The Hindu Business Line : Rlys woos pvt investment in new lines

In the first option, called the advance contribution model, companies must invest at least 50 per cent of the total project cost, including the cost of land for building the new rail line, which should be at least 20 km in length. In reciprocation, they will receive a 10-12 per cent freight discount, but only on incremental outward traffic.

In the second option, the special purpose vehicle (SPV) model, the Railways will “generally invest about 26 per cent in equity, and the SPV will get a concession, a share in the revenues generated in the line” in return for the construction, operation and maintenance of the line. The concession period will be only till the SPV recovers its equity, allowing for a 14 per cent rate of return.

Aimed at large projects

The two options are aimed at large projects (such as cement plants, steel plants and ports) that need rail connectivity for improving the project’s viability. The policy will not be extended to coal and iron ore traffic (segments where Indian Railways has assured traffic).

“These new options became necessary in order to address gaps in the existing options for such private parties,” said a Ministry official. The existing options are private sidings and the special purpose vehicles route of Rail Vikas Nigam Ltd (RVNL).

In private sidings, companies build rail links — on their own land or on railway land where available — to bridge the connectivity at their own cost and the rail links are only meant for their private use. The result is that many sidings stop functioning when that company stops generating traffic.

“Many private sidings, where the owners are out of business, continue to illegally book goods of other users in the vicinity,” a source in the Railways said. In the second existing option, namely the SPVs of RVNL, there is equity participation from Indian Railways through RVNL and other primary beneficiaries of the rail link, such as mining and steel companies, port trusts and state governments.

In return for the investment, the SPV is apportioned revenues earned by the Railways from the new rail link for a specified period. But in case the rail link does not get the projected traffic — as happened with the Pipavav Railway Corporation — and does not recover costs, the SPV starts making losses. “Such SPVs have their own overheads, so why should Railways’ equity get stuck?” asked a Ministry official.

Or it sometimes happens that the new line becomes a shorter route. Then the Railways’ traffic from its own existing links gets diverted and negatively impacts its revenues (as in the case of Kutch Rail Corporation). In the advance contribution model, Railways will acquire the land as it is relatively easier for Government agencies to do so. The investment would be routed in the form of ’advance payment’ to the Railways.

In return, the private party will receive 10-12 per cent freight discounts on the incremental outward traffic for the entire lead and not just the new line.

The discounts will be extended to the company till it recovers its advance or for a maximum of 10 years. The cost of construction will be agreed upon by the Railways and the investing company.

If the private firm agrees to pay over 90 per cent of project cost as advance, then Railways will pay the firm 7 per cent interest on the diminishing balance. The investing company can undertake the construction if it is paying entire cost.

Wide-ranging views

While some Railway officials say the risks in the new policy are loaded against the private investor, those in favour say that they have designed the policy after discussions with several companies who approached the Ministry.

“Several ports and cement firms had approached us saying that they be allowed to construct railway linkages as they can build it faster. This policy allows them do so,” said an official.

“Companies need to raise monies from banks for which they need an agreement. The Railways cannot commit their share of investment in the project unless they are approved in the Budget. Going by the Railways’ monopolistic attitude in past private partnership projects such as privatisation of container operations, private party is up against huge risks” said another source from Railways.

“The policy facilitates private investment,” said another official who has worked in a Railway PPP line project.

He, however, added, “In a way, the scope of the new SPV model also covers what RVNL already does, and allows port connectivity works to be undertaken by zonal Railways.”

Amidst these wide-ranging views, how will the policy fare on ground? We will have to wait and watch.

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