Public Private Partnership in Railways - A New Approach_IMR March 2008

IIMB Management Review, March 2008 1
Public-Private
Partnership in Railways:
A New Approach
AbstractAbstractAbstractAbstractAbstract
The evolution of public-private
partnership in Indian Railways shows a
unique incremental bottom-up pattern,
contrary to the existing railway
privatisation framework, which
advocates a project-centric top-down
reform approach. Based on an in-depth
research on the Indian Railways, this
paper proposes a two-dimensional PPP
framework for railways which will have
better social and political acceptance and
encounter less resistance to change
within a government organisation.
Anil Kumar Gupta
Railway Board, GOI
Shyamal Roy
IIM Bangalore
P
rivate partnership in government-sponsored projects has been in
existence for a long time. However, it was confined to contracting
and leasing in execution and operations only, with a very limited
role in overall financing and management of projects. In the last two
decades, the role of governments has been redefined the world over,
leading to more active private sector involvement in the erstwhile
government controlled sectors, infrastructure being one of them. The
reasons for such transformation vary from developed to developing
countries. A common problem in developing countries is a shortage of
funds in meeting the growing investment needs in transport infrastructure
and services. On the one hand, government investment is constrained
by the lack of public funds; on the other hand, the private sector on its
own is not ready with the required capacity, expertise and willingness
to take the risk of investing in large infrastructure projects. Public private
partnership (PPP) is therefore being explored all over the world as a
means of initiating intended reforms and/or generating more funds while
reaping higher levels of efficiency.
The Indian Railways (IR) has been experiencing similar pressures on
productive investments since the 1980s. Increasing social and political
aspirations have led to a drastic rise in the number of socially desirable
1-Public-Private Partnership in for +ve.pmd 3/25/2008, 3:11 PM1

2 Public-Private Partnership in Railways: A New Approach
but financially unviable projects1
, while capacity
augmentation and financially viable projects are getting
neglected. The changing external environment since the
economic reforms since 1991 – including increased
competition from pipelines, massive upgradation
programme of highways, modern private ports, open sky
policy for air transport, and PPP in airport projects – has
added enormous pressure on IR for new investments,
modernisation and expansion in meeting the challenges
of increased competition in the transport sector in India.
The estimated investment required is about Rs 3.5 trillion
by the year 20152
, of which about a third has to come
from either market borrowings or private investments.
This paper is an attempt to devise a suitable policy
framework for PPP in the Indian railway sector in order
to address the need for private investment.
Literature on Public Private Partnership inLiterature on Public Private Partnership inLiterature on Public Private Partnership inLiterature on Public Private Partnership inLiterature on Public Private Partnership in
InfrastructureInfrastructureInfrastructureInfrastructureInfrastructure
Many researchers have looked at PPP in the infrastructure
sector and comprehensive literature exists on the subject.
According to Fayard3
, PPP may be said to exist if ‘the
private partnership ensures an overall approach as part of
the general contract of work. The partnership can then
be developed through the inclusion of guarantees regarding
performance and prices, and by extending the contract
to include the management of operating activities’.
Tsamboulas and Kapros4
identify joint venture and
concession as two extremes of a spectrum of options for
private financing of infrastructure projects. Several models
are being used within this spectrum in which the public
and private sectors jointly form a project company, which
is then granted a concession by the government or the
parent public sector company. Brealey, Cooper and Habib5
talk about private funding of infrastructure projects
through project finance, which is primarily guaranteed
against future cash flows of the project company and the
concession granted by the government. Thillai Rajan6
classifies projects in terms of degree of privatisation that
can be said to occur with different project structures as
shown in Exhibit 1. It varies in a continuum from low
(Lease and Renovate Operate Transfer – ROT), where
the project is totally government owned, to high (Build
Own Operate - BOO), where it is 100% owned by a private
party.
The most widely encountered project is BOT (Build
Operate Transfer), according to which the investor pays
for the facility construction and owns the facility. The
private investor maintains and operates the facility during
the concession period. Thillai recommends a BOT
structure for transport infrastructure projects while
illustrating significant differences that exist between the
three main variants, the BOT, BOOT (Build Own Operate
Transfer) and BOO formats and their implications for
different projects. Pangotra and Raghuram7
provide a
framework for formulating unbundling strategies for
increased private participation in the financing of transport
services. They suggest that viability of private participation
in each transport sector varies considerably among
different components of the infrastructure system. Parikh
and Samson8
while discussing the BOT projects in
highways have given suggestions for structural changes
in the project structure for encouraging private
participation. Recently Raghuram9
has studied the toll road
projects in India and suggested several lessons for risk
assessment and mitigation, public consultation and review
arrangements and appropriate mechanisms for dispute
settlement. Cochin InternationalAirport is the first airport
in India to come up with PPP. A case study of this by
Varkkey and Raghuram10
brings out valuable learning in
the field of project and finance structuring, project
management and resource mobilisation.
The need for private sector participation in financing new
projects in the Indian Railways was felt as early as 1996-
97 when schemes like Build-Own-Lease-Transfer (BOLT)
were launched. Several other means of alternate financing
mechanisms have since been adopted. Raghuram and
Babu11
have discussed these, along with the pros and cons
of the potential modes including BOLT and BOT schemes.
They suggest an increased thrust on internal resource
generation. Raghuram12
has brought out the attributes of
commercialisation and their role in the success and failure
of various forms of commercial partnerships in the Indian
Exhibit 1 Degrees of Privatisation in
Different Project Structures
Low High
Lease ROT BOT BOLT BOOT BOO
Source: Thillai Rajan,A, 2004, ‘Observations on Project Structures
for Privately Funded Infrastructure Projects’, Journal of Structured
and Project Finance, Vol 10, No 1, Spring, pp 39-45.

Railways (IR). Swarup13
has brought out the reasons for
failure of the BOT/BOLT scheme of IR that was launched
in 1994. Indian Railways has so far completed only one
project (gauge conversion of theViramgam-Mehsana line)
on BOT at a cost of Rs 800 million. The maintenance of
the line is with IR and the contractor is paid a fixed annuity
for the construction.
Literature on Private Participation inLiterature on Private Participation inLiterature on Private Participation inLiterature on Private Participation inLiterature on Private Participation in
RailwaysRailwaysRailwaysRailwaysRailways
The principal elements of the PPP framework in transport
infrastructure that emerge from the literature study are:
project structure, project finance, risk management, and
regulatory mechanism. These four
elements have to be addressed
appropriately for designing a PPP
model for a transport infrastructure
project. However, this framework
does not fully address the issues
associated with private financing of
a railway project. Hence there is a
need for studying PPP in railway
projects in greater detail.
In rail transport any rail project is
generally supplementary to or an
extension to the existing railway
network. The interrelation with the
existing network/system is so strong
that a small railway project cannot
be operated, maintained and
marketed independently. This is
more so when the existing railway
network is fully under government control with no private
operator. Unlike other forms of transport, railways operate
on a permanent way on which traffic needs to be regulated
and controlled. Safe operation of the railways involves a
high degree of coordination among track, overhead electric
power, signalling, traffic control and such other activities.
Further, rail traffic usually runs longer distances than
highway traffic and these are usually beyond the identified
limits of a railway project. The railway network also
provides a huge captive market for smaller projects in the
peripheral activities like hospitality, freight villages,
terminal stations, rolling stock leasing and maintenance
etc. Several investment projects in service areas are
justified on the basis of the huge market in the existing
railway network. Their relationship with the railway
administration has a significant impact on its viability.
Technical know how in railway activities is not readily
available in the private sector for historical reasons, posing
a totally new challenge in building capacity through PPP.
All these have to be addressed while developing a
framework for private partnership in the railway sector.
Very few individual railway projects have been analysed
on the existing PPP framework. One of these is Finnerty’s
study14
of the Euro Tunnel Project, which was fully
privately funded at £10.5 billion through a 230-bank
syndication. The rest of the literature on private
participation in railways, sometimes referred to as railway
reforms, concerns aspects like restructuring, privatising,
licensing, unbundling and deregulating. In general, it adopts
a top down approach of policy
intervention in an existing network,
with private partnership in varied
forms as the by product. For
example, the privatisation of British
Railways has been well captured by
Mathieu15
, Smith16
and Muttram17
.
The main objectives that drove this
privatisation process were:
reduction in government subsidy,
private investment in the railway
sector, improvement of services
and productivity through
competition and better response to
market needs in order to arrest
dropping market share. Railway
reforms in Germany were also
initiated to arrest declining market
share and increasing government
subsidy18
. The other aim was to
restructure the finances of the existing government railway
in view of mounting debt. Developments in Europe
including European Union guidelines on transport also
played a significant role in the policies adopted by these
two countries. In contrast, the US’s fully private rail sector
went for public partnership when it started making heavy
losses in the passenger business. The government came
to its rescue by taking over loss making passenger services
and subsidising mass transit services. The deregulation
of the rail industry after the Staggers Act of 1980
rejuvenatedAmerican freight railroads19
.While rail reforms
in the UK and Germany have had below average results,
those in the US had an excellent impact on private rail
roads. Experience from these and other countries have
Most of the literature on private
participation in railways,
sometimes referred to as
railway reforms, concerns
aspects like restructuring,
privatising, licensing, unbundling
and deregulating. In general, it
adopts a top down approach of
policy intervention in an existing
network, with private
partnership in varied forms as
the by product.

