Indian Railways (IR) has large-scale financing requirements due to the capital-intensive nature of the works it is implementing. The funds are primarily needed for the creation of rail infrastructure such as new lines, railway stations and platforms, acquisition of rolling stock and electrification of lines. At present, IR is heavily dependent on gross budgetary support for its growth and expansion. Most of its financial resources are spent on meeting operational expenses. These comprise fuel costs, salaries and pensions, maintenance, etc. Therefore, only a small portion is left for investment in capacity augmentation.
More recently, instead of relying solely on budgetary outlays, IR has started exploring new sources of generating revenues to fund its projects and create an enabling environment for ensuring consistent growth. The Life Insurance Corporation [LIC] of India has agreed to provide financial assistance to the tune of Rs 1.5 trillion over the five-year period 2015-16 to 2019-20 for financing railway projects mainly under plan heads of line doubling and electrification. The carrier has further entered into an agreement with the Asian Development Bank (ADB) to fund its electrification projects. IR is also attracting foreign direct investment (FDI) equity inflows for railway-related components. Besides, the national transporter has successfully completed the initial public offer (IPO) issue for two of its public sector enterprises (PSEs).
Over the past five financial years (2014-15 to 2018-19), there has been a quantum jump in the total planned outlay of IR, registering a compound annual growth rate of 21.41 per cent. For 2019-20, the budget estimate of the total planned expenditure is Rs 1.59 trillion, including a gross budgetary support of Rs 645.87 billion, translating into a year-on-year increase of 8.3 per cent in total outlay.
Of the total planned outlay during 2019-20, the Indian Railway Finance Corporation (IRFC) will receive a share of 34.96 per cent (Rs 554.71 billion), IR 47.33 per cent (Rs 750.87 billion) and public-private partnership (PPP) investments around 18 per cent (Rs 281 billion).
So far, PPP experience in the sector has been limited owing to the highly capital-intensive nature of projects and the long gestation periods. In terms of a project-wise analysis, the PPP experience for IR has borne mixed results with success in projects with clear-cut demarcation of responsibilities, such as last-mile port connectivity projects and delays in those related to rolling stock and locomotives.
During the past few years, IR has experimented with various PPP schemes/models to set up railway lines, connect ports, privatise container trains, deploy dedicated parcel trains and manufacture wagons. One of IR’s biggest PPP initiatives has been the station redevelopment programme aimed at modernising and upgrading station infrastructure. It has already taken up two stations for redevelopment through the PPP mode (Habibganj station in Madhya Pradesh and Gandhinagar station in Gujarat). Besides, the Charbagh (Lucknow, Uttar Pradesh), Ernakulam Junction (Kerala), Gomti Nagar (Lucknow, Uttar Pradesh), Delhi Sarai Rohilla (Delhi), Jammu Tawi (Jammu & Kashmir), Kota (Rajasthan), Kozhikode (Kerala), Madgaon (Goa), Nellore (Andhra Pradesh), Puducherry and Tirupati (Andhra Pradesh) railway stations are also planned to be taken up on a PPP basis.
Further, in a bid to reduce its energy bills, IR plans to install 1 GW of solar power capacity by 2021 on a PPP basis. As of December 2018, tenders have been floated for 100 MW solar rooftop plants under Phase I and a survey is under way for the remaining 223 MW. Besides, to meet its increasing electrification requirements, IR also plans to lay over 8,500 km of transmission lines through the PPP route in the coming years.
Funding from LIC
One of the most important and recently explored funding sources for IR is LIC. In March 2015, IR entered into an agreement with the insurance corporation to avail of financial assistance of Rs 1.5 trillion till 2020, to be disbursed in tranches. Following the agreement, IRFC has been assigned the role of drawing the target amount through institutional finance from LIC via a bond issue.
The bonds issued to LIC have a tenor of 30 years with an interest moratorium of five years and a principal moratorium of 10 years. The repayment will be in 40 equal half-yearly instalments after the moratorium period. The interest rate is linked to 30 basis points over the benchmark 10-year government security yield, subject to resetting at 10-year intervals.
FDI equity inflows
IR has also been attracting FDI equity inflows for railway-related components. While it received about Rs 14 billion in 2013-14, the inflows dropped to a low of around Rs 5 billion in 2015-16. In 2017-18, FDI inflows increased, reaching Rs 6.35 billion. During the first quarter of 2018-19, IR’s component segment attracted FDI inflows of more than Rs 1.5 billion.
