Thursday, July 10, 2014

Railway Budget: PPP, a pie in the sky
Updated: Jul 8, 2014 07:05 PM , By Arvind Jayaram
He implemented a bold fare hike shortly after taking over, but it’s clearly not enough to keep the Indian Railways afloat. Railway Minister DV Sadananda Gowda has looked to a public-private partnership model as the solution to the Indian Railways’ desperate state of finances. But empirical evidence shows that railways has a very poor track record in attracting investments through this route.

The precarious state of Railway Finances makes it imperative that the government tries to tap as many sources of funding as it can. From ₹11,754 crore in 2007-08, the surplus has shrunk to as little as an estimated ₹602 crore in the 2014-15 financial year, mainly due to non-revision of fares.
This surplus is clearly not enough to fund the Railways’ Plan Outlay for safety, capacity expansion, infrastructure development and improving passenger services and amenities. But given that the Railways has an estimated requirement of ₹5 lakh crore over the next ten years just to implement ongoing projects, the gap between what is available as surplus and the requirement seems impossible to bridge.
Limited success
Gowda’s call for PPP funding of railway projects is by no means a novel approach to the Railways’ problems. His predecessors in the UPA government had also made a concerted push to attract private participation in Railway projects. But one only needs to look at the ₹59,359 crore shortfall in Plan Expenditure in 2013-14, which was mainly due to non-materialisation of PPP targets, to come to the conclusion that ambition and actualisation don’t go hand in hand.
The Railways has met with limited success in attracting private investors to partner in its development. In the 11th Five-Year Plan, the share of private investment in the electricity sector was 44 per cent, while it was 82 per cent in the case of telecom, 16 per cent for roads, 80 per cent for ports and 64 per cent at airports. In contrast, the share of private investment in the railways was a negligible 4 per cent, as per the Planning Commission.
Unreal expectations
The main reason for the failure of the policy has been a disconnect between the Railways’ expectations from the PPP model and the private sector’s focus on profit.
“The more important thing about PPP is that it is a partnership between the public and private sector. The Railways mindset has to be changed in attracting the private sector. The private sector will only come when their interests and expectations are addressed. You need to understand why you need the private sector and what they want from you and structure the projects in that way. That was not addressed in the past,” says Vishwas Udgirkar, Senior Director, Deloitte Touche Tohmatsu India Pvt Ltd.
He pointed out that the Railways seeks a return of about 12-14 per cent from its projects and has sought to cap the returns under the PPP model at 14-16 per cent. But this is not attractive enough to the private players, he contends.
“You cannot pass on loss-making projects to the private sector and expect they will be turned around and turn profitable…. Risk and reward go hand-in-hand,” says Udgirkar.

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