been captured by researchers in the form of policy
directions for separation of railway infrastructure and
operations20
, and licensing21
.
Framework of Railway ReformFramework of Railway ReformFramework of Railway ReformFramework of Railway ReformFramework of Railway Reform
An analysis of the literature on private participation in rail
transport led to the identification of the following key
elements of railway reforms:
• Public Organisational Separation: Several European
countries including Germany adopted this as the first
stage of their railway reforms. Infrastructure, freight
services, long distance passenger services and regional
passenger services were initially separated because of
the need to have separate accounting for each of the
business segments, while retaining them under a single
centre of public control. Germany restructured its
railway system in 1994 by creating Deutsche BahnAG
(DBAG) and four business divisions for track network,
long distance passenger, regional passenger and freight
respectively.
• Public Institutional Separation: When separate
organisational business units are converted into separate
companieswithindividualentities,itiscalledinstitutional
separation. Germany adopted this model in the second
stage of reforms beginning 1999 when DB AG was
converted into a holding public company and its
divisions into four subsidiary public companies. Their
third stage is to dissolve the holding company and make
individual companies independent of each other22
.
• Private Freight Operators (PFO): Creation of a
separate infrastructure unit not only allows better
accounting but also enables non-discriminatory access
to private operators regulated by a regulator. Private
freight operators are now operating in many European
countries. The privatisation of British Railways in 1994
led to the creation of four private freight operators. In
Germany, non-DB private freight operators have to
compete with the public owned DB Cargo, which in
the absence of independent regulation is unfair23
.
• Private Rolling Stock Companies (PRSC) and
Private Passenger Operators (PPO): The UK and
US experience shows that rolling stock is the most
appropriate segment for private investment. With open
access to infrastructure and private freight operators,
private investment in high capacity modern locomotives
and heavy haulage freight rolling stock becomes very
attractive. Private passenger operators are the next stage
of private partnership. In the UK three PRSCs and 25
PPOs were created in 1994 as part of the British
Railways privatisation.
• Private Railways with Public Passenger Services:
In all the stages of private partnership described above,
the infrastructure remains under the public control.
Historically, no country except the US has had
substantial private partnership in railway infrastructure.
In the UK a separate infrastructure company, Railtrack,
was created in 1994 which was later privatised in 1996.
But in 2001 it was taken into administration due to poor
management of network and numerous accidents24
and
later it had to return to public control under Network
Rail, a no-profit organisation. In the US, private railways
have existed right from beginning. Passenger services
along with some network of infrastructure were brought
under government control with the creation of Amtrak
in 1970. US Railroads have remained at this level of
PPP since then.
Each of the above reforms leads to a certain degree of
privatisation. Exhibit 2 shows these steps arranged in
seven columns in order of increasing degree of
privatisation. This could be called a framework of
international railway reform depicting the respective stages
of reform in the UK, Germany and the US, as described
above.
Although the lessons from these countries are valuable,
they are not applicable to developing countries as the key
parameters that dictated these reforms in Europe may not
be valid in developing countries. A comparison of these
key parameters between European countries and India
(Exhibit 3) clearly points to the differences.
Based on the literature study, the need for private
partnership in the rail sector in India could be summarised
as follows:
• Massive need for investment that cannot be undertaken
by the government alone
• Better selection and faster execution of projects to
realise the benefits
• Using private sector expertise and efficiency in
eliminating localised losses
• Leveraging existing network and assets in modernisation
without own investment.
There is a need for a policy approach through which private

partnership in the railway industry in India and other
developing countries could be promoted within the existing
government set up. This paper attempts to fill this gap by
integrating the framework for international railway reform
and the current treatment of PPP in infrastructure with
the evolutionary trend on IR.
Study of Public-Private Partnerships inStudy of Public-Private Partnerships inStudy of Public-Private Partnerships inStudy of Public-Private Partnerships inStudy of Public-Private Partnerships in
Indian RailwaysIndian RailwaysIndian RailwaysIndian RailwaysIndian Railways
Methodology
The case study and semi structured in-depth interview
methods were adopted in this research. The first task
was to bring together all the partnership experiments done
so far on the IR at one place and try to deduce generic
lessons for designing future PPP models. No academic
researcher has so far attempted this exercise. No single
organisational unit of IR deals with all such experiments.
Field data (comprising written notes, project reports,
presentation copies, annual financial reports, etc) was
collected from the field units and corporate offices of the
companies as well as from their official web sites. This
field data, along with interviews with key officials of the
companies, was used to prepare caselets25
for the seven
selected organisations. While preparing these caselets a
generic framework was used consisting of following: (a)
type of project, (b) need for PPP, (c) form and structure
of PPP, (d) nature of funding, (e) risk management, (f)
regulatory mechanism, (g) success/failures, and (h)
lessons learnt.
The purpose of the semi structured in-depth interviews
Exhibit 3 Key Parameters Leading Railway Reform in Europe and India
European Railways
• Under utilisation of existing infrastructure capacity
• Low GDP growth
• Low investment in rolling stock and passenger services
• Rising debt, need for restructuring
• Increasing government subsidy
• Dropping market share due to inferior service standards
• European Union competition requirements
• Modernisation for competing with road and air transport
Indian Railways
• Over utilisation of High Density Network
• High GDP growth
• Low investment in infrastructure and freight services
• Need for more market debt
• Dividend paying, no subsidy
• Dropping market share due to lack of capacity addition
• Evolutionary need, no outside compulsion
• Modernisation for adding capacity and meeting with public
aspirations
Exhibit 2 Framework of International Railway Reform
1
Public
Organisational
Business
Separation
2
Public Institutional
Separation
3
Private Freight
Operators (PFO)
4
PFO + Private
Rolling Stock
Companies (PRSC)
5
PFO + PRSC +
Private Passenger
Operators (PPO)
6
Private Railways +
Public Passenger
Service
7
Fully Private
Railways
All other segments under public control
Increasing Degree of Privatisation
UK 1994 2001$
1996
1970 USAGermany 1994 1999 1994#
#
Access to non-DB freight operators $
Reversal of Privatisation

was to elicit the views of key government officials26
and
important stakeholders. The objective was to cover all
the partnership experimentation units on rail transport
includingtheDelhiandBangaloreMetroprojects.Questions
were framed around the following key issues:
• What were the PPP initiatives taken on railways in the
past and how did they perform?
• What are the activities of IR that are amenable to PPP?
• What are the projects in the rail sector that are amenable
to PPP?
• Which PPP model will work for different activities and
projects?
• What are the reforms required in the railways in India
for realising the potential of PPP?
Interviews were interactive as each person was also
confronted with the salient details of relevant PPP models
and railway reforms happening internationally, in India and
in IR and requested to provide his comments and reactions.
In this way some project PPP models conceptualised
during the research were also validated.
Evolution of Public Private Partnership in
Indian Railways
The origin of public-private partnership in IR lies in public-
public partnership, which is still being used in some key
areas of rail transport. The first such partnership in IR
was the cost sharing with a state government when the
Government of Maharashtra partnered IR in the Navi
Mumbai Rail Connectivity Project in 1986. The state
government wanted new suburban railway lines to meet
the needs of the developing city, but IR didn’t have the
funds for the project. Since then there have been a large
number of experiments at various levels, ranging from
the creation of corporations for peripheral or specific
activities, creation of Special Purpose Vehicles (SPVs) for
big rail projects, outsourcing, leasing and licensing. These
experiments are spread across various organisations of
IR. Seven such organisations under Ministry of Railways
(MOR) were selected for case studies: Konkan Railway
Corporation Ltd (KRCL); Mumbai RailVikas Corporation
(MRVC); Container Corporation of India (CONCOR);
Indian Railways Catering and Tourism Corporation
(IRCTC); Pipavav Railway Corporation Ltd (PRCL);
HassanMangaloreRailDevelopmentCompany(HMRDC);
and Rail Vikas Nigam Ltd (RVNL). They are all public
sector companies incorporated under the Companies Act
1956. The brief highlights of these seven organisations
including their successes/failures and the lessons learnt
are given below.
Konkan Railway Corporation Ltd
KRCL is the first joint venture SPV formed in public-
public partnership in 1990 between four state
governments, for constructing a new 760 km coastal
railway line to cut short the distances from Mumbai to
Goa, coastal Karnataka and Kerala. The partnership was
formed because IR didn’t have the funds whereas the
state governments were ready to pay. The SPV was given
a BOT concession by the Ministry of Railways for 10
years. The Rs 14 billion project was proposed to be
financed through a 2.5:1 debt equity ratio with 51% equity
from MOR and the balance shared among the four state
governments. Debt was entirely through market bonds27
guaranteed by the Government of India (GOI). The project
structuring was based on conventional government
contracting with the major construction risk borne by
the company. There was uncertainty about the piecemeal
debt raising, and interest risk was entirely borne by the
company. The state governments did not bear any risk as
their role was limited to extending their share of the equity
fund. The project was appraised with a significant transfer
of traffic from the parallel existing network, however there
was no written guarantee for this transfer. The Railway
Board did the regulation of tariff and traffic, largely
favouring the zonal railway as subsequent gauge
conversion had added capacity to the existing parallel
network. The completed cost of the project was Rs 33.75
billion, with Rs 8 billion in equity and the rest in debt.
This is also the only organisation outside IR which owns,
operates, and maintains its assets, as does any zonal
railway28
. KRCL is considered a major technological and
operating success that developed cutting edge
construction expertise (now being used in other projects
including the Jammu and Kashmir Railway Project) and
modern operations and maintenance (O&M) systems29
establishing new benchmarks for operating efficiency30
.
It also carried out several engineering innovations.
However it had accumulated losses of Rs 23.53 billion till
year 2003-04. It is in a debt trap and with the balance
sheet in red it cannot bid for international projects in spite
of having the construction expertise.
KRCL’s engineering and operating success shows that
the creation of a project specific company enables better

