FDI IN RAILWAYS

FDI-FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans".[1] In a narrow sense, foreign direct investment refers just to building new facilities

FDI AND FII

FDI

. FDI is an investment that a parent company makes in a foreign country.

FDI is quite different from it as they invest in a foreign nation

FDI, this is not possible.

FII

FII or Foreign Institutional Investor is an investment made by an investor in the markets o

In FII, the companies only need to get registered in the stock exchange to make investments f a foreign nation.

The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back

.

FDI only targets a

specific enterprise. It

aims to increase the

enterprises capacity or

productivity or change

its management

control.

The FII investment flows

only into the secondary

market. It helps in

increasing capital

availability in general

rather than enhancing

the capital of a specific

enterprise

Low cost BUT Qualified, Educated/skilled labor pool.

Long-term market potential OR yields greater than can be achieved Domestically.

Access to natural Resources.

Geography.

Stability of the economic and political Environment.

Size of the market.

Legal and regulatory Framework.

Access to basic inputs.

Cost Factors.

Market Factors.

Infrastructure and technological Factors.

Political and legal factors.

Social and cultural factor.

Raising the level of Investment

Up gradation of Technology

Improvement in export Competitiveness

Employment Generation

Benefits to consumers

Revenue Generation

Economic Growth

Improved consumer welfare through reduced costs, wider choice and improved quality

Access to new market/distribution channel for products

Competitive advantage and innovation.

FDI TREND IN INDIA

Actual Previous Highest Lowest Dates Unit Frequency

2203.00 2133.00 3290 -60.00 2013 -

2014

USD

Million

Monthly

FDI IN RAILWAYS

Neel Shah

FDI – The Need

Railway finances are stressed, and it needs massive investment to

modernise, improve safety and play a role in globalising India’s transport

infrastructure. Allowing foreign investment for building and maintaining, say,

new rail lines, will help speed up such projects. The government already

allows 100% foreign investment in metro rail projects and there is no

reason why this should not be extended to the Railways. FDI must be

welcomed in most sectors, though it’s not the key to solving all problems of

the Indian economy.

That role has to be played by domestic investment. Projects must be

cleared fast, and public investment stepped up to revive the economy. So

far, the private sector has been chary of investing in long-gestation railway

projects. The Railways should engage with them. But investors need clarity

on the scope and terms of the contracts in public-private partnership

projects. It will make compliance easier.

According to information available, rail wagons are designed to carry a load of pre-

defined capacity plus nine tonnes with leeway to load one more tonne without any

overload penalty across the entire railway network, as per the interim budget,

presented recently.

The average load carried per wagon is about 62 tonnes though some wagons

carry about 67 tonnes. As per a railway official, as reported in the press, a capacity

creation of 15 million tonnes (mt) will account for about 30% of the 50 mt

incremental loading that the railways aim to move during 2014-15. They have set

a target to achieve 1,101 mt of cargo to be moved in this fiscal year.

However, in order to carry higher load per wagon, the Railways need to invest in

wagons, improve rail tracks and bridges. For this purpose, Railways propose a

market borrowing of Rs12,800 crore against Rs14,000 crore last year, to procure

rolling stocks, including wagons, locomotives and coaches. Should the need arise,

they will revise the target and borrowing accordingly.

FDI – The Need

FDI – The Need

One of the biggest problems that Railways have faced continuously is the issue

relating to extension of rail-track laying, for which there are no indigenous technology

or capacity. In fact, worldwide, there are only a few companies who can do this job

meticulously and who are in great demand. The three principal companies are

reported to be Harsco Corporation of the US, ETF of France and China Railway

Shanghai Design Institute Group Company. The railway track laying machines are

manufactured by the above three major companies, who, on obtaining overseas

contracts, bring in their equipment, lay the track, complete their job on schedule, and

take back the equipment, to another location for a new assignment!

The Eastern Railway Freight Corridor, according to information available, there are

16 bidders, both Indian and foreign, but most of whom have taken supporting bids

from two of the above named specialists in the field. This corridor is likely to be

completed in four years' time after the award.

