Capital expenditure (capex) is considered essential for growth of an organization. In fact, most of the organizations which grow big and sustain themselves are those who are continuously investing in their future. Such kind of investments may be in the form of scaling up business, lining up new products or investing in technology to keep their business model competitive.Covid-19 has had a mixed impact on railways business model. On one side, Railways freight is picking up, showing a clear sign of railways re-gaining some share of freight traffic from the road sector. On the other side, the passenger segment has been deeply impacted due lock-downs and general fear among people with respect to public transportation. The result is that railways is barely able to cover its revenue expenses that too after too much pruning down of variable costs and allowances.

The other casualty of such a development is that Railway is not able to generate much funds internally to invest in capital expenditure. The Government of India’s support from general finances also has its own limitations given that it is already running a high deficit and has so many competing demands that it has to satisfy. Thus, there is a signal that government funding of rail projects may be limited and not sufficient enough to fulfill the ambitious capex requirements that railways has set for itself. Railways requires a minimum of 1.5 lac crore per year for at least next 10 years in order to fulfill the backlog in capacity augmentation and speed enhancement projects. While railways has its own borrowing vehicle in form of IRFC(Indian Railways Finance Corporation), it is still not possible for IRFC to go for such massive borrowing as ultimately the borrowings have to be paid by railways and the provision of capital expenditure may not result in required rate of return for railways to pay up through its operational revenues. In fact, it may be too much of leverage for railways to handle in future. Already, railways has 10 to 14 percent of its revenue budget going towards lease payments which may drastically increase in case of purely leveraged investment is made by railways.

Going by above, the only option for railways is to prune its scope of capital expenditure and invite private/corporate sector to participate in railway projects through public private partnerships. However, private participation will not increase in railways till railways brings much needed ‘focus’ in its capital expenditure .At present, railways has more than 25 planheads( and some of these plan heads have lived their life and are major obstacle for private participation. It will not be wrong to say that till railways continues to keep so many heads on its books , there will always be a resistance to go for private participation. Plan heads like passenger amenities, Staff welfare, workshops and machinery and plants should shrink themselves to so minimal in nature that most of investment in such areas should come only from private sector. Railways should try to put an embargo on projects undertaken under these plan heads giving first priority to public private projects(PPP) to achieve the desired outcomes.

However, the above areas or plan heads do not form a very large chunk of railways’ capex. In fact, most of them are very small in size when compared to plan heads like new lines, doubling, tripling or gauge conversion. Thus, though private participation in above plan heads will bring symbolic and qualitative improvement in working of railways, it is massive participation of private/corporate parties in new lines, doubling and gauge conversion projects that can be a game changer for railways. These are the core areas of railways and are aligned with railways goal of capacity augmentation ,speed enhancement and generating future revenues. Thus, it is important that this area keeps on attracting capital in order to aid future growth of railway sector. The only way this is is possible is by allowing different types of PPP models to execute on railways and by making certain policy changes in railways. BOT, DBFOT,HAM etc all should be tried depending on the feasibility of project and policy should be made private sector friendly to attract them into this landscape.

The major policy change railways need to do is to bring in a land policy that ensure that acquisition of land will always be done by railways in any PPP project and private party will only be responsible for creation of infrastructure. A successful land policy that involves land swaps with state governments and stakeholders along with minimal amount of cash payments should be adopted in order to complete acquisition in a hassle free manner. A well framed land acquisition policy is important for railways to kick off PPP projects. Secondly, railways should empanel certain corporations like IRCON,RVNL,L&T,KEC,KALPATRU etc who should be given first right to build a new line on PPP basis before railways decides to do it internally. It is very important that all the new lines project should be first put on the block before railways decides to take them up internally in order to ensure that railways invests its money only on strategic projects. Some may critique that by offering private sector / corporates greenfield projects railways may be foregoing its own growth opportunities but the fact is neither railway has capital nor resources to take up these projects as so many projects are already demanding attention for completion. Further, the loss of revenue will be more than compensated by the savings which may happen due to delay in execution and cost overruns. Thus, it is in railways interest to off-burden some of its responsibilities to private sector in order keep itself financially stable and future fit.