APPPA- 40

DRAFT REASEARCH PROPOSAL FOR DISSERTATION

PPP IN INDIAN RAILWAYS- A CASE STUDY OF PIPAVAV PORT CONNECTIVITY

B.K. GUPTAGUIDE PROF. RAKESH GUPTA

INTRODUCTION

Statement of the Problem

Indian Railways, the worlds fourth largest railway network has suffered due to lack of sufficient investment and populist policies of subsidising the fares. Lack of investments has turned once a mighty system into a slow and congested network , that crimps the economic growth. In order to arrange the sufficient funds for investment in infrastructure, Minister of Railways in his budget speech in Indian parliament in 2014 has announced that bulk of future projects requiring bulk investments in IR will be executed on PPP model.

In past even though there was shortage of capital for investments in the infrastructure projects, but full potential of PPP model could not be tapped. To understand the reasons of low share of PPP projects at IR, it will be quite interesting first to study the issues of PPP projects already executed/under execution at present.

Objective

Politically-sensitive profits made by investors in PPPs from high returns on investment, debt refinancing or sale of their investment are known as windfall gains. The objective of this research is to study the windfall gains during period of concessionaire period of project of rail line connecting the Pipavav Port with Indian Railway network and find out how far existing provisions in the concessionaire agreement are required to be modified for meeting the challenges as encountered during the different phases of execution ,operation and maintenance of project. On the basis of this study various provisions of the concession agreement are to be analysed and necessary modifications in the concession agreement for meeting the challenges as faced during the different phases of construction, operation and maintenance of Pipavav port railway connectivity project are required to be suggested.

Background of Pipavav Railway CorporationPort Pipavav located on West Coast of India in Gujarat. Due to protection available nearby Islands there is tranquillity in the harbour and wave height is less than 0.5 meter most of the time.

In 1992, it was decided to develop the port as an all-weather facility for handling bulk, liquid and container cargo. A private limited company called Gujarat Pipavav Port Limited (GPPL) was incorporated as a joint venture between Sea King Infrastructure Limited and Gujarat Maritime Board, a state-owned organization.

General cargo handling operations at the Port commenced in November 1996 followed by container handling operations in 1998. Presently, the container terminal offers direct services to Europe, US East Coast, China and the Far East. Port Pipavav is today recognized as one of the principal gateways on the West Coast of India.

The management control now vests with APM Terminals, a subsidiary of A.P. Moller-Maersk. The port is being developed for handling 19 million tonnes of cargo per annum including 13 million tonnes of containerized cargo. APM Terminals is making an investment of US$ 245 million to develop the facilities. With available draft of 13.5 metres, the port is also able to handle Post-Panamax vessels.

Initially, there was no rail connection to the port. The nearest railhead was located at a distance of 18 km on the Rajula-Surendranagar metre gauge line of Western Railway, beyond which the broad gauge rail network was available. In the absence of a rail connection, the Port could not be adequately developed; hence its keenness for a proper rail connectivity, preferably a broad gauge rail link.Indian Railways had earlier sanctioned a project to convert the existing Rajula-Surendranagar metre gauge line into broad gauge as a part of the railways long-term plans for broad gauge network on the entire system. However, financial constraints had prevented its timely execution. In the meanwhile, the Ministry of Railways launched a programme for undertaking rail projects through public-private partnership.

In 1998, GPPL proposed a joint venture with the Ministry of Railways to undertake the rail connectivity project which would include provision of a rail link of 18 km and conversion of the existing metre gauge line. Detailed feasibility studies and traffic projections established the financial viability of the proposed project. A memorandum of understanding (MoU) between Ministry of Railways and Gujarat Pipavav Port Limited was a signed on 28 January 2000.

Based on the techno-economic studies, a business plan of the proposed joint venture was prepared by financial consultants engaged by GPPL. This plan was reviewed in the Ministry of Railways, who then obtained formal approval of the Government of India. As a follow-up, Pipavav Railway Corporation Limited was incorporated in May 2000 as a joint venture with equal participation between the India Railways and the Gujarat Pipavav Port Limited.

