Saturday, February 19, 2011

Rail PPP on a slow track

The government’s plan to transform the country’s crumbling transport infrastructure through private participation has not made much headway. While just over a year remains in the current Plan period, the projected private investment of Rs 211,600 crore in railways, roads and airports has already been lowered by 60 per cent to Rs 86,700 crore.

Not surprisingly, Indian Railways, which has resisted privatisation for years, has fared the worst. The Planning Commission recently slashed the expected private investment of Rs 50,354 crore — or, 20 per cent of the overall investment of Rs 261,800 crore — in railways for the current Plan period by as much as 83 per cent to Rs 8,316 crore.

That comes as disappointing news, given that the public-private participation (PPP) model has proved a major success in telecom and highway development. In a recent discussion with the media, Prime Minister Manmohan Singh said the country would see a fresh wave of infrastructure investment via the PPP route.

The ministry of railways has issued several policies aimed at building infrastructure with private participation in the past two years. Crucial projects on offer via PPP include new engine manufacturing units in Marhoura and Madhepura in Bihar, high-capacity freight bogey manufacturing factories in Dalmianagar in Bihar and Majerhar in West Bengal and the Son Nagar-Dankuni Section of the dedicated freight corridor.

Industry’s response to these schemes has, however, been somewhat muted. A host of reasons, including ill-designed model agreements and the railways’ insistence on majority stake in projects, have ensured delays in awarding PPP projects, according to experts.

The showcase Madhepura locomotive project in Bihar, conceived in February 2007 at an investment of Rs 1,290 crore, is an example. Bids to select a joint venture partner were invited in May 2008. The rail ministry shortlisted Alstom, Bombardier and Siemens through competitive bidding and issued draft requests for proposal in September. However, none of them applied for the financial bid.

The ministry then decided to set up the unit as a railways production factory, which was approved by the Cabinet. In December 2009, the ministry decided to revert to the JV mode and a fresh request for quotes was issued in March 2010.

The ministry shortlisted Alstom, Bombardier, Siemens and GE Transportation and final bids will be invited soon, according to sources.

“PPP is a game of structuring a project well. The structure of projects being planned by Indian Railways is not up to the expectation of private players. Projects have to be made bankable. Otherwise, private players are reluctant to invest, given the long gestation period of rail projects,” said Akhileshwar Sahay, president, transportation, at Delhi-based project management firm Feedback Ventures.

Apart from expectations of a greater role in running a project, the lack of adequate concessions and assured off-take often dampen private players’ interest in projects. A case in point is the Son Nagar- Dankuni section of the dedicated freight corridor.

While 14 top infrastructure companies have evinced interest in the project, talks have remained inconclusive owing to their demand for a change in the project model. “We had initially said the project would be on design-build-finance-transfer basis. But the companies said they want design-build-finance-operate-maintain-transfer basis. And this is in addition to appropriate concessions. That is currently being discussed. Indian Railways has never done this,” said a senior rail ministry official.

Another issue is the government’s insistence on a majority stake in projects. The rail ministry was initially unwilling to accept less than 51 per cent stake in PPP projects. “Now, it has come down to 26 per cent. Actually, the government’s stake should be less than 26 per cent,” Sahay said.

“PPP is about sharing risk and ownership, and the rail ministry has been touchy on this issue,” said Tarun Kumar Gupta, senior manager, PricewaterhouseCoopers. However, he added that the entire concept of PPP is still new for Indian railways.

"Another issue is the lack of players with the kind of technical expertise required to execute large projects being offered by the government. Also, the lack of a proper policy document detailing the government's thinking on PPP makes private players apprehensive of railway projects,” he said.

While Minister for Railways Mamata Banerjee had said in her Budget speech last year that policy guidelines on private investment would be made simple, easy and investment friendly, a month before the current financial year comes to an end, her ministry is still struggling to finalise a workable PPP policy. The ministry last month set up a six-member committee to do the job. It has so far had only “generic” discussions on the concept of PPP, according to Railway Board chairman Vivek Sahay.

Banerjee had also set up an expert committee in 2009-10 under Ficci Secretary-General Amit Mitra to work out a suitable PPP model for rail projects and suggest innovative ways to finance them. While the panel submitted its report last month, according to sources, the railways’ limited financial resources might come in the way of implementing provisions like assured off-take.

Experts agree that at the current pace, meeting the Vision 2020 target of mobilising a “considerable share” of the required Rs 14 lakh crore investment in Indian Railways over the next decade through private participation might be difficult.

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