project management, and establishes new benchmarks for
IR in terms of efficiency of operations. However it also
shows that short-term debt and high debt-equity ratio are
not suitable for railway projects. Without non-recourse
financing and independent due diligence by the lending
financial institutions it is difficult to ensure realistic traffic
forecasting and sound financial appraisal. A regulatory
mechanism is needed for playing a neutral role when the
interests of a zonal railway and an SPV clash. Government
guaranteed debt blocks subsequent financial restructuring
of the company.
Mumbai Rail Vikas Corporation
MRVC was created in partnership with the Government
of Maharashtra (GOM) in 2001 for
the upgradation of suburban railway
infrastructure in Mumbai to meet
the growing transport demand in the
already extremely congested trains
and corridors. The project consisted
of construction of additional lines
and missing links in the network,
procurement of new coaches,
modifying platforms to take longer
12-coach trains, changing traction
from DC to AC etc. While IR was
disbursing funds to this project at a
very slow rate, the World Bank was
ready to fund an integrated Mumbai
Urban Transport Project (MUTP).
However the government was not
ready to guarantee the World Bank
debt unless the recovery from the
project was assured. Against this
backdrop, MRVC was created as a joint venture SPV with
the Ministry of Railways (MOR) holding 51% and the
state government the rest. The debt recovery was planned
through additional cess on suburban fares. Phase I of the
project was to cost Rs 31.25 billion, funded through debt
equity ratio of 1:1. The World Bank debt is channelised
through GOI to GOM and MOR in equal ratio.
Construction is being carried out by two zonal railways,
Western and Central, which are also the operators of
services. Shortfall in cess collection is guaranteed by GOM
and MOR. The project is being executed in a time bound
manner with dedicated funding. As against the targeted
collection of cess of Rs 800 million per year, the first
year realisation was between Rs 450-500 million.
MRVC is a good example of social entrepreneurship. It
establishes that passengers are willing to pay higher
suburban fares for better services. Political opposition to
such fare hike could be managed through a targeted project
with state government partnership. The model was found
so attractive and workable that Phase II of the project is
being planned with 100% cost realisation through additional
cess. It has been estimated that the rate of cess could go
as high as 30% of the ticket fare. This model has opened
the door for future financing of the project through Indian
financial institutions.
Container Corporation of India
CONCOR was set up in March 1988 with the objective
of developing multi-modal transport
logistics infrastructure like terminal
facilities, container carriers etc. It
has, since then, generated own
resources out of accruals and
reinvested them. It has a paid up
equity capital of Rs 649.9 million,
of which 37% has been divested by
the GOI to the public between 1994
and 1999. It has no shortage of
funds for building infrastructure but
in order to capture the future
market, CONCOR is going for joint
venture Container Freight Stations
(CFSs)31
in its own Inland Container
Depots (ICDs) with the private
partner holding 51%, and its own
share of equity at 49%. Its biggest
PPP venture is for a container
terminal at Jawaharlal Nehru Port
Trust (JNPT). It partnered (with 26% equity in the JV)
with a private shipping company Maersk to get a 30-year
licence for the Rs 10 billion terminal, which has already
been commissioned. CONCOR has also taken a 15%
equity partnership inVallarpadam ContainerTranshipment
Terminal in Kerala, promoted by Dubai Port International,
which is the biggest such terminal in Asia. Being the sole
container operator on IR till October 200632
, it enjoyed a
monopoly status, only facing competition from road
transport. CONCOR has consistently been a profit earning
company and through reinvestment of part of its earnings
it has created a net worth of Rs 20.91 billion at the end of
financial year 2005-06. Project level PPPs in CFSs at Dadri
ICD and container terminals at ports gave CONCOR
KRCL’s engineering and
operating success shows that
the creation of a project specific
company enables better project
management, and establishes
new benchmarks for IR in terms
of efficiency of operations.
However, it also shows that
short-term debt and high
debt-equity ratio are not suitable
for railway projects.

captive traffic and a strategic long-term advantage.
CONCOR has helped IR to capture market share in
growing container traffic and earn through transportation
charges levied on CONCOR.
From the point of view of IR, creation of separate
companies in specific profitable sectors of Indian Railways
is a good form of PPP, allowing them to build value
through their own accruals, and later divesting their shares
to private institutional and individual investors. IR’s
infrastructure network and captive market are a big
attraction and provide scope for the creation of separate
companies in various sectors. In such PPP projects, IR
should focus more on the fit of business interests with
partners than on return on investment in the specific
project. It is better to leave the
management of such joint venture
PPPs under private control,
maintaining a veto power in certain
decision making processes. This
would also help them avoid the
conservative business regulations of
the government. Further if the
shares of fully owned subsidiaries
of a public sector company are
divested, the funds so collected
could be reinvested in the parent
company, thus proving more
beneficial.
Indian Railways Catering and
Tourism Corporation
IRCTC was created in 1999 with a
paid up capital of Rs 200 million for
developing the hospitality sector in IR through the
involvement of the private sector. It has since diversified
its business into Internet ticketing, commercial exploitation
of space at stations and establishing a chain of budget
hotels on railway land. Earlier, departmental catering
services were running at a loss and fresh investments
were required for modernisation. IRCTC uses various
models of private partnerships such as outsourcing, O&M
contracting, business contracts, licensing and commercial
leasing. It is also mandated to market the existing Yatri
Niwas railway hotels, hill railways and other isolated lines
with tourism potential, and to conserve Rail Heritage.
In all the above-mentioned business activities IRCTC is
adopting PPP as a primary strategy. It has established
packaged water brand ‘Rail Neer’ with state of the art
plants at Nangloi in Delhi and Danapur in Bihar. The plants
are owned by IRCTC with investments of Rs 40 million
per plant. They are being operated and maintained by O&M
contractor, Ion Exchange Ltd. The Transport Corporation
of India does transportation and distribution. All its
investments are funded through equity funds, surplus
generation and private partners. The business model of
IRCTC carries no market risk as IR provides the captive
market and most of the business risk is borne by the private
partners. The Railway Board issues all the licensing policy
and guidelines. It is the first railway Public Sector
Undertaking (PSU) to pay a dividend in the very first year
of commercial operation. Its turnover is increasing with
an average annual growth rate of
about 100% from 2003-04 till 2005-
06 and earned Rs 19.78 crores of
net profit in 2005-0633
. It has taken
over the loss making catering
services of Indian Railways along
with its staff and is now earning a
profit out of it. All initiatives taken
by IRCTC so far have been highly
profitable. It has succeeded in
expanding the usage of information
technology in ticketing. IRCTC
represents the largest e-commerce
business in India34
. It has enabled
business tie-ups with banks, mobile
phone service providers, credit card
and cash card companies etc, which
could not have been possible in a
monolith IR organisation.
IRCTC’s success establishes that
the captive market for peripheral services provided by IR
is a low risk high return business opportunity for PPP.
Privatisation and outsourcing through an intermediate PSU
is politically more acceptable than if done directly. PSUs
are also better suited to carry out the large number of tie-
ups involved.
Pipavav Railway Corporation Limited
PRCL was established in 2001 as a 50:50 joint venture
SPV company between Gujarat Pipavav Port Limited
(GPPL), a private company, and the Ministry of Railways
for a 270 km gauge conversion and port linking project to
link Pipavav Port with Surendranagar in Gujarat. The
gauge conversion project was going on slowly due to
IRCTC’s success establishes
that the captive market for
peripheral services provided by
IR is a low risk high return
business opportunity for PPP.
Privatisation and outsourcing
through an intermediate PSU is
politically more acceptable than
if done directly. PSUs are also
better suited to carry out the
large number of tie-ups
involved.

