India has one of the largest rail networks in the world, comprising over 115,000km.
In 1951, almost a century after railways were introduced into India, the network was nationalised but in a bid to encourage economic growth and improve ailing infrastructure newly-elected Prime Minister Modi has signalled a new era of foreign direct investment and the involvement of the private sector in the development and operation of India’s railways.
Parts of the network are now quite old (about 25% of the 130,000 railway bridges are over a century old) and it is reported that at least USD 93bn over five years is needed to maintain and modernise the existing network. But the new government wants to go further and build high speed lines between key centres, each of which could cost in the region of USD 10bn . With almost all of the network’s revenue spent on operating the system and paying social costs little is left to upgrade the infrastructure.
The government has acknowledged that it does not have the resources to upgrade the system so public private partnerships are to be adopted to utilise private finance (including foreign private finance).
The Ministry Of Railways’ Preferred Models
The Ministry of Railways has proposed five models to implement rail connectivity and capacity augmentation projects. Details regarding each scheme are sparse but conclusions can be drawn from the description of each scheme.
- Non-Government Private Line Model – the owners of large industrial facilities (such as ports, mines and logistics parks) could develop a railway, primarily for goods movements. Under this approach the private sector would develop and operate the railway with little input or assistance from the Ministry of Railways, although Indian Railways could enter into arrangements where it uses the infrastructure to transport good using its own wagons and locomotives in return for the payment of access charges or user fees. Railways are rarely economically viable so this approach would only work where the private sector is satisfied that the revenue generated will pay all the costs and leave an acceptable return for the investors. If such a scheme exists the Ministry of Railways might be interested in promoting it, or working with the private sector to do so, to derive financial benefits from the scheme itself.
- Joint Venture Model (JV) – under the joint venture model the public and private sectors will work together to develop a scheme. The Ministry of Railways could enter into a development agreement with the joint venture which develops the scheme in accordance with the terms of the development agreement. If this approach were to be adopted it is likely that funding would be provided by the Ministry of Railways with the railway (once developed) being transferred to the Ministry of Railways to be operated by it or Indian Railways. The development agreement would legislate for issues such as acquisition of land, the specification of the railway and the standards to which it has to be built, timing, procurement of subcontracts and payment.
- Build, Operate and Transfer Model (BOT) – a BOT is a traditional PPP model where the private sector builds and operates a scheme for a number of years and then transfers it to the public sector at the end of the concession period (which may be 30 years or more). The private sector also finances the scheme, raising finance which is then repaid over the life of the concession utilising the revenues generated by the scheme. Such revenue could comprise fares, freight charges or access charges (to pay for access to the track or other infrastructure) as well as revenue from other commercial activities, such as retail activities.
- Capacity augmentation through BOT annuity model – this model is similar to the BOT but with the project company being paid for the system it provides on an availability basis (i.e., provided the system is available the contractor will be paid) rather than by reference to the revenues generated by the scheme. This should relieve the contactor of any revenue risk which can be a significant impediment to securing finance for a scheme.
- Capacity Augmentation with funding provided by customers – under this arrangement, a customer and the Ministry of Railways will agree the basis on which the latter would develop a scheme with funding for the scheme being provided by the customer. The customer would deposit the required funding in an escrow account to be expended by the Ministry of Railways on the railway project in accordance with the agreement between the customer and the Ministry of Railways. The customer would be entitled to earn an agreed rate of return equivalent to 7% of the disbursed amount along with interest up to a maximum of the freight charges in any year.
Although these five headings are fairly vague, it is clear from other information released by the Ministry of Railways that it sees a role for the private sector in developing high speed railways (above 250kmh) and in upgrading the existing network to semi-high speed operation (above 120kmh).
For further information, please contact:
Michael Horn, Partner, Clyde & Co
michael.horn@clydeco.com
David Moore, Partner, Clyde & Co
david.moore@clydeco.com
