Railway is exploring private participation in both passenger and freight segments.Although railways have already decided on the kind of Public private Partnership it wants to have with private players, this article aims at another alternative model i.e. ‘Wet-Leasing’ which can emerge as formidable and cost effective model in the near future.To understand ‘Wet-Leasing model’, it is important that we should first have a look at the present model of rolling stock procurement in railways.
Ninety percent of rolling stock operating on Indian railways i.e. locomotives and coaches are not owned by Indian Railways but by Indian Railways’ financial arm known as Indian Railway Finance Corporation(IRFC). IRFC borrows the money from domestic and global markets and then purchases the rolling stock and leases it to Indian Railways.This is essentially a ‘financial lease’ where Railways decides which rolling stock to buy and tells IRFC to buy it from Railways production unit and lease it back to Indian railways.Thus, leasing in the form of ‘lease-back model’ is already an embedded idea in Indian rolling stock landscape.
The above model , however, is limited to Ministry of Railways(MoR) as all the three parties i.e. rolling stock producer, rolling stock procurer and the financier, all belong to same promoter i.e. MoR. The idea of ‘Wet-leasing of trains ‘ is just an improvisation over the above idea and is aimed at tweaking the above idea with a view to increase the private participation in different segments of railway sector.Wet-leasing means that the ‘New Leasing Entity’ will not only lease the rolling stock but also the crew who will run those trains.It will also be responsible for repair,maintenance and overhauling of the rolling stock.Thus, the Wet-leasing model is a structural shift from ‘financial lease model’ to ‘operating lease model’ .Operating lease model can have tangible benefits in railway sector some of which have been enumerated below.
1) Encouraging Private Players in Train operations:Currently, the private players are required to bring with them a high initial investment as they need to buy rolling stock and will also be required to invest in the ground infrastructure for maintenance of their rolling structure.The corollary to such high initial investment is that private players will require a comfortably long concession period.However, in a competitive industry like transportation the likelihood of failure is equal to success if not more.Wet-Leasing provides an alternative to the above asset heavy structure and hugely decreases the financial liability of the private players encouraging them to comfortably enter the railway market.
For example, if a private train operator decides to operate on 10 routes, it will require him a minimum of 20 train sets considering daily up-down movement and a journey time of more than 12 hours.The cost of each ‘Vande Bharat’ train-set is around 100 crores.So, pure rolling stock investment by a train operator will be an upfront 2000 crores.On the other side, if he takes it on lease, it may cost him only 5 crores as basic cost of each train- set considering the codal life of rolling stock as conservative 20 years. Considering risk free rate of 5 percent and a margin of 20 percent as an additional cost, the total cost comes to 6.25 crore per train-set per year against upfront investment of 100 crores per train-set apart from 5 crore interest every year.So , if an operator plans to try the railway sector for 5 years, he can do it by initial investment of 6.25*20*5 i.e. 625 crores reducing his initial commitment by two-third and if he attempts to exit the sector , he can easily exit without going for distressed sale of assets.
2) Up-gradation of Rolling stock: A new leasing entity relatively independent of ministry of railways would be able to scout for good quality rolling stock and bring them into Indian railway sector.It will encourage Indian private rolling stock producers like Medha, BEML etc to create good quality rolling stock and sell it to this leasing entity.This will give a new market to rolling stock producer who not only can sell train directly to private train operator but also to the leasing company.Thus, it will become a market maker for high quality Indian rolling stock and will bring competition into this market hitherto dominated by Indian railways production units.
3) Reduce Cost of Rolling Stock: The creation of Independent Entity will create market data for the standard cost of rolling stock and will put an active pressure on the Railway production units to become cost competitive and deliver high-notch quality.This will give key benefit to Indian railways who solely depends on these Production units for the rolling stock.The reduction in cost is likely to create breathing space for the railways struggling with financial woes.It will also decrease the overall cost of transportation in both passenger and freight segment.
4) Attracting Global Investors and Development Banks:World bank has been active promoter of leasing in developing countries.Its financial arm IFC (International Financial Corporation) can be roped in to invest in the new leasing entity.This will not only bring low cost investment to the new entity but will also bring technical and financial expertise to Indian rolling stock market.It will also attract other development funds and banks to invest in the entity as it increases the market depth as well as creates new opportunities in transportation sector.Further, railway transportation is green in nature and efficient and thus, fits in vision of global institutions aimed at sustainable development.
5) Decreasing the logistic cost:India has one of the highest logistic costs in the world which is around 14 percent of the value of the goods whereas most of the developed economies have logistic cost of around 8 to 10 percent of the value of goods.This is primarily because of the inefficiencies of primitive structures is getting passed on to the customers.Thus, the leasing of freight rolling stock will not only reduce this cost but also bring in light weight rolling stock to the Indian market which is likely to be more fuel efficient.This is especially crucial as the dedicated freight corridor will become operational in few years and thus,a huge demand for freight rolling stock will be created.
6) Corporate capital structure:Unlike government institutions, this entity can create a much more efficient capital structure as not only it can attract high quality equity investments but it will also have the flexibility to go to capital markets and raise the capital in which ever form it feels suitable.Thus, its access to markets will make it a value creator in the sector. Further, it is going to play the role of financial inter-mediator in the sector and can attract various Infrastructure Investment Trusts and Sovereign Wealth Funds.
7) Capturing South Asian and African Markets:The new Entity cannot only lease to Indian market but also to neighboring markets like Bangladesh, Sri Lanka etc.. Two key production Units like RCF AND ICF already have a market in South Asia and Africa and this means that technologically the Indian rolling stock may be suitable in these countries.The New leasing entity can leverage on this potential and increase the market for Indian rolling stock by providing a flexible financial structure to these countries.This can also give push to India’s rail diplomacy.
If all is so well then what is the risk? The major risk that leasing entity will take on is the ownership risk i.e. in case no one takes rolling stock on lease from it then what happens.The answer to this is that market for rolling stock is always there in the form of Indian railways.Only thing which this model is attempting is to create a leasing market to facilitate entry for private players.Leasing, like any other industry, will take time to mature and it will be very clear whether the model is successful or not in a time frame of 5 years.Secondly, it should not repeat the mistakes of IL&FS i.e. it should maintain good governance standards and limit its functions to leasing only rather than foraying into infrastructure development.
Thus, Wet-leasing is a suitable financial inter-mediation whose time has come.The beauty of this model is that it is achievable in short span of time and creates an entity with fresh professional and independent expertise.Its global governance structure will bring huge benefit to railway sector in India which by and large is influenced by one monolithic entity known as Indian Railways.On the other hand, it will encourage the policy goal of Atmanirbhar Bharat by providing private players(Rolling stock producers and train operators) a fair opportunity to enter into the market.Thus, it may be worthwhile to give it a shot as its benefits far outweigh its risks.