slow disbursement of funds by MOR. GPPL wanted a
direct broad gauge link to the port at the earliest and hence
it partnered with MOR to set up an SPV. MOR granted a
concession for 33 years on BOT basis with a concession
fee of Rs 20 million per year for licence to use the existing
land, buildings and bridges on the earlier metre gauge line.
The funding of this Rs 3.73 billion project is through
Rs 2 billion equity and the balance through non-recourse
debt. A consortium of seven Indian banks and financial
institutions arranged the debt. The GPPL has provided a
traffic guarantee of three million tons per year beginning
with one million tons in the first year of operation and
reaching three million in three years. Construction was
carried out by the zonal railways on the pre sanctioned
railway estimate with 6% cost plus charges. The project
had a captive market as the entire traffic originating on
the port would go to the project railway. The risk of
emergency management of the project railway is with the
zonal railway on a cost plus basis. The zonal railway does
the operation and maintenance of the infrastructure as
well as the trains against pre agreed payments that are
well below the average cost on the IR network. The
maintenance system is the same as that adopted on KRCL.
The Railway Board regulates the traffic, the zonal railway
collects the revenue and it is apportioned to PRCL on
established norms35
. The formation of PRCL enabled the
completion of the project within two years. The first two
financial years saw operating losses of Rs 70 million and
Rs 20 million respectively. However it earned a net profit
of Rs. 5 crore in 2006-07 carrying about 2.2 million traffic.
The traffic guarantee provided by GPPL was not encashed
by the company till year 2006-07. The banks agreed to
restructuring of debt and interest payment was postponed
till March 2007. The company is likely to start repayments
of debt from year 2007-08 provided it gets the dues
against the traffic guarantee from GPPL which will
become more than Rs 80 crore by March 2008.
The experience gained from PRCL shows that traffic
guarantee from a port is not an adequate market risk
mechanism. The better method would be a mechanism
for matching the development of the port with that of the
port linking line36
. Debt servicing must not start till five
years of operation have been completed; otherwise,
provision should be made from a subordinate interest free
debt from promoters during the period37
. The SPV mode
of execution of new projects enables the adoption of a
modern system of O&M with a smaller recurring cost. A
strategic partner in the SPV brings great value to the
project company and the MOR.
Rail Vikas Nigam Ltd
RVNLwas created in 2003 as a wholly government owned
SPV for executing the National Rail Vikas Yojana. This
involved strengthening of the Golden Quadrilateral (GQ)
for running goods trains at 100 km per hour, port
connectivity projects and construction of mega bridges38
,
with a budget of Rs 150 billion in a limited period of five
years. These important projects were clubbed under RVNL
in order to ensure a focused funding and execution. The
experience gained during the creation of PRCL and
HMRDC has brought into focus the need to create an
umbrella SPV that would further enter into joint venture
partnerships with the private sector for creating project
specific SPVs and other modes of project execution. RVNL
is such an umbrella SPV, which is intended to help avoid
the need to approach GOI each time an SPV is to be
formed. RVNL proposes to create nine SPVs and execute
11 projects on BOT. Of the Rs 30 billion equity fund from
GOI, Rs 15 billion has been given by the Asian
Development Bank (ADB) as a loan to GOI. The remaining
funds are to be raised from the market, either through
market debt or through private investments in PPP
projects. Project specific SPVs will have 26 percent equity
from RVNL whereas in case of BOT projects 100 percent
of the fund is to be mobilised by the private sector. Two
private port railway projects are going to be funded 100
percent by the private port owner on BOO basis. The
Indian Railway Finance Corporation (IRFC) arranges
market borrowings for non PPP projects. Risk
management in SPV projects is similar to PRCL and
HMRDC. In BOT projects, the entire risk of construction,
time and completion is on concessionaire; the government
provides the viability gap funding and the Railway Board
regulates the tariff and licensing policy. RVNLhas achieved
mixed results. It has been successful in arranging
dedicated funding for identified projects but is nowhere
near achieving its target of completing the projects in five
years, i e by 2008. The progress on development of PPP
projects, creation of SPVs and awarding of concession
agreements has been very slow. Till December 2007 only
three SPVs could be created, out of which concession
was granted by MOR to only one, while the others are in
advanced stages of approval. So far no model concession
agreement has been developed, which has caused delays
in getting MOR approval for each new concession
agreement. Against the target of spending Rs 150 billion

in 5 years, RVNL spent Rs 26.5 billion till March 2007.
RVNL has not yet developed a PPP model for repayment
of market borrowings and no BOT project has taken off
so far. In effect it is more like a corporation carrying out
new construction works for zonal railways.
RVNL’s failure in designing new project structures for
PPP and speedier structuring of SPVs has established that
merely establishing an umbrella SPV is not adequate. Such
a company has to be empowered adequately to take
decisions without requiring the government’s approval at
every stage. Further it must develop into a new institution
with better capability, innovative organisational structure
and new procedures in order to avoid the danger of falling
into the old IR system. RVNL should have been different
from KRCL, but in reality it has
turned out to be another
construction company with no
technological or engineering
challenges comparable to KRCL.
Hassan Mangalore Rail
Development Company
HMRDC was established in 2003 for
executing a 183-km long gauge
conversion project linking New
Mangalore Port Trust (NMPT) port
to Hassan in Karnataka. Slow annual
disbursement of funds in the
ongoing project was the prime driver
in the formation of HMRDC. Iron
ore exporting companies in
Chitradurga, NMPT and
Government of Karnataka (GOK)
wanted speedier execution and hence HMRDC was
created, under the umbrella SPV, K-RIDE, a joint venture
company between MOR and GOK. K-RIDE is to develop
four such projects and HMRDC was the first SPV. MOR
and GOK hold 41% equity each and the balance has been
shared between NMPT and a mining company. MOR has
granted a concession for 32 years on a nominal annual
fee of Rs 1000. Of the total project cost of Rs 2.91 billion,
the amount (Rs 1.41 billion) already spent by MOR on
the project before formation of the SPV was converted
into a subordinate debt. The remaining Rs 1.5 billion is
funded through Rs 1.1 billion equity and Rs 400 million
non recourse debt arranged by two banks. The SPV bears
the full market risk as no traffic guarantee exists. It faces
competition from other adjacent developing ports and
from another similar project development by K-RIDE. The
construction has been carried out by the zonal railway in
a manner similar to PRCL. However the completion of
the project was delayed significantly.As against the original
completion target of March 2005, the project was finally
completed on 8 December 2007 with the start of passenger
services between Bangalore and Mangalore. However the
freight train operation commenced in early 2006 carrying
about 1.5 million ton traffic in 2006-07 with limited
infrastructure facility. Matching development at NMPT
was delayed, resulting in delayed generation of traffic;
still the company is likely to carry 3.5-4.0 million tons in
2007-0839
. However, the long term prospects of the
company appear very favourable as indicated by the
intention among certain mining
companies to acquire additional
equity of Rs 100 million40
. The
money so raised could be used for
retiring debt.
The HMRDC experience and the
lessons to be drawn from it are
similar to those of PRCL, although
the project structures are very
different.
Projects, Structures andProjects, Structures andProjects, Structures andProjects, Structures andProjects, Structures and
Activities Amenable to PPPActivities Amenable to PPPActivities Amenable to PPPActivities Amenable to PPPActivities Amenable to PPP
While the study of organisations led
to a better understanding of the
evolution of PPP on IR, the
interviews helped in identifying
activities and projects that are
amenable to PPP and finding
suitable structures for them. Until the creation of CONCOR
in 1988, IR carried out all the activities itself through its
zonal railways, production units and workshops. There
was hardly any activity that was either outsourced or
delegated to a public company. But IR is now gradually
setting aside more and more activities for the private sector
under two models: leasing/service agreement and licensing.
The general belief among a section of the people
interviewed was that any project could be structured in a
manner that makes the PPP option viable. However, the
research was limited to only those rail projects in which
massive investments are required in the next 10 years.
Project structuring for PPP involves balancing risks,
incentives and returns between public and private partners,
RVNL’s failure in designing new
project structures for PPP and
speedier structuring of SPVs
has established that merely
establishing an umbrella SPV is
not adequate. It has to be
empowered to take decisions
and must develop into an
institution with better capability,
organisational structure and
procedures than the old IR
system.

