The Hindu Business Line : Transport Infrastructure

Already into the first fiscal of the Eleventh Plan, a focused investment strategy with some out-of-the-box solutions are the crying need of the hour if the country's transport infrastructure is to remain ahead of demand. In this context, the Indian Railways should formulate and spell out its investment strategy taking note of all options, says VIJAYALAKSHMI VISWANATHAN.

HAVING BECOME more competitive, the Railways should aim for a greater share of the freight market from the current 25 per cent. — Sushil Kumar Verma

Quality and capacity of physical infrastructure are the major determining factors for the economic development of a nation. In planning a transport policy framework, it is imperative that the transport developments align with the overall economic growth. In fact, the transport infrastructure should remain ahead of demand.

The Railways continues to be an important mode of transport and the incremental freight growth of over 200 million tonnes registered in the last four years reinforces the vital role of this infrastructure. Freight has grown at an annual compound rate of 9 per cent in the last three years. Having made itself competitive, the Railways should aim for a greater share of the market from the current 25 per cent. The Railway Budget for 2007-08 declares that a `twin mid-term and long-term investment strategy will be adopted to enhance productivity through modernisation and technological upgradation on the one hand and enhancement of capacity of the network and rolling stock on the other'.

The targets for Eleventh Plan are 1,100 million tonnes of freight loading in the terminal year compared to 726 million tonnes at the end of the Tenth Plan. Passenger traffic is expected to reach 8,400 million from 6,242 million in 2006-07. To meet these ambitious targets the Railways has projected an investment of Rs 3 lakh crore. Of this, 40 per cent is to be via the Public-Private-Partnership route including container trains, Dedicated Freight Corridors, logistic parks, and warehousing.

It has been assessed that the average annual investment required for all infrastructure (rail, roads, ports and civil aviation) is Rs 2,90,000 crore from this fiscal, while the actual allocation is Rs 2,05,100 crore with a budgetary support of Rs 1,54,939 crore. Against the Railways' requirement of Rs 36,000 crore the Budget for the current year provides Rs 31,000 crore. Internal resources and contribution from extra-Budgetary resources account for three-fourths of the Plan outlay.

Low Private Interest

While telecom and civil aviation sectors have attracted private capital essentially due to short gestation periods and the comparatively low capital requirements, other physical infrastructure areas, especially the Railways, have not been able to make any significant dent in the BOLT, BOT routes which they have been experimenting for a few decades now. The Wagon Investment Scheme introduced recently, with incentives such as assured number of rakes, is expected to contribute Rs 210 crore only in 2006-07 as per the Revised Estimates. The Budget Estimates for 2007-08 provide for Rs 500 crore for this scheme.

PPPs may create a competitive environment, lead to greater efficiency and reduce costs, but the Indian experience is that it is neither easy nor automatic to implement this approach. In his Budget speech, the Railway Minister observed that, "I am not in favour of blind privatisation of the Railways nor is PPP a compulsion or fashion for us. We are seeking partnership with the private sector on the terms that are in the interest of Railways and our customers."

It may be relevant to note that even a well-defined policy framework, assuring fair returns to investors and ensuring quality supply/service at reasonable cost protecting the interest of users, will not be a sufficient incentive for private funds to flow into what is a rather tricky investment. The gestation period is too long (more than 30 years) to visualise results with reasonable certainty. Cost escalation is the rule rather than exception. Revenue generation forecasts are normally over-stated and may not stand the test of independent appraisal. In this context, Government's intention to rate the projects before posing for private funding is a welcome move.

This leads us to the inevitable question of innovative funding mechanisms and there are lessons to learn from world experience. The European Union has recognised the imperative of public funding in infrastructure and accordingly set up the `Cohesion Fund 2007-2013' to finance environmental measures and the Trans-European transport network. Railways are rated as a high quality infrastructure ensuring mobility of persons and goods. The Fund is aimed at co-financing projects up to 85 per cent. A high-level group of the European Commission has compiled a list of 30 priority projects, the cost of which is estimated to be 225 billion euro, to be launched before 2010. These projects, defined as being in the interest of the community, include 20 high-speed and conventional lines as also high speed trains.