The above was followed by a host of agreements between various stakeholders Ministry of Railways, Western Railway (a constituent of Indian Railways), Gujarat Pipavav Port Limited, Pipavav Railway Corporation Limited. A Shareholders Agreement between MOR and GPPL was signed on 28 March 2001, Concession and Lease Agreements between MOR and PRCL on 28 June 2001.

Ministry of Railways is the Licensor and PRCL is the Concessionaire for the project. The concession period is for 33 years and permits PRCL to own and operate the project line both for freight and passenger operations. It enjoins upon the SPV to pay lease rent of Rs. 2 crore (20 million) per year to the Ministry of Railways for the use of land and other assets. In turn, the railways would pay to PRCL the apportioned revenue derived from the freight moved on the rail line after deducting the operational expenses. The revenue derived from passenger services is not apportioned, since there is a heavy subsidy component in the fare structure.

Funding of the project

The project has been funded in the following pattern:66 2/3% of the Project Cost has been funded through a shareholding Equity 33 1/3% of the Project Cost has been funded through Debt. i.e. a Debt: Equity Ration of 1:2a) Ministry of Railways Rs. 98 crore b) Gujarat Pipavav Port Limited Rs. 98 crore c) Financial Institutions Rs. 177 crore Project Cost Rs 373 crore

Debt: Equity ratio with above funding was 1:1.13

BOARD OF DIRECTORS Board of PRCL consists of the following directors:-1. Member Traffic- Chairman & Director (railway)2. Executive Director (PP) Director (Railway)3. Executive Director, TT (M) Director (Railway)4. Executive Director, (FX-II) Director (Railway)5. Executive Director, (Works) Director (Railway)6. DRM, Bhavnagar Director (Railway)7. Managing Director, GPPL Director (Railway)8. Group Director, Maersk India (P) Ltd. Director (Railway)9. CEO (METCO) Project, IL&FS Tptn. Network Ltd., - Director (Railway) 10. Chief Financial Officer, GPPL Director (Railway)

The management team is headed by Managing Director Who is a full-time Director on the Board of Directors.

Justification/ Rationale of the Research

Balancing of the risk among the different stakeholders according to their responsibilities and shared equity as decided by various provisions of concession contracts is of utmost importance for the success of any PPP projects. On the basis of projected investment for initial scope of work to be provided by different stakeholders and projected likely revenues to be shared during the different phases of project construction and operation are normally covered under the provisions of concessionaire contract. However, it has been observed there are huge uncertainties in the original projected estimates of investments for meeting their obligations and availability of projected revenues during the execution and operation of PPP projects, hence it is quite imperative that necessary provisions are included in concession contracts for sharing windfall gains/losses which cannot be foreseen at the time of formulation of project proposal. These provisions will not only satisfy different stakeholders to share uncertain risks/revenues at various stages of project execution and maintenance but also necessary for maintaining transparency requirements which are very important involving the public agencies like IR. Proper drafting of provisions for sharing windfall gains and losses will ensure building trust and confidence among the various stakeholders of the PPP project, hence, these are very important for the success of these projects undertaken by agencies from using the public funds.

Research Questions

a) How risk sharing and revenue sharing are balanced in concession agreement between PRCL and Indian Railways.b) Are the existing provisions in PRCL concession agreement are adequate to take care wind fall gains/losses. If not ,what are problems faced in this regard during construction and operation of a rail connectivity project of Pipavav port in Gujarat c) What are suggested provisions to taking care windfall gains/losses during concessionaire period?

Methodology

Available data of a rail connectivity project of Pipavav port in Gujarat on Indian railways will be collected in regards conceptualization, construction phase, operation phase and other aspects like maintenance etc. All these details will be analyzed on the basis of actual problems faced in pipavav port connectivity project financed by arranging the investments through PPP model.

