopted under this policy are non-governmental railway private line (NGR), joint venture (JV), build-operate-transfer (BOT), customer funding, and annuity.

  • The NGR model is usually adopted for last-mile connectivity projects where the stakeholders can set up JVs with infrastructure finance and development institutions. The model has been used for developing the Mundra port railway line by Western Railway and the Gujarat government, the Bhadrak-Dhamra port new railway line by East Coast Railway and the Odisha government, etc.
  • Under the JV model, financially viable new line and gauge conversion projects have already been sanctioned. The stakeholders for these projects include port and mine authorities, state governments and exporters. The partners are selected through inviting expressions of interest or on a nomination basis. Some examples of such JVs are Pipavav Rail Corporation Limited, the Hasan Mangalore Rail Development Corporation, Kutch Railway Company Limited and Bharuch Dahej Rail Development Corporation Limited.
  • The BOT model is used in projects where stakeholders or strategic partners are difficult to identify. One such example is the case of new railway lines between long-rail corridors being operated by IR. Under the BOT model, investors are selected through competitive bidding and IR pays the concessionaire 50 per cent of the freight revenue as user charge for the concession period (typically, 25 years).
  • The customer funding model is adopted in situations where the customer does not want to get involved in the design and construction of the project but stands to benefit from its early completion. In such a case, the stakeholder invests in part or full and IR is responsible for project construction and maintenance.
  • The annuity model is mostly used where there is no specific user to fund the project. An example is the case of a line doubling project that caters to a diverse customer base. The concessionaire is responsible for the financing, construction and maintenance of the project during the concession period and is selected solely on the basis of lowest contract price/annuity amount.

The way forward

IR is taking a number of initiatives to ramp up investments in the sector by tapping various non-budgetary sources. To deal with large-scale infrastructure projects with a long gestation period, IR has experimented with participative models with a variety of innovative features such as inflated mileage, flexible concession period and deferred recovery of operation and maintenance charges. Going forward, IR aims to use these innovative models to provide significant opportunities for different stakeholders and further boost infrastructure expansion in the sector.

Based on a presentation by Manjula Rangarajan, Additional Member, Finance, Railway Board, at a recent India Infrastructure conference

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