FDI in Railways – what for?

Last updated on September 9th, 2014 at 04:01 pm

Talks of FDI in Railways had been going around immediately after the new Govt. took over and now the government notified the liberalized FDI norms for the Railways, permitting 100 per cent foreign direct investment through the automatic route in several areas, including high-speed trains.

http://dipp.nic.in/English/acts_rules/Press_Notes/pn8_2014.pdf

Other segments of the Railways in which FDI will be allowed include suburban corridor projects through Public Private Partnership (PPP), dedicated freight lines, rolling stock including train sets, locomotives/coaches manufacturing and maintenance facilities, railway electrification, signalling systems, freight terminals, passenger  terminals and infrastructure in industrial parks like railway line/sidings.

Optimism has no limits

I recall the year when the economic system was liberalized in mid-1991, optimism has risen so hoping not flow, but pouring  of foreign money that  UTI master share trading around Rs. 11/- for the last many years jumped to Rs. 110/- and the UTI master gain share which was not even listed was trading at a bounty of Rs. 8/-. All this optimism is without any check on reality and vanished within a little period.

FDI in Rail Sector

FDI means investment by non-resident entity/person resident outside India in the Capital (through equity shares/debentures) on an Indian company.

In 1991, 8 sectors (Defence, Atomic energy, Coal, Mineral Oil, Mining of important minerals, certain minerals of atomic energy and Rail Transport)  were out of FDI.

FDI policy is governed by DIPP, Ministry of Commerce and Industry. As per the 2014 policy, FDI was prohibited in Railway transport (other than mass rapid transport system) as the sector is not open for private sector for investment. The Railway policy of participating models issued in December, 2012 provides that Foreign Direct Investor can apply after FIPB clearance. DIPP view was that participative policy 2012 may confuse foreign investors. In the past,  private sector investments have been made in the construction of rail connectivity to ports, container sector, private freight terminals and rolling stock procurement. Foreign companies looking for investment in major infrastructure rail projects (locomotive factories, world-class stations and elevated Rail corridor project) need permissible framework.

Now the present FDI policy removes the anomaly that no private investment/FDI can be sought in Rail Transport. This is a welcome step as lauded by FICCI also. How it is and not likely to benefit Indian Railways?

Benefit to the Industry

There are large many industries dealing with Railway products want to set up a manufacturing hub in India to meet the demand of Indian as well as nearby countries due to cost of manufacturing advantage.

 Suburban corridor projects through PPP

There is nothing new in this as already Delhi airport, Mumbai sub-urban network from Versova to Ghatkopar Station,  Secunderabad Sub-urban network by L&T etc. These projects were made financial viable through real estate development. This could not be successful in some of these projects  and there is need to study all aspects to make it successful for luring FDI. Some of the ideas are

1. Naming the Metro Railway Station by affixing  nearby industry/outlet for developing brand value with fixed annual charges and advertising rights.
2. Metro Station to be connected with other mode of transport like road, rail, air with hindrance free connectivity. The entire connectivity to be through departmental stores.
3. Cess shall be levied on the housing colonies around 1 Km of the diameter through increased housing tax.
4. Sky-walk connecting metro station to improve catchment. The cost of Skywalk to be inbuilt  in the price. The breadth of the sky walk shall be such to include small shopkeeper.
5. Suburban projects shall not fall in line with the existing Rail network. It will never be financially feasible. The project envisaged such as by NCRTC to have rapid rail network connecting Delhi with Meerut, Alwar, Paniput etc. will be a waste of money.
6. There should be clear demarcation of Urban and Sub-urban projects.

