One of the most investment-intensive sectors, the railways has been the mainstay of India’s overall economic growth for many decades. Arguably, it has proved to be the prerequisite for infrastructure development by being the only accessible mode of long-haul transport within the purchasing reach of most of the citizens. However, in recent decades (especially after the 1990s), which were marked by a high growth trajectory, the sector lost some of its sheen to the fast developing road sector. The situation continues, and Indian Railways (IR) is making aggressive efforts to pump in investments to enhance the mode’s competitiveness as compared to other alternatives.
However, with the government’s control, lack of political will, budget constraints, sluggish decision-making, and legacy issues associated with land acquisition, the sector has been in dire need of funds for a long time now. Under-investment has been a trend, though its extent has varied with economic progress and the government’s priorities. Faced with competing fiscal responsibilities with a growing economy, the government eventually turned to the private sector to bring in investments to complement annual budgetary support to the sector. In 2012, IR introduced policies to drive private sector investments. However, the move did not fare well at the time. Today, there is fresh impetus from the government to fill the gaps in the sector, especially with regard to investments.
Investment trends and financing experience
Budgetary support has been the main source of financing for the railway sector. During the five-year period 2014-15 to 2018-19, IR’s capital investment has shown an upward trend, clocking a compound annual growth rate (CAGR) of 25.68 per cent, increasing from Rs 587.2 billion in 2014-15 to Rs 1,465 billion in 2018-19.
For 2019-20, a capital expenditure of Rs 1,601.76 billion has been proposed for the sector that is 20 per cent higher than the preceding fiscal year. The outlay comprises Rs 658.37 billion from budgetary support, Rs 2.67 billion from the Nirbhaya Fund, Rs 105 billion from internal resources and Rs 835.71 billion from extra-budgetary resources.
So far, the financing experience of the private sector has been mixed. The public-private partnership (PPP) mechanism was introduced in the railway sector in 2012 (amended in 2014), under which five models were introduced. These were non-government railway (for developing private lines), joint ventures (for bankable projects where state governments, ports, industries, etc. come together), the customer-funded model (capacity augmentation projects), the build-operate-transfer model, and the annuity-based framework (generally for freight-oriented lines).
Overall, the scope for private sector participation in the sector has been limited owing to the highly capital-intensive nature of projects coupled with long gestation periods. PPP projects have showcased mixed results with success in projects with clear-cut demarcation of responsibilities, such as last-mile rail-port connectivity projects and limited success in projects related to rolling stock and locomotive manufacturing.
While IR has taken initiatives and drawn up schemes to ramp up PPP projects, some crucial schemes have remained only on paper. In a bid to improve market attractiveness, the Ministry of Railways (MoR) had announced the constitution of a Rail Development Authority, which would play a key role in ensuring a level playing field for private players and securing the interest of various stakeholders. However, this plan has not made much progress so far.
Station redevelopment is an important segment where projects are being executed on a PPP basis. Currently, works at the Habibganj and Gandhinagar stations are progressing well, and the projects are expected to be commissioned within the next two years. Further, request for proposal bids have been invited for the Nagpur and Gwalior stations. Besides, the Dankuni-Sonnagar section of the Dedicated Freight Corridor (DFC) project is also being taken up in the PPP mode. In this regard, the model concession agreement is expected to be signed by July 2020.
Elaborate plans, massive investment requirements
IR has extensive capacity augmentation plans. These pertain to both network and rolling stock. For the coming two-three years, tall targets have been set for new lines, line doubling, gauge conversion and coach manufacturing.
According to the pipeline of railway projects analysed by India Infrastructure Research, investments to the tune of Rs 10 trillion will be required in the next three-five years. There are over 4,000 projects at various stages of development. While some are under construction, most of the projects are at planning/proposal and approved/sanctioned stage. These include new lines, line doubling, gauge conversion, electrification, signalling, station redevelopment, and bridge and tunnel development projects. With regard to capacity addition, these projects will add about 47,245 km to the railway network. The majority of these projects are scheduled to be completed in the next four-five years.
Major investment areas – Promising outlook for private investors
Given the government’s moves towards reinvigorating IR, significant quantum of funds will be required. Funds will be required in specific areas, such as high speed rail (HSR), augmentation of capacity for rolling stock manufacturing, digitalisation and adoption of new technologies, station redevelopment, improving safety levels, as well as laying of new lines in geologically difficult areas such as the Northeast.
With regard to PPPs, areas such as development of suburban corridors, HSR, rolling stock, electrification, signalling, freight terminals, logistics parks, solar plants, passenger terminals, loco/coach manufacturing, station redevelopment, and investment in wagons (under the Liberalised Wagon Investment Scheme) will be attractive investment destinations. The biggest PPP investment opportunity lies in the corridors planned under the DFC project, where there are about Rs 3 trillion worth of upcoming projects. These are the East Coast DFC (Kharagpur-Vijayawada; 1,115 km), the East-West DFC (Howrah-Mumbai; 2,328 km), the North-South DFC (Delhi-Chennai; 2,328 km) and the Southern Corridor (893 km).
The planned DFC corridors are understood to be economically viable and are expected to carry an internal rate of return of about 14 per cent. The corridors are acclaimed as the most lucrative PPP investment opportunity in the coming years. Significant investment potential also lies in the setting up of solar, wind and solar-wind hybrid energy plants. This area is being pursued keenly by IR to reduce its carbon footprint. There are a number of other areas where investment opportunities would lie.
- Station redevelopment: Charbagh (Lucknow, Uttar Pradesh), Ernakulam Junction (Kerala), Gomtinagar (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) stations are planned to be taken up on a PPP basis.
- Solar plants: In a bid to reduce energy costs, IR aims to install 1 GW of solar power capacity by 2021 on a PPP basis.
- Electrification: IR plans to lay over 8,500 km of transmission lines through the PPP route in the coming years. Plans are also afoot to electrify about 38,000 route km of the railway network by 2022.
In sum
The railway sector is one of the major drivers of economic growth in the country, given the massive Rs 50 trillion investment that will be required during the 2018-30 period. This investment will go towards network decongestion, network expansion and safety-related works to address the carrier’s key concerns of safety, operational efficiency, declining modal share and overall competitiveness.
That said, the time is opportune to tap funds from the private sector. This would also mean a lower fiscal burden on the government. While several policies and schemes have been introduced, there has been a mixed response so far. In broad terms, investment (be it by the public or private sector) will reap results only if the projects are economically viable and risks are compensated for. Equally important is that IR as an organisation should strive towards being run more professionally. Such steps will help in tapping the investment potential in the railway sector.