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Indian Railways, which has been facing severe financial constraints in recent times, has shown its willingness to accept foreign direct investment (FDI). However, lack of clarity in the scope of foreign partnership has made the Union Ministry of Commerce and Industry to delay the FDI policy decision. The ministry has directed the Railway ministry to bring in more clarity on the scope of partnership it is planning to have with foreign entities.
Even though 100 per cent is allowed in railway related components and for Mass Rapid Transport Systems (MRTS) through the automatic route, no FDI is allowed in the Indian Railways sector as of now. Opening up the sector to foreign investment would be a life saver for the financially strapped railways sector especially when public-private partnerships (PPP), to revive investment, have not been very successful.
In May 2013, the Railway Ministry approached the DIPP urging it to permit FDI into the sector, following which the DIPP circulated a cabinet note in September 2013, proposing 100 per cent FDI in railway projects.
As per the proposal, foreign investors will be allowed to hold 100 per cent stake in the special purpose vehicles (SPVs) constructing port connectivity projects as well as railway lines that will connect mines and industrial hubs to the existing rail network. First-to-last mile connectivity will mean smooth movement of raw materials from mines to ports.
The draft Cabinet note recommends amendment to Schedule I of Industries Act 1951, which currently doesn’t permit FDI in sectors such as atomic energy and railways. DIPP will send the note for Cabinet approval after receiving comments from various ministries.
Railway Ministry has sought FDI investment only in construction and maintenance of projects, and not in operations and safety. Mostly, FDI is sought in all areas having PPP, like the elevated rail corridor project in Mumbai and both, the eastern and western dedicated freight lines. The Ministry has also proposed FDI through the automatic route, which does not require prior government approval in railways infrastructure.
Private Participation
Faced with financial constraints, the Railways Ministry has been forced to look for FDI even when the PPP model in the railway sector is still at a takeoff stage. Although private investment is eagerly sought in the sector, private players have given it a miss so far. In the 11th Five Year Plan, the Railways managed to attract only four per cent of their targeted Rs 66,000 crore from private companies.
Most of the PPP projects announced in the Railways sector have encountered bureaucratic hurdles in clearing them. Reflecting the trend, the two mega PPP projects envisaged by the Railway Ministry — Mumbai-Ahmedabad high speed rail corridor and the Mumbai Suburban elevated rail corridor projects have made little progress so far.
The high speed rail corridor project, which was envisaged in 2008, is still in the planning stage. In October 2013, the Union Government signed an MoU with Japan International Cooperation Agency (JICA) for the project. As per the MoU, JICA will undertake a detailed feasibility study for the project and present the report by March 2015. Thus, the project is expected to enter the execution stage only after two years, if no other issues hold up its progress.
As for the Chhatrapati Shivaji Terminus (CST)-Panvel elevated railway line project in Mumbai, the developer, Mumbai Railway Vikas Corporation, has submitted a draft of the State Support Agreement for clearance from the state government. The 49 km elevated railway line, to be built at a cost of Rs 13,502 crore, will go a long way in decongesting the traffic flow to mainland Mumbai.
Traditionally, the Indian Railways has been saddled with problems like delay in project execution and cost overruns. Due to the populism policies adopted by the government in fixing fares and announcing new (some of which are economically non viable) railway lines, the Railways is facing a funds crunch to meet the expansion plans and to incorporate the much needed safety measures.
For the current fiscal, the total investment in railways was estimated at Rs 63,000 crore. However, the Ministry has now reduced the annual plan size to Rs 56,000 crore because of earnings falling short, especially on the passenger earnings front.
There is a huge opportunity awaiting Indian and foreign private players in the railway sector. Encouraging private investment and opening up to foreign direct investors will certainly help the Railway Ministry to meet its ambitious target of Rs one lakh crore of investment through the PPP route in the 12th Five Year Plan.
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