and creating space for innovation, efficiency and
application of new technology for the private sector,
thereby creating a greater long term value and a win-win
situation for the parties involved. The classification
proposed by Thillai Rajan41
provides the basic framework
for PPP project structures. However in addition to
licensing mentioned above there are other variants of BOT
either already being used or likely to be used soon by IR.
These project structures and types of project are treated
in detail below.
Lease/Service Agreement
This form of PPP is the lowest degree of privatisation,
with existing railway assets given to the private sector
only for managing. There are several loss making business
areas and services in which IR is at present losing billions
of rupees. The catering service was one of them and was
taken over by IRCTC as described earlier. Yatri Niwas
and other railway hotels are also likely to be handed over
to IRCTC for turning them around through the
involvement of the private sector. Uneconomic branch
lines (UBLs) and hill railways (HRs) are other services
that are running at a loss, and have been surviving on
implicit cross subsidy within IR. They have to be separately
dealt with if the subsidies are to be reduced and operating
efficiency is to be improved in these services. The UK
and Germany have done this through community
partnership and service agreements. Agarwal42
has come
out with a public private partnership model as an
opportunity for turning around these loss making branch
lines. The underlying principle in this model is making IR
a customer who will purchase the socially desirable
services from the independent operators of such services
and pay for it under a service agreement. The independent
operator would have an incentive for improving its
performance by reducing costs, increasing ridership,
competing with road transport in offering better services
and partnering with private people especially of local origin
in this endeavour. The lines, along with dedicated rolling
stock, would be given on lease to these public sector
companies with a graded reduction in subsidy from MOR
during the licence period. Such operators may be called
Leased Passenger Service Operators (LPSOs)
Because IR has proved very inefficient at piecemeal
business, it has stopped dealing with individual wagonloads
and instead focuses on the bulk freight train business. A
similar strategy is required in the case of parcel services,
advertising, and retiring rooms, as the returns from these
services are not in proportion to their potential. These
services could be leased to the private sector along with
railway assets against a competitive annual fee. Piecemeal
leasing of parcel vans in some important mail express
trains has already been tried on Indian Railways. The
underlying principle is that the private sector is better at
aggregating piecemeal bookings and arranging ‘first mile’
and ‘last mile’ services. IR could then concentrate on
carrying the parcels, which poses no problem as these
will be carried by mail/express trains, exactly as at present.
Licensing
Licensing is the form of PPP with the highest degree of
privatisation in which the government opens up a business
segment to the private sector and regulates it through
licensing only, leaving the private sector free to make its
project investment decisions. Services such as container
operation and tourist train operation offer great
opportunities but involve either piecemeal traffic or
business tie ups with several other market players. They
also require customised rolling stock which cannot be
used elsewhere on IR. Such services are best suited for
licensing to the private sector. IR has opened up container
operation to the private sector; in the first round of
licensing 14 private operators including CONCOR have
been awarded licences to operate container services. This
policy should be taken further by building in suitable
guarantees and long term commitments on transit time
and access charges from IR in order to enable the private
operators to provide value added container services and
bring in private investment in container handling facilities
and logistics like inland container depots and container
freight stations. Tourist train operation through non-
railway operators is not new to IR – the Palace on Wheels
has been running for years now in partnership with the
Rajasthan Tourism Corporation. Such operators may be
called private container operators (PCOs) and tourist train
operators (TTOs) respectively.
A logical extension of the leasing policy of parcel vans in
mail/express trains could be to provide licences for running
parcel train services between a pair of cities, with the
frequency determined by market demand. Private operators
also could be encouraged to own rolling stock and offer
full trains for scheduled running by IR on the same lines
as container operations. Such operators may be called
private parcel operators (PPOs).

BOOT/BOO
Projects that can best be developed by the private sector,
and for which the private sector is fully capable, should
be executed through Build Own Operate Transfer (BOOT)
and Build Own Operate (BOO) models. The existing
literature covering these two project structures under PPP
indicates that they are suitable for multi modal railway
transport projects (freight terminal, multi modal logistics
park, inland container depot, freight village, warehouse
etc) and railway freight ancillary projects (siding, terminal
facility, loading unloading facility etc). These are most
attractive for private investors as they have maximum
utility for private industry. These projects are fully financed
by the private sector and IR will offer the concession.
Private firms with a licence for container service and parcel
services may also take up such projects. The only
distinction between these two models is with regard to
the railway land: if the asset is constructed on railway
land it has to be transferred to IR at the end of the
concession period in the BOOT model. The private
concessionaires managing railway terminals may be called
private terminal operators (PTOs).
BOT
This is the basic Build Operate Transfer model which
was recommended by Thillai Rajan43
for infrastructure
projects. For the purposes of this paper, BOT is that PPP
model where the government has no equity partnership in
the project company. This model is suitable for railway
projects that are essentially developed by the government
to exploit the existing assets and raise capital resources
for modernisation and capacity addition to the existing
infrastructure. Under this category comes the
modernisation of metro city railway stations. Twenty two
such stations have been identified for modernisation44
.
These stations have enormous real estate development
potential and can be developed into world class stations
with the necessary passenger amenities and services.Areas
around the stations and the air space above platforms could
be commercially developed while the development and
maintenance of operational and passenger areas is provided
to IR free of cost. The concessionaire’s source of revenue
would be by managing and marketing passenger facilities
at the station and renting commercial space. Concessions
for such projects could be structured on either maximum
revenue share for a fixed concession period or minimum
concession period for a fixed revenue share, or a
combination of both. New Delhi railway station is the
first station being developed on this model and the
concession is likely to be granted by the middle of 2008.
The number of passengers and the demand for trains are
increasing every year. The existing metro city stations do
not have space for future expansion to meet this growing
demand. Hence new modern passenger terminals are being
planned in such cities like Delhi and Mumbai, away from
the city centre at places which already have some railway
infrastructure including land. If additional land is required,
it will be provided by the state government or city
development authority. Such projects could also be taken
up through BOT.As it would be a green field development
there would be greater opportunity with comparatively
easier execution for maximising commercial development
in order to achieve train operational area free of cost and
at zero maintenance cost too.
BOT (SPV)
The BOT model in which a concession is given to a special
purpose vehicle (SPV) such as KRCL or PRCL is different
from the BOT model in two respects: it does not involve
any competitive bidding and there is a majority or equal
partnership of the IR in the project company resulting in
a lower degree of privatisation than the BOT model. Hence
its is treated separately under the category of BOT (SPV),
to distinguish it from the BOT concession given to a
private entity. This model is suited for two types of railway
projects:
• Projects for which strategic private investors can be
found and which are financially viable without any grant
or subsidy from the government, and whose project
development could be done either by the railways or
by the private sector. Port linking projects, private
sidings for a manufacturing unit (steel factories,
refineries etc) and link lines to mines fall under this
category. These are attractive for the private investors
whose strategic interest such projects serve.
• Projects which are essentially required by the
government for its long term capacity augmentation
but where the government does not have the funds to
finance it alone; for which private partners can be found
from the beginning; which are not financially viable
enough to be financed by the market and whose
development has to be done by the IR. Suburban rail
projects, dedicated rail corridor projects etc fall into
this category. These projects could be started without
any private partnership in the SPV, with the private

sector being roped in once the project line becomes
operational and starts offering a return.
BOT (JV)
The BOT model in which the government has a minority
equity partnership is treated separately here as BOT (JV).
In this model, a shell company is generally created by the
government for executing a development project, with a
majority of its equity share being offered to a private entity
through a competitive bidding process. This model falls
between BOT and BOT (SPV) in terms of the extent of
private sector participation. Concessions for developing
the new Bangalore InternationalAirport and restructuring
and modernisation of Delhi and Mumbai Airports have
been awarded through this PPP
model. Indian Railways could
implement two types of projects
through this model:
• Those rail projects which have a
high economic rate of return for
the country and society but a very
low or negative financial rate of
return, for which the
government does not have
adequate funds, and which could
be privatised partly or fully once
the project is commissioned to
recover the government fund.
Under this category come the
Urban Mass Rapid Transport
projects in metro cities. The
equity share of the government
could be specified in advance, an
upfront grant could also be fixed
in advance and the bid could be called on the basis of
viability gap demanded by each bidder (which could
be a consortium of companies). The concession for
the Mumbai Metro Project was awarded through this
model. In a variant of this model, instead of offering
an upfront government grant, the bidders would be
offered a guarantee for a minimum ridership over a
fixed number of initial operational years and the bid
could be called on the basis of the viability gap demanded
by the bidders. This model was under consideration
for the Hyderabad Metro Project45
. But finally the
bidding process presently underway is based on the
viability gap, similar to the Mumbai project.
• Projects mentioned under BOT could also be executed
through this model. In such cases the management of
the world class stations (except train running and
ticketing) will be under the joint venture company, in
which the government will be a minority equity partner
with around 26%. Such BOT or BOT(JV) station
operators may be called private station operators
(PSOs).
BOT (LPVP)
Capacity augmentation projects like doubling, gauge
conversion, railway electrification, and major bridge
construction were being tried on the earlier BOLT scheme
on IR in which a fixed annual annuity was paid to the
concessionaire during the concession period. The
concessionaire was essentially a
construction company who had the
responsibility of arranging finance
too. The private sector did not share
the traffic risk. BOT (LPVP – Least
Present Value of Payment) is a far
superior model that makes possible
the sharing of traffic risk by the
concessionaire for such projects.
They are essentially missing link rail
projects similar to projects being
undertaken by RVNL. The
maintenance system on such newly
constructed assets would be same
as is currently in practice on the
network. Maintenance of new
assets cannot be separated as once
constructed the assets become part
of the existing network. An SPV
like RVNL, that is executing a large
number of scattered projects in a particular corridor, could
use the BOT (LPVP) model. This model envisages annuity
payment linked to traffic growth on the line. It is based
on the shadow LPVR46
proposed by Mukhopadhyay47
for highway projects. LPVP may be fixed in agreement
with the zonal railway, keeping the duration of payment
flexible depending upon the traffic generated on the project
line. Payment will be linked to a shadow tolling based on
the running of trains. Hence the risk of traffic could be
partly shared between the zonal railway and the
concessionaire. As soon as the present value of all the
payment credited by the zonal railway becomes equal to
this LPVP, the contract will be closed and the line will
wholly belong to the zonal railways. Risk sharing by the
A Special Purpose Vehicle
like RVNL, that is executing
a large number of scattered
projects in a particular
corridor, could use the BOT
(LPVP) model.This model
envisages annuity payment
linked to traffic growth on the
line. Payment will be linked to a
shadow tolling based on the
running of trains.