High Speed Train Projects

1. I am unable to understand the financial viability of High Speed Projects. In most of the studies and discussion, it is always with the pre-text “ let us build and then see” Is it worth to spend Rs. 60000 Crs. just for experimenting?
2. One month advance air fare between Mumbai-Ahmadabad checked on 7^th Sept 2014 is Rs. 1999/- as compared to Rs. 1870/- and Rs. 960/- for EC and II chair car. With the arrival of Air Asia and more competition in the air, the fare may further come down to the range of Rs. 1500/- . It may become difficult even for the Railways to keep its clientele then what to say of High Speed Trains. For an investment of Rs. 60,000 Crs., the earning potential had to be in the range of Rs. 10,000 Crs with top line of Rs. 20000 Crs. and expenses of not more than 10000 Crs  inclusive of  all working expenses and DRF but excluding interest charges  for FDI to be attracted. In order to compete with air, the competitive average high speed fare rate per passenger shall not exceed Rs. 1000/-, than annual passenger traffic had to be 20 Crs. annual or 5.4 lakhs daily on the route. During 2012-13, the total upper class travel ( I, II and III AC)  over Indian Railway network was 12.6 Crs. Further with about 1000 passenger per train, minimum train to be run each way daily  will be 270 trains!!!
3. One has to understand that High Speed network is exclusively for passenger traffic. How it can be financially viable when Indian Railway network running trains round the clock with mix of both passenger and freight finds difficulty in fiscal management?
4. Is there anyone who has detailed analysis of the finances of Japan, China or France and can explain the financial viability of high-speed project or it is just to prove technological supremacy.
5. Whatever is talked about above, but the most important is political compulsion and the commitment of the present Government. These projects are not evaluated based on financial viability. What is the financial viability of building Taj Mahal, Qutab Minar, Rail link from Jammu-Baramullaha etc. There is no financial support for such project from anywhere and were built to project the supremacy of the kingdom of that time. Therefore, the project is very unlikely to come through PPP or FDI but only with the expenses of the Government.

Dedicated Freight Lines

Disinvestment of DFCCIL equity with FII, building of last mile connectivity with ports, mining are some of the investment opportunity. With good fiscal model, there will be many takers as freight rail road has been prudent investment.

Rolling Stock including train sets and locomotive/coaches manufacturing and maintenance facility

Indian Railway expects manufacturing and maintenance facilities for such projects. Foreign investment may consider investment for modernization of production units, sheds, maintenance depots etc.

1. There are many Indian industries ready to invest in the manufacturing of rolling stock. Technology to support indigenous manufacturing is available with Indian Industry and there are only few issues requiring support through FDI. The unfortunate part is resistance from unions of Railway production units and making specification without consulting Indian Industry. Why not develop specification which provides a win-win situation for Railways as well as Industry.
2. Indian Railways had been struggling hard to set up Electric and Diesel Locomotive factory at Madhepura and Marhaura respectively. 
3. Introduction of new rolling stock technologies has always with a headache for maintenance and operating organisation. Look at WAG9/WAP5 class of locomotive, LHB coaches and I am not sure of WDP4 diesel locomotive taking around 15 years to train its manpower to manufacture, maintain and operate with teething problem to continue. Jerking in LHB coaches during run continues to be an issue even today. There are many dedicated engineers in Railways to work day and night to improve and upgrade the designs with incremental input. Replacement of GTO with IGBT is one example. There is a race to bring in technology from abroad but not to develop and take risk with his own engineers.

Railway Electrification

The potential identified in this area are power generation and transmission, traction sub-stations and green energy projects using railway land.

1. One fourth of Indian Railway revenue budget goes towards to fuel cost consisting of electrical and diesel fuel. Even after setting up of regulatory mechanism, Indian Railway management does not have a say in containing the increasing trend. There was a mandate to cut subsidy of class of user over another but it only remained on paper due to political compulsion.
2. It is easy to work out the financial viability of such projects and financing model.
3. A Green Energy project with availability of land to set up solar plant is very attractive and there will be many takers of this. For this, there is many of Indian Industry who will come forward for such projects.
4. Such projects are a win-win situation for Railways to have a long-term tariff contract.

Signalling System

The potential is for installation and maintenance of signalling system on a standalone, freight lines, port lines etc. Manufacturing companies of signalling system gets the opportunity to investment through shares/debentures etc.

