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Indian Railways to set up US$ 5 billion development fund

Economic Times:  January 23, 2017

New Delhi: Indian Railways has circulated a draft cabinet note for setting up a dedicated $5 billion Railways of India Development Fund (RIDF).

The fund will to be anchored by the World Bank and will serve as an institutional mechanism for the national transporter to arrange fund from the market for its investments. According to a top railway official, the fund will be managed independently by a non-government entity.

"It will support commercially viable investment in railway sector in India over the period of next seven years," the official said, requesting anonymity. Railways expects to construct high traction projects such as various freight corridors, warehouses, last mile connectivity for ports and electrification of various routes using this fund. 

Several rounds of consultations have already been held with various international pension funds including some big Canadian names to gauge market response. 

"Market sounding exercise has been carried out and has received positive response from both domestic and international investors," the official added. As per the details of the draft note, the railways would raise 20% of $5 billion on its own. It will work on the commercial principles of project-based funding rather than sovereign based borrowing being undertaken for Indian Railways. 

"Projects which can give early returns such as freight lines and electrification projects would be funded by the RIDF. Currently, because of the burden of high wages and pension bills, cost overruns of incomplete projects and increasing operational cost due to losses in passenger segment, there are hardly any funds left to undertake new projects which are profitable on standalone basis," the official said. 

For the current financial year, railways expects to have a high operating ratio of 94%. Operating ratio shows how much of revenue goes into meeting expense. Lower the ratio better it is for the railways. The national transporter hopes to set up this fund by the end of the first quarter of the next financial year.

For the next financial year, Indian Railways has sought Rs 60,000 crore as gross budgetary support from the finance ministry and has drawn a capacity expansion plan of Rs 1.35 lakh crore.

It's a sensible move. For vital transport infrastructure like the Indian Railways, we do need to leverage funds from multilateral sources. But in parallel, rail marketing needs to be thoroughly overhauled and revamped. The railways cannot chug along fine with 40% of freight revenue accruing from haulage of mostly un-beneficiated coal. Besides, we need independent oversight on rail tariffs. Also speedily required is competition in railway services, to improve quality and provide better value for railway customers and commuters.

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