1
Lease/ Service
Agreement
Catering, Yatri
Niwas Hotels,
Advertising,
Rest Rooms,
Parcel Vans,
UBLs
2
BOT (LPVP)
Capacity
Augmentation-
Doubling, GC,
RE, etc
3
BOT (SPV)
Port Links,
Suburban
Railway,
Passenger
Terminal
4
BOT (Annuity)
New Railway
5
BOT (JV)
Metro Railway,
World Class
Stations, New
Stations
6
BOT
Modernisation of
Stations, New
Passenger
Terminal, Land
Development
7
BOOT/BOO
Multi Modal
Logistics Park,
ICDs, Freight
Terminals,
Budget Hotels,
Food Plaza
8
Licence
Container
Operation,
Passenger
(Tourist)
Operation,
Parcel
Operation
SPV would be in the form of fixing the discount rate
judiciously, slightly below the interest rate of the debt.
With this the debt would be secured with earning in the
long run, and financial institutions would not have any
problem financing the projects. In this project model, the
private sector has a smaller role to play than in the BOT
(SPV) model because the SPV or project company is meant
for many smaller rail projects and not much private sector
advantage could be achieved except project financing and
its associated benefits.
BOT (Annuity)
In the BOT (Annuity) project model, the private sector
has the responsibility of designing, financing, constructing
and maintaining the railway infrastructure during the
concession period in return for a fixed annuity to be paid
by the government. This is suitable for new railway line
construction projects more than 500 km in length. In this
model the concessionaire can adopt a design that optimises
the maintenance expenses to get a minimum life cycle
cost. This model is advantageous when the IR would like
to take advantage of the latest design and maintenance
practices with a smaller staff, thereby lowering the
recurring cost and raising the standard. The Annuity PPP
model has been successfully used in National Highways
projects in India. Several of the experts interviewed48
opined
that this model would be useful for railway projects. This
form of partnership would be most suited in the dedicated
freight corridor project being executed by an SPV, the
Dedicated Freight Corridor Corporation of India Ltd
(DFCCIL). It has been mandated by GOI to carry out
construction of railway infrastructure through a mix of
engineering and procurement contracts (EPC) and PPP
packages. The BOT (Annuity) model will work only if
the contract packages are made for 400-600 kms length
each, so that the private sector is encouraged to bring in
the latest construction and maintenance practices. Rights
to the concessionaire for developing terminal facilities like
multi modal logistics parks along the railway line would
bring down the annuity charges to be paid by the DFCCIL.
One full corridor from origin to destination should be
implemented with a series of such BOT (Annuity)
concessions in order to ensure early returns. From the
point of view of degree of privatisation, this model falls
between BOT (SPV) and BOT (JV). Such operators may
be called private annuity infrastructure operators (PAIOs).
Activity cum Project Level FrameworkActivity cum Project Level FrameworkActivity cum Project Level FrameworkActivity cum Project Level FrameworkActivity cum Project Level Framework
Building on the framework used by Thillai Rajan, the eight
PPP models explained in the previous section could be
arranged in increasing degree of privatisation. This is
presented in Exhibit 4 along with the activities or projects
coming under each structure.
This framework lists activities and projects on IR that
could be assigned to the private sector under various PPP
models mentioned therein. This framework also arranges
the various PPP models in increasing degree of privatisation
for assisting decision makers and conceptual clarity. The
list of activities and projects is not exhaustive and additional
activities and projects could be added under each column.
Only the basic features of each PPP model have been
explained in this paper and each model needs further
development. IR has adopted leasing and licensing PPP
models in a big way on the identified activities. On the
project front only the BOT (SPV) model has been used
Exhibit 4 Activity cum Project Level Partnership Framework in PPP Models

so far, while projects under BOT, BOT (Annuity), BOT
(JV) and BOOT/BOO models are under various stages of
development.
PPP Evolution around OrganisationsPPP Evolution around OrganisationsPPP Evolution around OrganisationsPPP Evolution around OrganisationsPPP Evolution around Organisations
The seven caselets presented in a previous section
establish that organisations are the centres around
which PPP has evolved on IR. In the 40 years of IR’s
existence, only three public companies (IRCON
International Ltd, RITES Ltd and Indian Railway Finance
Corporation Ltd — IRFC) were created prior to 1988.
However, between 1988 and 2006, 12 public organisations
were created, the most recent being the Dedicated Freight
Corridor Corporation of India Ltd (DFCCIL) and the Rail
Land Development Authority (RLDA). Out of these 15
organisations, 13 are public companies, the Centre for
Railway Information System (CRIS) is a Trust constituted
under the Societies Act, and RLDA is an Authority
constituted under the Railways Act. Many more
organisations will be created in the coming years. Most
of the PPP models explained in the preceding section have
been implemented by IR through organisations. With such
organisations playing a prominent role in the PPP initiatives
taken in IR so far, it is imperative to analyse these
organisations and see if any meaningful framework
evolves.
Based on the ownership structure and the nature of
business assigned to an organisation, organisations in IR
may be classified into seven categories as shown below:
• Segment Specific Organisation
• Umbrella SPV
• Public-Public SPV
• Partly Privatised Public Company
• Public-Private SPV
• Subsidiary Joint Venture SPV/Company
• Privatised Public Company or JV Company with
minority government stake.
The approach towards PPP depends not only on the
activities and projects framework explained in Exhibit 4,
but also on what type of organisation is carrying them
out.
A segment specific organisation is a public organisation
that is 100 percent owned by GOI and its business area is
focused on a particular segment of the railway sector,
such as construction, consultancy, multimodal transport,
hospitality, telecom, financing or information system.
CONCOR, a partly privatised company, and IRCTC, a
public company, both fall under this class. Other such
companies formed by MOR so far are IRCON, RITES,
RailTel, IRFC and CRIS49
. For such organisations, PPP
may be either a necessity or an opportunity; they may go
for JV as a minority partner or for licensing, contracting
and leasing, and their motivation may range from long
term interest and investment in infrastructure to reduction
Exhibit 5 Umbrella Special Purpose Vehicle (SPV)
Government of India
Financial InstitutionsUmbrella SPVState Governments
Project SPVProject SPVProject SPV

in existing losses and exploiting assets.
An umbrella SPV is also a public organisation owned 100
percent by GOI but as the name ‘special purpose vehicle’
suggests, it is specially created for executing certain
projects or type of projects through the creation of more
project specific SPVs among other modes of execution.
Exhibit 5 shows a schematic diagram of an umbrella SPV
in relationship with other stakeholders. RVNL, DFCCIL
and RLDA are examples of such SPVs under MOR. MOR
is also planning to create another umbrella SPV for joint
venture manufacturing companies for modern rolling
stock.
While KRCL is a public-public conventional SPV with
one well defined project (arranging debt and project
execution), RVNLis a modern multi project umbrella SPV,
whose function is to develop projects, select partners,
and provide financial closure and execution. MRVC is
another public-public partnership SPV, while PRCL and
HMRDC are public-private partnership SPVs. However,
PRCL is driven by one private strategic partner (GPPL)
for connectivity to the port, with no grant and a consession
fee of Rs 20 million per year. HMRDC in contrast, is an
SPV set up by the state government and MOR with
multiple private partners from the mining and port sector,
a 50 percent grant from MOR, and a concession fee of
Rs 1000 per year. In PRCL, the market risk is borne by
GPPL with a traffic guarantee for three years, and the
future expectation is bullish; the risk in HMRDC is
uncovered and the future expectation depends on the
extent of mining export.
New Organisation Level FrameworkNew Organisation Level FrameworkNew Organisation Level FrameworkNew Organisation Level FrameworkNew Organisation Level Framework
Based on the discussion in the previous section, an
organisation level framework is proposed in Exhibit 6.
The seven different classes of railway organisations have
been placed in seven cells from 1 to 7 in increasing order
of private partnership or decreasing order of GOI
ownership. Cell 1 and 2 both represent 100% GOI
ownership but SPVs have been considered a higher PPP
entity than segment specific organisations. The experience
of a German company LVB in Leipzig50
suggests that
subsidiaries in the peripheral activities of the main railway
network could later be used for private partnerships for
expanding business outside the rail network and raising
capital for the expansion of the holding public sector
company. Several executives interviewed for the present
study opined that this method of private partnership would
have more acceptability within IR as the holding company
would continue to be under government control.
When the strategic importance of a public company gets
diluted due to the presence of several similar private
companies in the market, the public company could be
partially privatised by selling minority share to the public.
Exhibit 6 Organisation Level Partnership Framework in IR
1 2 3 4 5 6 7
Government Created Organisations
Increasing Degree of Private Partnership
Subsidiary and Converted Companies
Segment
Specific
IRCON,
RITESIRFC,
CONCOR,
IRCTC, RailTel,
CRIS
Umbrella
SPV
RVNL, DFCCIL,
RLDA
Public-Public
SPV
KRCL
MRVC
Public-Private
SPV
PRCL
HMRDC
Partly
Privatised
CONCOR^
Subsidiaries/
JVs/SPVs
KRC
Privatised/
Minority JV
JVs of
CONCOR
^CONCOR has been placed twice, cell 1 being its original place and cell 5 the present place