LITERATURE REVIEW

Literature survey on the ppp on Indian railway a case study on pipavav port rail connectivity was carried out and important articles are summarised below for finding out gaps in research.

1.PIPAVAV RAIL CORPORATION LIMITED Meena (June 2013) has studied the financial results of Pipavav project and relevant portion out of this study is summarized below:-

A. Financial Analysis

Based on the normal projections, a 32.54 percent internal rate of return (IRR) was expected. It was also recognized that there were sources of revenue other than the freight earnings. These could be (i) other goods earnings in the form of demurrage charges, wharfage charges, ground rent, etc and (ii) passenger earnings. The passenger component was due to operations of WR on the Pipavav railway line. Since these charges had not yet been fixed, the revenue accruing from this source had not been incorporated in the financial analysis. The cash flow analysis had also not included the loan repayments.

Sensitivity analysis for the project was carried out for the following scenarios: (i) 10 percent escalation in project cost due to increase in procurement price of materials or delay in implementation of the project, (ii) 10 percent reduction in earnings due to competition from the road services or unforeseen circumstances, and (iii) a combination of both the above factors. The IRR for the three cases was calculated as below:

Sl No.ScenarioIRR (%)

1.Normal case 32.54

2.Cost overrun by 10% 30.53

3.3 Reduction in earnings by 10% 30.30

4.Combination of 2 and 3 28.42

2. CUTS INSTITUTE FOR REGULATIONS & COMPETITION (DECEMBER 2013) : Public Private Partnership: Pipavav Railways, Gujarat

Author has discussed number of issues pertaining to the profit & loss and relevant issues are summarized below:-

Better Forecasting: PRCL's profit and loss statements and balance sheet for 2003-04 shows that it incurred losses of Rs 32.96 crore and that of 2004 -05 shows a loss of Rs 24.72 crore. The principal reason for this is the low cargo originating/destined from GPPL, as traffic density was much lower than guarantee of 1MT and 2MT respectively for given years. Thus, Traffic forecasting needs to be more realistic with greater accountability of the agency doing the forecasting.

Recent Updates (up to September 2013) Although in initial periods of its operation PRCL incurred losses for few years, but according to recent update, the company has registered a profit of Rs 46.41 crore (after tax) and net worth of Rs 207 crore as on 31st March 2013. Despite economic slowdown, as compared to 2011-12, company experienced a growth of 18 per cent and paid maiden interim dividend of Rs 4.90 crore to Ministry of railways for year 2013-14.53. POSITION PAPER ON THE RAILWAYS SECTOR IN INDIAOctober 2009 Department of Economic Affairs Ministry of FinanceGovernment of India. Unlike ports, highways & airports, where a regulator offers certain level of stable returns to private investors, railways by virtue of their monopolistic nature of operation, do not offer an alternative to customers among various Railways. The tariff policy is also fixed by the Government. There is thus a need for separate accounting for infrastructure and train operations for initiating any long term PPP regulatory framework. It would thus be seen that Ministerial, commercial, and regulatory powers are vested with a single entity: the Railway Board. IR as an enterprise is integrated with the government and hence is not able to function with commercial objectives. The vertically integrated monolith structure of IR leads to product pricing and costing being determined on non-commercial principles. In order to take care of this problem, the Expert Group under the Chairmanship of Dr Rakesh Mohan had recommended the framework of a restructured railways (main recommendations of Rakesh Mohan Committee put in a box below) envisaging a corporate entity with an executive board. It has also called for abolishing the Railway Budget.

The following is the committee's observation on the proposed structure:

The IR Corporation (IRC) will be responsible for managing railway assets and resources to best meet the objectives of the owner. Its main characteristics are:

It will be an independent, corporatized, customer focused and financially viable railway, run along commercial principles and subject to generally accepted corporate accounting principles and reporting.

The Indian Railway Executive Board (IERB) will manage the IRC and be responsible for the restructuring process.