According to an official of the Railways, as reported in the media, there are 35,000

route Kms that cover 70% of rail lines engaged in carrying freight allow for higher

carrying capacity. The load per wagon will increase only by about 2 tonnes, as the

routes currently permit 2 tonnes less loads per wagon. But to do so, Railways will

have to make an incremental investment of Rs2,000 crore to replace old tracks and

engage in upgrades in some areas.

RAILWAY REVENUE

The Advantages

The Railways’ plan is to allow foreign investors to hold stakes in the special

purpose vehicles for constructing port connectivity projects .a

IT would help faster evacuation of raw materials. The private sector should be

involved, in a big way, to augment investment and step up freight volume and

revenue.

Private entrepreneurship must also be roped in for projects such as high-speed

trains, modernizing stations and freight terminals.

Railways owns large portions of the land on which it wants to build new lines or

install modern electronic signaling for high-speed operations.

Increasing the capacity of the Railways will help lower India’s imports.

Increased productive efficiency

More Employment

Consumer Benefits

Increase in savings and investments

The Disadvantages

Will affect current tariff and increased tariffs will lead to increase in overall cost of

living

Profit distribution, investment ratios are not fixed

Inflation may be increased

Again India become slaves because of FDI

critics have also raised concerns over the efficacy of purported benefits of direct

investments.

While the levels of FDI tend to be resilient during periods of economic uncertainty,

it has the potential of adversely affecting the net capital flow of a developing

economy.

FDIs generate negative externalities in the labor market of the host economy.

Why so?

The Disadvantages

Evidence shows that multinational companies do pay a slight premium over local-

term wages, but does this really benefit the host economy? Paying a premium for

the price of labour may improve the consumption power of workers, but it also has

the detrimental ability of disrupting the local employment market. When prices rise,

supply increases while demand falls. Similarly, when the price of labour increase,

wage premiums in this case, this creates a distortion and creates a disequilibrium

in the labour market. Job matching stops being efficient and may even create

unemployment.

FDI – The Way Forward

With these data in the background, it is hoped, that when the final directives are

outlined for the FDI in Railways, the following factors will also play a vital role in the

development:

a) to engage in serious joint venture discussions to actually start manufacturing the

track laying machinery in India itself - need and scope for continuous exists for a

few decades to come;

b) to have a separate joint venture with the same FDI (or the second company) to

take contracts for fresh track laying and to renew the old and worn out ones that

need to be replaced for improvement and safety;

c) to have a separate organisation only for maintenance and repairs of all railway

tracks in the country

d) current passenger coaches are mostly (almost 95-98%) in single decks only;

double-decker passenger coaches area novelty; since in many areas the traffic is

high, double-deckers would help faster movement

e) if Railways do not have a separate division for procurement of land in the

proposed areas for laying tracks and stations, this should be established as a

separate entity

MAJOR SECTORS

ATTRACTING FDI

FDI IN RAILWAYS

The government is moving swiftly to allow foreign direct

investment in railways to upgrade infrastructure for freight

and high-speed trains.

The commerce and industry ministry has initiated the

exercise to allow 100% FDI in several segments of railways,

moving beyond its earlier plan to open select sectors such

as high-speed train systems, dedicated freight lines built

through the public-private partnership route and in certain

areas of suburban rail networks.

FDI IN RAILWAYS

Currently, there is a complete ban on any kind of FDI in

railways, except mass rapid transport systems.

High-speed trains and dedicated corridors are top agenda

items for the BJP government and the intention to upgrade

infrastructure was officially announced by president Pranab

Mukherjee in his address to the joint sitting of both Houses

of Parliament.

FDI IN RAILWAYS

Railway minister Sadananda Gowda has said on it needs

Rs 5 lakh crore for modernization, a large chunk of which

will come from the private sector.

Sources said the draft note is for discussion and a final

proposal will be moved after consultation with other

ministries, led by the Railways.

In its election manifesto, the BJP has committed to

modernize and upgrade railways and launch Diamond

Quadrilateral project of high-speed train network.

FDI IN RAILWAYS

In her first interview to any newspaper, commerce & industry minister Nirmala Sitharaman had backed the move. "Railways is desperate for investment. It needs money for expansion. It needs money for safety. It needs money for modernization and for railways the quantum of investment that you need India cannot suffice, so FDI would be a very good opportunity.”

