Modi govt's plan to allow 100% FDI in rail infra picks up pace; but investors in wait-and-watch mode

A week before retiring as Railway Board chairman on December 31, Arunendra Kumar conceded that foreign investors were not gung-ho over pouring money into the Indian Railways (IR).

The fear that the Railways may tweak the rulebook somewhere down the line still looms large in the minds of potential investors even as the August 26 order allowing 100% foreign direct investment (FDI) in most rail infrastructure states the fineprint in clear terms.

But Kumar, who had a 38-year-long innings in the Railways, claims he knows a trick or two to attract FDI into this mammoth sarkari department (which houses a 1.4 million workforce and where decisions are taken in various complex pathways of a bureaucratic maze).

Finding the first investor, and ensuring he remains a blissful one, is crucial, reckons Kumar. “Finding Columbus [who discovered America] and taking care of him well will be the key to the success of FDI story in Indian Railways. Other investors will follow him.”

On paper, the IR is now fully opened up. A foreign player can invest up to 100% in most segments of rail infrastructure such as suburban rail, metro rail, locomotive and rolling stock and dedicated freight lines.

In high-speed rail projects — informally called bullet trains — a foreign player is now allowed to run a parallel and fully privatised railway company, completely detached from the existing IR network.

The Reserve Bank of India notified the new rules last month and foreign corporations such as Bombardier, GE, Alstom, Siemens, EMD, Mitsubishi, Toshiba and Mitsui are expected to bring in both the money and state-of-the-art technology.

Chugging Along

Despite protests and apprehensions, the IR has little choice but to woo foreign investors as it currently lacks both resources and new technology to undertake expansion or modernisation programmes.

According to the last Railway budget presented in July after the Narendra Modi-led government came into power, gross traffic receipts in 2013-14 stood at Rs 1,39,558 crore but the operating ratio was high at 94%; in other words, for every Rs 100 that the Railways earns, it spends Rs 94 for day-to-day expenses leaving only Rs 6 for investment.

What has rattled the government further is the reality that the IR’s operating ratio has remained above 90% for six consecutive years. The IR’s best-ever operating ratio was 74.7% achieved way back in 1963-64.

“The Indian Railways has now no option but to take the FDI route to become more competitive with the high-cost highway sector. Attracting FDI is highly desirable, but the success of the FDI story will depend on how much freedom the private players get to fix tariffs and market their products,” says Ajay Dua, former secretary, ministry of industry and commerce.

Dua recounts how, in a pre-feasibility study in 2005, Japan International Cooperation Agency and RITES, a state-owned engineering consultancy, pegged the fare between Mumbai and Ahmedabad in a highspeed train at about Rs 2,100.

The Railways then was reluctant to give a go-ahead, arguing that it would be difficult to find customers at such a high rates. Being a secretary, Dua was privy to that development.

“Now, I suspect, the fare for one trip between Mumbai and Ahmedabad could be as high as Rs 14,000. The feasibility report [expected to be completed in next six months] will arrive at a more exact figure. I don’t think FDI will rush into areas as high-speed rail, even though theoretically it may have opened up to foreign investors,” he says.

In Wait-and-watch Mode

Bringing in FDI, and investing in large manufacturing facilities in anticipation of bulk IR orders, is clearly a gamble. Most investors would prefer to wait for bidding to begin and win contracts before investing in factories.

Take, for example, Canadian multinational Bombardier, which invested €33 million (roughly Rs 240 crore) six years ago to set up a rail vehicles production site at Savli in Gujarat, mainly to supply rolling stock for metro rail. “We are exporting 450 metro cars to the Australian market from this Gujarat facility.

Let us get an order from the Indian Railways, we will immediately expand the facility,” says Harsh Dhingra, chief country representative, Bombardier. Dhingra explains that the IR must focus on wooing foreign investors to the low hanging fruit before getting ambitious with big-ticket bullet train projects.

“Two projects where FDI can come in right away are in the electric loco factory in Madhepura and the diesel locomotive factory in Marhowrah, both in Bihar.

But the bidding has to take place,” Dhingra adds. The IR had short-listed four multinationals — Bombardier, Siemens, Alstom and General Electric — but the companies have been waiting for the request for proposal (RFP) documents for the last eight months.

Though a section of the workforce and trade unions in particular has expressed their concern over FDI in rail infrastructure, fearing that this could be the first step towards privatisation, there has not been any serious resistance.

In fact, the bigger challenge is emanating from the investors themselves Sample this: RR Jaruhar, former member (engineering) of Railway Board along with his fellow members of a government-appointed panel, were confronted with a volley of uncomfortable questions a few months ago when they had interacted with investors, both Indian and foreign, when preparing a report on mobilisation of extra-budgetary resources for implementation of rail projects.