Monetary Moves: Financing trends and private participation opportunities

Over the past several years, the railway sector has been one of the priority are­as of the government. With the intention of transforming and modernising Indian Railways (IR), the government has made huge investments in the network expansion and moder­n­isation activities of the sec­tor. Sub­stan­tial investment opportunities are in store with programmes such as dedicated freight corridors (DFCs), high speed rail (HSR), station re­de­velopment, and the national monetisation and infrastructure pipeline.

Budgetary outlay

Under the Union Budget 2023-24, the Ministry of Railways (MoR) has received an allocation of Rs 2.4 trillion. This is the highest ever allocation to the national transporter. It also maintains the trend of hike in allocation established in 2022-23 with an allocation of Rs 1.4 trillion, of which Rs 1.37 trillion was meant for capital expenditure and Rs 32.67 billion for revenue expenditure. The budget estimate for 2023-24 is nearly 48 per cent higher than the revised estimate for 2022-23. Additionally, this outlay is nearly nine times the amount earmarked in 2013-14. Of this budget, around Rs 750 billion will be spent on new schemes.

Meanwhile, Southern Railway has receiv­ed an allocation of over Rs 10 billion to fast-track nine new rail lines in Tamil Nadu. Ad­d­itionally, National High Speed Rail Corpo­ration Limited has received Rs 195.92 billion for the Mumbai-Ahmedabad HSR corridor project. Allocations to the tune of Rs 11.21 billion (91 per cent increase) have been made for various metropolitan transport projects in Mumbai. Of this, Rs 11 billi­on has been allocated for the Mumbai Urban Transport Project alone.

IR plans to focus on the development of in­frastructure, and to bring high speed trains back on track at the earliest. Funds will bespent mainly on green trains such as hydrogen trains, gr­een energy, tourism, high speed trains and im­por­tant corridors. Additionally, the budget will be utilised on building railway tracks, wagons, trains, electrification, signalling and developing facilities at stations while focusing on safety.

The hike in allocation to IR is very encouraging, and could make the sector an engine of national growth.

Privatisation potential

Historically, there has been low private participation in the railways. Even the government’s mega sta­tion redevelopment programme failed to en­tice the private sector into undertaking project development. The plan for privatisation of 150 trains was also cancelled due to poor bidding response. However, over the years, the sector has been mulling ways of generating revenue through different streams, including the non-fare revenue segment, leasing out its vast pool of vacant land and permitting PPP across the entire chain of railway infrastructure. Despite consistent efforts, the PPP potential is restricted to DFCs, station rehabilitation, and Gati Shakti cargo terminals.

Furthermore, in mid-December 2022, the railway ministry also proposed a hybrid annuity model for laying of tracks. Under the model, the ministry aims to take the project risks in terms of traffic and delays, and will provide an up­front payment of 40 per cent of the project cost to the developer.

With the establishment of the Infrastruc­ture Financing Secretariat, the most recent bud­get has rekindled confidence for private in­vestment in sectors overly dependent on public resources, such as the railways. Another policy push, the long-term leasing of railway land, wo­uld provide a level playing field to private and public logistics entities, as well as encourage private participation in the development of lo­gis­tics infrastructure in India.

While project development has received a lukewarm response from the private sector, oth­er areas are emerging as lucrative propositions for private participation. These in­clude rolling stock supply, train safety soluti­ons, security and surveillance systems, advanced signaling systems, and driverless technology solutions.

Private sector participation in railways is crucial as with the shift in control, there may be positive consequences such in the form of better ca­pital infusion, management practices and te­ch­nology.

Assets changing hands

The key railway assets identified for monetisation (over the period 2021-22 to 2024-25) in­clude 400 railway stations, 90 passenger trains, one 1,400 km route railway track, 741 km of Konkan Railway, 15 railway stadiums and selected railway colonies, 265 railway-ow­ned goods sheds, and four hill railways.

Even as a bright spot in the monetisation pipeline, the railway sector fell behind its monetisation targets due to poor response from the private sector. In 2021-22, the MoR realised only Rs 8 billion through the redevelopment of one railway station and some railway colonies as against a target of Rs 170 billion.

In view of this subpar performance, the mi­nistry revised the monetisation target for 2022-23 from Rs 572 billion to Rs 300 billion. The Centre’s move to limit the IRFC’s market borrowing in 2023-24 has placed enormous strain on the ministry to raise finances via asset monetisation.

The possibility of turning fully redeveloped stations into monetised assets through instruments such as real estate investment trusts/­infrastructure investment trusts (InvITs) is also being considered. IR may also come up with an InvIT in 2023-24. Moreover, IRFC and India Infrastructure Finance Compa­ny (IIFCL) have signed an MoU for financing railway infrastructure.

As of December 2022, the sector has monetised assets worth Rs 18.29 billion, with a few other deals worth Rs 32 billion already inked. Assets under consideration for monetisation in­clude trains, track overhead equipment, goods sheds, hill rail and stadiums. Key transactions for 2022-23 include monetisation of rail­way colonies and land parcels. As of Jan­uary 2023, in a bid to monetise its Wi-Fi projects at more over 6,100 railway stations across the country, RailTel has tied up with a consortium led by 3i Infotech Limited.

The ministry’s decision to redevelop sta­tio­ns in engineering, procurement, and construction mode instead of PPP has been the biggest hit to the monetisation pipeline. Sta­tion redevelopment, which accounts for 50 per cent of the total monetisation target of Rs 1.52 trillion over the four financial years, has not seen fruition yet.

Other avenues

Due to the sector’s minimal operational surplus, capital investments in the sector are fun­ded through mainly budgetary support, which is proving to be inefficient. Other helpful funding av­enues have been multilateral institutions, cost sharing of projects and special purpose ve­hicles with state governments, along with asset monetisation.

Additionally, the market borrowing arm of IR, IRFC has been very proactive in issuing bonds and IPO. In January 2022, IRFC raised $500 million (Rs 35 billion) in green bonds as part of its $7 billion global medium-term note programme and also became the first central public sector enterprise to list its green bonds exclusively on the India Internatio­n­al Exch­ange exchanges. In a latest development, IRFC also mobilised Rs 25 billion through the issuance of bonds for 10 years th­rough private placement at a competitive rate of 7.69 per cent per annum.

In sum

Attracting private capital in the railway sector is complicated, but there still lie huge opportunities for the private sector. In the next four to five years, the railway sector will see a quant­um jump in infrastructure development and in­vestment opportunities. With network expansion and upgradation works in progress, and mega projects being executed, significant opportunities will come up for private players, rolling stock providers, signalling and telecom players, electrification equipment manufacturers, and consultants.