public private partnership in railways - a new approach_imr march 2008

IIMB Management Review, March 2008 1

Public-PrivatePartnership in Railways:A New Approach

AbstractAbstractAbstractAbstractAbstract

The evolution of public-private

partnership in Indian Railways shows a

unique incremental bottom-up pattern,

contrary to the existing railway

privatisation framework, which

advocates a project-centric top-down

reform approach. Based on an in-depth

research on the Indian Railways, this

paper proposes a two-dimensional PPP

framework for railways which will have

better social and political acceptance and

encounter less resistance to change

within a government organisation.

Anil Kumar GuptaRailway Board, GOI

Shyamal RoyIIM Bangalore

Private partnership in government-sponsored projects has been in

existence for a long time. However, it was confined to contracting

and leasing in execution and operations only, with a very limited

role in overall financing and management of projects. In the last two

decades, the role of governments has been redefined the world over,

leading to more active private sector involvement in the erstwhile

government controlled sectors, infrastructure being one of them. The

reasons for such transformation vary from developed to developing

countries. A common problem in developing countries is a shortage of

funds in meeting the growing investment needs in transport infrastructure

and services. On the one hand, government investment is constrained

by the lack of public funds; on the other hand, the private sector on its

own is not ready with the required capacity, expertise and willingness

to take the risk of investing in large infrastructure projects. Public private

partnership (PPP) is therefore being explored all over the world as a

means of initiating intended reforms and/or generating more funds while

reaping higher levels of efficiency.

The Indian Railways (IR) has been experiencing similar pressures on

productive investments since the 1980s. Increasing social and political

aspirations have led to a drastic rise in the number of socially desirable

1-Public-Private Partnership in for +ve.pmd 3/25/2008, 3:11 PM1

2 Public-Private Partnership in Railways: A New Approach

but financially unviable projects1, while capacity

augmentation and financially viable projects are getting

neglected. The changing external environment since the

economic reforms since 1991 – including increased

competition from pipelines, massive upgradation

programme of highways, modern private ports, open sky

policy for air transport, and PPP in airport projects – has

added enormous pressure on IR for new investments,

modernisation and expansion in meeting the challenges

of increased competition in the transport sector in India.

The estimated investment required is about Rs 3.5 trillion

by the year 20152, of which about a third has to come

from either market borrowings or private investments.

This paper is an attempt to devise a suitable policy

framework for PPP in the Indian railway sector in order

to address the need for private investment.

Literature on Public Private Partnership inLiterature on Public Private Partnership inLiterature on Public Private Partnership inLiterature on Public Private Partnership inLiterature on Public Private Partnership in

InfrastructureInfrastructureInfrastructureInfrastructureInfrastructure

Many researchers have looked at PPP in the infrastructure

sector and comprehensive literature exists on the subject.

According to Fayard3, PPP may be said to exist if ‘the

private partnership ensures an overall approach as part of

the general contract of work. The partnership can then

be developed through the inclusion of guarantees regarding

performance and prices, and by extending the contract

to include the management of operating activities’.

Tsamboulas and Kapros4 identify joint venture and

concession as two extremes of a spectrum of options for

private financing of infrastructure projects. Several models

are being used within this spectrum in which the public

and private sectors jointly form a project company, which

is then granted a concession by the government or the

parent public sector company. Brealey, Cooper and Habib5

talk about private funding of infrastructure projects

through project finance, which is primarily guaranteed

against future cash flows of the project company and the

concession granted by the government. Thillai Rajan6

classifies projects in terms of degree of privatisation that

can be said to occur with different project structures as

shown in Exhibit 1. It varies in a continuum from low

(Lease and Renovate Operate Transfer – ROT), where

the project is totally government owned, to high (Build

Own Operate - BOO), where it is 100% owned by a private

party.

The most widely encountered project is BOT (Build

Operate Transfer), according to which the investor pays

for the facility construction and owns the facility. The

private investor maintains and operates the facility during

the concession period. Thillai recommends a BOT

structure for transport infrastructure projects while

illustrating significant differences that exist between the

three main variants, the BOT, BOOT (Build Own Operate

Transfer) and BOO formats and their implications for

different projects. Pangotra and Raghuram7 provide a

framework for formulating unbundling strategies for

increased private participation in the financing of transport

services. They suggest that viability of private participation

in each transport sector varies considerably among

different components of the infrastructure system. Parikh

and Samson8 while discussing the BOT projects in

highways have given suggestions for structural changes

in the project structure for encouraging private

participation. Recently Raghuram9 has studied the toll road

projects in India and suggested several lessons for risk

assessment and mitigation, public consultation and review

arrangements and appropriate mechanisms for dispute

settlement. Cochin International Airport is the first airport

in India to come up with PPP. A case study of this by

Varkkey and Raghuram10 brings out valuable learning in

the field of project and finance structuring, project

management and resource mobilisation.

The need for private sector participation in financing new

projects in the Indian Railways was felt as early as 1996-

97 when schemes like Build-Own-Lease-Transfer (BOLT)

were launched. Several other means of alternate financing

mechanisms have since been adopted. Raghuram and

Babu11 have discussed these, along with the pros and cons

of the potential modes including BOLT and BOT schemes.

They suggest an increased thrust on internal resource

generation. Raghuram12 has brought out the attributes of

commercialisation and their role in the success and failure

of various forms of commercial partnerships in the Indian

Exhibit 1 Degrees of Privatisation in

Different Project Structures

Low High

Lease ROT BOT BOLT BOOT BOO

Source: Thillai Rajan, A, 2004, ‘Observations on Project Structures

for Privately Funded Infrastructure Projects’, Journal of Structured

and Project Finance, Vol 10, No 1, Spring, pp 39-45.



Railways (IR). Swarup13 has brought out the reasons for

failure of the BOT/BOLT scheme of IR that was launched

in 1994. Indian Railways has so far completed only one

project (gauge conversion of the Viramgam-Mehsana line)

on BOT at a cost of Rs 800 million. The maintenance of

the line is with IR and the contractor is paid a fixed annuity

for the construction.

L i te ra ture on Pr iva te Par t ic ipat ion inL i te ra ture on Pr iva te Par t ic ipat ion inL i te ra ture on Pr iva te Par t ic ipat ion inL i te ra ture on Pr iva te Par t ic ipat ion inL i te ra ture on Pr iva te Par t ic ipat ion in

RailwaysRailwaysRailwaysRailwaysRailways

The principal elements of the PPP framework in transport

infrastructure that emerge from the literature study are:

project structure, project finance, risk management, and

regulatory mechanism. These four

elements have to be addressed

appropriately for designing a PPP

model for a transport infrastructure

project. However, this framework

does not fully address the issues

associated with private financing of

a railway project. Hence there is a

need for studying PPP in railway

projects in greater detail.

In rail transport any rail project is

generally supplementary to or an

extension to the existing railway

network. The interrelation with the

existing network/system is so strong

that a small railway project cannot

be operated, maintained and

marketed independently. This is

more so when the existing railway

network is fully under government control with no private

operator. Unlike other forms of transport, railways operate

on a permanent way on which traffic needs to be regulated

and controlled. Safe operation of the railways involves a

high degree of coordination among track, overhead electric

power, signalling, traffic control and such other activities.

Further, rail traffic usually runs longer distances than

highway traffic and these are usually beyond the identified

limits of a railway project. The railway network also

provides a huge captive market for smaller projects in the

peripheral activities like hospitality, freight villages,

terminal stations, rolling stock leasing and maintenance

etc. Several investment projects in service areas are

justified on the basis of the huge market in the existing

railway network. Their relationship with the railway

administration has a significant impact on its viability.

Technical know how in railway activities is not readily

available in the private sector for historical reasons, posing

a totally new challenge in building capacity through PPP.

All these have to be addressed while developing a

framework for private partnership in the railway sector.

Very few individual railway projects have been analysed

on the existing PPP framework. One of these is Finnerty’s

study14 of the Euro Tunnel Project, which was fully

privately funded at £10.5 billion through a 230-bank

syndication. The rest of the literature on private

participation in railways, sometimes referred to as railway

reforms, concerns aspects like restructuring, privatising,

licensing, unbundling and deregulating. In general, it adopts

a top down approach of policy

intervention in an existing network,

with private partnership in varied

forms as the by product. For

example, the privatisation of British

Railways has been well captured by

Mathieu15, Smith16 and Muttram17.

The main objectives that drove this

privatisation process were:

reduction in government subsidy,

private investment in the railway

sector, improvement of services

and productivity through

competition and better response to

market needs in order to arrest

dropping market share. Railway

reforms in Germany were also

initiated to arrest declining market

share and increasing government

subsidy18. The other aim was to

restructure the finances of the existing government railway

in view of mounting debt. Developments in Europe

including European Union guidelines on transport also

played a significant role in the policies adopted by these

two countries. In contrast, the US’s fully private rail sector

went for public partnership when it started making heavy

losses in the passenger business. The government came

to its rescue by taking over loss making passenger services

and subsidising mass transit services. The deregulation

of the rail industry after the Staggers Act of 1980

rejuvenated American freight railroads19. While rail reforms

in the UK and Germany have had below average results,

those in the US had an excellent impact on private rail

roads. Experience from these and other countries have

Most of the literature on private

participation in railways,

sometimes referred to as

railway reforms, concerns

aspects like restructuring,

privatising, licensing, unbundling

and deregulating. In general, it

adopts a top down approach of

policy intervention in an existing

network, with private

partnership in varied forms as

the by product.



been captured by researchers in the form of policy

directions for separation of railway infrastructure and

operations20, and licensing21.

