Foreign direct investment in railways moving ahead

By Akshay Jaitly and Suchita Saigal, Trilegal
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Indian Railways, the largest rail passenger carrier and the fourth largest rail freight carrier in the world, has historically been plagued with problems of inadequate infrastructure, high operating costs, funding shortfalls and inefficiency in management. Government policies to increase private participation in the railways sector met with limited success. Further, funding sources were limited as foreign direct investment (FDI) was not permitted in the railways sector (except in mass rapid transport systems where 100% FDI is permitted without prior government approval, known as the automatic route).

Recent changes

The minister of railways, in the railway budget for 2014-15, proposed that FDI be permitted in the sector. Following this proposal, the Ministry of Commerce and Industry, the Department of Industrial Policy and Promotion and the Reserve Bank of India issued notifications pursuant to which private participation, including up to 100% FDI through the automatic route, has been permitted in several areas in the railways sector.

Akshay Jaitly
Akshay Jaitly

The Ministry of Railways has also issued sectoral guidelines for domestic and foreign investment in the sector. The guidelines include an option for investors, customers or zonal railways to propose a project by submitting a concept note to the Railway Board. If approved, the public-private partnership (PPP) cell of the Railway Board will be involved in structuring the project. Further, for projects being allocated through a bidding process, the guidelines provide that the zonal railway will be responsible for the bid process and drafting the documents, based on model documents approved by the Railway Board. The monitoring of approvals of the projects at different levels will be coordinated by the board’s Advisor (Infrastructure).

The guidelines also elaborate on the notifications. For instance, they clarify that “sensitive areas” means border areas and FDI beyond 49% in projects located in these areas will require clearance from the Cabinet Committee on Security.

Additionally, the government is considering setting up an independent rail regulator. While the scope of the proposed regulator’s authority is unclear, it would likely have jurisdiction over contractual disputes which arise between Indian Railways and private participants.

The government has identified 38 potential projects which could attract FDI of about ₹900 billion (US$14.3 billion). They include the Mumbai-Ahmedabad high-speed corridor and the Chennai-Bangalore-Mysore high-speed train.

Further, the government’s “Make in India” campaign focuses on the railways sector as an investment opportunity and identifies EMD and GE (US), Siemens (Germany) and Alstom (France) as existing foreign investors. Roadshows, including in the US, China and Japan, are reported to be in the works.

Key issues

The recent report on the audit of Indian Railways PPP projects conducted by the Comptroller and Auditor General of India for the year ended 31 March 2013 noted that Indian Railways needs to: (a) frame a model concession agreement for execution of its projects within a stipulated time frame, adopting a uniform approach to all PPP projects; (b) analyse the adequacy and accuracy of data/information, including assumptions, used for assessing the internal rate of return for proposed projects in order to judge their economic viability; and (c) streamline (i) the project approval process, (ii) the formation of special purpose vehicles to implement projects, and (iii) the signing of agreements relating to the projects, to ensure timely implementation and avoid delays in completion of projects.

Suchita Saigal
Suchita Saigal

To effectively address the problems of the railways sector, the government would need to partner the liberalization in the FDI regime with policy reforms which tackle issues of delayed implementation of projects, ineffective monitoring, etc. One of the reforms proposed in the audit report is adopting a model concession agreement. Following this recommendation, for projects to be allocated through a bidding process, the sectoral guidelines require the Railway Board to develop model bid documents, including a concession agreement.

For suburban corridor PPP projects and high-speed train projects, the Ministry of Railways is required to use the model concession agreement for urban railways issued by the Planning Commission, with suitable modifications. However, adopting a model concession agreement may not be a panacea for Indian Railways’ problems. In the roads sector, for instance, the adoption of a model concession agreement met with limited success. Further, the Planning Commission is expected to be replaced by another body that will be more like a think-tank so it is not clear whether the previous model will be followed.

The government may be better advised to focus on the other recommendations in the report and ensure that land and approvals for the proposed projects are obtained within prescribed time frames and the documentation underpinning the PPP structure realistically and appropriately allocates risk between the parties.

Akshay Jaitly is a partner at Trilegal and Suchita Saigal is a senior associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.

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