Looking for investment

By Praveen Raman
In Infrastructure
August 11, 2015

Government plans to pump in $120 billion investment in next five years

RAILWAY-JOURNEYINDIAN RAILWAYS, like any other commercial enterprise, requires continuous capital investment to achieve the desired results. Historically, the rail projects are largely financed through internal accruals, from budgetary support and not from external financing. Thus, the fact that the IR has steadily  gone from bad to worse financial situation testifies that the critical gaze of the financier has largely been absent from the oversight of IR’s operation and financial management.

The external fi nance began only in the Sixth Five Year Plan with the establishment of the Indian Railway Finance Corporation (IRFC) in 1987. Starting from about 17 per cent in the Seventh Plan period, the share of external finance has increased slowly and gradually. In 2014-15, the share of extra-budgetary  resources was 27 per cent, while the government continued to contribute 46 per cent, an increase as compared to 42 per cent in the Seventh Plan. The only change in the mix was the reduction of internal contributions to investment from 43 per cent to 23 per cent. The lack of corporate entities who can borrow  on behalf of IR has limited market access for IR investments.

Recently, the government has announced an ambitious plan to spend $120 billion in the next five years. This investment in the cash-strapped railways will be used for of up gradation and expansion. While the roadmap for this massive investment has been framed, many specialists believe that attracting such a massive investment will not be easy to make as the railways already has a large number of pending projects. Currently, as of 2014-15, a total of 11,709 projects that have been approved by the Railway
Board are in the process of completion, with an estimated cost to completion of Rs 4,94,911 crores. These constitute 98 per cent of the cost to complete. Additionally, 14,369 projects have been approved by the zonal general managers of the IR, with an anticipated cost of completion of only Rs 7,140 crore and 15,078 projects of DRMs, adding up to Rs 2,173 crore. The total cost to completion for all these projects is thus Rs. 5,04,224 crore. This essentially means that roughly 2 per cent of the remaining funding is dedicated to 71 per cent of the projects.

The big question is where is this money going to come from? Needless to say, there is immediate need to pool in resources for the projects. Broadly, there are five sources from which resources can be generated. These range from internal Resource Generation to external financing (which includes foreign funding) through borrowing and PPP. Lets see how each of these can work for IR.

Internal resource generation
The Rakesh Mohan Committee (2001) noted the sharp decline in the share of budgetary support and internal resources leading to increasing market borrowings and financial stress in IR. According to the Committee, there is a need to increase efficiency of railway services by better utilizing of existing capacity and assets through improved operating and scheduling practices. This would generate more internal  resources. It is important to ensure that the operational improvements effected get converted into revenues. This can be achieved by accounting reforms, effective project management and MIS systems, which besides operational improvements, would help the management monitor the results better.

On the revenue front, primarily tariffs are not in aligned to cover the increased input costs. There has specially been significant under recovery of costs in passenger segment. Even the improvement in IR’s operating ratio, between financial year 2004-05 and 2007- 08 was negated by the 6th Pay Commission award. With another round of wage increases expected from the 7th Pay
Commission, though hopefully not as destabilizing as the 6th Pay Commission, revenue growth can be expected to fall quite a bit behind, in a business-as-usual fashion. This is why action is needed both on the expenditure side, by improving efficiency and on the revenue side, both of which are more in the control of IR than wage growth.


Proposed Investmet (2015-2019) (Amount in Rs crore)
Network de-congestion 1,99,320
Network Expansion 1,93,000
National Projects 39,000
Safety 1,27,000
Information and technology 5,000
Rolling stocks 1,02,000
Passenger amenities 12,500
High speed rail, elevated  corridor  65,000
Station development & logistical park  1,00,000
Total 8,56,020

External financing through borrowing
There is a need to tap other extra budgetary sources like the multilateral funding agencies. IR needs to provide for capital investments in critical projects that would increase its revenues. However, owing to the historical baggage of a large shelf of projects riddled with time and cost over runs and continued piece meal allocations, IR needs to change its investment strategy through ring-fenced investments in high yield projects. Some of these can be funded through the multilateral funding agencies (who would also do their own due diligence of the project) with the provison of take-out financing through long-term lower interest rate funds from, say, insurance companies and pension funds. The funds borrowed from the market should be used exclusively for capacity generation and not diverted for any asset replacements.

External financing through use of assets
IR can leverage ownership of one of the largest land banks spread across the country, as well as other fixed immovable properties like its housing colonies, etc. Identified immovable properties can be transferred to an SPV, which can be structured as a REIT (Real Estate Investment Trust), wholly owned by IR or in conjunction with domestic financial institutions. Another method could be the sale of equity. IR has thirteen undertakings in which it holds either the entire or a substantial stake. Of these, only CONCOR is listed. Today, the market valuation of CONCOR is Rs. 30,000 crores; 62 per cent of which is held by the government. Even a 10 per cent disinvestment would fetch Rs. 3,000 crores. Similarly, there are other corporate entities, including RITES, IRCON, IRCTC, etc., which can be listed.

One more way is the sale and lease back of non-land assets. IR has a number of other assets that can be leveraged to raise revenue namely, rolling stock and track. As noted above, rolling stock today is almost entirely leased from the IRFC, which issues bonds to finance their purchase. However, there is an older complement of rolling stock that is not leased. This comprised, as of March 2014, 1,533 diesel locomotives, 2,980 electric locomotives, 13,000 coaches and 93,250 wagons. This rolling stock can be sold to IRFC (or other leasing companies) and leased back from them. This would generate resources for investment which can then generate the revenue to service the lease. Track can also be similarly sold and leased back.

Building capacity through joint ventures
Activities station development, can be separated as special purpose vehicles (SPVs) involving joint ventures (JVs) with the respective state / local governments, it will permit greater involvement by the states in the governance and provision of this service and permit it to be priced more appropriately. This will also be in the government’s overall spirit of cooperative federalism. Already, pursuant to the Minister of Railway’s statements on the subject, a cell has been established in the Railway Board to explore possibilities of such JVs.

Building capacity through PPP
IR did attempt some forays into PPP projects for setting up two new Locomotive factories at Madhepura and Marhowra, station development and some port connectivity projects, but these met with limited success. There is a need to relook at the engagement with the private sector, both foreign and domestic, in the IR. This is not simply a matter of allowing, but of redefining the manner in which business with the private sector will be conducted. They can bring in technology, capital, and productive management practices to help modernize the IR if the relationship is successfully managed.

Successfully inviting private sector participation has many dimensions. The procurement process should involve announcing aggregate off-take from IR over the next few years and switch from one year contracts to longer duration contracts. This will facilitate investments by providing predictability and certainty to the private sector and ensure better quality and vendor development. Once the processes and, more importantly, the relationship with the private sector is on a more even keel, there is no reason to believe that far larger investments cannot be attracted to cover a more extensive array of investment in infrastructure, production of goods and delivery of services across the railways eco-system. Indian Railways has a poor record of financial management, both  of project management and revenue realization. But unless the behemoth is not financially strong, it can not be a medium to service the society at large to its optimal level. There is therefore, an immediate and urgent requirement of improved way of not only procuring money for the IR, but also of radically improving the way in which it uses its finances.