Framework of Railway ReformFramework of Railway ReformFramework of Railway ReformFramework of Railway ReformFramework of Railway Reform

An analysis of the literature on private participation in rail

transport led to the identification of the following key

elements of railway reforms:

• Public Organisational Separation: Several European

countries including Germany adopted this as the first

stage of their railway reforms. Infrastructure, freight

services, long distance passenger services and regional

passenger services were initially separated because of

the need to have separate accounting for each of the

business segments, while retaining them under a single

centre of public control. Germany restructured its

railway system in 1994 by creating Deutsche Bahn AG

(DB AG) and four business divisions for track network,

long distance passenger, regional passenger and freight

respectively.

• Public Institutional Separation: When separate

organisational business units are converted into separate

companies with individual entities, it is called institutional

separation. Germany adopted this model in the second

stage of reforms beginning 1999 when DB AG was

converted into a holding public company and its

divisions into four subsidiary public companies. Their

third stage is to dissolve the holding company and make

individual companies independent of each other22.

• Private Freight Operators (PFO): Creation of a

separate infrastructure unit not only allows better

accounting but also enables non-discriminatory access

to private operators regulated by a regulator. Private

freight operators are now operating in many European

countries. The privatisation of British Railways in 1994

led to the creation of four private freight operators. In

Germany, non-DB private freight operators have to

compete with the public owned DB Cargo, which in

the absence of independent regulation is unfair23.

• Private Rolling Stock Companies (PRSC) and

Private Passenger Operators (PPO): The UK and

US experience shows that rolling stock is the most

appropriate segment for private investment. With open

access to infrastructure and private freight operators,

private investment in high capacity modern locomotives

and heavy haulage freight rolling stock becomes very

attractive. Private passenger operators are the next stage

of private partnership. In the UK three PRSCs and 25

PPOs were created in 1994 as part of the British

Railways privatisation.

• Private Railways with Public Passenger Services:

In all the stages of private partnership described above,

the infrastructure remains under the public control.

Historically, no country except the US has had

substantial private partnership in railway infrastructure.

In the UK a separate infrastructure company, Railtrack,

was created in 1994 which was later privatised in 1996.

But in 2001 it was taken into administration due to poor

management of network and numerous accidents24 and

later it had to return to public control under Network

Rail, a no-profit organisation. In the US, private railways

have existed right from beginning. Passenger services

along with some network of infrastructure were brought

under government control with the creation of Amtrak

in 1970. US Railroads have remained at this level of

PPP since then.

Each of the above reforms leads to a certain degree of

privatisation. Exhibit 2 shows these steps arranged in

seven columns in order of increasing degree of

privatisation. This could be called a framework of

international railway reform depicting the respective stages

of reform in the UK, Germany and the US, as described

above.

Although the lessons from these countries are valuable,

they are not applicable to developing countries as the key

parameters that dictated these reforms in Europe may not

be valid in developing countries. A comparison of these

key parameters between European countries and India

(Exhibit 3) clearly points to the differences.

Based on the literature study, the need for private

partnership in the rail sector in India could be summarised

as follows:

• Massive need for investment that cannot be undertaken

by the government alone

• Better selection and faster execution of projects to

realise the benefits

• Using private sector expertise and efficiency in

eliminating localised losses

• Leveraging existing network and assets in modernisation

without own investment.

There is a need for a policy approach through which private



partnership in the railway industry in India and other

developing countries could be promoted within the existing

government set up. This paper attempts to fill this gap by

integrating the framework for international railway reform

and the current treatment of PPP in infrastructure with

the evolutionary trend on IR.

Study of Publ ic-Private Partnerships inStudy of Publ ic-Private Partnerships inStudy of Publ ic-Private Partnerships inStudy of Publ ic-Private Partnerships inStudy of Publ ic-Private Partnerships in

Indian RailwaysIndian RailwaysIndian RailwaysIndian RailwaysIndian Railways

Methodology

The case study and semi structured in-depth interview

methods were adopted in this research. The first task

was to bring together all the partnership experiments done

so far on the IR at one place and try to deduce generic

lessons for designing future PPP models. No academic

researcher has so far attempted this exercise. No single

organisational unit of IR deals with all such experiments.

Field data (comprising written notes, project reports,

presentation copies, annual financial reports, etc) was

collected from the field units and corporate offices of the

companies as well as from their official web sites. This

field data, along with interviews with key officials of the

companies, was used to prepare caselets25 for the seven

selected organisations. While preparing these caselets a

generic framework was used consisting of following: (a)

type of project, (b) need for PPP, (c) form and structure

of PPP, (d) nature of funding, (e) risk management, (f)

regulatory mechanism, (g) success/failures, and (h)

lessons learnt.

The purpose of the semi structured in-depth interviews

Exhibit 3 Key Parameters Leading Railway Reform in Europe and India

European Railways

• Under utilisation of existing infrastructure capacity

• Low GDP growth

• Low investment in rolling stock and passenger services

• Rising debt, need for restructuring

• Increasing government subsidy

• Dropping market share due to inferior service standards

• European Union competition requirements

• Modernisation for competing with road and air transport

Indian Railways

• Over utilisation of High Density Network

• High GDP growth

• Low investment in infrastructure and freight services

• Need for more market debt

• Dividend paying, no subsidy

• Dropping market share due to lack of capacity addition

• Evolutionary need, no outside compulsion

• Modernisation for adding capacity and meeting with public

aspirations

Exhibit 2 Framework of International Railway Reform

1

Public

Organisational

Business

Separation

2

Public Institutional

Separation

3

Private Freight

Operators (PFO)

4

PFO + Private

Rolling Stock

Companies (PRSC)

5

PFO + PRSC +

Private Passenger

Operators (PPO)

6

Private Railways +

Public Passenger

Service

7

Fully Private

Railways

All other segments under public control

Increasing Degree of Privatisation

UK 1994 2001$ 1996

1970 USAGermany 1994 1999 1994#

#Access to non-DB freight operators $Reversal of Privatisation



was to elicit the views of key government officials26 and

important stakeholders. The objective was to cover all

the partnership experimentation units on rail transport

including the Delhi and Bangalore Metro projects. Questions

were framed around the following key issues:

• What were the PPP initiatives taken on railways in the

past and how did they perform?

• What are the activities of IR that are amenable to PPP?

• What are the projects in the rail sector that are amenable

to PPP?

• Which PPP model will work for different activities and

projects?

• What are the reforms required in the railways in India

for realising the potential of PPP?

Interviews were interactive as each person was also

confronted with the salient details of relevant PPP models

and railway reforms happening internationally, in India and

in IR and requested to provide his comments and reactions.

In this way some project PPP models conceptualised

during the research were also validated.

Evolution of Public Private Partnership inIndian Railways

The origin of public-private partnership in IR lies in public-

public partnership, which is still being used in some key

areas of rail transport. The first such partnership in IR

was the cost sharing with a state government when the

Government of Maharashtra partnered IR in the Navi

Mumbai Rail Connectivity Project in 1986. The state

government wanted new suburban railway lines to meet

the needs of the developing city, but IR didn’t have the

funds for the project. Since then there have been a large

number of experiments at various levels, ranging from

the creation of corporations for peripheral or specific

activities, creation of Special Purpose Vehicles (SPVs) for

big rail projects, outsourcing, leasing and licensing. These

experiments are spread across various organisations of

IR. Seven such organisations under Ministry of Railways

(MOR) were selected for case studies: Konkan Railway

Corporation Ltd (KRCL); Mumbai Rail Vikas Corporation

(MRVC); Container Corporation of India (CONCOR);

Indian Railways Catering and Tourism Corporation

(IRCTC); Pipavav Railway Corporation Ltd (PRCL);

Hassan Mangalore Rail Development Company (HMRDC);

and Rail Vikas Nigam Ltd (RVNL). They are all public

sector companies incorporated under the Companies Act

1956. The brief highlights of these seven organisations

including their successes/failures and the lessons learnt

are given below.

Konkan Railway Corporation Ltd

KRCL is the first joint venture SPV formed in public-

public partnership in 1990 between four state

governments, for constructing a new 760 km coastal

railway line to cut short the distances from Mumbai to

Goa, coastal Karnataka and Kerala. The partnership was

formed because IR didn’t have the funds whereas the

state governments were ready to pay. The SPV was given

a BOT concession by the Ministry of Railways for 10

years. The Rs 14 billion project was proposed to be

financed through a 2.5:1 debt equity ratio with 51% equity

from MOR and the balance shared among the four state

governments. Debt was entirely through market bonds27

guaranteed by the Government of India (GOI). The project

structuring was based on conventional government

contracting with the major construction risk borne by

the company. There was uncertainty about the piecemeal

debt raising, and interest risk was entirely borne by the

company. The state governments did not bear any risk as

their role was limited to extending their share of the equity

fund. The project was appraised with a significant transfer

of traffic from the parallel existing network, however there

was no written guarantee for this transfer. The Railway

Board did the regulation of tariff and traffic, largely

favouring the zonal railway as subsequent gauge

conversion had added capacity to the existing parallel

network. The completed cost of the project was Rs 33.75

billion, with Rs 8 billion in equity and the rest in debt.