It will be rather difficult to visualise a similar funding device for Asian emerging economies. The next alternative is to tap the multilateral institutions such as the Asian Development Bank. It has been reported that an Eminent Persons Group (EPG) has recommended a fresh focus for the Bank. The ADB has developed expertise in funding infrastructure. The Indian Railways already has a sanctioned loan of Rs 1,500 crore from the ADB with the possibility of another tranche.

The EPG, which was headed by UNCTAD Secretary-General, Mr Supachai Panitchpakdi, suggested that the refocused ADB should concentrate on six core areas — infrastructure development, financial development, energy and environmental activities, regional integration, technological development and knowledge management — apart from its poverty alleviation programme in the low-income economies. India should aggressively pursue this funding mechanism as a possible source.

The burgeoning foreign exchange reserves (they have crossed $200 billion) have led to demands for using them for infrastructure development. Setting up an Infrastructure Investment Corporation with a corpus of $7-10 billion is being talked about.

Using the Forex Riches

Those favouring such a venture cite Singapore's experiments with managing its forex reserves through Government of Singapore Investment Corporation (GIC). But, then, GIC does not invest within the country as the funds are considered to be Emergency Fund. Further, it is oriented towards fetching better returns for the reserves. It may be useful at this juncture to assess the Chinese sceneChina plans to invest a whopping 1.25 trillion yuan ($154.5 billion) in 2006-2010 to augment the capacity by 30 per cent.

Further, the cost of China's ambitious goal to reach one lakh kilometres by 2020 will be 2 trillion yuan ($247.2 billion). The Chinese Government cannot hope to fund such a huge investment by itself. In this context, remarks of the Vice-Chairman of China's National People Congress, Mr Cheng Siwei, that Chinese forex reserves of $1 trillion (as of January 1) are to be put to better use, assume significance. The IMF has indicated that China requires only $650 billion as a reserve for economic stability of the country and the balance can be used more efficiently. It will be interesting to follow the strategy the Chinese Railways propose to adopt, and perhaps take a leaf or two out of their experience.

Freight Corridors

The Indian Railways has decided to construct Dedicated Freight Corridors in the Western and Eastern sectors. It is estimated that the traffic on the Western Corridor will grow from 23 million tonnes in 2005-06 to 40 million tonnes by 2021-22. Similarly, the total traffic on the Eastern Corridor is expected to grow from 53 million tonnes in 2005-06 to 144 million tonnes by 2021-22. The cost of the Western Corridor, from the Jawaharlal Nehru Port to Tughlakabad, is put at Rs 16,592 crore.

The Eastern Corridor, from Ludhiana to Sonnagar, is estimated to cost Rs11,589 crore. Considering the importance of the project, the Railways has decided to set-up a PSU — Dedicated Freight Corridor Corporation of India Limited — under the administrative control of the Ministry. The company will explore all possible funding options including debt — domestic as well as off-shore — multi-lateral funding, export credit and budgetary support apart from seeking Japanese assistance under Special Terms of Economic Partnership.

The Railways can probably study the Hong Kong model where property development has been used to fund the rail network. Mass Transit Railway Corporation Limited of Hong Kong (MTRCL), a private company, has been successfully adopting this strategy.

Rail infrastructure being highly capital intensive, not only during the initial construction phase but also through the life of the operation, to ensure sustained quality service and also to meet the demands of a listed company, funding through property rights has been devised.

Having already entered into the first fiscal of the Eleventh Plan, a focussed investment strategy with some out-of-the-box solutions are the crying need of the hour. The Indian Railways should formulate and spell out its investment strategy taking note of all options.

(The author is a former Financial Commissioner of the Indian Railways.)

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