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Journalism of Courage
PAVING THE way for more investments into connectivity projects meant for far-flung, backward and hilly areas where creating large connectivity-infrastructure like railways did not make sense financially, the government has decided to give weightage to “intangible benefits” like social, environmental and network effects of such projects.
The policy change gives the government the necessary leeway to justify connectivity projects of new lines, gauge conversion, doubling of lines, etc even if they do not necessarily generate financial returns. This also means Railways will not have to struggle to obtain financial sanction for these projects.
The Ministry of Railways has sent a set of four new project proposals for appraisal to the NITI Aayog, justifying their investment based on this new ‘Modified Economic Internal Rate of Return’ model. These are: 30 km Kalyan-Murbad new line, 300 km Jalna-Jalgaon new line, doubling of 98 km Ankai-Aurangabad – all three in Maharashtra, and the 100 km Sabarmati-Sarkhej-Dholera new line in Gujarat.
The Niti Aayog considers only projects which entail an investment of over Rs 500 crore. “Many more projects will be taken up on this concept in the future,” a Railway ministry spokesperson told The Indian Express. In the current financial year 2022-23, Railways has allocated Rs 67,000 crore towards capital spend for new lines, gauge conversion and doubling of lines.
Traditionally, Railways could justify a new project if it offered a minimum internal rate of return of around 12 per cent. This takes into account the project cost, time taken, maintenance, and future prospects. Under the ‘Modified Economic Internal Rate of Return’ model, a proposed new-line project can obtain a sanction even if its financial rate of return is poor, even 2-4 per cent, simply by being “socially desirable” even if “financially unviable”.
Railways would generally consider projects which offer an internal rate of return of about 12 per cent or more. But there are some projects which may not be financially viable, but can be justified based on benefits which are not immediately visible, for example, the social, environmental or network effects they generate. The new policy aims to give such projects a push.
“Railways has taken a cue from Metro projects to devise the methodology of calculating the economic rate of return,” a senior official said. It was discussed that a capital-intensive system like Metro justifies a lot of its corridor projects by using similar methodology of project appraisal.
The logic is that assessing a project, like connectivity to a port or a mine may be easy in terms of financial returns, but projects that connect backward areas or faraway places also have a long-term ripple effect in the economy, and those “intangible benefits” need to be factored in as well, the official explained.
As per the toolkit devised by the Railway Ministry, the project assessment would have to answer questions like travel time savings, savings in reduced road stress, increased safety, savings in fuel overall for the country, savings in vehicle operating cost, savings accrued due to reduction in pollution and the like.
It was finalised following a report of a multi-disciplinary committee in Railways set up to devise a comprehensive project appraisal method. The proposals are also required to assess the other benefits including the social and environmental impact of the project and the impact on modal share of the commodity or passengers.
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