Author: Nideshna Naidu
Indian Railways – Overused and underinvested
Indian Railways is the world's second largest rail network and fourth largest freight carrier controlled by a single management. The country's railway network route stretches over more than 64,600 kilometers (km), of which 23,541 km is electrified. The sector plays a critical role in transportation within the country — it operates 19,000 trains every day, moving 2.6 million metric tons (MT) of freight and 23 million passengers.
Though Indian Railways is one of the mightiest networks in the world, it is currently facing capacity constraints and funding limitations. For reasons such as partly improved road infrastructure and lower freight transport costs, road transport is preferred over rail network for freight movement in India and for its last mile connectivity. This is evident from the fact that the share of rail freight movement has dropped from 89 percent in 1950-1951 to 31 percent in 2010-2011. High rail freight cost (approximately 9.1 percent more than road transport) is another factor for this loss. The situation is the same for passenger movement, too.
Considering the growth of India's commerce and economy and corresponding transport infrastructure needs, the railway sector has always been inadequately funded. Since Independence in 1947, India has added only 11,864 km of new lines according to the Planning Commission of India, with much of the expansion happening in the northern, western, and peninsular parts of the country. Much of the northeastern states in India and regions in the Himalayan foothills lack rail connectivity. Capacity enhancements in the railway sector have always lagged the demand generated by passengers and freight traffic. The railway sector needs investments for adding new lines and associated infrastructure, exhaustive modernization, speed enhancement, electrification, and technological changes to improve services and attract more passenger and freight traffic movement.
Although 72.3 percent of the total rail capacity is utilized for passenger movement, this segment accounts to only 31.2 percent of the total railway revenues. The passenger segment is highly subsidized in India. On the other hand, freight utilizes only 27.7 percent of the capacity but generates 68.8 percent of the total revenues. Most of the revenues earned through freight movement are used to cross-subsidize the passenger segment. This results in low funds to be reinvested in to the system for infrastructure development. In addition, lack of dedicated corridors for freight movement has resulted in low speed of freight transportation, which adds to the loss of revenues, as customers prefer road transport.
Foreign Direct Investments (FDI) – A Catalyst for Growth
Given the current financial scene of the Indian Railways, proposed Foreign Direct Investments (FDI) could bring the much-needed funds for improving the railway infrastructure in India. Although FDI is already allowed in railway component manufacturing, infrastructure development was solely with the Indian Railways. However, with the supply being inversely proportional to the demand, the proposed FDI could boost investments and result in fast implementation of infrastructure projects.
FDI in Indian Railways would facilitate the following:
The proposed FDI in rail infrastructure would create a huge wave of opportunities for the private sector. So far, Engineering Procurement and Construction (EPC) contractors were executing rail infrastructure projects through turnkey contract awarded by Indian Railways. The major issues in developing railway infrastructure include project delays and cost overrun. Hence, Public-private Partnerships (PPP) is encouraged to bring in investments and, currently, the PPP model funds only 20 percent of the railway projects. PPP based projects are executed by EPC contractors as well. Thus, EPC contractors stand to reap maximum benefits from the proposed FDI, as this would result in fund generation and faster rate of project implementation.
Private sector participation is encouraged in the areas of port connectivity and other infrastructure work, modernization of railway stations, commercial utilization of land, and construction of dedicated freight corridors, multi-modal logistics parks and private sidings, inland container depots, rail side warehouses, and high-speed passenger rail corridors.
While the proposed FDI policy would help in overcoming project delays and cost overruns, enormous opportunities would arise in areas of automation, signal systems, traffic designs and systems, and newer technologies for better and improved efficiency. Key railway segments that could benefit from the proposed FDI include:
Indian Railways is the world's second largest rail network and fourth largest freight carrier controlled by a single management. The country's railway network route stretches over more than 64,600 kilometers (km), of which 23,541 km is electrified. The sector plays a critical role in transportation within the country — it operates 19,000 trains every day, moving 2.6 million metric tons (MT) of freight and 23 million passengers.
Though Indian Railways is one of the mightiest networks in the world, it is currently facing capacity constraints and funding limitations. For reasons such as partly improved road infrastructure and lower freight transport costs, road transport is preferred over rail network for freight movement in India and for its last mile connectivity. This is evident from the fact that the share of rail freight movement has dropped from 89 percent in 1950-1951 to 31 percent in 2010-2011. High rail freight cost (approximately 9.1 percent more than road transport) is another factor for this loss. The situation is the same for passenger movement, too.
Exhibit 1: Rail versus Road Freight
Movement, India, 1950–2011
Considering the growth of India's commerce and economy and corresponding transport infrastructure needs, the railway sector has always been inadequately funded. Since Independence in 1947, India has added only 11,864 km of new lines according to the Planning Commission of India, with much of the expansion happening in the northern, western, and peninsular parts of the country. Much of the northeastern states in India and regions in the Himalayan foothills lack rail connectivity. Capacity enhancements in the railway sector have always lagged the demand generated by passengers and freight traffic. The railway sector needs investments for adding new lines and associated infrastructure, exhaustive modernization, speed enhancement, electrification, and technological changes to improve services and attract more passenger and freight traffic movement.
Although 72.3 percent of the total rail capacity is utilized for passenger movement, this segment accounts to only 31.2 percent of the total railway revenues. The passenger segment is highly subsidized in India. On the other hand, freight utilizes only 27.7 percent of the capacity but generates 68.8 percent of the total revenues. Most of the revenues earned through freight movement are used to cross-subsidize the passenger segment. This results in low funds to be reinvested in to the system for infrastructure development. In addition, lack of dedicated corridors for freight movement has resulted in low speed of freight transportation, which adds to the loss of revenues, as customers prefer road transport.
Foreign Direct Investments (FDI) – A Catalyst for Growth
Given the current financial scene of the Indian Railways, proposed Foreign Direct Investments (FDI) could bring the much-needed funds for improving the railway infrastructure in India. Although FDI is already allowed in railway component manufacturing, infrastructure development was solely with the Indian Railways. However, with the supply being inversely proportional to the demand, the proposed FDI could boost investments and result in fast implementation of infrastructure projects.
FDI in Indian Railways would facilitate the following:
- Faster implementation of rail infrastructure projects
- Easy movement of goods from mines to ports
- Reliable transport facility for industrial and export growth
The proposed FDI in rail infrastructure would create a huge wave of opportunities for the private sector. So far, Engineering Procurement and Construction (EPC) contractors were executing rail infrastructure projects through turnkey contract awarded by Indian Railways. The major issues in developing railway infrastructure include project delays and cost overrun. Hence, Public-private Partnerships (PPP) is encouraged to bring in investments and, currently, the PPP model funds only 20 percent of the railway projects. PPP based projects are executed by EPC contractors as well. Thus, EPC contractors stand to reap maximum benefits from the proposed FDI, as this would result in fund generation and faster rate of project implementation.
Private sector participation is encouraged in the areas of port connectivity and other infrastructure work, modernization of railway stations, commercial utilization of land, and construction of dedicated freight corridors, multi-modal logistics parks and private sidings, inland container depots, rail side warehouses, and high-speed passenger rail corridors.
While the proposed FDI policy would help in overcoming project delays and cost overruns, enormous opportunities would arise in areas of automation, signal systems, traffic designs and systems, and newer technologies for better and improved efficiency. Key railway segments that could benefit from the proposed FDI include:
- Sub-urban corridors
- High-speed train systems
- Dedicated freight corridors
- Elevated rail corridors
- Rail-port connectivity
- Station development
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