This is also the only organisation outside IR which owns,

operates, and maintains its assets, as does any zonal

railway28. KRCL is considered a major technological and

operating success that developed cutting edge

construction expertise (now being used in other projects

including the Jammu and Kashmir Railway Project) and

modern operations and maintenance (O&M) systems29

establishing new benchmarks for operating efficiency30.

It also carried out several engineering innovations.

However it had accumulated losses of Rs 23.53 billion till

year 2003-04. It is in a debt trap and with the balance

sheet in red it cannot bid for international projects in spite

of having the construction expertise.

KRCL’s engineering and operating success shows that

the creation of a project specific company enables better



project management, and establishes new benchmarks for

IR in terms of efficiency of operations. However it also

shows that short-term debt and high debt-equity ratio are

not suitable for railway projects. Without non-recourse

financing and independent due diligence by the lending

financial institutions it is difficult to ensure realistic traffic

forecasting and sound financial appraisal. A regulatory

mechanism is needed for playing a neutral role when the

interests of a zonal railway and an SPV clash. Government

guaranteed debt blocks subsequent financial restructuring

of the company.

Mumbai Rail Vikas Corporation

MRVC was created in partnership with the Government

of Maharashtra (GOM) in 2001 for

the upgradation of suburban railway

infrastructure in Mumbai to meet

the growing transport demand in the

already extremely congested trains

and corridors. The project consisted

of construction of additional lines

and missing links in the network,

procurement of new coaches,

modifying platforms to take longer

12-coach trains, changing traction

from DC to AC etc. While IR was

disbursing funds to this project at a

very slow rate, the World Bank was

ready to fund an integrated Mumbai

Urban Transport Project (MUTP).

However the government was not

ready to guarantee the World Bank

debt unless the recovery from the

project was assured. Against this

backdrop, MRVC was created as a joint venture SPV with

the Ministry of Railways (MOR) holding 51% and the

state government the rest. The debt recovery was planned

through additional cess on suburban fares. Phase I of the

project was to cost Rs 31.25 billion, funded through debt

equity ratio of 1:1. The World Bank debt is channelised

through GOI to GOM and MOR in equal ratio.

Construction is being carried out by two zonal railways,

Western and Central, which are also the operators of

services. Shortfall in cess collection is guaranteed by GOM

and MOR. The project is being executed in a time bound

manner with dedicated funding. As against the targeted

collection of cess of Rs 800 million per year, the first

year realisation was between Rs 450-500 million.

MRVC is a good example of social entrepreneurship. It

establishes that passengers are willing to pay higher

suburban fares for better services. Political opposition to

such fare hike could be managed through a targeted project

with state government partnership. The model was found

so attractive and workable that Phase II of the project is

being planned with 100% cost realisation through additional

cess. It has been estimated that the rate of cess could go

as high as 30% of the ticket fare. This model has opened

the door for future financing of the project through Indian

financial institutions.

Container Corporation of India

CONCOR was set up in March 1988 with the objective

of developing multi-modal transport

logistics infrastructure like terminal

facilities, container carriers etc. It

has, since then, generated own

resources out of accruals and

reinvested them. It has a paid up

equity capital of Rs 649.9 million,

of which 37% has been divested by

the GOI to the public between 1994

and 1999. It has no shortage of

funds for building infrastructure but

in order to capture the future

market, CONCOR is going for joint

venture Container Freight Stations

(CFSs)31 in its own Inland Container

Depots (ICDs) with the private

partner holding 51%, and its own

share of equity at 49%. Its biggest

PPP venture is for a container

terminal at Jawaharlal Nehru Port

Trust (JNPT). It partnered (with 26% equity in the JV)

with a private shipping company Maersk to get a 30-year

licence for the Rs 10 billion terminal, which has already

been commissioned. CONCOR has also taken a 15%

equity partnership in Vallarpadam Container Transhipment

Terminal in Kerala, promoted by Dubai Port International,

which is the biggest such terminal in Asia. Being the sole

container operator on IR till October 200632, it enjoyed a

monopoly status, only facing competition from road

transport. CONCOR has consistently been a profit earning

company and through reinvestment of part of its earnings

it has created a net worth of Rs 20.91 billion at the end of

financial year 2005-06. Project level PPPs in CFSs at Dadri

ICD and container terminals at ports gave CONCOR

KRCL’s engineering and

operating success shows that

the creation of a project specific

company enables better project

management, and establishes

new benchmarks for IR in terms

of efficiency of operations.

However, it also shows that

short-term debt and high

debt-equity ratio are not suitable

for railway projects.



captive traffic and a strategic long-term advantage.

CONCOR has helped IR to capture market share in

growing container traffic and earn through transportation

charges levied on CONCOR.

From the point of view of IR, creation of separate

companies in specific profitable sectors of Indian Railways

is a good form of PPP, allowing them to build value

through their own accruals, and later divesting their shares

to private institutional and individual investors. IR’s

infrastructure network and captive market are a big

attraction and provide scope for the creation of separate

companies in various sectors. In such PPP projects, IR

should focus more on the fit of business interests with

partners than on return on investment in the specific

project. It is better to leave the

management of such joint venture

PPPs under private control,

maintaining a veto power in certain

decision making processes. This

would also help them avoid the

conservative business regulations of

the government. Further if the

shares of fully owned subsidiaries

of a public sector company are

divested, the funds so collected

could be reinvested in the parent

company, thus proving more

beneficial.

Indian Railways Catering and

Tourism Corporation

IRCTC was created in 1999 with a

paid up capital of Rs 200 million for

developing the hospitality sector in IR through the

involvement of the private sector. It has since diversified

its business into Internet ticketing, commercial exploitation

of space at stations and establishing a chain of budget

hotels on railway land. Earlier, departmental catering

services were running at a loss and fresh investments

were required for modernisation. IRCTC uses various

models of private partnerships such as outsourcing, O&M

contracting, business contracts, licensing and commercial

leasing. It is also mandated to market the existing Yatri

Niwas railway hotels, hill railways and other isolated lines

with tourism potential, and to conserve Rail Heritage.

In all the above-mentioned business activities IRCTC is

adopting PPP as a primary strategy. It has established

packaged water brand ‘Rail Neer’ with state of the art

plants at Nangloi in Delhi and Danapur in Bihar. The plants

are owned by IRCTC with investments of Rs 40 million

per plant. They are being operated and maintained by O&M

contractor, Ion Exchange Ltd. The Transport Corporation

of India does transportation and distribution. All its

investments are funded through equity funds, surplus

generation and private partners. The business model of

IRCTC carries no market risk as IR provides the captive

market and most of the business risk is borne by the private

partners. The Railway Board issues all the licensing policy

and guidelines. It is the first railway Public Sector

Undertaking (PSU) to pay a dividend in the very first year

of commercial operation. Its turnover is increasing with

an average annual growth rate of

about 100% from 2003-04 till 2005-

06 and earned Rs 19.78 crores of

net profit in 2005-0633. It has taken

over the loss making catering

services of Indian Railways along

with its staff and is now earning a

profit out of it. All initiatives taken

by IRCTC so far have been highly

profitable. It has succeeded in

expanding the usage of information

technology in ticketing. IRCTC

represents the largest e-commerce

business in India34. It has enabled

business tie-ups with banks, mobile

phone service providers, credit card

and cash card companies etc, which

could not have been possible in a

monolith IR organisation.

IRCTC’s success establishes that

the captive market for peripheral services provided by IR

is a low risk high return business opportunity for PPP.

Privatisation and outsourcing through an intermediate PSU

is politically more acceptable than if done directly. PSUs

are also better suited to carry out the large number of tie-

ups involved.

Pipavav Railway Corporation Limited

PRCL was established in 2001 as a 50:50 joint venture

SPV company between Gujarat Pipavav Port Limited

(GPPL), a private company, and the Ministry of Railways

for a 270 km gauge conversion and port linking project to

link Pipavav Port with Surendranagar in Gujarat. The

gauge conversion project was going on slowly due to

IRCTC’s success establishes

that the captive market for

peripheral services provided by

IR is a low risk high return

business opportunity for PPP.

Privatisation and outsourcing

through an intermediate PSU is

politically more acceptable than

if done directly. PSUs are also

better suited to carry out the

large number of tie-ups

involved.



slow disbursement of funds by MOR. GPPL wanted a

direct broad gauge link to the port at the earliest and hence

it partnered with MOR to set up an SPV. MOR granted a

concession for 33 years on BOT basis with a concession

fee of Rs 20 million per year for licence to use the existing

land, buildings and bridges on the earlier metre gauge line.

