Private push may reduce Railways burden

Indian Railways is now truly emerging as a public-private partnership business, moving away from decades of government taking up the sole responsibility of investing, creating and maintaining this mammoth infrastructure.

Partly driven by an immediate need to minimise strain on government finances, give a boost to the private engineering and manufacturing sector and also to bring in latest technologies available across the globe, Railways is turning to the private sector with a renewed zeal in a methodical way.

Railways is also set to allow companies run their own private wagons on its track systems, thereby reducing demand for railways’ own wagons. And last week, it awarded a contract to a private sector player to build tracks with allied infrastructure under the annuity model for the first time.

The move is expected to herald a new phase wherein the private sector turns into a real operating partner, responsible for developing the rail infrastructure and not just remain as a customer who supplies just bogies, wagons and engines.

Essel Infraprojects, part of Subhash Chandra led Essel Group, has got the mandate to build the third line between Bhadrak and Byree in Odisha, India’s first Railway project under annuity mode was awarded by East Coast Railways as part of the larger Eastern Freight Corridor connecting Howrah and Chennai main line.

Covering a total stretch of 74.92 km including 62.68 km of mainline and 12.23 km of loop line, Essel Infra would construct major and minor rail-over bridges, rail-under bridges, footbridge, platform shelters, and create water supply, waste disposal system and drainage and bank protections.

What are the economics of the project and how will both the parties – Essel and the Railways – stand to gain?

The tender was awarded based on the lowest annuity the bidders had bid, the payback that they would get back from East Coast Railways over a long period of time. 

Essel Infra emerged winner for annuity bidding of Rs 28.44 crore a quarter for a period of 15 years, or Rs 1,706.40 crore, a company official told DNA Money. The second lowest bidder was IRCON International with a bid value of Rs 28.50 crore a quarter, he said.

“While construction period is three years from appointed date, payback period is 15 years from COD (Commercial Operation Date),” the official explained.

So, while the government would get a project completed within three years, there wouldn’t be any immediate major capital expenditure and the investment would be paid back in installments spread over 15 years.

The private sector, would, in turn, shoulder the capex burden and would be rewarded through steady annuity cashflow over a long period. 

“Entire design, drawing, measurements, supervision and quality checks would be undertaken effectively. Safety at work site, signalling and telecommunication works, railway and general electrification would also be an important work under this project,” the Essel Infra official said.

Interestingly, not all track projects are being conceived through the annuity model.

So, between Bhadrak and Byree, a stretch between Jhakhapura and Haridaspur, is excluded out of the project which has already been commissioned by Railway Vikas Nigam Ltd while the stretch between Byree and Nergundi, a stretch if about 14 km would be developed as per the conventional method by Railways on its own.

While the tender for the project was floated in 2016, the foundation of this innovative annuity-based model was chalked out in 2012 under the "participative models for rail-connectivity and capacity augmentation projects Policy” in which 'non–government railway model and joint venture model were mooted.

"This model is applicable to sanctioned doubling, third line and fourth line projects where it may not be possible to find funding from any specific user. The concessionaire would be paid through annuity for the limited predetermined period. An annuity will be determined through competitive bidding. Annuity payments will be budgeted and paid on a committed basis," a policy document says.

And not only laying of tracks and building associated infrastructure, creation of port rail terminal connectivity was looked at for projects under dedicated freight corridors, Railway Board officials explained.

"To strengthen, modernise and expand the Indian Railways network, the investment requirement is huge. Ministry of railways wishes to attract private capital for accelerated construction of fixed rail infrastructure. For this purpose, it has formulated participative investment models for its existing shelf of projects and also for new projects," a Railway Board document says.

Apart from this annuity model, Railways have come up with a novel scheme to boost its revenues by at least Rs 1,000 crore from each of its large customers by luring them to pay upfront their freight charges for the whole year and offering them in exchange fixed freight rates that won't go up during the year.

"The proposed (Freight Advance Scheme) seeks to provide a onetime facility to major freight customers to avail tariff certainty against advance freight. Indian Railways and its customers shall benefit from a regime of guaranteed tariff offerings and tariff certainty," a document of the Railway board while inviting views and suggestions of its consumers, said.

"As there was long-term demand for railway freight wagon users for better and timely availability of general purpose wagons it has been decided by the ministry to introduce a scheme," Railway Board said in its circular. 

Indian Railways will provide 10% rebate on base freight rate on each loaded wagon procured by its customers for a period of 15 years.