Joint ventures stocks and funds are very promising for Indian companies at present.

There are lots of technologies needed for upgradation of the infrastructure in India, especially with respect to high-speed trains. Then you would require high-speed infrastructure corridors as the new railway engines are of high capacity.

IMPACT OF FDI IN RAILWAYS

IMPACT OF FDI IN RAILWAYS

Then in railway engine manufacturing and safety

equipment, there are very few companies in India. With

foreign players coming in, there will be a flood of

technology into India.

Railways are very important for the country; they are the

economy mover. If the railways are not able to move the

economy, I do not think India can make good progress.

All these and more and innovative ideas will take at least a decade or more to

accomplish, but it is time we set the goals right and focus to reach those

objectives. Just in passing reference may be made that a few years ago, these

track laying machines cost between Rs10 crore and Rs30 crore, and why these

were not purchased by the Ministry of Railways is a serious issue that they can

only answer, since these would be more expensive now. But it is never too late to

buy the latest and most modern equipment available, to get the job done!

FDI – The Way Forward

Prospective buyers in railways

General Electric Co, the world's largest maker of diesel locomotives, said it would prefer a public-private partnership to make locomotives with Indian Railways for new projects, but despite a lot of discussion, "progress has been very slow".

The US company said it would welcome any steps to open India's railways to foreign investment.

"Any fresh impetus to expedite private sector participation on existing project plans, as well as new areas, would be a welcome step in the right direction," said Nalin Jain, South Asian business leader for GE's transportation unit.

GE, which has operated in India since 1902 and has nearly 15,000 employees there, said it has submitted a formal proposal to manufacture locomotives in India and was also trying to sell its train signalling and speed control products for various subway projects around the nation.

Companies such as Canada’s Bombardier, General Electric of the US and Germany’s Siemens have already shown interest in investing in India. Chinese companies such as CSR Corp Ltd and Japanese manufacturers that already supply hi-tech equipment to the railways are other potential investors.

Railway ministry officials expect interest from Chinese firms such as CSR Corp Ltd (601766.SS), Germany's Siemens, as well as Japanese manufacturers that already work in India as contractors and suppliers to the railways.

The proposal was greeted enthusiastically by Canada's Bombardier, which in 2008 set up a 33 million euros factory in Gujarat state to build trains for Delhi Metro and plans exports to other Asian markets.

WHY FDI ? Railways have been running short of cash as the

populist polices of the government do not permit any increase in passenger fares while the number of loss-making passenger trains is increased every year to win votes. For 2012- 13, railways posted a loss of about 26,000 crore.

Main earnings of the railways come from its freight operations which crosssubsidise the losses on running passenger trains.

However, goods trains are made to wait to let passenger trains pass as there are not enough tracks to accommodate such a large number of trains. As a result, the average speed of a goods train has come down to 25 km per hour.

While the railways had a market share of 65 per cent in the goods movement of the country in 1986- 87, this has now come down to 30 per cent while that of the road sector has gone up from 34 per cent to 60 per cent during this period. A mere 25 per cent of the investment in the railway budget is financed through internal revenues of the vast organisation. The rest of the investment comes from government handouts and loans.

The vast network of railways is therefore, in desperate need of more funds.

India has the world's fifth largest rail network, after US, Russia, Canada and China. However, it is lagging behind the others and has deteriorated over the years due to heavy congestion of the tracks and the failure to modernise.

HOW FDI CAN RESCUE RAILWAYS

?? RESCUE PLAN

RESCUE POLICIES

FRAMEWORK OF POLICIES

VARIATION ACCORDING TO

TIME

PASSING OF PROJECT

PROPOSAL

APPROVAL FROM

GOVERNMENT

SEEKING INTEREST OF

COMPANIES

SOME INTERESTED

COMPANIES

RESCUE PLAN

STRUCTURAL REFORM

BETTER FUNCTIONING OF

RAILWAYS

TRANSPIRANCY

INCREASE IN EFFICIENCY

FRAMEWORK

THANK YOU