The funding of this Rs 3.73 billion project is through

Rs 2 billion equity and the balance through non-recourse

debt. A consortium of seven Indian banks and financial

institutions arranged the debt. The GPPL has provided a

traffic guarantee of three million tons per year beginning

with one million tons in the first year of operation and

reaching three million in three years. Construction was

carried out by the zonal railways on the pre sanctioned

railway estimate with 6% cost plus charges. The project

had a captive market as the entire traffic originating on

the port would go to the project railway. The risk of

emergency management of the project railway is with the

zonal railway on a cost plus basis. The zonal railway does

the operation and maintenance of the infrastructure as

well as the trains against pre agreed payments that are

well below the average cost on the IR network. The

maintenance system is the same as that adopted on KRCL.

The Railway Board regulates the traffic, the zonal railway

collects the revenue and it is apportioned to PRCL on

established norms35. The formation of PRCL enabled the

completion of the project within two years. The first two

financial years saw operating losses of Rs 70 million and

Rs 20 million respectively. However it earned a net profit

of Rs. 5 crore in 2006-07 carrying about 2.2 million traffic.

The traffic guarantee provided by GPPL was not encashed

by the company till year 2006-07. The banks agreed to

restructuring of debt and interest payment was postponed

till March 2007. The company is likely to start repayments

of debt from year 2007-08 provided it gets the dues

against the traffic guarantee from GPPL which will

become more than Rs 80 crore by March 2008.

The experience gained from PRCL shows that traffic

guarantee from a port is not an adequate market risk

mechanism. The better method would be a mechanism

for matching the development of the port with that of the

port linking line36. Debt servicing must not start till five

years of operation have been completed; otherwise,

provision should be made from a subordinate interest free

debt from promoters during the period37. The SPV mode

of execution of new projects enables the adoption of a

modern system of O&M with a smaller recurring cost. A

strategic partner in the SPV brings great value to the

project company and the MOR.

Rail Vikas Nigam Ltd

RVNL was created in 2003 as a wholly government owned

SPV for executing the National Rail Vikas Yojana. This

involved strengthening of the Golden Quadrilateral (GQ)

for running goods trains at 100 km per hour, port

connectivity projects and construction of mega bridges38,

with a budget of Rs 150 billion in a limited period of five

years. These important projects were clubbed under RVNL

in order to ensure a focused funding and execution. The

experience gained during the creation of PRCL and

HMRDC has brought into focus the need to create an

umbrella SPV that would further enter into joint venture

partnerships with the private sector for creating project

specific SPVs and other modes of project execution. RVNL

is such an umbrella SPV, which is intended to help avoid

the need to approach GOI each time an SPV is to be

formed. RVNL proposes to create nine SPVs and execute

11 projects on BOT. Of the Rs 30 billion equity fund from

GOI, Rs 15 billion has been given by the Asian

Development Bank (ADB) as a loan to GOI. The remaining

funds are to be raised from the market, either through

market debt or through private investments in PPP

projects. Project specific SPVs will have 26 percent equity

from RVNL whereas in case of BOT projects 100 percent

of the fund is to be mobilised by the private sector. Two

private port railway projects are going to be funded 100

percent by the private port owner on BOO basis. The

Indian Railway Finance Corporation (IRFC) arranges

market borrowings for non PPP projects. Risk

management in SPV projects is similar to PRCL and

HMRDC. In BOT projects, the entire risk of construction,

time and completion is on concessionaire; the government

provides the viability gap funding and the Railway Board

regulates the tariff and licensing policy. RVNL has achieved

mixed results. It has been successful in arranging

dedicated funding for identified projects but is nowhere

near achieving its target of completing the projects in five

years, i e by 2008. The progress on development of PPP

projects, creation of SPVs and awarding of concession

agreements has been very slow. Till December 2007 only

three SPVs could be created, out of which concession

was granted by MOR to only one, while the others are in

advanced stages of approval. So far no model concession

agreement has been developed, which has caused delays

in getting MOR approval for each new concession

agreement. Against the target of spending Rs 150 billion



in 5 years, RVNL spent Rs 26.5 billion till March 2007.

RVNL has not yet developed a PPP model for repayment

of market borrowings and no BOT project has taken off

so far. In effect it is more like a corporation carrying out

new construction works for zonal railways.

RVNL’s failure in designing new project structures for

PPP and speedier structuring of SPVs has established that

merely establishing an umbrella SPV is not adequate. Such

a company has to be empowered adequately to take

decisions without requiring the government’s approval at

every stage. Further it must develop into a new institution

with better capability, innovative organisational structure

and new procedures in order to avoid the danger of falling

into the old IR system. RVNL should have been different

from KRCL, but in reality it has

turned out to be another

construction company with no

technological or engineering

challenges comparable to KRCL.

Hassan Mangalore Rail

Development Company

HMRDC was established in 2003 for

executing a 183-km long gauge

conversion project linking New

Mangalore Port Trust (NMPT) port

to Hassan in Karnataka. Slow annual

disbursement of funds in the

ongoing project was the prime driver

in the formation of HMRDC. Iron

ore exporting companies in

Chitradurga, NMPT and

Government of Karnataka (GOK)

wanted speedier execution and hence HMRDC was

created, under the umbrella SPV, K-RIDE, a joint venture

company between MOR and GOK. K-RIDE is to develop

four such projects and HMRDC was the first SPV. MOR

and GOK hold 41% equity each and the balance has been

shared between NMPT and a mining company. MOR has

granted a concession for 32 years on a nominal annual

fee of Rs 1000. Of the total project cost of Rs 2.91 billion,

the amount (Rs 1.41 billion) already spent by MOR on

the project before formation of the SPV was converted

into a subordinate debt. The remaining Rs 1.5 billion is

funded through Rs 1.1 billion equity and Rs 400 million

non recourse debt arranged by two banks. The SPV bears

the full market risk as no traffic guarantee exists. It faces

competition from other adjacent developing ports and

from another similar project development by K-RIDE. The

construction has been carried out by the zonal railway in

a manner similar to PRCL. However the completion of

the project was delayed significantly. As against the original

completion target of March 2005, the project was finally

completed on 8 December 2007 with the start of passenger

services between Bangalore and Mangalore. However the

freight train operation commenced in early 2006 carrying

about 1.5 million ton traffic in 2006-07 with limited

infrastructure facility. Matching development at NMPT

was delayed, resulting in delayed generation of traffic;

still the company is likely to carry 3.5-4.0 million tons in

2007-0839. However, the long term prospects of the

company appear very favourable as indicated by the

intention among certain mining

companies to acquire additional

equity of Rs 100 million40. The

money so raised could be used for

retiring debt.

The HMRDC experience and the

lessons to be drawn from it are

similar to those of PRCL, although

the project structures are very

different.

Projects, Structures andProjects, Structures andProjects, Structures andProjects, Structures andProjects, Structures and

Activities Amenable to PPPActivities Amenable to PPPActivities Amenable to PPPActivities Amenable to PPPActivities Amenable to PPP

While the study of organisations led

to a better understanding of the

evolution of PPP on IR, the

interviews helped in identifying

activities and projects that are

amenable to PPP and finding

suitable structures for them. Until the creation of CONCOR

in 1988, IR carried out all the activities itself through its

zonal railways, production units and workshops. There

was hardly any activity that was either outsourced or

delegated to a public company. But IR is now gradually

setting aside more and more activities for the private sector

under two models: leasing/service agreement and licensing.

The general belief among a section of the people

interviewed was that any project could be structured in a

manner that makes the PPP option viable. However, the

research was limited to only those rail projects in which

massive investments are required in the next 10 years.

Project structuring for PPP involves balancing risks,

incentives and returns between public and private partners,

RVNL’s failure in designing new

project structures for PPP and

speedier structuring of SPVs

has established that merely

establishing an umbrella SPV is

not adequate. It has to be

empowered to take decisions

and must develop into an

institution with better capability,

organisational structure and

procedures than the old IR

system.



and creating space for innovation, efficiency and

application of new technology for the private sector,

thereby creating a greater long term value and a win-win

situation for the parties involved. The classification

proposed by Thillai Rajan41 provides the basic framework

for PPP project structures. However in addition to

licensing mentioned above there are other variants of BOT

either already being used or likely to be used soon by IR.

These project structures and types of project are treated

in detail below.

Lease/Service Agreement

This form of PPP is the lowest degree of privatisation,

with existing railway assets given to the private sector

only for managing. There are several loss making business

areas and services in which IR is at present losing billions

of rupees. The catering service was one of them and was

taken over by IRCTC as described earlier. Yatri Niwas

and other railway hotels are also likely to be handed over

to IRCTC for turning them around through the

involvement of the private sector. Uneconomic branch

lines (UBLs) and hill railways (HRs) are other services

that are running at a loss, and have been surviving on

implicit cross subsidy within IR. They have to be separately

dealt with if the subsidies are to be reduced and operating

efficiency is to be improved in these services. The UK

and Germany have done this through community

partnership and service agreements. Agarwal42 has come

out with a public private partnership model as an

opportunity for turning around these loss making branch

lines. The underlying principle in this model is making IR

a customer who will purchase the socially desirable

services from the independent operators of such services

and pay for it under a service agreement. The independent

operator would have an incentive for improving its

performance by reducing costs, increasing ridership,

competing with road transport in offering better services

and partnering with private people especially of local origin

in this endeavour. The lines, along with dedicated rolling

stock, would be given on lease to these public sector

companies with a graded reduction in subsidy from MOR

during the licence period. Such operators may be called

Leased Passenger Service Operators (LPSOs)

Because IR has proved very inefficient at piecemeal

business, it has stopped dealing with individual wagonloads

and instead focuses on the bulk freight train business. A

similar strategy is required in the case of parcel services,

advertising, and retiring rooms, as the returns from these

services are not in proportion to their potential. These

services could be leased to the private sector along with

railway assets against a competitive annual fee. Piecemeal

leasing of parcel vans in some important mail express

trains has already been tried on Indian Railways. The

underlying principle is that the private sector is better at

aggregating piecemeal bookings and arranging ‘first mile’

and ‘last mile’ services. IR could then concentrate on

carrying the parcels, which poses no problem as these

will be carried by mail/express trains, exactly as at present.

