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Railways in talks with LIC on funding pact

Livemint:  March 02, 2015

New Delhi: Indian Railways is in talks with Life Insurance Corporation of India (LIC) to devise a mechanism to deploy Rs.1 trillion of its surplus funds into railway infrastructure over a period of five years, as part of a government plan to secure funds for improving and expanding the world's fourth largest railway network.

Railway minister Suresh Prabhu is expected to sign an agreement for the same within two weeks, according to two people familiar with the development. They did not want to be named.

"LIC's investment will be in the form of debt. The exact mechanism is being worked out," said one of the two people, requesting anonymity.

In the Railway Budget presented on 26 February, Prabhu had unveiled a plan that proposed an investment of Rs.8.5 trillion into the railways over the next five years, sourcing part of the funds from financial institutions such as state-run LIC.

Indian Railways has already identified projects for funding by the financial institutions. "These projects are those which promise a good return on investment and hence will be attractive for investment by financial institutions. The cost of these projects is also broadly estimated to be around Rs.1 trillion," the person said.

Finding funds to transform the nation's decrepit railway network into an efficient and modern freight transporter is critical to Prime Minister Narendra Modi's vision of making India a manufacturing hub and speeding up economic growth.

The reluctance of successive governments to raise passenger fares has left the railways with little money to spend on upgrading its network. Traditionally, it has increased freight rates to keep passenger fares low, losing market share to road transport.

Across the world, infrastructure is supported by long-term funds such as pension, insurance and provident funds, said Vinayak Chatterjee, chairman and managing director, Feedback Infra Pvt. Ltd, an infrastructure consultancy.

"These funds involve the life savings of people and so are mostly invested in projects with assured cash flows and low risk. Indian Railways is a public entity with a monopoly and a large amount of assured cash flows. Its engagement with LIC, the country's insurance behemoth, to raise funds is very much in order," Chatterjee said.

Indian Railways is estimated to generate a surplus of Rs.7,278.46 crore in the year to 31 March and expects to nearly double that to Rs.14,265.71 crore in the following year. A white paper released by the railway ministry on 26 February estimated that pending projects alone require Rs.2 trillion to complete.

In December, LIC said in an email that it planned to invest Rs.3 trillion in the year ending 31 March, half of which will be in government bonds. It added that the infrastructure and real estate sectors would be its primary focus. LIC, India's largest money manager, has total assets worth at least Rs.20 trillion.

An email and phone call to an LIC spokesperson for a comment on the development remained unanswered till the time of going to print.

Speaking at a Confederation of Indian Industry conference in New Delhi on Sunday, the railway minister said he was soon going to announce an agreement with a financial institution to tie up funds for investment, without naming the institution.

"May be in the another 10-12 days' time...we'll sign an agreement with financial institutions to get more than what has been budgeted in my proceeds for this year as the money that is available for financing of the railways, in fact much more than that," Prabhu said.

For the five years ending 31 March 2019, railways has planned investments in a dedicated freight corridor, high-speed rail and elevated corridor (Mumbai), rolling stock production, station development and logistics parks, among others.

The government doubled the plan size for railways by earmarking Rs.1 trillion for the fiscal year 2015-16. Out of its own coffers, the government will provide Rs.40,000 crore as budgetary support, Rs.10,050 crore higher than the current fiscal, in line with its thrust on boosting infrastructure.

The railways expects to raise Rs.40,000 crore from extra budgetary resources in the next fiscal year. It plans to approach financial institutions, public sector units and multilateral development agencies to raise the funds.

Prabhu said on Sunday that railways is also keen to sell tax-free bonds for raising funds. Further, he expects a significant proportion of funds raised by the proposed National Investment and Infrastructure Fund to be allocated to the railways.

Finance minister Arun Jaitley announced the formation of an investment and infrastructure fund, and tax-free bonds for raising funds for investment in rail, roads and irrigation in his budget speech.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

x IBEF : India Brand Equity Foundation