IRCON and RITES fall under this category but, despite
attempts, the shares of these two companies could not be
sold to the public. However, this was done in case of
CONCOR when it was still a monopoly player in the
market. One of the reservations of MOR against such
disinvestment was that the proceeds were not benefiting
the company itself. This was also the opinion of the
management of CONCOR when they were interviewed.
A far superior form of privatisation would be for
subsidiaries to be created by such companies and
subsequently privatised, or subsidiaries to be created under
JV partnerships with minority equity as has been done by
CONCOR. IRCON and RITES could also do this. A
privatised company is one in which the government holds
only a minority share. Such a company would play a vital
role in the PPP initiatives of IR as it would bring in the
much needed railway technology and experience in the
private sector into maintenance, construction, rolling stock
and train operations.
Evolution of Reforms in IREvolution of Reforms in IREvolution of Reforms in IREvolution of Reforms in IREvolution of Reforms in IR
Since the beginning, IR has been organisationally divided
into separate zonal railways, whose number has increased
over the years. Further, Kolkata Metro and various
production units are also separate organisational entities
centrally controlled by the Railway Board. The creation
of various segment specific organisations has resulted in
the gradual institutional separation of several business
segments. This process is continuing and might result in
the institutional separation of all segments except bulk
freight operations and mainstream passenger train
operations. Bulk freight operation is considered the most
efficient operation and there is neither any need nor any
possibility of introducing private freight operators in this
segment. But piecemeal traffic handling segments such
as container services, parcel services and tourist train
services will gradually get transferred to private operators
as identified under the section on Project Structures. Loss
making passenger services such as uneconomic branch
lines and hill railways will however get institutionally
separated through leasing to private operators. Existing
infrastructure too will gradually get institutionally separated
through modernisation projects getting executed through
PPP project models bringing in private parties like private
station operators in the near future. All major
infrastructure additions through PPP will result in
institutionally separate infrastructure operators like private
terminal operators. Although IR is not going to privatise
present rolling stock, several new JV companies in rolling
stock manufacturing are being planned through an umbrella
SPV, in order to meet the growing demand for rolling
stock. These will bring in several new private joint venture
rolling stock companies.
Sector Level FrameworkSector Level FrameworkSector Level FrameworkSector Level FrameworkSector Level Framework
The evolution of reforms in IR differs from the framework
of international railway reform as presented in Exhibit 2,
in two of its elements. The first is its incremental nature,
unlike the one time restructuring of the existing set up in
the case of Europe and the US. The second is the
evolutionary nature of reform through various
experiments of public private partnership on IR in contrast
to the reform in European and American railways that
was effected due to a deliberate top down policy
intervention. The evolution of reforms in IR could be
captured in a framework as shown in Exhibit 7.
The framework is called ‘sector level’ as it applies to the
entire railway sector in the country. This framework
shows six stages of increasing degree of private
partnership at the sector level. All these stages are open
ended beginning at different periods of time but continuing
incrementally thereafter. Sector level partnerships at stages
1 to 4 had already begun by year 2006 whereas stage 5
may begin in 2008 and stage 6 may begin in 2012, with
the commissioning of the Dedicated Freight Corridor. It
is expected that by this time Accounting Separation, the
most urgently required reform51
, will be in place, enabling
the future sustenance of PPP in IR. The organisation level
and activity cum project level PPP framework proposed
will continue to bring new private operators on IR.
New PPP Framework for RailwayNew PPP Framework for RailwayNew PPP Framework for RailwayNew PPP Framework for RailwayNew PPP Framework for Railway
The evolution of PPP in IR has been captured in three
different frameworks — activity cum project level,
organisation level and sector level partnership. However,
these three perspectives are not exclusive and independent;
rather they are mutually interrelated and interdependent.
Hence a two-dimensional three level PPP framework is
arrived at by combining the three frameworks, which is
applicable to railway systems in countries with economic
parameters similar to India (Exhibit 8).
At the lowest or activity cum project level, the framework
provides eight different models of PPP, which can be used

for different categories of railway activities and projects.
These models vary in degree of private partnership as
shown in the figure. However a model with higher degree
of private partnership is not necessarily better or superior.
Hence the selection of a PPP model should be entirely
based on the nature of activity/project and the form of
organisation used for implementation.
At the middle or organisation level, the framework provides
seven different forms of government created or subsidiary/
converted organisations with varying degrees of private
partnership. Once again a form with higher degree of
private partnership may not be necessarily superior. Hence
the selection of a form of (government created)
organisation should be based on the purpose and the nature
of project for which the organisation is to be created.
However once such an organisation is created it may be
converted to the next three stages (of subsidiary/converted
organisations) in the direction of increasing degree of
private partnership. This would help in building the much
needed private sector capability in the rail sector and
realising the full potential of private partnership in the
railway sector. This in turn would encourage the
government to adopt activity/project models with higher
degrees of private partnership.
At the sector level, the framework provides six stages of
partnership with increasing degrees of private partnership.
The government must strive not only to reach higher stages
of sector level private partnership, but also to increase
the magnitude of private participation in each stage. This
is largely dependent on the extent of private partnership
at organisation level and activity/project level: each new
organisation and PPP model adopted helps IR reach its
goal.
ConclusionConclusionConclusionConclusionConclusion
Public-private partnership in railways is multi-dimensional,
requiring a new framework different from the existing
project based one-dimensional PPP framework used in
other transport sectors. Railway reform in India has
evolved in the existing set up through a need-based
incremental process derived from encouraging private
participation in various non-core activities, new railway
projects and new public companies. The new three-level
two-dimensional PPP framework developed in this paper
captures this evolution and provides visibility of the degree
of private partnership in the railway industry. The
framework helps in drawing up a roadmap for encouraging
PPP at all the three levels as their interlinkage is essential
for achieving each goal. The eight project structures for
railway sector explained here would enable practitioners
and policy makers to design the PPP model for a railway
project based on nature of project and degree of
1
Public Organisational
Separation (Regional)
2
Institutional
Separation of
Segment Specific
Organisations
3
Separation of New
Infrastructure – SPVs,
JVs
4
Leased and Licensed
Operators (PCOs,
PPOs, LPSOs, TTOs)
5
BOT Operators and
Rolling Stock
Providers (PSOs,
PAIOs, PTOs,
JVRSCs)
6
Government Owned
Parent Network with
Accounting
Separation + Private
Operators + Rail
Organisations
Exhibit 7 Sector Level Partnership Framework in IR
Increasing Degree of Private Partnership
Note: Arrows with the year given above indicate when a particular stage began; the dotted arrows show when a stage is expected to begin in
the future. The thickness of an arrow shows the relative magnitude of achievement of a sector level partnership in that stage with the thickness
of the first arrow representing almost 100% achievement and hardly any further scope of future increase. It is expected that as more and more
privatisation is achieved in a stage, the arrow will become thicker until it ultimately matches the thickness in stage 1.
Pre 1988 1988- 1990- 2006- 2008- 2012-

privatisation intended. The framework presents a more
socially and politically acceptable alternative to railway
privatisation, which will encounter less resistance to
change within the government. All developmental
objectives can be achieved with this framework without
going in for any privatisation in the mainstream government
railway network. For the Indian Railways, which has
achieved a remarkable financial turnaround in recent years
due to higher capacity utilisation, this framework could
be utilised for designing a massive capacity augmentation
and modernisation programme through greater public-
private partnership for ushering in the next level of
turnaround.
References and NotesReferences and NotesReferences and NotesReferences and NotesReferences and Notes
1 In year 2000-01, the cost of all sanctioned works in this category
was Rs 230 billion, and the annual allotment in the Railway
budget for carrying out such works was a meagre Rs 7.1 billion.
This implies that it would take several decades just to clear the
backlog of such sanctioned projects. Indian Railways Report,
2001, ‘Policy Imperatives for Reinvention and Growth’, Expert
Group on Indian Railways.
2 ‘Building Railway Infrastructure: Challenges and Opportunities’,
Presentation by Chairman, Railway Board at a Conference at
Exhibit 8 Public Private Partnership Framework for Railway
Increasing Degree of Privatisation
IncreasingLevelofPartnership
Lease/
Service
Agreement
BOT
(LPVP)
BOT
(SPV)
BOT
(Annuity)
BOT (JV) BOT BOOT/ BOO License
Segment
Specific
Umbrella SPV Public-Public
SPV
Public-Private
SPV
Partly
Privatised
Subsidiaries/
JVs/ SPVs
Privatised/
Minority JV
Government Created Organisation Subsidiary and Converted Organisation
Organisation
Public
Organisational
Separation
(Regional)
Institutional
Separation of
Segment Specific
Organisations
Separation of New
Infrastructure —
SPVs, JVs
Leased and
Licensed
Operators (PCOs,
PPOs, LPSOs,
TTOs)
BOT Operators
and Rolling Stock
Providers (PSOs,
PAIOs, PTOs,
JVRSCs)
Government-
owned Parent
Network with
Accounting
Separation +
Private Operators
+ Rail
Organisations
SectorActivity/Project
Vigyan Bhavan, 7th October 2006.
3 Fayard, A, 1999, ‘Overview of the Scope and Limitations of
Public-Private Partnerships’, ECMT Seminar on PPPs in
Transport Infrastructure Financing.
4 Tsamboulas, DimitriosA, and Seraphim Kapros, 2003, ‘Freight
Village Evaluation under Uncertainty with Public and Private
Financing’, Transport Policy, Vol 10, pp 141-156.
5 Brealey, Richard A, Ian A Cooper, and Michel A Habib, 1996,
‘Using Project Finance to Fund Infrastructure Investments’,
Journal of Applied Corporate Finance, Vol 9, No 3, pp 25-39.
6 Thillai Rajan A, 2004, ‘Observations on Project Structures for
Privately Funded Infrastructure Projects,’ Journal of Structured
and Project Finance, Vol 10, No 1, Spring, pp 39-45.
7 Pangotra, P, and G Raghuram, 1999, ‘Resource Mobilization
Strategies for Financing of Transport Infrastructure and Services’,
Infrastructure Development and Financing: Towards a Public-
Private Partnership, New Delhi: Macmillan India, pp 327-355.
8 Parikh, N C, and R Samson, 1999, ‘BOT Road Infrastructure
Projects: Process, Problems, and Suggestions’, Vikalpa, Vol 24,
No 1, pp 3-12.
9 Raghuram, G, 2004, ‘Value for Money in Toll Roads: Lessons
from Recent Road Projects’, India Infrastructure Report 2004,
New Delhi: IDFC, pp 252-258.
10 Varkkey, B, and G Raghuram, 2002, ‘Governance Issues in
Airport Development: Learnings from Cochin International
Airport Ltd’, India Infrastructure Report 2002, New Delhi:
IDFC, pp 303-310.
11 Raghuram, G, and M R Babu, 1999, ‘Alternate Means of

