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Private railway tracks get green signal

By Sharmistha Mukherjee
July 27, 2010 01:01 IST
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Private sector entities will now be able to construct, operate and maintain railway tracks in the country under a new policy framed by the ministry to promote investment in railway infrastructure projects. Though private companies now operate railway linkages to a few ports or have captive rail systems, it is for the first time that large-scale private operations in freight are being planned.

A senior official at the ministry said: "Resource crunch is delaying the execution of network capacity expansion projects of the railways. The R3i (Railways' Infrastructure for Industry Initiative) policy has been formulated to tap alternative sources of funding to create additional rail transport capacity and augment rail share in freight traffic."

Under the policy, private companies would be able to build tracks, 20 km or longer, adopting one of the four business models proposed by the railways. They are "full contribution-apportioned earning model", "cost-sharing-freight rebate model", "special purpose vehicle (SPV) model" and "private line model". The companies would be allowed to develop logistics-related activities and stations on the project line.

The ministry, however, has included a rider to keep connectivity to coal and iron ore mines, directly or indirectly, away from these companies. This is so because the railways get 55 per cent of its total freight revenue from moving coal and iron ore. The total freight revenue targeted for this year is Rs 62,489 crore.

In all models, except in the private line model, land for building new lines will be acquired by the railways. Funds for land acquisition have to be paid upfront to the railways by the private companies. The ownership of land and tracks would vest with the railways.

In the cost-sharing-freight-rebate model, the railways and private companies would enter into a cost-sharing agreement to construct the proposed line, the contribution of the private player being not less than 50 per cent of the total project cost. The railways would take up construction, operation and maintenance of the new tracks. The private player, in lieu of investments made, would be entitled to a freight rebate varying between 10 and 12 per cent on incremental traffic moved on the line for a maximum period of 10 years.

Alternatively, the private players can contribute fully in developing and maintaining a proposed stretch for 25 years. The interested party would receive earnings from traffic on the line, except for the operating and maintenance costs incurred by the railways. The railways would impose a fee of two per cent on the gross earnings of the partner's share for the first 10 years of operations and four per cent for the remaining 15 years. Expenses incurred to acquire the land would be refunded at the end of the concession period.

An SPV, with 26 per cent equity share of the railways, can also be formed to execute a new line project. Under this model, the SPV shall be granted a concession to construct, operate and maintain the line. It shall be granted a share in the revenues generated on the line for 30 years. For port connectivity projects, as much as 100 per cent of the earnings generated, apart from the operational costs incurred by the railways, would be forwarded to the consortium.

Private parties can build a new line on non-railway land and claim revenues generated on the line for 30 years under the "private line model". Operational and maintenance expenses of the railways would be deducted from the gross revenues in this case. Besides, the railways would levy a fee on gross earnings of two per cent between 5 and 10 years, three per cent between 10 and 20 years and four per cent for the remaining period on the private entity.

Indian Railways, at present, has 110 new line projects in various stages of development, the balance funds required for the completion of which are estimated to be Rs 60,000 crore. Officials at the ministry said severe scarcity of funds had led to spreading of resources thinly over a large number of projects. This was leading to considerable time and cost over-runs.

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Sharmistha Mukherjee
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