Railways is at the centre of National Monetisation Pipeline released by Niti Aayog recently. The pipeline has kept ambitious plan for railway’s monetisation of railways’ assets that includes stations, operational assets like OHE, signaling and Track maintenance, Railway colonies and stadiums, Hill railways,DFCCIL and Konkan Railways .At the outset, there is a need to congratulate the government to keep an ambitious plan to monetize assets and to raise capital which can be utilised in other projects of the same sector. For a country like India, rapid creation of assets is crucial for economic growth and creation of infrastructure assets requires a lot of money. Therefore, taking out some money out from the existing projects makes complete sense and putting it as a fresh capital makes a sound strategy. That said, asset monetisation can easily become a fictional idea beautifully written on paper if it is not executed meticulously and tactfully.
Railway’s monetisation efforts are hanging between the two opposite but completely possible outcomes of fiction and reality. To understand that why many of these efforts may become fictional works, it is important to critically examine each aspect of such monetisation and understand the possible bottlenecks where the plan is likely to go awry. The knowledge and expectations of how bottleneck can spoil the Railway’s plan is important to make a course correction and to be firmly on track to achieve the objective of Asset monetisation which author feels is to unlock value of existing capital and create new assets at a lower cost than what the current economic environment allows. A holistic view of Railways projects can be done when viewed across following dimensions:
- Core or non core project based on its connectedness with train operations.
- Investor sentiments
- Regulatory Environment
- Bottom-line impact of Monetisation
Let us first take the monetisation of non-core assets of railways. These are the low hanging fruits which can be easily plucked and juiced out. In this bucket of non-core assets, railways has identified its colonies and stadiums along with hill railways. Out of these three, two which seem to be very much possible and viable is railway colonies and hill railways. Hill railways have deep value and can easily attract private parties when bundled together with land as envisaged in document and thus, is likely to be the one which can see the light of the day soon. Coming to railway colonies, it is a very typical subject and railway has already been monetizing many of these assets through RLDA but the results are rarely as per the expectations. Here, the railways will have to seriously consider that whether railway should really go into this domain or explore alternate route of land swap with state governments and try to reduce the cost of land acquisition in its core projects of new lines and doubling. That said, still this monetisation even in its current avatar has lot of potential provided that land monetisation is driven by strong business objectives of the organization.
The third and last non-core area is the leasing of Stadiums or Railway Sports complex. This is a very perplexing identification of Assets. What is a role of a Stadium? To create money or to create Sports excellence. Apart from cricket, no other sports generate revenue in India. Further, what happens to sports team of railways who have been performing in Olympics. Will the private party who gets the stadium on lease allow railway people to play? Railway sports Complexes require corporate style of functioning and can deliver much more in corporate avatar while delivering on their objective of creating quality Sportspersons. Creating a Sports corporation and disinvesting some part of it to Corporates or Sports Bodies like BCCI would not only monetize the assets but also bring better governance and technology which is desperate need of these areas. Therefore, there is a need to review the model being chosen for monetization of sports infrastructure of Railways.
Coming to core areas, let us first take the monetization of DFCCIL.DFCCIL is one the most prestigious infrastructure projects of India and is likely to generate positive investor sentiment in the market. It has a bright outlook and is likely to generate good amount of revenue as and when it gets operationalized. Infrastructure Investment Trust(INVIT) has been envisaged for monetising DFCCIL. This plan can easily workout because it is likely to generate steady revenues in future and INVITs may like to be part of its growth story. However, the only problem is that an INVIT can be operational only after one year of operational history of DFCCIL as per SEBI rules. Thus, one will have to wait for DFCCIL to be fully operationalized to actually reap benefit of this route. Carry -operate -Transfer is another route which has been envisaged by giving operational control to private parties. This route is yet to prove its track record in the history of railways but yet it can not be ruled out that it may workout in case of DFCCIL as it is a green field project. However, here the policy makers first need to ask a very fundamental thing i.e. why DFCCIL should run trains. Are there not enough private parties to run trains? Was DFCCIL not supposed to be a purely ‘below the wheel’ operational entity that holds infrastructure while letting private party run the trains. There is a serious need for DFCCIL’s business model to be reviewed to not let it go off the track. Further, government should also seriously look at equity dilution in DFCCIL to sovereign wealth funds and other international infrastructure funds to unlock instant value , create better market cap and bring more professionalism to the board of DFCCIL.
Unlike DFCCIL, Konkan railway has a different story. Konkan railway is a brownfield project where owner of asset and user of Assets is the same entity. This brings a peculiar situation where Konkan railway will have to find an investor through INVIT who will give certain capital to Konkan Railway but will demand assured traffic from Konkan railway for which they will have to part with their revenues. While DFCCIL has scope of private parties operating the trains and massive expansion that lies ahead of it, Konkan railway has very few such opportunities available. Until unless, significant changes are made to Konkan railways, it is unlikely to generate excitement among the investors.
The monetisation of OHE, signalling and track of India railways is going to face similar problems like Konkan railways. Let us assume that railways is able to monetise its Infrastructure by going for INVIT but INVIT will also demand from railways to pay regular dividends. Now the point which railway has to evaluate is that the return which investor demands from railways in the form of assured traffic will be more or less than the rate at which the railway borrows from market. Indian Railway’s own financing arm, IRFC, is borrowing at lower than G-sec rate. Will an InvIT investor agree on that rate or even near to it? It is possible but highly unlikely. So if we are unlocking these assets to avoid loans we may actually end up paying more than what we pay for loans. Railways will need to do a lot of Business revamp in order to make this model work.
Coming to Station redevelopment, the PPP models have already been institutionalized in the form of IRSDC and can be further taken towards reality .However, pandemic may cast a shadow on feasibility of such projects and thus, it totally depends on investor’s appetite to take risk in such projects. In case of private train operations, Railways have a lot of work to do especially in decreasing the cost of operating trains for private parties by creating enabling environment for private players. A flat fees should be levied rather than have multiple components which generally lead to dispute. Variable components have to be minimized and a regulator is must for private train operations to succeed.
Lastly, let us touch on the PPP model in good sheds which is one the most crucial model for pushing railway traffic in India. This is where railway should go gung-ho. With good amount of land available and desperate need to provide end-user facilities in freight traffic. This is likely to be the game changer and can bring even more value than what national monetisation pipeline envisages. In fact, this is where railways should take quick steps and tap on instant license fees as well create better prospects for onloading of freight onto railway network.
In the end, one can only say that asset monetisation in Indian Railways needs a very strong understanding of Railways’ core and non-core area.It requires an understanding of looking railways as a sum of parts where different parts are rolling stock, infrastructure and operations, and to see how each part is creating or destroying value. Valuation of different parts will give a first hand view of whether equity , debt or structured financial vehicles are going to work. One size that fits all is unlikely to work in railway and may only end up in consuming time and energy which an aspirational Nation like India can ill-afford now.