Freight and Passenger Terminals

This area is reserved for PPP model but now it will be possible for the existing private freight terminal companies, CONCOR etc. to seek foreign equity under this route.

1. PPP model for investment in Passenger Terminals had not been has not shown very encouraging signals. With investment through FDI, it may be possible for many to come forward and invest in passenger terminals. Major Railway stations all over world have changed into major business centres, Hotels etc. with proneness of long-term financial viability.
2. Freight model is already proved successful in India and therefore, there will be many takers of this.

From the above it is very clear that FDI is not going to be assist railways in its need to find 1,82,000 Crs. worth of money for completing on going projects.

Is FDI so important for turnaround of Railways?

Railways had to be thrifty in its optimism of the prospect of flooding of money to change the Railways. There were also news terming it a cheap foreign fund; is it really cheap? I had tried to find out the change Indian Railways is expecting and which cannot be done without FDI. Continuity of a period of 10-15 years similar to what was provided by Rail Management during 2004-09 can make a difference in the Railway functioning. Why the political compulsion made the Railway management of later years adopting the line of political masters to call it a “Financial Gimmick”? If it was so, why the people involved were not taken up?

There were few management factors which made the  turnaround of 2004-09

1. Accountability: There were norms for fixing accountability even at the level of Railway Board Members.
2. Questioning: Questioning of Railway Board members made them to think in directions other than traditional. I remember simple questioning by Late MOSR Sh. Madhav Rao Scindia about the statistical data of “Availability data of rolling stock” made the management to think and within a short period the management responded with improved performance. The Board was questioned and it responded with positivity.
3. Harmony: Railway Board members were and are experts in their own field of technical and managerial functions, but unable to co-exists to think in the larger interest of Railways. Personal and Cadre interest dominated. If there is any doubt, look into the minutes of the Board Meeting.
4. Hope: Every individual wants to take part in the success story of the management. A success story was created and then everyone has fallen in line to join and contribute to the success story.  The slogan of “Accha din Aana wale hain” helped in winning elections and why cannot be the enthusiasm of 1.3 million railway man.

MR shall question the following to improve Railways

1. There is no more  quota system anywhere in India and why it is still continuing in seat reservation? And  how long will it continue?
2. Why the average speed of freight train is stagnant for the last 40 years? Page 45 of Indian Railway year book 1970-71: 22.9(Diesel) 25.2(Electric) 2012-13 23.8(Diesel) 26.5(Electric)
3. Have we reached to plateau of the asset utilization, if not, what is the maximum?
4. Why not introduce passenger and freight train time corridor to manage speed differential?
5. What is the passenger reserved seat kilometer versus Train reserved seat capacity? This will help in fixing standards of fixing standards of earning capacity of reserved seat in different class.
6. Had we met the justification given at the time of sanction of the project of Rs. 10 Crs. and more? This will help in avoiding departmental-ism in sanctioning of projects.
7. Why running Pantry car when food can be served by ordering through Mobile phone and served at the stopping station? We should learn from the developed countries who are not running such luxurious facilities.
8. Why number of approved sources not decided based on annual procurement to have a competition as well as reasonable quantity order every year for industry to sustain.
9. What is the quantum of PAC procurement every year and the industries involved? The maintenance spares are procured from Original equipment manufacturing unit and there is a tendency to hike rates and quantity under procurement under the name of reliability and safety.
10. Why railwayman not showing concern for cleanliness before expecting from others?
11. Why there is no brain storming among young Engineers and Managers having done minimum 10 years of service and not more than 25 years about the role of RDSO? It is so unfortunate and know fact that people sitting at the top used RDSO and not ensuring its purposeful functioning. Everyone criticizes RDSO but did nothing to change. It is the best case for Re-engineering.
12. Why manpower yardsticks not yet reviewed when bench marking target is very much less?

FDI is not so an important factor as wealth to be created by its engineers, manager and workforce only. While chasing for FDI, Railways shall not forget its prime role and it’s dedicated workforce of 1.3 million who had always stood the ups and down of time and never let down the Railways.