Learning from various concessions by IR in the last decade

Yogendra Sharma, Retd IRTS

President Rail
Adani Power and Mines

IRICEN
26.09.2017
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 Contents

• PPP – Definition

• Need for unconventional source of capital funding.

• PPP- WHY? Types, Agents and Stages of PPP Projects development

• Non Govt Railway - a beginning with port connectivity

• A few Special Purpose Vehicles under Joint Venture arrangements

• New PPP Policy of Dec’2012

• Participative Models of Rail Connectivity and Domestic and Foreign Direct Investment of
Dec’ 2014

• Participation of State Govt. Railway PSUs in development of rail infrastructure.

• A comparative assessment of Role and Responsibilities and Revenue Sharing

• Concession agreement- challenges and Way Forward

• Discussion
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 PPP- Definition

• PPPs are aimed at increasing the efficiency of infrastructure projects

by means of a long term collaboration between the public sector and
private business, over the lifecycle of the project.

• Standard & Poor’s definition of a PPP is any medium-to-long term

relationship between the public and private sectors, involving the
sharing of risks and rewards of multi-sectors skills, expertise and
finance to deliver desired policy outcomes

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 Need for unconventional source of capital for IR ?

• From the beginning of the first five year plan, creating infrastructure was
the prime responsibility of the Govt.

• However, with the increasing social obligations and growing aspirations

from the industry and the people, it has been realised that Govt. alone
can’t mobilise resources for creation of infrastructure, country may require

• Need for Public-Private-Partnership

– IR is suffering from aged assists, capacity constraints, low speed, poor condition of the
railway stations, obsolete technology, etc.
– Budgetary resources are inadequate for the Infrastructure growth to meet public
aspirations
– IR is losing market share and various key commodities have moved to other sectors,
such as Steel, Cement, Petroleum products, etc.
– Indian Railways shall need Rs 8.56 lac crore investment in next five years, 47% of
which is targeted to come from the private investment. 4
 Why PPP ?

• PPP brings additional resources through private funding

• Minimum risk allocation for the Govt agencies.
• Access to international funding through private sector
• Increasing efficiency in the execution of projects
• Technological innovations and automation

• Rationale for concessions

– In market monopolies Head-to-Head competition does not operate
– When markets can be served efficiently by several private firms ordinary competition usually
works well.

• Competitively auctioned concessions allow some of the benefits of cost

and efficiency

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 Types of PPP Models
• The graphic below shows the kinds of PPPs based on extent of
Private Sector Participation in the projects

Public Private Partnership

BOOT/ Full
Service/ BOT/
Lease Privatization
Management Concession BOO
Contracts

Low High

Extent of Private sector participation

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 Six Agents of PPP
1. PRINCIPAL
Government
4. CONTRACTOR
Concession Agreement
Facility Limited Equity Construction
Concession
2. SPONSORS Agreement
Shareholders Dividends Construction cost
agreement
Equity
CONCESSIONAIRE

Operation Fees

5. OPERATOR
Operation Agreement
O&M Services
Debt

3. LENDERS
Debt Payments Fees
6. END USERS
Lenders Agreement
Off Take Agreement 7
Stages in development of BOT Projects

Project
Preliminary Selection Construction Operations Transfer
Implementation

• Pre
• Project • Execution of •Facility is operated • Transfer
Qualification •Execution
Identification Concession and maintained • & Close
• Request for agreement
• Feasibility Proposals Testing & • Repairs and
Study • Approval of Commissioning Augmentation as
• Evaluation of design may be required
• Sharehold proposals
ers • Obtaining •Repayments of
selection • Draft clearances debt
Concession and
agreement Building reserves
approvals
for future use

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 Beginning of PPP – The First Non Govt. Railway in India

• In year 2000, Adani Group secured long term lease from GMB for development of sea port at Mundra
• Adani approached MOR to provide 52 Km new railway line from Adipur station to Mundra port.
• MOR refused to fund the new line due to business risk, being new port.
• Adani offered to build its own, and demanded revenue sharing arrangement to recover the cost of
construction and maintenance.
• MOR made a new policy on Non –Govt. Railway and a Concession agreement was signed in 2002, where:

o Private Party was allowed to plan, develop and construct new line on NGR model, and own in perpetuity,
o Entire cost on land, rail construction, etc. was borne by the Private Party,
o The new line was developed as per IR norms, NWR issued the safety certificate, line was opened to traffic,
o Adani maintains P.Way, S&T , Stations Buildings and manages LC gates,
o IR provide Reserved Services, i.e. Locos, Wagons, Fuel, Running Repairs of rolling stock, manages stations
operations and collect freight charges.

