Business Today

Railways: Right on track

There is much by way of investments in the railway sector that are waiting to happen.

Shalini S. Dagar | Print Edition: April 19, 2009

Stoicism and patience are two virtues that infrastructure investors need in plenty. Pratyush Kumar, President and CEO, GE Infrastructure India, is no exception. In February, the government rejected GE Infrastructure’s financial bid to be a 51 per cent partner in the Rs 2,000-crore diesel locomotive factory in Bihar. The reason: GE was the only bidder!

And, within 18 days, the Union Cabinet changed its mind on the ownership pattern: instead of the government holding a 26 per cent stake, the factory would be fully owned by it.

Sitting in his office in central Delhi, across the Rail Bhawan, Kumar, though disappointed, is determined to be there whatever the opportunity, whenever. “We will not walk away from this,” he says, all the while hoping that a better decision will be arrived at. At the Rail Bhawan, senior railway officials admit that it is difficult for the government to take such decisions close to the general elections.

“We recognise that this opportunity will still be there after the elections because the fundamental need for locomotives has not gone away,” says GE’s Kumar. Sure, that is true for many of the other opportunities in the rail sector.

“The New Delhi Railway station modernisation is another missed opportunity. It was delayed for rather inane reasons—one of them being cross-ownership, which was causing discomfort to the bidders. Now it will take another 8-9 months to bid it out again,” says a high-ranking Railway Ministry official.

These two stalled projects were clear and present opportunities and had held out hope for public-private partnership in the Railways on a really big scale. But there are plenty of others waiting to be grabbed. According to industry estimates, opportunities in construction and development projects, adding up to nearly Rs 1,60,000 crore, would be available over the next few years.

Reason: Movement of goods across India is an expensive proposition. The cost of the supply chain in India is estimated to be around 13 per cent of GDP, as compared to 9 per cent of GDP in developed nations. That translates into a $45-50 billion logistics opportunity straight away. And rail freight has an advantage over road freight not just in terms of cost and ease of operations, but in terms of environment friendliness, too.

In line with this logic, and aided by the Budget surpluses of the last few years, several big-ticket item of investments were proposed by the Railway Ministry. A major one being the dedicated rail freight corridor connecting the northern regions to the ports on the east and west coast of India.

A special purpose vehicle Dedicated Freight Corridor Corporation of India (DFCCI) was formed two years ago to plan, mobilise resources and execute the project. This is likely to throw up several opportunities to bid for turnkey projects for the private sector. V.K. Kaul, Managing Director, DFCCI, says: “Loan financing from the Japanese investors and World Bank will be finalised shortly. And the freight corridor will come up in 5-6 years after that.” The corporation has sought some 11,000 hectares of land for the corridor.

Railway Ministry officials say land is not a problem. “We need to acquire very little land for the freight corridor. We will need to acquire only in towns or where it has been encroached, otherwise we have space for four lines from Delhi to Mumbai,” says Sudhir Kumar, Officer on Special Duty (OSD) to the Railway Minister. The same is the case with the Eastern Corridor where work was initiated recently. Of the recently bid out contracts, the cost of earthworks alone adds up to Rs 500 crore, says Railways’ Kumar.

The freight corridors will spawn huge logistics and warehousing infrastructure alongside. Bids invited by the Indian Railways for multi-modal logistics parks received enthusiastic response from logistics players. Industry watchers peg the opportunity at Rs 20,000 crore.

Fitting into this piece of action will be the private container trains, which were introduced a few years ago. The current downturn in traffic volumes has added to their woes.

Many of them had blindly replicated the business model of Container Corporation of India. Ajay S. Mittal, Chairman & Managing Director, Arshiya International, a logistics company, admits that many players did not get things right. “There has to be an equal investment in rakes, containers and associated infrastructure. Private players will certainly rectify these issues now,” he adds. Much of that will mean more investments.

Arshiya, through its wholly-owned subsidiary, Arshiya Rail Infrastructure, started its rail operations in February. It plans 30 rakes for Vedanta Aluminium with custom-built containers. “This will not only help in lowering Vedanta’s operational costs, but also reduce damage to the cargo (aluminium powder and ingots). The end-to-end solution will lead to direct and indirect savings of around 20 per cent in the cost of the supply chain,” says Mittal. The BSE mid-cap company is planning Rs 6,000 crore of investments in sidings, rakes and free trade warehousing zones over the next six years. One of the earliest proposed warehousing zones will be at Khurja—where the two freight corridors will meet.

Fresh investments apart, the existing rail network will also need continuous modernisation to make it perform. The good thing is that money and the inclination are not missing, both in the state-run Railways and the private companies. As GE’s Kumar says, there is no reason to walk away from building infrastructure in India.

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