Private participation in rail infrastructure projects: an analysis

Abstract

Challenge of financing infrastructure has been a concern for policy makers world over. In the context of developing countries it has become all the more important as development and infrastructure have been proved to be positively correlated. Increasing globalisation and economic liberalisation have in general led to a situation where in physical infrastructure has to be financed by user charges whereas government should only look after financing of social infrastructure. Railways being an important infrastructure segment has been confronted with the challenge of financing its investments in capacity enhancement projects at the same time maintain high level of service delivery. Gradually, central budgetary support to the plan expenditure of Indian Railways has been depleting and it has been left to manage its investments in infrastructure build up projects through internal resources. Though Indian Railways has been in sound financial health recently due to its financial turnaround there is a need for extra budgetary resources if it has to enhance its capacity to match the growing rail transport demand. Indian economy has been growing at an unprecedented rate and it is expected to put pressure on transport infrastructure. It has been seen through time series regression that GDP elasticity of rail transport demand is around 7 to 8 %. Which clearly implies sound investment in rail infrastructure projects will be required for sustained growth. Eleventh five year plan projections clearly brings our financing gap which is required to be filled with extra budgetary resources which will only come from private participation in rail infrastructure projects. In this direction, the dissertation paper has looked into the attractiveness of rail companies based on a framework wherein some listed rail companies have been analysed besides Indian Railways and Chinese Railways. Effort has been made to draw learnings from these rail companies with respect to their attractiveness for private participation. This has been done with the basic assumption that for any private participation in any form it is important for the organisation to be attractive to the private sector. Private sector will invest its money in such companies either in form of direct privatisation or in form of public private partnerships unless it is convinced about the ability of the organisation to provide adequate financial returns. However, it is not only returns but also many other factors that may affect interest of the private sector which have been looked at during the course of analysis of the rail companies. In the second stage, various efforts undertaken for private sector participation in rail infrastructure projects in form of Public Private Partnerships in India have been analysed to assess their efficacy in attracting private sector. In this regard two important PPP ventures viz. Pipavav Rail Corporation and Kutch Rail Company have been analysed in great detail. An attempt has been made to draw learnings from these case studies with respect to risk and reward sharing arrangements, concession agreements and financial structure. Post completion aspects have also been discussed to assess how unforeseen risks have been addressed by keeping the interests of various stakeholders in mind. Essence of the work is to draw lessons from the past experiences so that present PPP structure can be modified to increase the attractiveness of rail infrastructure projects. This is important in present economic scenario wherein central budgetary support is likely to dwindle and investment in rail infrastructure will continue to grow.