• Out of the total apportioned earnings for the 52 km section, IR retains the cost of providing Reserved
Services and balance is transferred to Adani. Also IR recover 3% concession fee on the total apportioned
earnings.

• In 2016-17, Mundra port became the biggest port in India by handling 110 Million ton cargo, 19 Million Ton
moved by rail, 20 daily average number of trains each way.

• Today Mundra port is connected with a double line section having over 250 ETKM network

• In 2016-17 out of a total apportioned earnings of 145 Cr. Mundra port received Rs 58 Cr.
 Another NGR Connecting Port

• In year 2011 Tata and L&T developed Dharma port in Orissa and constructed 62 Km new rail line
from Bhadrak station on the ECoR at their own cost.
• After new Policy on PPP announced in Dec’2012, DPCL approached MOR to treat the new line
as Non Govt. Railway.
• With the approval of MOR, in 2015 ECoR signed concession agreement with DPCL on NGR
model.
• DPCL is responsible for:
o Maintenance of P.Way, S&T, CTC control, OHE, Powerline, LC and Station Management,
etc.
o Payment of traction power supply bill
o All terminal operations, cleaning and minor repairs of wagons before back loading
o Provision and Maintenance of the diesel locomotives for internal shunting
o Maintenance of running rooms, conservancy, etc.

• ECoR is responsible for:

o Provision of all Reserved Services, i.e. Locos, Wagons, Running Repairs of rolling stock and
collection of revenue.

o Out of the total apportioned earnings for the section, IR retains the cost of providing Reserved
Services and balance is transferred to DPCL after recovery of 5% concession fee on the total
apportioned earnings.
o In 2016-17, Dharma port handled 21 Million ton cargo, 10 daily average number of trains each
way.
o In 2016-17 out of a total apportioned earnings of 260 Cr, DPCL received Rs. 182 Cr.
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 Beginning of JV Model in Rail Infrastructure

• Year 2001, Nikhil Gandhi Group secured long lease from GMB for development of sea port
at Pipavav , near Bhavnagar in Gujarat.
• Party approached MOR for GC of 271 Km Km MG line on SurendraNagar - Pipavav port.
• MOR refused to fund the project due to business risk, being new port.
• Private Party offered to cost sharing and demanded revenue sharing to recover the cost of
construction and maintenance.
• MOR made a new policy on Joint Venture Railway and a Concession agreement was signed
between MOR and Pipavav Railways, where:

o MOR and the Pipavav port floated a new SPV of Pipavav Railway on 50:50% equity sharing basis.
o The new SPV arranged debt and undertook GC, awarded contract to Western Railway . SPV procured major
free issue material, such as Rail, Sleepers, P&Cs and Ballast, etc.
o WR manages the maintenance of P.Way, S&T and Stations and manning of LC gates, and stations operations.
o IR also provide Reserved Services of Locos, Wagons, Fuel, Running Repairs of rolling stock, etc. and collect
freight and passenger revenue. IR also runs passenger trains with no revenue sharing

• Out of the total freight earnings for the 271 km section, IR retains the cost of providing O&M
and Reserved Services and balance is transferred to the SPV.
• In 2016-17, Pipavav Railway moved 8 Million Ton freight on 8 daily average number of
trains.
• In 2016-17 out of a total apportioned earnings of 240 Cr, Pipavav Railway received Rs 90 Cr.
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 Few other JV Models in Rail Infrastructure

• In 2003, to promote private participation in rail, MOR created a separate PPP

Cell in Railway Board

• Also Rail Vikas Nigam was set up to develop railway projects on PPP model

• After the success of the first PPP project of Pipavav Railway, following JVs
were set up with RVNL as Govt. shareholder

o Kutch Railway for GC of 300 km line from Palanpur to Gandhidham in Gujarat,

o Hassan-Mangalore for GC of 293 km line in Karnataka,
o Dahej-Barucch for GC of 52 km line in Gujarat
o Krishnapattnam Port connectivity in Andhra Pradesh
o Haridaspur-Paradip port new line connecting port
o Angul-Sukinda new line as alternate route in Orissa

• While the first four projects have been commissioned and operations are in full
swing, last two projects are under execution in the State of Orissa

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 PPP Policy of Dec’2012

• Prior to Dec’2012, NGR model was allowed only for rail port connectivity projects

• R3i policy of 2011 did not allow last mile rail connectivity on NGR model to other than sea
ports

• In 2011, I represented to the then CRB about R3i policy; and strongly pitched for enlarging
the scope of NGR beyond the port connectivity

• CRB asked me to assist in drafting of new PPP policy, which allowed first and last mile
connectivity to various freight centres, such as ports, large mines, logistics parks, etc.

