Opinion Laying new tracks
The rail budget must spell out how it will attract private investment
The rail budget must spell out how it will attract private investment
Union Railway Minister Pawan Kumar Bansal has a daunting task of locating resources for pulling back the Indian Railways (IR) from the brink of bankruptcy,for enhancing safety,implementing modernisation and augmenting capacities. He also has to weed out projects of doubtful social relevance justified on grounds of equity. The latter is easier said than done since the IR is also looked upon as an instrument of social policy for integrating the country,opening up remote areas to settlement and economic development and offering low fares for those who cannot afford to pay. For these reasons,investments with less than market return cannot be entirely wished away. Since determining to what extent an investment will aid the disadvantaged has been a problem,the judgement of the minister has ultimately decided the issue. As long as ministers ensured that investments in projects with less than market return did not undermine the IRs financial stability,the outcome was good.
However,over the last two decades or so,railway ministers have been increasingly buffeted by the winds of coalition politics and have sought new political constituencies by extending sops in the form of concessions,and trains and projects in remote areas. In fact,railway ministers have been able to use voters disparate objectives and the varied patterns of distribution of voting power to justify self-serving behaviour. Moreover,unlike private-sector firms,the Central government can often tax its way out of financial difficulties. This blunts the threat of financial distress and reduces its effectiveness in deterring railway ministers from uneconomical investment. This has led to the diversion of scarce capital to projects or services that dont give adequate returns,forcing the IR to cut expenditure on replacement of over-aged assets,expansion and modernisation. The impact of this shows in falling safety standards and poor service.
Two committees to look into the funding needs of the IR for modernisation and enhancing safety were constituted in 2011 by then-Railway Minister Dinesh Trivedi. The Expert Group for Modernisation of Indian Railways,headed by Sam Pitroda,estimated that,for undoing the effects of severe and chronic underinvestment in railway infrastructure and modernising the system,Rs 5.6 trillion was required. The High Level Safety Review Committee,chaired by Anil Kakodkar,held the IRs poor financial health as one of the reasons for the drift in safety and estimated that,for modernisation and replacement of over-aged assets,a sum of Rs 1.03 tn was needed.
In addition to the sums estimated by the two committees,the IR needs a significant infusion of capital for capacity argumentation to meet the expected increase in traffic over the next five years. The 12th Five Year Plan estimates are Rs 4.43 tn,which makes for a total overall investment requirement over the next five years to be around Rs 11.06 tn. The Planning Commission has agreed to provide a gross budgetary support of Rs 3.54 tn against the IRs request of Rs 10 tn,which leaves it with a substantial gap of Rs 6.49 tn to fund from internal and other resources. The IR expects it can generate Rs 2 tn from internal resources,and about Rs 168.5 billion from market borrowing,green energy and road safety funds. The balance will have to come from state governments and through PPPs. However,despite all these efforts,the IR will still be left with a visible funding gap of about Rs 1.05 tn or nearly 10 per cent of the required investment.
Bansal has the difficult task of covering this shortfall and removing institutional roadblocks that have prevented the IR from getting funds through the PPP route. The IRs experience in the 11th Plan was far from satisfactory. Against the planned extra-budgetary support of Rs 746.5 bn,it was able to raise only Rs 544.6 bn that is,a shortfall of 32 per cent. One of the main reasons was the failure of the PPP initiative. It could generate only 4 per cent of the total plan outlay,which is far less than what was achieved in other infrastructure sectors,such as,ports,80 per cent,telecom,82 per cent,electricity,44 per cent,airports,64 per cent and roads,16 per cent.
One of the reasons for the PPP initiatives failure was the lack of experience and the complex nature of obligation to customers. There are also legal restrictions that dont allow core railway operations to be privatised. Despite these difficulties,there have been a few successful PPP projects,such as the Viramgam-Mahesana Gauge Conversion project,Surendranagar Pipavav Rail project and the Gandhidham Palanpur Railway project,which could be models for last-mile connectivity and core infrastructure industries. It also shows that,with a clear policy framework for promoting private sector investment and FDI,it is possible for the IR to raise resources for its modernisation and expansion. In fact,it should be quite easy for the IR to put in place effective policies as all decisions are taken by the nodal ministry. In practice,however,the IR has found it most difficult to bring in policies conducive to private investment participation.
The big question is,will Bansal spell out in his budget how he expects to get private sector participation,especially through the PPP route,in the face of dismal past performance? In addition,will he spell out his thinking on how he judges the important issue of social equity in rail investment so that projects of doubtful social benefit are not funded at the cost of projects that can give market returns?
The writer is former general manager,Indian Railways and former member,Central Administrative Tribunal
express@expressindia.com
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