Financing Railways’,Infrastructure Development and Financing:
Towards a Public-Private Partnership, New Delhi: Macmillan
India, pp 356-380.
12 Raghuram, G, 2002, ‘Experiences of Various Forms of
Commercial Partnerships in Indian Railways’, India
Infrastructure Report 2002, New Delhi: IDFC, pp 288-297.
13 Swarup, S, 2004, ‘Public Private Partnerships in Port
Connectivity in India’, Dissertation in progress, PGPPM, IIM
Bangalore.
14 Finnerty, John D, 1996, Project Financing-Asset Based Financial
Engineering, John Wiley, Ch 14.
15 Mathieu, G, 2003, ‘The Reform of UK Railways – Privatization
and its Results’, Japan Railway & Transport Review, No 34,
Mar, pp 16-31.
16 Smith, Ian, 2003, ‘Britain’s Railways – 5 Years after the
Completion of their Privatization’, Japan Railway & Transport
Review, No 34, pp 12-15.
17 Muttram, R I, 2003, ‘UK Railway Restructuring and the Impact
on the Safety Performance of Heavy Rail Network’, Japan
Railway & Transport Review, No 34, pp 4-11.
18 Link, Hieke, 2003, ‘Rail Restructuring in Germany – 8 Years
Later’, Japan Railway & Transport Review, No 34, pp 42-49.
19 Dilger, Robert Jay, 2003, American Transportation Policy,
Westport: Praeger, pp 27-158.
20 Profillidis, VA, 2001, ‘Separation of Railway Infrastructure and
Operations’, Japan Railway & Transport Review, No 29, Dec,
pp 19-23.
21 Public-Private Infrastructure Advisory Facility (PPIAF), 2005,
‘The Experience of Rail Concessions: Lessons for Policy
Makers’, http://ppiaf.org. Last accessed on: May 4, 2005.
22 Link, ‘Rail Restructuring in Germany — 8 Years Later’.
23 Ibid.
24 Mathieu, ‘The Reform of UK Railways – Privatization and its
Results’.
25 The study of the seven organisations being limited in scope and
extent, they are termed caselets rather than case studies. Detailed
caselets are presented in Chapter 6 of the Dissertation Report of
A K Gupta, submitted to IIM Bangalore on 21st February 2006
in partial fulfillment of PGPPM Programme.
26 Including those from the seven organisations selected for case
study. Among the persons interviewed, some prominent ones
were: Managing Director, Delhi Metro; Officer on Special Duty
to Minister of Railways; Executive Director/Perspective Planning,
Railway Board; Director Finance, Konkan Railway Corporation;
Managing Director, Container Corporation of India; Director
Finance, Mumbai Rail Vikas Corporation; Managing Director,
Pipavav Railway Corporation; Director Operations, Rail Vikas
Nigam Ltd; Group General Manager, Mumbai, Indian Railway
Catering and Tourism Corporation; Chief Executive Officer,
Hassan Rail Development Company; Advisor Transport
Planning, Planning Commission; Managing Director, Bangalore
Metro; Managing Director, Karnataka Urban Infrastructure
Development Finance Corporation; and Managing Director,
Infrastructure Development Corporation Karnataka Ltd.
27 There were 13 bond issues – two public bonds and 11 on private
placements. One private placement was through ILFS through
asset leasing.
28 The IR network is divided into 16 regional units known as zones.
Each zone has 3 to 5 divisions.
29 Popularly known as the KRCL model.
30 During the last three financial years (2003-04, 2004-05, 2005-
06), the Operating Ratio was 79.6%, 76.6%, 65% as against IR’s
corresponding figures of 92.1%, 90.9%, 83.7%. Source:Annual
Financial Statements of KRCL and IR.
31 Four have been set up at their Dadri ICD, each costing Rs 160-
200 million, funded through 2:1 debt equity ratio.
32 In 2006, MOR registered 14 private firms including CONCOR
for giving container licences and the concession agreements were
signed on January 4, 2007. Till November, eight of them had
already started running a total of 31 container trains transporting
about 0.25 million tons of goods every month.
33 On a gross turnover of Rs 2.67 billion. Source: IRCTC’s audited
financial results for year ending 31st March 2006.
34 As stated by Mr Vinod Asthana, Group General Manager,
IRCTC Mumbai on 8 Feb 2005 in an interview – seven to eight
thousand tickets are sold every day through these arrangements,
bringing in about Rs 10 million a day. However, as of December
2007, about 18 lakh bookings were made for an aggregate of
Rs 170 crore. Source: Company website, bank statements.
35 The existing revenue apportionment formula among zonal
railways is based on a system in which revenue is shared in
proportion to the distance travelled by the goods in a zonal
railway subject to special weightages to loading, unloading and
certain other parameters.
36 Views expressed by the MDs of PRCL and HMRDC during
interviews on 26 Apr 2005 and 15 Feb 2005 respectively.
37 Views expressed by the MD of PRCL during interview on 26
Apr 2005.
38 Thirty four projects on the Golden Quadrilateral, 22 port
connectivity projects and 4 mega bridges.
39 As stated by the Chief Executive Officer, HMRDC on 18 January
2008 in a telephonic interview.
40 As stated by the MD, IDeCK in an interview on 15 Feb 2005.
41 Thillai Rajan, Observations on Project Structures for Privately
Funded Infrastructure Projects.
42 Agarwal, Rajesh, 2005, ‘Railways’ Uneconomic Branch Lines:
Potential and Possibilities’, a dissertation work in partial
fulfillment of PGPPM course at IIM Bangalore, 2004-06.
43 Thillai Rajan, Observations on Project Structures for Privately
Funded Infrastructure Projects.
44 Supplementary Rail Budget 2006 presented in the winter session
of Parliament and subsequent press releases from Railway Board.
45 As stated by Mr E Sreedharan, MD, Delhi Metro, in an interview
on 21 Apr 2005.
46 Least Present Value of Revenue.
47 Mukhopadhyay, Partha, 2005, ‘Are Old Shoes Always
Comfortable?’, Conference on Policy and Practice: Designing
and Promoting Effective Institutions, Sep 2005, IIM Bangalore.
48 As stated during interviews by MD, IDeCK on 15 Feb 2005;
Sector Head, Transport, IDFC on 8 Feb 2005 and Officer on
Special Duty, Bangalore Metro on 24 Feb 2005.
49 RailTel Corporation of India Limited for the telecommunication
segment, IRFC for the financing segment, and CRIS for

Reprint No 08101
Anil Kumar Gupta is Director, Public Private Partnership (Civil)
in the Ministry of Railways (Railway Board), New Delhi.
anilk04@gmail.com
Shyamal Roy is Professor, Economics and Social Science,
and Dean (Academic), Indian Institute of Management
Bangalore. sroy@iimb.ernet.in
Information Systems.
50 Hanss, W G, 2001, ‘Overcoming Competitive Disadvantages of
Public Enterprises by Public-Private Partnerships and their
Financing Models’, Annals of Public and Cooperative
Economics, Vol 72, No 3, pp 393-411.
51 The findings from the interviews indicate that the separation of
the accounts for infrastructure, passenger services and freight
services is the most important reform required on IR.Aconsultant
has already been appointed by IR for advising it on accounting
reforms.

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