• Fundamentally, such lines are operated on the principle of “Common Users corridor”

• Following PPP Models are suggested in 2012 PPP policy

o Non-Govt. Lines Model on revenue sharing

o Joint Ventures Model on revenue sharing
o Built Own Operate and Transfer Model on revenue sharing
o Annuity Model of fixed fee recovery basis
o Customer Funded Model on discount on freight moved on the line

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 Participative Models of PPP- Dec’2014

• Moving forward on PPP, MOR in Dec’ 2014 issued framework agreements on vide
arranging projects.

• Dec’2014 policy provides following five Models:

o Non- Govt railway Private line Model;
o Joint Venture Model;
o BOT Model;
o Capacity Augmentation with Customer funding;
o Capacity Augmentation through Annuity Model

o In addition to new lines, new policy framework allowed PPP in several other areas, such
as:
o Suburban Corridors
o Mass Rapid Transport System
o High Speed Trains
o Dedicated Freight Lines
o Rolling Stock, Train Sets, Locomotives, etc.
o Railway Electrification
o Signalling Systems
o Freight and Passengers Terminals
o Industrial Parks

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 Participation of PSUs and State Govt.

• Dec’2014 policy also provides development of new railway lines and Rolling
Stock manufacturing on JV model with participation from railway PSUs and
State Govts.

• JV Models with MOR/Railway PSUs already under implementation:

o IRCON, SECL & Govt of Chhattisgarh- Two Rail Corridors of 230 kms in Chhattisgarh
o RITES, PCM & Shapoorji- 130 km Bhuj- Nalia new line in Gujarat
o MOR and Rolling Stock manufactures to set up car manufacturing factory at Kachrapara in West Bengal
o MOR, GE & Alstom – manufacturing of 1800 new locomotives in State of Bihar

• Two railway line projects are being identified in Chhattisgarh under this policy
• RITES has already started execution on the Bhuj- Nalia line in Gujarat
• Tenders for 5000 EMU sets is under financial bidding at the Railway Board
• Two loco factories are under construction in Bihar
• High Speed Rail Corridor on Ahmedabad-Mumbai - foundation stone has been
laid

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 Participation of PSUs and State Govt.

• In another initiative, MOR created a post of ED JV in Railway Board to mobilise participation

of the State Govt.

• Following State Govt. have entered into MoUs with MOR for development of new railway
lines in their respective States. They are in the process of identification of the PPP projects
and to sign the Concession Agreements with MOR
o Karnataka
o Gujarat
o Jharkhand
o Chhattisgarh
o Orissa
o Andhra Pradesh

• Under this Model, each State Govt. shall have an Umbrella JV and for specific railway
projects the State JVs will float separate SPVs to execute the projects on a 30 year
concession agreement with the Railways

• Such SPVs will invite participation from the local industry and investors; and shall operate
new Rail Systems on revenue sharing basis during the Concession period.

• Upon expiry of the Concession period, Rail System shall revert back to Indian railways at
Rs.1 cost 16
 Comparative Position of Various PPP Models

S. No Model Period of CA Private Party- Role MOR – Role Revenue

1 NGR No concession Finance, Land Acquisition, Train operations, IR pays Track Access
No transfer of Rail System to IR Construction, O&M, Traffic Provision of Reserved Charge to NGR in
Risk, etc. Services perpetuity

2 JV 30 years Finance, land (in name of IR) Train operations, IR pays Track Access
Construction, O&M, Traffic Provision of Reserved Charge to JV
Risk, etc. Services

3 BOT 25 years subject to actual traffic Construction, O&M along Provide ROW, all IR pays TAC to BOT
materialisation with performance security to sanctions, may Provide operator
meet KPIs VGF

4 Customer Based on Traffic volume Funding for the last mile Construction, O&M 7% rebate on freight
Funded railway line charges allowed to the
Developer for a
specific period

5 BOT- Till the Cost recovery Funding and Construction Land Acquisition and Annuity payment
Annuity O&M services through competitive
bidding

6 FDI 100% FDI is allowed in
railways, new lines,
Electrification, power
Generation, Rolling Stock,
Terminals, Training Institutes
Concessionaire will be free to Assessment of technical IR to pay cost of
establish SPV and bring FDI and financial viability services/products
based on competitive
bidding

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 Reserved Services by IR on various Models
and Apportioned revenue sharing in %