Licensing

Licensing is the form of PPP with the highest degree of

privatisation in which the government opens up a business

segment to the private sector and regulates it through

licensing only, leaving the private sector free to make its

project investment decisions. Services such as container

operation and tourist train operation offer great

opportunities but involve either piecemeal traffic or

business tie ups with several other market players. They

also require customised rolling stock which cannot be

used elsewhere on IR. Such services are best suited for

licensing to the private sector. IR has opened up container

operation to the private sector; in the first round of

licensing 14 private operators including CONCOR have

been awarded licences to operate container services. This

policy should be taken further by building in suitable

guarantees and long term commitments on transit time

and access charges from IR in order to enable the private

operators to provide value added container services and

bring in private investment in container handling facilities

and logistics like inland container depots and container

freight stations. Tourist train operation through non-

railway operators is not new to IR – the Palace on Wheels

has been running for years now in partnership with the

Rajasthan Tourism Corporation. Such operators may be

called private container operators (PCOs) and tourist train

operators (TTOs) respectively.

A logical extension of the leasing policy of parcel vans in

mail/express trains could be to provide licences for running

parcel train services between a pair of cities, with the

frequency determined by market demand. Private operators

also could be encouraged to own rolling stock and offer

full trains for scheduled running by IR on the same lines

as container operations. Such operators may be called

private parcel operators (PPOs).



BOOT/BOO

Projects that can best be developed by the private sector,

and for which the private sector is fully capable, should

be executed through Build Own Operate Transfer (BOOT)

and Build Own Operate (BOO) models. The existing

literature covering these two project structures under PPP

indicates that they are suitable for multi modal railway

transport projects (freight terminal, multi modal logistics

park, inland container depot, freight village, warehouse

etc) and railway freight ancillary projects (siding, terminal

facility, loading unloading facility etc). These are most

attractive for private investors as they have maximum

utility for private industry. These projects are fully financed

by the private sector and IR will offer the concession.

Private firms with a licence for container service and parcel

services may also take up such projects. The only

distinction between these two models is with regard to

the railway land: if the asset is constructed on railway

land it has to be transferred to IR at the end of the

concession period in the BOOT model. The private

concessionaires managing railway terminals may be called

private terminal operators (PTOs).

BOT

This is the basic Build Operate Transfer model which

was recommended by Thillai Rajan43 for infrastructure

projects. For the purposes of this paper, BOT is that PPP

model where the government has no equity partnership in

the project company. This model is suitable for railway

projects that are essentially developed by the government

to exploit the existing assets and raise capital resources

for modernisation and capacity addition to the existing

infrastructure. Under this category comes the

modernisation of metro city railway stations. Twenty two

such stations have been identified for modernisation44.

These stations have enormous real estate development

potential and can be developed into world class stations

with the necessary passenger amenities and services. Areas

around the stations and the air space above platforms could

be commercially developed while the development and

maintenance of operational and passenger areas is provided

to IR free of cost. The concessionaire’s source of revenue

would be by managing and marketing passenger facilities

at the station and renting commercial space. Concessions

for such projects could be structured on either maximum

revenue share for a fixed concession period or minimum

concession period for a fixed revenue share, or a

combination of both. New Delhi railway station is the

first station being developed on this model and the

concession is likely to be granted by the middle of 2008.

The number of passengers and the demand for trains are

increasing every year. The existing metro city stations do

not have space for future expansion to meet this growing

demand. Hence new modern passenger terminals are being

planned in such cities like Delhi and Mumbai, away from

the city centre at places which already have some railway

infrastructure including land. If additional land is required,

it will be provided by the state government or city

development authority. Such projects could also be taken

up through BOT. As it would be a green field development

there would be greater opportunity with comparatively

easier execution for maximising commercial development

in order to achieve train operational area free of cost and

at zero maintenance cost too.

BOT (SPV)

The BOT model in which a concession is given to a special

purpose vehicle (SPV) such as KRCL or PRCL is different

from the BOT model in two respects: it does not involve

any competitive bidding and there is a majority or equal

partnership of the IR in the project company resulting in

a lower degree of privatisation than the BOT model. Hence

its is treated separately under the category of BOT (SPV),

to distinguish it from the BOT concession given to a

private entity. This model is suited for two types of railway

projects:

• Projects for which strategic private investors can be

found and which are financially viable without any grant

or subsidy from the government, and whose project

development could be done either by the railways or

by the private sector. Port linking projects, private

sidings for a manufacturing unit (steel factories,

refineries etc) and link lines to mines fall under this

category. These are attractive for the private investors

whose strategic interest such projects serve.

• Projects which are essentially required by the

government for its long term capacity augmentation

but where the government does not have the funds to

finance it alone; for which private partners can be found

from the beginning; which are not financially viable

enough to be financed by the market and whose

development has to be done by the IR. Suburban rail

projects, dedicated rail corridor projects etc fall into

this category. These projects could be started without

any private partnership in the SPV, with the private



sector being roped in once the project line becomes

operational and starts offering a return.

BOT (JV)

The BOT model in which the government has a minority

equity partnership is treated separately here as BOT (JV).

In this model, a shell company is generally created by the

government for executing a development project, with a

majority of its equity share being offered to a private entity

through a competitive bidding process. This model falls

between BOT and BOT (SPV) in terms of the extent of

private sector participation. Concessions for developing

the new Bangalore International Airport and restructuring

and modernisation of Delhi and Mumbai Airports have

been awarded through this PPP

model. Indian Railways could

implement two types of projects

through this model:

• Those rail projects which have a

high economic rate of return for

the country and society but a very

low or negative financial rate of

return, for which the

government does not have

adequate funds, and which could

be privatised partly or fully once

the project is commissioned to

recover the government fund.

Under this category come the

Urban Mass Rapid Transport

projects in metro cities. The

equity share of the government

could be specified in advance, an

upfront grant could also be fixed

in advance and the bid could be called on the basis of

viability gap demanded by each bidder (which could

be a consortium of companies). The concession for

the Mumbai Metro Project was awarded through this

model. In a variant of this model, instead of offering

an upfront government grant, the bidders would be

offered a guarantee for a minimum ridership over a

fixed number of initial operational years and the bid

could be called on the basis of the viability gap demanded

by the bidders. This model was under consideration

for the Hyderabad Metro Project45. But finally the

bidding process presently underway is based on the

viability gap, similar to the Mumbai project.

• Projects mentioned under BOT could also be executed

through this model. In such cases the management of

the world class stations (except train running and

ticketing) will be under the joint venture company, in

which the government will be a minority equity partner

with around 26%. Such BOT or BOT(JV) station

operators may be called private station operators

(PSOs).

BOT (LPVP)

Capacity augmentation projects like doubling, gauge

conversion, railway electrification, and major bridge

construction were being tried on the earlier BOLT scheme

on IR in which a fixed annual annuity was paid to the

concessionaire during the concession period. The

concessionaire was essentially a

construction company who had the

responsibility of arranging finance

too. The private sector did not share

the traffic risk. BOT (LPVP – Least

Present Value of Payment) is a far

superior model that makes possible

the sharing of traffic risk by the

concessionaire for such projects.

They are essentially missing link rail

projects similar to projects being

undertaken by RVNL. The

maintenance system on such newly

constructed assets would be same

as is currently in practice on the

network. Maintenance of new

assets cannot be separated as once

constructed the assets become part

of the existing network. An SPV

like RVNL, that is executing a large

number of scattered projects in a particular corridor, could

use the BOT (LPVP) model. This model envisages annuity

payment linked to traffic growth on the line. It is based

on the shadow LPVR46 proposed by Mukhopadhyay47

for highway projects. LPVP may be fixed in agreement

with the zonal railway, keeping the duration of payment

flexible depending upon the traffic generated on the project

line. Payment will be linked to a shadow tolling based on

the running of trains. Hence the risk of traffic could be

partly shared between the zonal railway and the

concessionaire. As soon as the present value of all the

payment credited by the zonal railway becomes equal to

this LPVP, the contract will be closed and the line will

wholly belong to the zonal railways. Risk sharing by the

A Special Purpose Vehicle

like RVNL, that is executing

a large number of scattered

projects in a particular

corridor, could use the BOT

(LPVP) model. This model

envisages annuity payment

linked to traffic growth on the

line. Payment will be linked to a

shadow tolling based on the

running of trains.