The national transporter has also tapped the multilateral funding route to part finance its capital-intensive electrification drive. In June 2018, ADB agreed in principle to provide an up to $750 million non-sovereign project finance loan to IRFC for financing a project involving the electrification of 3,378 route km. The project will be executed by the Central Organisation for Railway Electrification through the appointment of contractors. Earlier, in May 2018, the central government signed a $120 million loan agreement with ADB for the completion of works for doubling of tracks and electrification along high density corridors to improve IR’s operational
efficiency. This Tranche 3 loan is a part of the $500 million multitranche financing facility for the railway sector investment programme approved by ADB’s board in 2011. Funding from the Tranche 3 loan will be used for doubling of about 840 km of rail routes and electrification of 640 km of tracks along high density corridors in Chhattisgarh, Odisha, Maharashtra, Karnataka and Andhra Pradesh, including the Golden Quadrilateral corridor (connecting Chennai, Kolkata, Mumbai and New Delhi).
To kick-start the PSE Disinvestment Programme and abide by the mandate of holding not more than 25 per cent public shareholding in companies, IR successfully completed IPO issuances of two of its PSEs – RITES Limited and IRCON Limited – in June 2018 and September 2018 respectively. In 2019, Rail Vikas Nigam Limited (RVNL) became the third rail PSE to come out with an IPO after RITES and IRCON.
The three-day IPO of RITES Limited opened on June 20, 2018 with a price band of Rs 180-185 per equity share with a Rs 10 face value. The IPO consisted of 25,200,000 shares and was oversubscribed by 67.17 times. The issue reportedly received total bids of about 1.7 billion shares against the total issue size of 25.2 million shares. The company raised Rs 4.66 billion from the issue.
Following this, the three-day IPO of IRCON Limited opened on September 17, 2018 with a price band of Rs 470-Rs 475 per equity share and a Rs 10 face value. The IPO consisted of 9,905,157 shares and was oversubscribed by 9.85 times. The issue reportedly received total bids of about 97.58 million shares and the company raised Rs 4.66 billion from the issue.
RVNL offered 253.46 million shares at a price band of Rs 17-Rs 19 per equity share. According to the data available with the National Stock Exchange, the IPO received bids for 463.32 million shares against the total issue size of 253.46 units. RVNL’s Rs 4.8 billion IPO was oversubscribed by 1.83 times.
Focus on non-fare revenue generation
Recently, IR has been working towards monetising its assets and undertaking revenue yielding activities. To this end, it has decided to promote new ideas and concepts for enhancement of non-fare revenues. In May 2018, IR brought out guidelines for the New Innovative Non-Fare Revenue Ideas Scheme which is to be executed at the divisional level in each zonal railway. Under the scheme, receiving, examining and implementing new ideas and concepts by zonal railways will be an ongoing process.
Earlier, in January 2017, a number of policy initiatives were taken to increase non-fare revenues. These included out-of-home advertisement, content on demand, branding of trains, ATM policy, vinyl advertising on trains, on-board advertising, etc.
To sum up
The railway sector is poised to become one of the major drivers for economic growth in the country, given the huge Rs 10 trillion investment planned in the next four-five years. The funds have been earmarked to address the carrier’s concerns of safety, operational efficiency, declining modal share and its overall competitiveness. They are expected to be utilised for network expansion and decongestion, and safety-related works. The sector has suffered from years of underinvestment, which has led to overutilisation of most of its routes and resulted in inadequate carrying capacity. Besides, cross-subsidisation of passenger fares has resulted in a severe strain on IR’s financial health. IR has now started taking initiatives to mobilise more funds. It has been working towards monetising assets and undertaking revenue yielding activities. To this end, it has decided to promote new ideas and concepts for enhancement of non-fare revenue. IR launched the New Innovative Non-Fare Revenue Ideas Scheme in May 2018 and has set a target of raising revenues of Rs 12 billion from advertising, based on bids to be issued for content on demand, railway display networks and application-based cab services at railway stations.
Net, net, taking into consideration the recent initiatives taken to mobilise funds from a plethora of new sources, the financial health of the national carrier is expected to improve in the near future.