S. No SPV Reserved Services by IR Services by P/Party IR share of P/Party share

revenue of revenue
1 Mundra- Station Ops, Rolling Stock, Fuel, Safety of fixed assets, running 3% on A/ 40%
NGR Crew, Commercial Ops, etc. rooms, maintenance of P.Way, Revenue +
S&T, LCs, Stations, etc. 60%
2 PRCL-JV Safety of fixed assets, running rooms, NIL 70% 30%
maintenance of P.Way, S&T, Stations,
Ops of Stations, LCs, Rolling Stock,
Fuel, Crew, Commercial Ops, etc.
3 KRCL-JV Safety of fixed assets, running rooms, NIL 73% 27%
maintenance of P.Way, S&T, Stations,
Ops of Stations, and LCs, Rolling
Stock, Fuel, Crew, Commercial Ops ,
etc.
4 Dhamra – Rolling Stock, Crew and Commercial Safety of fixed asserts, 5% of 70%
NGR Ops only maintenance of P. Way, S&T, A/Revenue +
Stations, Ops of Stations, LCs, 30%
Fuel, Running Rooms, etc.

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 Concession Agreement to have incentives and
clarity to the shareholders
• CA to have more autonomy to SPVs to encourage innovation, new technology, cost
reduction, increase in efficiency and risk taking

• SPV should be free to develop freight terminals and private sidings along the Rail
Systems to attract more originating traffic to the rail System

• SPV should be allowed to manage the following services:

• All maintenance of P.Way, S&T and OHE the way they like to meet the KPIs
• Stations operations and management of all services, except freight collection
• Full freedom for generating Non-Fare revenue on the rail Systems
• SPV has the first right over freight trains booked via the rail System
• SPV should recover the cost of train paths for passenger train operations

• Role of IR should be limited to the following services:

• Provision of rolling stock both for freight and passenger services
• Maintenance of the rolling stock
• Revenue collection and payment of Track Access Charge to the SPV
• Monitoring the functioning of SPV through Independent Engineer
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 Challenges ahead
• Infrastructure is overstretched, 60% of the network is utilised over 100%
• In last 70 years, while freight loading has increased by 1340% and passengers kms by
1640%, route kms have grown only by 23%
• Large infra projects takes 24 months in approval
• Two third of revenue comes from freight, however, two third of capacity is utilised by
passenger services,

• Few Big policy decisions MOR has taken in recent times:

• JVs with State Govts to muster additional capital for major projects
• PSU to leverage free reserve for raising debts and building assets
• RIDF shall finance major projects, independent of the Railway Budget
• Two DFC under commissioning by 2019, three more in pipeline
• Semi-High Speed trains on the golden quadrilateral
• Average speed to increase to 50kmph for freight and 80kmph for passengers
• 100 world class stations, including 25 through IRSDA
• In 2017-18
• 3500 kms new BG lines, including 481 kms in North East – 9.5 km per day
• 4000 kms electrification – 12.3 kms per day – Target to 90% network infra

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 Challenges ahead
• Mission 100 new freight terminals, Modernise goods shed through PPP
• Freight trains to run on pre-determined time table
• Freight tonnage to grow from 1100 million to 2400 million by 2025 – 8.5% CAGR
• Full fledged Railway University at Vadodara
• Passenger trains punctuality to increase to 95 kmph
• Rail Market Share in Freight to increase
• IR Operating Ration to improve

• All this shall require:

• A major shift in the style of functioning of IR, where decision making is very slow,
There is need to prepare “Customer Charter” IR to commit timelines on projects
• Project Management capabilities to be upgraded to meet the massive challenges
• Skill development, development of human resources and introducing multi-disciplinary
approach in profession
• Open mind on new ideas and risk taking attitude at all levels

• Public- Private – Partnership is the key to Success and let us recognise and embrace the
same willingly and sportingly.

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 Few Lessons Learnt
• SPVs to control capital cost by executing Rail Systems in phases on need based

• JVs on new lines should tie up for Traffic Guarantee(TG) for a minimum tonnage

• Should be able to recover the fixed cost in case TG is not met

• Based on traffic assessment in the catchment area, JV should establish PFTs and focus on
marketing for new customers

• MOR should divert freight trains if Rail System provides shorter route for a given route

• SPVs to have full freedom on commercial exploitation of the assists to generate Non-Fare
revenue

• MOR to restrict to minimum Reserved Services and let SPVs to manage rest all activities on
Operations and Maintenance . This model provides better cash flow to the SPVs

• MOR to stay at Arms length and exercise control over SPV only to ensure that
infrastructure is created and maintained for the required level of traffic with robust22
SOPs
Discussion

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