1

Lease/ Service

Agreement

Catering, Yatri

Niwas Hotels,

Advertising,

Rest Rooms,

Parcel Vans,

UBLs

2

BOT (LPVP)

Capacity

Augmentation-

Doubling, GC,

RE, etc

3

BOT (SPV)

Port Links,

Suburban

Railway,

Passenger

Terminal

4

BOT (Annuity)

New Railway

5

BOT (JV)

Metro Railway,

World Class

Stations, New

Stations

6

BOT

Modernisation of

Stations, New

Passenger

Terminal, Land

Development

7

BOOT/BOO

Multi Modal

Logistics Park,

ICDs, Freight

Terminals,

Budget Hotels,

Food Plaza

8

Licence

Container

Operation,

Passenger

(Tourist)

Operation,

Parcel

Operation

SPV would be in the form of fixing the discount rate

judiciously, slightly below the interest rate of the debt.

With this the debt would be secured with earning in the

long run, and financial institutions would not have any

problem financing the projects. In this project model, the

private sector has a smaller role to play than in the BOT

(SPV) model because the SPV or project company is meant

for many smaller rail projects and not much private sector

advantage could be achieved except project financing and

its associated benefits.

BOT (Annuity)

In the BOT (Annuity) project model, the private sector

has the responsibility of designing, financing, constructing

and maintaining the railway infrastructure during the

concession period in return for a fixed annuity to be paid

by the government. This is suitable for new railway line

construction projects more than 500 km in length. In this

model the concessionaire can adopt a design that optimises

the maintenance expenses to get a minimum life cycle

cost. This model is advantageous when the IR would like

to take advantage of the latest design and maintenance

practices with a smaller staff, thereby lowering the

recurring cost and raising the standard. The Annuity PPP

model has been successfully used in National Highways

projects in India. Several of the experts interviewed48 opined

that this model would be useful for railway projects. This

form of partnership would be most suited in the dedicated

freight corridor project being executed by an SPV, the

Dedicated Freight Corridor Corporation of India Ltd

(DFCCIL). It has been mandated by GOI to carry out

construction of railway infrastructure through a mix of

engineering and procurement contracts (EPC) and PPP

packages. The BOT (Annuity) model will work only if

the contract packages are made for 400-600 kms length

each, so that the private sector is encouraged to bring in

the latest construction and maintenance practices. Rights

to the concessionaire for developing terminal facilities like

multi modal logistics parks along the railway line would

bring down the annuity charges to be paid by the DFCCIL.

One full corridor from origin to destination should be

implemented with a series of such BOT (Annuity)

concessions in order to ensure early returns. From the

point of view of degree of privatisation, this model falls

between BOT (SPV) and BOT (JV). Such operators may

be called private annuity infrastructure operators (PAIOs).

Activity cum Project Level FrameworkActivity cum Project Level FrameworkActivity cum Project Level FrameworkActivity cum Project Level FrameworkActivity cum Project Level Framework

Building on the framework used by Thillai Rajan, the eight

PPP models explained in the previous section could be

arranged in increasing degree of privatisation. This is

presented in Exhibit 4 along with the activities or projects

coming under each structure.

This framework lists activities and projects on IR that

could be assigned to the private sector under various PPP

models mentioned therein. This framework also arranges

the various PPP models in increasing degree of privatisation

for assisting decision makers and conceptual clarity. The

list of activities and projects is not exhaustive and additional

activities and projects could be added under each column.

Only the basic features of each PPP model have been

explained in this paper and each model needs further

development. IR has adopted leasing and licensing PPP

models in a big way on the identified activities. On the

project front only the BOT (SPV) model has been used

Exhibit 4 Activity cum Project Level Partnership Framework in PPP Models



so far, while projects under BOT, BOT (Annuity), BOT

(JV) and BOOT/BOO models are under various stages of

development.

PPP Evolution around OrganisationsPPP Evolution around OrganisationsPPP Evolution around OrganisationsPPP Evolution around OrganisationsPPP Evolution around Organisations

The seven caselets presented in a previous section

establish that organisations are the centres around

which PPP has evolved on IR. In the 40 years of IR’s

existence, only three public companies (IRCON

International Ltd, RITES Ltd and Indian Railway Finance

Corporation Ltd — IRFC) were created prior to 1988.

However, between 1988 and 2006, 12 public organisations

were created, the most recent being the Dedicated Freight

Corridor Corporation of India Ltd (DFCCIL) and the Rail

Land Development Authority (RLDA). Out of these 15

organisations, 13 are public companies, the Centre for

Railway Information System (CRIS) is a Trust constituted

under the Societies Act, and RLDA is an Authority

constituted under the Railways Act. Many more

organisations will be created in the coming years. Most

of the PPP models explained in the preceding section have

been implemented by IR through organisations. With such

organisations playing a prominent role in the PPP initiatives

taken in IR so far, it is imperative to analyse these

organisations and see if any meaningful framework

evolves.

Based on the ownership structure and the nature of

business assigned to an organisation, organisations in IR

may be classified into seven categories as shown below:

• Segment Specific Organisation

• Umbrella SPV

• Public-Public SPV

• Partly Privatised Public Company

• Public-Private SPV

• Subsidiary Joint Venture SPV/Company

• Privatised Public Company or JV Company with

minority government stake.

The approach towards PPP depends not only on the

activities and projects framework explained in Exhibit 4,

but also on what type of organisation is carrying them

out.

A segment specific organisation is a public organisation

that is 100 percent owned by GOI and its business area is

focused on a particular segment of the railway sector,

such as construction, consultancy, multimodal transport,

hospitality, telecom, financing or information system.

CONCOR, a partly privatised company, and IRCTC, a

public company, both fall under this class. Other such

companies formed by MOR so far are IRCON, RITES,

RailTel, IRFC and CRIS49. For such organisations, PPP

may be either a necessity or an opportunity; they may go

for JV as a minority partner or for licensing, contracting

and leasing, and their motivation may range from long

term interest and investment in infrastructure to reduction

Exhibit 5 Umbrella Special Purpose Vehicle (SPV)

Government of India

Financial InstitutionsUmbrella SPVState Governments

Project SPVProject SPVProject SPV



in existing losses and exploiting assets.

An umbrella SPV is also a public organisation owned 100

percent by GOI but as the name ‘special purpose vehicle’

suggests, it is specially created for executing certain

projects or type of projects through the creation of more

project specific SPVs among other modes of execution.

Exhibit 5 shows a schematic diagram of an umbrella SPV

in relationship with other stakeholders. RVNL, DFCCIL

and RLDA are examples of such SPVs under MOR. MOR

is also planning to create another umbrella SPV for joint

venture manufacturing companies for modern rolling

stock.

While KRCL is a public-public conventional SPV with

one well defined project (arranging debt and project

execution), RVNL is a modern multi project umbrella SPV,

whose function is to develop projects, select partners,

and provide financial closure and execution. MRVC is

another public-public partnership SPV, while PRCL and

HMRDC are public-private partnership SPVs. However,

PRCL is driven by one private strategic partner (GPPL)

for connectivity to the port, with no grant and a consession

fee of Rs 20 million per year. HMRDC in contrast, is an

SPV set up by the state government and MOR with

multiple private partners from the mining and port sector,

a 50 percent grant from MOR, and a concession fee of

Rs 1000 per year. In PRCL, the market risk is borne by

GPPL with a traffic guarantee for three years, and the

future expectation is bullish; the risk in HMRDC is

uncovered and the future expectation depends on the

extent of mining export.

New Organisation Level FrameworkNew Organisation Level FrameworkNew Organisation Level FrameworkNew Organisation Level FrameworkNew Organisation Level Framework

Based on the discussion in the previous section, an

organisation level framework is proposed in Exhibit 6.

The seven different classes of railway organisations have

been placed in seven cells from 1 to 7 in increasing order

of private partnership or decreasing order of GOI

ownership. Cell 1 and 2 both represent 100% GOI

ownership but SPVs have been considered a higher PPP

entity than segment specific organisations. The experience

of a German company LVB in Leipzig50 suggests that

subsidiaries in the peripheral activities of the main railway

network could later be used for private partnerships for

expanding business outside the rail network and raising

capital for the expansion of the holding public sector

company. Several executives interviewed for the present

study opined that this method of private partnership would

have more acceptability within IR as the holding company

would continue to be under government control.

When the strategic importance of a public company gets

diluted due to the presence of several similar private

companies in the market, the public company could be

partially privatised by selling minority share to the public.

Exhibit 6 Organisation Level Partnership Framework in IR

1 2 3 4 5 6 7

Government Created Organisations

Increasing Degree of Private Partnership

Subsidiary and Converted Companies

Segment

Specific

IRCON,

RITESIRFC,

CONCOR,

IRCTC, RailTel,

CRIS

Umbrella

SPV

RVNL, DFCCIL,

RLDA

Public-Public

SPV

KRCL

MRVC

Public-Private

SPV

PRCL

HMRDC

Partly

Privatised

CONCOR^

Subsidiaries/

JVs/SPVs

KRC

Privatised/

Minority JV

JVs of

CONCOR

^CONCOR has been placed twice, cell 1 being its original place and cell 5 the present place



IRCON and RITES fall under this category but, despite

attempts, the shares of these two companies could not be

sold to the public. However, this was done in case of

CONCOR when it was still a monopoly player in the

market. One of the reservations of MOR against such

disinvestment was that the proceeds were not benefiting

the company itself. This was also the opinion of the

management of CONCOR when they were interviewed.

