Laying the Tracks

Increasing investment opportunities in the railway sector

Indian Railways (IR) has envisaged an investment of Rs 1 trillion in infrastructure over the next five years. This will include projects focused on modernising railway stations, metro and railway transportation, and logistics and warehousing. The gross budgetary support from the central government in 2020-21 is proposed to be Rs 702.5 billion. This is 3 per cent higher than the revised estimates of 2019-20 (Rs 681.05 billion). Currently, in terms of investment, announced and approved projects account for the maximum share in the upcoming investment at Rs 9.7 trillion.

Infrastructure development initiatives, such as dedicated freight corridors (DFCs), high speed rail (HSR), station redevelopment, and port-rail connectivity projects are expected to provide a huge thrust to investment in the railway sector. The central government is also expanding the scope of public-private partnership (PPP) beyond operations and maintenance services in the sector. PPP is now being adopted in areas such as station redevelopment, building private freight terminals, and private train operations. Further, the government’s Make in India initiative is expected to bring huge foreign direct investment (FDI) into the sector.

Investment opportunities

IR has been actively working towards the modernisation of its rail network across the country and has undertaken a string of mega projects to that end. IR plans to move to 100 per cent electrification by 2023. So far, IR has completed the electrification of more than 40,000 route km (rkm). Another major project being undertaken by the railway sector is the development of DFCs. Dedicated Freight Corridor Corporation of India Limited is setting up India’s first two DFCs, the western DFC, from Uttar Pradesh to Mumbai (1,506 km), and the eastern DFC from Ludhiana in Punjab to Dankuni in West Bengal (1,337 km). The various sections of the eastern DFC are being funded by the World Bank and IR, and through a PPP. The entire western DFC is being funded by the Japan International Corporation Agency (JICA). Three new corridors were also announced in Union Budget 2021-22: the East-Coast Corridor, the East-West Sub Corridor and the North-South Corridor. The upcoming corridors are expected to entail an investment of Rs 2.17 trillion.

IR’s ambitious plan of station redevelopment is also aiming to open up about 20 million square feet of real estate, attracting investments of Rs 500 billion. Of the 123 stations currently on the list for redevelopment, IR aims to issue tenders for 50 stations by the first quarter of 2021-22. In 2020-21, work was awarded for major stations such as Delhi, Mumbai, Nagpur, Amritsar, Dehradun, Nellore, Tirupati and Puducherry. Other mega projects being developed by IR include HSR corridors, semi-HSR corridors, new suburban rail systems and regional rapid transit systems. All these mega projects are expected to entail a combined investment of around Rs 16 trillion.

IR has also started exploring new sources of revenues to fund its projects. It plans to implement projects under the annuity model to increase investment contribution from the private sector. It is also exploring the PPP model of implementation for station redevelopment, and the construction of DFCs and suburban rail corridors. These projects are expected to offer opportunities to long-term investors and lenders. As mentioned above, various international organisations such as JICA, the World Bank and the Asian Development Bank (ADB) are providing financial assistance to mega railway projects in the country.

New funding sources

The Ministry of Railways has decided to create a special cell, the Project Development Cell (PDC), in the Railway Board to increase investments and the inflow of FDI. During 2020-21 (till June 2020), IR’s component sector had attracted FDI inflows of around Rs 1 billion. Additionally, IR has tapped the multilateral funding route to partly finance its capital-intensive electrification drive. In June 2018, ADB agreed in principle to provide a non-sovereign project finance loan of up to $750 million to the Indian Railway Finance Corporation (IRFC) to finance a project involving the electrification of 3,378 rkm. The project will be executed by the Central Organisation for Railway Electrification. In May 2019, ADB also gave approval for a funding of $4.37 billion to the Delhi-Meerut Regional Rapid Transit System Corridor.

Further, IR has unleashed a series of initial public offerings (IPOs) to generate additional revenue. This sale of stake by the government is a part of its disinvestment programme, whereby it intends to monetise assets and plug the fiscal deficit. In 2018-19, IR successfully completed IPO issuances of two of its public sector enterprises – Rites Limited and Ircon International Limited. Further, Rail Vikas Nigam Limited and IRCTC Limited were listed in April 2019 and October 2019 respectively. In October 2020, IRFC filed its papers with the market regulator,  Securities and Exchange Board of India (SEBI), to float an IPO of over 1.78 billion shares. State-owned RailTel Corporation of India Limited has also received SEBI’s approval to raise Rs 7 billion via an IPO, through which the government will offload 86.6 million equity shares.

In order to monetise assets and undertake revenue yielding activities, IR has decided to promote new ideas and concepts for the enhancement of non-fare revenue. In May 2018, IR issued the guidelines of the New Innovative Non-Fare Revenue Ideas Scheme, which is to be executed at the divisional level in each zonal railway. During 2019-20, the share of sundry/non-fare revenue accounted for around 4.4 per cent of overall revenue (based on budget estimates), up from 3.7 per cent in 2018-19. This is in contrast to the global standards of 10-20 per cent.

Various initiatives are being taken by IR to generate non-fare revenue. IR has decided to provide a content-on-demand service on trains and railway stations to generate more non-fare revenues. This service will be available in 8,731 trains and all Wi-Fi-enabled railway stations. The full project is expected to be completed by 2022. Further, freight trains have decided to display advertisements to generate non-fare revenue. South Eastern Railway awarded a contract under the “Branding on Wheels” scheme to Dalmia Cement for a period of five years for 300 BOXN wagons, or five rakes, in 2019.

Impact of Covid-19 and recovery strategies

The Covid-19-induced lockdown and the consequent restrictions on movement led to a huge fall in revenue for the railway sector. As a result, the Ministry of Railways has decided to suspend all new/umbrella works included in the Pink Book in 2020-21. Only those works that impact the safe running of trains and are essential and unavoidable will be considered for execution. Hence, the order does not impact any vital infrastructure projects of IR, such as 100 per cent electrification of routes, doubling of tracks, high speed corridors, signalling projects, passenger amenities, launch of modern trains/locomotives, or any project to enhance safety. Further, despite the prolonged lockdown and the economic slowdown, IR achieved about Rs 500 billion of its planned capex of Rs 1.61 trillion for 2020-21 during the first five months.

In a bid to start its recovery, IR has formulated a string of initiatives. It has begun sector-specific discussions to attract additional freight business. The development comes in light of IR’s efforts to gain more market share in new areas and consolidate its position in existing sectors such as coal. In order to attract private investment, IR is planning to set up new goods shed facilities and develop the existing goods sheds on a PPP basis. Further, to increase its revenues from passenger trains, IR has decided to levy an additional user charge of Rs 10-Rs 35 on passengers availing of services from redeveloped stations.

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