The Hindu Business Line : How Kutch Rail reduced project cost

As Kutch Railway Company Ltd (KRCL) gets ready to commission on March 24 its 248-km rail line from Palanpur to Samakhiali, which would establish direct broad gauge connectivity from the Northern hinterland to Gandhidham, the project will have several lessons to offer for railway project execution.

This is so because the commissioning has been achieved within 99 days of the link being blocked for broad gauge conversion— which is "impressive" by Indian Railways standards.

Moreover, apart from commissioning the rail link in a short time-frame, it has also managed to control the cost over-runs and has reduced the landed project cost.

Reduction in project cost

KRCL is an SPV formed to develop, finance, design, construct, operate and maintain the 301-km Palanpur-Gandhidham rail link. At present, trains move goods between various Gujarat ports and north India along a 434-km route between Gandhidham and Palanpur. The KRCL rail route will reduce distance between these two points by 120 km.

From an estimate of Rs 550.75 crore in June 2005, the landed cost of project was down to Rs 499.95 crore in December 2005. "We expect to save another Rs 20 crore," said Mr Yogendra Sharma, Managing Director, KRCL. The cost reductions were achieved by a combination of strategies, including fund management, phased implementation of project, controlling construction time overruns and strict inventory control of construction material.

"We planned the project implementation in a phased manner so that we could generate revenues right after the completion of Phase I," explained Mr Sharma. KRCL had to construct the 301-km Palanpur-Gandhidham rail link. But it decided to construct the 248 km Palanpur-Samakhiali in Phase I. This would enable freight trains to move till Gandhidham as a broad gauge link already exists between Samakhiali and Gandhidham.

Fund management

The company was able to raise Rs 300 crore of debt finance from Oriental Bank of Commerce and United Bank at an attractive rate of 7.5 per cent with a 15-year term and two years moratorium on repayment.

"We deferred the debt financing by raising the entire Rs 200 crore equity from shareholders. Though a term loan of Rs 300 crore was sanctioned, disbursement was taken based on needs. We have utilised Rs 150 crore so far (from the debt) and our internal fund generation starts this month," he said. The overhead expenditure was controlled by keeping a small office set-up and lean organisation — with only 11 full-time employees — and outsourcing several jobs such as office maintenance.

Through proper fund management, the cost of servicing the "interest during construction" (IDC) was reduced to Rs 17.5 crore (December `05) compared to Rs 36.04 crore (June `05 estimate). "We hope to further bring down the IDC to Rs 4 crore," said Mr Sharma adding that savings of about Rs 20 crore were also achieved in the debt service reserve fund.

Management strategy

Since supply of railway material is critical, KRCL monitored the material position with supplies on a day-to-day basis and gave advance payments to suppliers. "We released 90 per cent of payment to suppliers within 48 hours of receipt of bills and the balance 10 per cent after scrutiny," said Mr Sharma.

The company also adopted mid-course correction. "To ensure double-stack container movement on the track, we decided to raise the height of three foot-over-bridges and one road-over-bridge 7.3 metres and revised our construction plans. Ensuring movement of double-stack containers increased the revenue generation capacity of the project."

Financial appraisal

As per the project appraisal carried out by ICRA, KRCL is expected to generate at least Rs 115 crore revenue in its first year of operation, ensuring an internal rate of return (IRR) of 20.81 per cent. If things work out as projected, revenues could even be at Rs 127 crore, with a 23.27 per cent IRR.

More Stories on : Railways | Insight | Economy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
FOR BANKABLE FARMING

Stymied by the bogey of national security

Selling India: A look at the complete picture

Not so soon

Government's buy-f.o.b policy sails into sunset

Pedestrian policy on real-estate

Correction ahead for stocks?

How Kutch Rail reduced project cost

Crossing the divide

Liquidity problem

VAT on bullion