A far superior form of privatisation would be for

subsidiaries to be created by such companies and

subsequently privatised, or subsidiaries to be created under

JV partnerships with minority equity as has been done by

CONCOR. IRCON and RITES could also do this. A

privatised company is one in which the government holds

only a minority share. Such a company would play a vital

role in the PPP initiatives of IR as it would bring in the

much needed railway technology and experience in the

private sector into maintenance, construction, rolling stock

and train operations.

Evolution of Reforms in IREvolution of Reforms in IREvolution of Reforms in IREvolution of Reforms in IREvolution of Reforms in IR

Since the beginning, IR has been organisationally divided

into separate zonal railways, whose number has increased

over the years. Further, Kolkata Metro and various

production units are also separate organisational entities

centrally controlled by the Railway Board. The creation

of various segment specific organisations has resulted in

the gradual institutional separation of several business

segments. This process is continuing and might result in

the institutional separation of all segments except bulk

freight operations and mainstream passenger train

operations. Bulk freight operation is considered the most

efficient operation and there is neither any need nor any

possibility of introducing private freight operators in this

segment. But piecemeal traffic handling segments such

as container services, parcel services and tourist train

services will gradually get transferred to private operators

as identified under the section on Project Structures. Loss

making passenger services such as uneconomic branch

lines and hill railways will however get institutionally

separated through leasing to private operators. Existing

infrastructure too will gradually get institutionally separated

through modernisation projects getting executed through

PPP project models bringing in private parties like private

station operators in the near future. All major

infrastructure additions through PPP will result in

institutionally separate infrastructure operators like private

terminal operators. Although IR is not going to privatise

present rolling stock, several new JV companies in rolling

stock manufacturing are being planned through an umbrella

SPV, in order to meet the growing demand for rolling

stock. These will bring in several new private joint venture

rolling stock companies.

Sector Level FrameworkSector Level FrameworkSector Level FrameworkSector Level FrameworkSector Level Framework

The evolution of reforms in IR differs from the framework

of international railway reform as presented in Exhibit 2,

in two of its elements. The first is its incremental nature,

unlike the one time restructuring of the existing set up in

the case of Europe and the US. The second is the

evolutionary nature of reform through various

experiments of public private partnership on IR in contrast

to the reform in European and American railways that

was effected due to a deliberate top down policy

intervention. The evolution of reforms in IR could be

captured in a framework as shown in Exhibit 7.

The framework is called ‘sector level’ as it applies to the

entire railway sector in the country. This framework

shows six stages of increasing degree of private

partnership at the sector level. All these stages are open

ended beginning at different periods of time but continuing

incrementally thereafter. Sector level partnerships at stages

1 to 4 had already begun by year 2006 whereas stage 5

may begin in 2008 and stage 6 may begin in 2012, with

the commissioning of the Dedicated Freight Corridor. It

is expected that by this time Accounting Separation, the

most urgently required reform51, will be in place, enabling

the future sustenance of PPP in IR. The organisation level

and activity cum project level PPP framework proposed

will continue to bring new private operators on IR.

New PPP Framework for RailwayNew PPP Framework for RailwayNew PPP Framework for RailwayNew PPP Framework for RailwayNew PPP Framework for Railway

The evolution of PPP in IR has been captured in three

different frameworks — activity cum project level,

organisation level and sector level partnership. However,

these three perspectives are not exclusive and independent;

rather they are mutually interrelated and interdependent.

Hence a two-dimensional three level PPP framework is

arrived at by combining the three frameworks, which is

applicable to railway systems in countries with economic

parameters similar to India (Exhibit 8).

At the lowest or activity cum project level, the framework

provides eight different models of PPP, which can be used



for different categories of railway activities and projects.

These models vary in degree of private partnership as

shown in the figure. However a model with higher degree

of private partnership is not necessarily better or superior.

Hence the selection of a PPP model should be entirely

based on the nature of activity/project and the form of

organisation used for implementation.

At the middle or organisation level, the framework provides

seven different forms of government created or subsidiary/

converted organisations with varying degrees of private

partnership. Once again a form with higher degree of

private partnership may not be necessarily superior. Hence

the selection of a form of (government created)

organisation should be based on the purpose and the nature

of project for which the organisation is to be created.

However once such an organisation is created it may be

converted to the next three stages (of subsidiary/converted

organisations) in the direction of increasing degree of

private partnership. This would help in building the much

needed private sector capability in the rail sector and

realising the full potential of private partnership in the

railway sector. This in turn would encourage the

government to adopt activity/project models with higher

degrees of private partnership.

At the sector level, the framework provides six stages of

partnership with increasing degrees of private partnership.

The government must strive not only to reach higher stages

of sector level private partnership, but also to increase

the magnitude of private participation in each stage. This

is largely dependent on the extent of private partnership

at organisation level and activity/project level: each new

organisation and PPP model adopted helps IR reach its

goal.

ConclusionConclusionConclusionConclusionConclusion

Public-private partnership in railways is multi-dimensional,

requiring a new framework different from the existing

project based one-dimensional PPP framework used in

other transport sectors. Railway reform in India has

evolved in the existing set up through a need-based

incremental process derived from encouraging private

participation in various non-core activities, new railway

projects and new public companies. The new three-level

two-dimensional PPP framework developed in this paper

captures this evolution and provides visibility of the degree

of private partnership in the railway industry. The

framework helps in drawing up a roadmap for encouraging

PPP at all the three levels as their interlinkage is essential

for achieving each goal. The eight project structures for

railway sector explained here would enable practitioners

and policy makers to design the PPP model for a railway

project based on nature of project and degree of

1

Public Organisational

Separation (Regional)

2

Institutional

Separation of

Segment Specific

Organisations

3

Separation of New

Infrastructure – SPVs,

JVs

4

Leased and Licensed

Operators (PCOs,

PPOs, LPSOs, TTOs)

5

BOT Operators and

Rolling Stock

Providers (PSOs,

PAIOs, PTOs,

JVRSCs)

6

Government Owned

Parent Network with

Accounting

Separation + Private

Operators + Rail

Organisations

Exhibit 7 Sector Level Partnership Framework in IR

Increasing Degree of Private Partnership

Note: Arrows with the year given above indicate when a particular stage began; the dotted arrows show when a stage is expected to begin in

the future. The thickness of an arrow shows the relative magnitude of achievement of a sector level partnership in that stage with the thickness

of the first arrow representing almost 100% achievement and hardly any further scope of future increase. It is expected that as more and more

privatisation is achieved in a stage, the arrow will become thicker until it ultimately matches the thickness in stage 1.

Pre 1988 1988- 1990- 2006- 2008- 2012-



privatisation intended. The framework presents a more

socially and politically acceptable alternative to railway

privatisation, which will encounter less resistance to

change within the government. All developmental

objectives can be achieved with this framework without

going in for any privatisation in the mainstream government

railway network. For the Indian Railways, which has

achieved a remarkable financial turnaround in recent years

due to higher capacity utilisation, this framework could

be utilised for designing a massive capacity augmentation

and modernisation programme through greater public-

private partnership for ushering in the next level of

turnaround.

References and NotesReferences and NotesReferences and NotesReferences and NotesReferences and Notes

1 In year 2000-01, the cost of all sanctioned works in this category

was Rs 230 billion, and the annual allotment in the Railway

budget for carrying out such works was a meagre Rs 7.1 billion.

This implies that it would take several decades just to clear the

backlog of such sanctioned projects. Indian Railways Report,

2001, ‘Policy Imperatives for Reinvention and Growth’, Expert

Group on Indian Railways.

2 ‘Building Railway Infrastructure: Challenges and Opportunities’,

Presentation by Chairman, Railway Board at a Conference at

Exhibit 8 Public Private Partnership Framework for Railway

Increasing Degree of Privatisation

Incre

asin

g L

eve

l o

f P

art

ne

rsh

ip

Lease/

Service

Agreement

BOT

(LPVP)

BOT

(SPV)

BOT

(Annuity)BOT (JV) BOT BOOT/ BOO License

Segment

Specific

Umbrella SPV Public-Public

SPV

Public-Private

SPV

Partly

Privatised

Subsidiaries/

JVs/ SPVs

Privatised/

Minority JV

Government Created Organisation Subsidiary and Converted Organisation

Org

an

isa

tio

n

Public

Organisational

Separation

(Regional)

Institutional

Separation of

Segment Specific

Organisations

Separation of New

Infrastructure —

SPVs, JVs

Leased and

Licensed

Operators (PCOs,

PPOs, LPSOs,

TTOs)

BOT Operators

and Rolling Stock

Providers (PSOs,

PAIOs, PTOs,

JVRSCs)

Government-

owned Parent

Network with

Accounting

Separation +

Private Operators

+ Rail

Organisations

Se

cto

rA

ctivity /

Pro

ject

Vigyan Bhavan, 7th October 2006.

