PPP model for railways – the viable future option?

Indian Railways, state-owned by the Ministry of Railways, has been the backbone of India’s mass public transportation network for decades. The Indian railway network is among the world’s largest and with constantly increasing and countrywide urbanization, it has become imperative for the government to modernize the railway sector. This has opened more areas of investments to private and public sector companies, banks and financial institutions.

The Finance Minister, Smt. Nirmala Sitharaman, in her maiden budget speech in 2019, announced that the public-private partnership model (PPP) will be used to bring about faster development of the railways including rolling stock manufacturing and the delivery of freight.

In 2014, the government put forward plans for the largest ever expenditure for the railways of ₹654 billion (US$9.1 billion). It also proposed the introduction of bullet trains on the Mumbai-Ahmedabad network. The government in successive budgets has increased the outlay to ₹1.2 trillion and has introduced superfast trains with onboard services. The government also set up the Indian Railway Stations Development Corporation (IRSDC), a nodal agency whose remit is the redevelopment of stations in India. Under the Adarsh Station Scheme (ASS), Indian Railways has identified 1,253 stations, of which 1,103 have already been redeveloped.

In the 2019 budget, the government allocated more than ₹30 billion for rail passenger amenities. In order to improve the quality of travel and to provide world-class services the government has decided to build modern trains such as Train 18 or Vande Bharat trains and aims to put 109 such trains in service in the near future, replacing the Shatabdi and Rajdhani express trains.

Considering the huge investments which are required for further development of the Indian Railways, the 2019 budget proposed using the PPP model for faster development and completion of tracks, manufacturing of rolling stock and delivery of passenger freight services with the allocation of a budget of ₹658 billion. The government has also laid out a vision for the investment of nearly ₹50 trillion over the next 10 years.

In the process of establishing a PPP model to develop the railways, Indian Railways is also planning to select private operators to run the trains on selected routes such Lucknow and New Delhi. Due to the strenuous efforts that the current government is making, one can foresee that Indian Railways is heading towards privatizing the rail infrastructure. To achieve this, large infrastructure corporates may come up with plans to enter into a PPP with financial institutions and banks and take this opportunity to develop Indian Railways by undertaking projects that are profitable as well as secure.

The Asian Development Bank has already signed an agreement to provide US$750 million for the purpose of electrification of railway tracks in India. Further it has decided to lend US$926 million for the Mumbai metro rail project (657km of metro rail network has become operational across the country). However, the majority of funding to Indian Railways is undertaken by the Indian Railway Finance Corporation (IRFC), which was set up in 1986. The IRFC is registered as a Systemically Important Non-Deposit Taking Non-Banking Finance Company with the Reserve Bank of India. IRFC’s funding up to 2017 is more than ₹1.8 trillion. IRFC has been lending to various entities within the railway sector such as Rail Vikas Nigam Limited, Railtel, Konkan Railway Corporation Limited, Pipavav Railway Corporation Limited and so on.

It is astonishing that the private banks and financial institutions have not shown interest in direct funding of the rail infrastructure of the country. The banks and financial institutions may lend to such private players that may enter into an agreement with the government through the PPP model to develop the rail infrastructure.

As the government is planning to introduce PPP model in the railway sector, it will be interesting to see which model the government will adopt, whether it be the joint venture model, the build, operate and transfer model, the customers’ model or the annuity model.

To conclude, the banks and financial institutions should make the effort to increase their direct funding in ever expanding rail infrastructure. To support such an effort, the government should frame policies aimed at developing and providing regulatory support to banks for the purpose of encouraging them to help fund new rail projects.

Source: Vantageasia