It will focus on core activities such as provision of infrastructure and the operation of freight and passenger services. To provide adequate focus on the core business as well as improve flexibility and cost competitiveness, the non-core activities of the railways would be fully divested over time, say five years.

It will combine a central organisation with a regional decentralised structure. In that context, passenger, freight and suburban will function as profit centres and infrastructure and service as cost centres .Actual corporatisation is expected to take three to five years. Recasting of accounts, setting up of the Indian Rail Regulatory Authority (which will regulate the system setting rules, providing frameworks and upholding supervisory responsibilities), and restructuring of business units, will have to precede corporatisation.

4. CCS WORKING PAPER NO. 182: PPP IN IR

Karan (2008) Centre for Civil Society finds that there is very little progress in PPP Projects IR and underlines the following reasons in this regard It must be noted that in spite of such dire need of funds in IR and the limited nature of its surplus, the IR has followed an over-cautious approach in inviting private sector participation in Indian Railways.

There exists no clear roadmap for implementation of PPP in IROn interaction with the senior railway officials it can be easily drawn that the IR are being forced to look outwards for finance and techno-managerial skills. What we have is a list of projects that have been selected on urgency basis but without any sound official articulation or planning.

Political ClimateIt is evident that in our country politics dominate the decisions relating to economic policies. In the words of a senior railway official in-charge of PPP, We live in a political economy and hence political sensitivities of the times will have a bearing on the economic policies of the time. We dont want to hit bigger roadblocks later on in future. We must not only be transparent but also be seen transparent. No blind privatization will take place and hence private sector participation will only be invited in areas which require immediate attention and that too where the private sector is capable of reducing costs and improving the quality of service.

Enforceability of the ContractA PPP can only be successful if the government can ensure discipline on part of the private player to enforce the contract and thus result in achieving the desired objective. A senior railway official reveals the true reason, We lack prior experience in dealing with such complex situations and hence are going very slow as we dont want anything to go wrong.

It is clear that the IR does not possess the requisite managerial skills that the current complex business environment calls for.

Threat of Private monopoliesAnother reason for the slow approach is the fear of emergence of private monopolies (in the place of state monopoly) in case right policies are not adopted. In the words of a senior railway official The characteristics of the railways are such that private monopolies will mushroom in place of state monopoly in case the right policy is not adopted.

PSU MindsetAnother fact accepted by the railways is that a change in the mindset of the people from top to bottom (from the gang man to the customer) in the organization is required for mainstreaming of the PPP model. To achieve this, dedicated PPP cells have been established in every state to identify the projects that can be implemented through PPP.The private sector participation is not a gift without a curse. It comes with its own set of problems. It has historically been proved that inviting of private sector participation in case of a government monopoly has not always led to the private sector efficiencies and modernization. On the contrary it has led to monopolization in the hands of the private sector. Therefore it is of pivotal interest that whenever private sector participation is being talked about it should always be assumed to be inviting competition as well.

Criteria to evaluate projects for PPPThere is a general perception that bringing in the private sector is an antidote to poor public services provided by the government. If the government fails to deliver, it can be for reasons not addressable by the private sector. Therefore, it is important to develop criteria to evaluate projects which are amenable to PPP model and not follow the wisdom stated above.

Here, a model is devised using two important criteria- revenue (protection) certainty and contract enforceability to determine the viability of the project being considered for implementation through the PPP Model.

Revenue Protection (certainty) It is of immense significance because the private sector will be interested in investing in public projects only if a minimum amount of revenue is guaranteed and also if they are provided with appropriate safeguards against (insulation from) changes in political climate or policy or regulatory risk. It is because of the failure of the government to guarantee the same that no additional private investments have been forthcoming in the power sector. Attractive incentives should be provided to the private sector to invest in public utilities. The risk of the investment must also be confined to controllable factors.