3 Fayard, A, 1999, ‘Overview of the Scope and Limitations of

Public-Private Partnerships’, ECMT Seminar on PPPs in

Transport Infrastructure Financing.

4 Tsamboulas, Dimitrios A, and Seraphim Kapros, 2003, ‘Freight

Village Evaluation under Uncertainty with Public and Private

Financing’, Transport Policy, Vol 10, pp 141-156.

5 Brealey, Richard A, Ian A Cooper, and Michel A Habib, 1996,

‘Using Project Finance to Fund Infrastructure Investments’,

Journal of Applied Corporate Finance, Vol 9, No 3, pp 25-39.

6 Thillai Rajan A, 2004, ‘Observations on Project Structures for

Privately Funded Infrastructure Projects,’ Journal of Structured

and Project Finance, Vol 10, No 1, Spring, pp 39-45.

7 Pangotra, P, and G Raghuram, 1999, ‘Resource Mobilization

Strategies for Financing of Transport Infrastructure and Services’,

Infrastructure Development and Financing: Towards a Public-

Private Partnership, New Delhi: Macmillan India, pp 327-355.

8 Parikh, N C, and R Samson, 1999, ‘BOT Road Infrastructure

Projects: Process, Problems, and Suggestions’, Vikalpa, Vol 24,

No 1, pp 3-12.

9 Raghuram, G, 2004, ‘Value for Money in Toll Roads: Lessons

from Recent Road Projects’, India Infrastructure Report 2004,

New Delhi: IDFC, pp 252-258.

10 Varkkey, B, and G Raghuram, 2002, ‘Governance Issues in

Airport Development: Learnings from Cochin International

Airport Ltd’, India Infrastructure Report 2002, New Delhi:

IDFC, pp 303-310.

11 Raghuram, G, and M R Babu, 1999, ‘Alternate Means of



Financing Railways’, Infrastructure Development and Financing:

Towards a Public-Private Partnership, New Delhi: Macmillan

India, pp 356-380.

12 Raghuram, G, 2002, ‘Experiences of Various Forms of

Commercial Partnerships in Indian Railways’, India

Infrastructure Report 2002, New Delhi: IDFC, pp 288-297.

13 Swarup, S, 2004, ‘Public Private Partnerships in Port

Connectivity in India’, Dissertation in progress, PGPPM, IIM

Bangalore.

14 Finnerty, John D, 1996, Project Financing- Asset Based Financial

Engineering, John Wiley, Ch 14.

15 Mathieu, G, 2003, ‘The Reform of UK Railways – Privatization

and its Results’, Japan Railway & Transport Review, No 34,

Mar, pp 16-31.

16 Smith, Ian, 2003, ‘Britain’s Railways – 5 Years after the

Completion of their Privatization’, Japan Railway & Transport

Review, No 34, pp 12-15.

17 Muttram, R I, 2003, ‘UK Railway Restructuring and the Impact

on the Safety Performance of Heavy Rail Network’, Japan

Railway & Transport Review, No 34, pp 4-11.

18 Link, Hieke, 2003, ‘Rail Restructuring in Germany – 8 Years

Later’, Japan Railway & Transport Review, No 34, pp 42-49.

19 Dilger, Robert Jay, 2003, American Transportation Policy,

Westport: Praeger, pp 27-158.

20 Profillidis, V A, 2001, ‘Separation of Railway Infrastructure and

Operations’, Japan Railway & Transport Review, No 29, Dec,

pp 19-23.

21 Public-Private Infrastructure Advisory Facility (PPIAF), 2005,

‘The Experience of Rail Concessions: Lessons for Policy

Makers’, http://ppiaf.org. Last accessed on: May 4, 2005.

22 Link, ‘Rail Restructuring in Germany — 8 Years Later’.

23 Ibid.

24 Mathieu, ‘The Reform of UK Railways – Privatization and its

Results’.

25 The study of the seven organisations being limited in scope and

extent, they are termed caselets rather than case studies. Detailed

caselets are presented in Chapter 6 of the Dissertation Report of

A K Gupta, submitted to IIM Bangalore on 21st February 2006

in partial fulfillment of PGPPM Programme.

26 Including those from the seven organisations selected for case

study. Among the persons interviewed, some prominent ones

were: Managing Director, Delhi Metro; Officer on Special Duty

to Minister of Railways; Executive Director/Perspective Planning,

Railway Board; Director Finance, Konkan Railway Corporation;

Managing Director, Container Corporation of India; Director

Finance, Mumbai Rail Vikas Corporation; Managing Director,

Pipavav Railway Corporation; Director Operations, Rail Vikas

Nigam Ltd; Group General Manager, Mumbai, Indian Railway

Catering and Tourism Corporation; Chief Executive Officer,

Hassan Rail Development Company; Advisor Transport

Planning, Planning Commission; Managing Director, Bangalore

Metro; Managing Director, Karnataka Urban Infrastructure

Development Finance Corporation; and Managing Director,

Infrastructure Development Corporation Karnataka Ltd.

27 There were 13 bond issues – two public bonds and 11 on private

placements. One private placement was through ILFS through

asset leasing.

28 The IR network is divided into 16 regional units known as zones.

Each zone has 3 to 5 divisions.

29 Popularly known as the KRCL model.

30 During the last three financial years (2003-04, 2004-05, 2005-

06), the Operating Ratio was 79.6%, 76.6%, 65% as against IR’s

corresponding figures of 92.1%, 90.9%, 83.7%. Source: Annual

Financial Statements of KRCL and IR.

31 Four have been set up at their Dadri ICD, each costing Rs 160-

200 million, funded through 2:1 debt equity ratio.

32 In 2006, MOR registered 14 private firms including CONCOR

for giving container licences and the concession agreements were

signed on January 4, 2007. Till November, eight of them had

already started running a total of 31 container trains transporting

about 0.25 million tons of goods every month.

33 On a gross turnover of Rs 2.67 billion. Source: IRCTC’s audited

financial results for year ending 31st March 2006.

34 As stated by Mr Vinod Asthana, Group General Manager,

IRCTC Mumbai on 8 Feb 2005 in an interview – seven to eight

thousand tickets are sold every day through these arrangements,

bringing in about Rs 10 million a day. However, as of December

2007, about 18 lakh bookings were made for an aggregate of

Rs 170 crore. Source: Company website, bank statements.

35 The existing revenue apportionment formula among zonal

railways is based on a system in which revenue is shared in

proportion to the distance travelled by the goods in a zonal

railway subject to special weightages to loading, unloading and

certain other parameters.

36 Views expressed by the MDs of PRCL and HMRDC during

interviews on 26 Apr 2005 and 15 Feb 2005 respectively.

37 Views expressed by the MD of PRCL during interview on 26

Apr 2005.

38 Thirty four projects on the Golden Quadrilateral, 22 port

connectivity projects and 4 mega bridges.

39 As stated by the Chief Executive Officer, HMRDC on 18 January

2008 in a telephonic interview.

40 As stated by the MD, IDeCK in an interview on 15 Feb 2005.

41 Thillai Rajan, Observations on Project Structures for Privately

Funded Infrastructure Projects.

42 Agarwal, Rajesh, 2005, ‘Railways’ Uneconomic Branch Lines:

Potential and Possibilities’, a dissertation work in partial

fulfillment of PGPPM course at IIM Bangalore, 2004-06.

43 Thillai Rajan, Observations on Project Structures for Privately

Funded Infrastructure Projects.

44 Supplementary Rail Budget 2006 presented in the winter session

of Parliament and subsequent press releases from Railway Board.

45 As stated by Mr E Sreedharan, MD, Delhi Metro, in an interview

on 21 Apr 2005.

46 Least Present Value of Revenue.

47 Mukhopadhyay, Partha, 2005, ‘Are Old Shoes Always

Comfortable?’, Conference on Policy and Practice: Designing

and Promoting Effective Institutions, Sep 2005, IIM Bangalore.

48 As stated during interviews by MD, IDeCK on 15 Feb 2005;

Sector Head, Transport, IDFC on 8 Feb 2005 and Officer on

Special Duty, Bangalore Metro on 24 Feb 2005.

49 RailTel Corporation of India Limited for the telecommunication

segment, IRFC for the financing segment, and CRIS for



Reprint No 08101

Anil Kumar Gupta is Director, Public Private Partnership (Civil)in the Ministry of Railways (Railway Board), New [email protected]

Shyamal Roy is Professor, Economics and Social Science,and Dean (Academic), Indian Institute of ManagementBangalore. [email protected]

Information Systems.

50 Hanss, W G, 2001, ‘Overcoming Competitive Disadvantages of

Public Enterprises by Public-Private Partnerships and their

Financing Models’, Annals of Public and Cooperative

Economics, Vol 72, No 3, pp 393-411.

51 The findings from the interviews indicate that the separation of

the accounts for infrastructure, passenger services and freight

services is the most important reform required on IR. A consultant

has already been appointed by IR for advising it on accounting

reforms.


public private partnership in railways - a new approach_imr march 2008

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