Contract Enforceability It is also very important for the successful implementation of the project through the PPP model. Weak enforcement of the contract can lead to tremendous amount of loss to the public enterprise. Hence, if any mission critical activity (system maintenance, rolling stock and tracks, signalling, tracks, telecommunication) is to be run through the PPP Model then the impact of its violation (if any) due to failure of enforcement must be considered keeping the safety mechanism in mind. British Privatization experiment was a failure as it did not provide adequate safeguards against the failure of enforcement of mission critical activities. The attempt was rolled back.

The values of these two variables are determined through a thorough evaluation of the project on the basis of factors internal to the project and finally a value between 0 and 10 is awarded to each project for the two characteristics. The values of (on a scale of 0 and 10) these two characteristics of the project to be considered for PPP model are plotted on the x and y-axis of the graph. Any project that lies on the farther right side of the two-coordinate graph is generally viable for implementation through PPP model. Any project that is relatively closer to the origin on either of the two sides is not generally considered eligible for implementation through the PPP model.

Author concludes that Non-critical areas in the Indian Railways should be identified and private sector participation should be allowed in the same. The Indian Railways should focus on the core activities of running and operating the trains. The prospects remain bleak for any major policy change due to an extremely weak record of enforcement of contracts in the long run.From the review above literature it is noted that number of the issues pertaining to limited success/little success in PPP Project in Pipavav and other discussed including the poor life cycle costing, lack of rigour in the asset allocation and project development are already analysed. Issues such as dealing with the accountability, private sector accountability are also considered. However issues of windfall gains/losses are not researched so far in detail. Hence gap exist needs to be analysed for finding out the way out for distributing these among the various stake holder bearing the risk in the PPP Projects

CHAPTERISATION SCHEME

Chapterisation Scheme of dissertation will be as given below:

Chapter 1: Introduction:

It shall include statement of the Problem, Objective, Rationale of the Research, Research Questions, Limitations.

Chapter 2: literature survey

Chapter 3: Background of Pipavav Port Rail Connectivity Project.

Chapter 4: Review of Concessionaire Agreement

Chapter 5: Conclusion.

BIBLIOGRAPHY

5. Government of India, Planning commission.nic.in (website of planning commission of India)6. Government of India, pppinindia.com (public private partnership website of ministry of finance)7. Concession agreement between Indian Railways and PRCL.8. Government of India, Planning Commission (January, 2010) Private Participation in infrastructure, New Delhi: The Secretariat for the Committee on Infrastructure9. Government of India, Planning Commission, Projections in the 11th Five Year Plan, New Delhi: The Secretariat for the Committee on Infrastructure 10. Government of India, Planning Commission, Approach paper of 12th plan11. Confederation of Indian Industry, background paper on port connectivity in Gujarat12. Government of India, National conference of container infrastructure to India 2012, background paper13. IIT Kanpur, India infrastructure report 2001, issues in regulation and market structure 14. Government of India, Planning Commission, Working Sub-Group on Infrastructure, Infrastructure Funding Requirements and its Sources over the implementation period of the Twelfth Five Year Plan (2012- 2017)15. Meena (June 2013) Pipavav Rail Corporation Limited A case study IRITM, Lucknow, Utter Pradesh 16. Case study 10 (December 2013) Cuts Institute for Regulation & Competition 17. Government of India, position paper on railway sector in India October 2009 Department of Economic Affairs18. Karan Kumar, Public-Private Partnership in Indian Railways, CCS Working Paper no. 182 Summer Research Internship Programme 2007-08, Centre for Civil Society19. Government of India, Ministry of Finance Department of Economic Affairs, Compendium of Case Studies: Public Private Partnership, Projects in India, December 201020. L. Lakshmanan, Public-Private Partnership in Indian Infrastructure Development: Issues and Options Vol. 29, No. 1, Summer 2008 Reserve Bank of India Occasional Papers 21. Federation of Indian Chamber of Commerce Industry, India Infrastructure 2012 accelerating Implementation of Infrastructure projects 22. Govt. of India (December 2010) Public Private Partnership Project in India: Compendium of Case Studies23. Pipavav Rail Corporation Limited (June 2001) Concession Agreement

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