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Last Updated : Feb 25, 2016 05:11 PM IST | Source: CNBC-TV18

Rail Budget 2016: This is how Suresh Prabhu will fund Railways

Railway Minister Suresh Prabhu today announced a large investment plan in Rail Budget 2016-17 that led many experts to question how the Railways will be able to tie up finances.

Railway Minister Suresh Prabhu today announced a large investment plan in Rail Budget 2016-17 that led many experts to question how the Railways will be able to tie up finances.

For instance, while the minister said Railways will have Gross Budgetary Support of Rs 40,000 crore, he said capital investment would be to the tune of Rs 1.21 lakh crore.

But not everyone is pessimistic on the Railways' funding plan.

"The Railways can raise funds through masala bonds, state funding, public private partnership, institutional funding and augmenting non-tariff revenue," said Jaijit Bhattacharya, Partner - Government Advisory, KPMG.

One of the key highlights of the Budget was the announcement to set up a Rail Development Authority, Bhattacharya. "It suggested the authority will have more freedom to decide on fare pricing."

Below is the transcript of Jaijit Bhattacharya’s interview with Surabhi Upadhyay on CNBC-TV18.

Q: Some of the criticism is very evident in the numbers. I just want to go over some of the numbers for our viewer’s benefit. Plan expenditures for FY16 has come down by 18 percent from Rs 1 lakh crore, it is down to Rs 82,100 crore odd, there is no denying that. Also, on the receipt side, whether you are looking at passenger receipts, whether you are looking at freight receipts, there is a growth of just 4-5 percent. Then targeting a growth of 10 percent for FY17, how much of this is realistic and how do you sum up the railways finances for FY16?

A: All the points that you mentioned are definitely points of concern. The passenger receipts increasing by just 4-5 percent and total number of passengers falling down is a matter of concern. The first issue that you mentioned in terms of planned expenditure, that is not necessarily an issue in terms of not being able to get the funding, but it is more of the capacity of the railways to execute. Do keep in mind that they jacked up the capital expenditure by 50 percent which is audacious. So, slipping up on a target which was increased on a 50 percent, I do not think it is too much of a concern in that reason because, it takes time to build up the capacity to execute.

I strongly believe that moving forward in the current financial year, the railways would be able to execute the kind of targets that they are putting in. So, the Rs 1,25,000 crore of capital expenditure that they are targeting, I am confident that they will be able to reach near about the target to execute.

The question is that how will they really tie up the finances, where will the source of finances be? And those details need to be looked at. Obviously, in a 40 minute speech, it is difficult to get into all of those details, but I do hope that the finances are tied up. There were a few innovative mechanisms of financing that was mentioned. The minister talked about rupee bonds, essentially, the masala bonds of institutional financing. They talked about funding from LIC and so on and so forth. I do hope that that part is taken care of.

And if the financing is taken of, I am pretty confident that the rest of the story does make sense. And, the good part that we saw in this Budget was, it was more driven by policies. There was no announcement of trains going from one random place to some other random place. It talked about policies of how new kinds of trains will be there, what their speed limits will be, what the philosophies of each of those trains will be. There definitely again, was an issue that some of those trains where, it looked like repackaged existing product. But, I am sure there are more details to it than are expressed in the short period of time that the Budget speech talked about.

But, coming back to my point, there was a lot of policies that was being talked about. And that puts in the fundamentals and the basis for moving forward and for transforming the railways. Another important aspect that we noticed overall as the flavour of the Budget, is that it looked at changing the entire railways or transforming the railways into a modern railways and not doing it at one shot, but putting in the bases for making those changes.

Talking about bullet train, per se, it will not have a financial return on the investment, but it does have a very considerable economic return on the investment.

Q: You seem to be sounding a little bit more optimistic about meeting this funding requirement of Rs 1,21,000 crore for FY17, Rs 40,000 crore is coming in as part of the gross budgetary support. Rs 20,000 crore is supposed to be market borrowing. Where else do you think the railways would turn to, they were looking at Japanese investment for the current financial year, where else could they turn to get the money because money is what is going to drive a lot of this. The minister spoke about partnerships with states for instance to upgrade suburban railway network. But again where will the money come from?

A: As you rightly said there is partnership from the states, there is PPP, there is a masala bond, there is institutional funding, there is also a significant amount of non-tariff revenues that can potentially come in. To give you an example right now the advertising revenues for railways is roughly around Rs 350 crore. It can easily increase to Rs 9,500 crore approximately, that is a significant amount of funding. That is almost 10 percent of the total capex.

If you look at some of these other avenues I hope we can cover up. Again without having the absolute details I can\\'t be completely confident about how we can tie up these resources but it seems possible, it seems like a plausible Budget in that sense. So, I won\\'t be too much worried.

If you look at the Japanese funding that has been promised for the high speed rail which is the bullet train that is about 50 percent of the Rs 98,000 crore that has been envisioned for that particular project and that too at 0.1 percent. Yes, there are tied up clauses and I am not going to those details but funding is available.

Q: The talk of the independent tariff regulator. The hint seems to be that the railway is going to move towards dynamic pricing for both freight and perhaps even for passenger trains at least for some extent. What are the other big takeaways for your from the Budget. Were you satisfied with whatever was announced in terms of progress for let us say the dedicated freight corridors, what about freight because freight has not been generating the kind of revenue that it needs to generate for Indian railways?

A: Let me just touch upon the independent railway authority. The other takeaway from that particular step is that possibly the railways is looking at more private players coming in because as long as the railways per se was controlling the fares it will be difficult for a private player to operate in that environment. If there is an independent rail authority then there is a possibility of private players finding it more attractive to get into this market and running trains based on an independent pricing authority.

Having said that the other key takeaways that I look at is a large infusion of technology being brought in. And technology not just in terms of ICT which is SMSs and on demand complaint of toilets being cleaned up and so on but also non-ICD technology such as the bio-toilets, heavy axel wagons that are being proposed which will increase the carrying capacity of the railways and also the signalling improvements and so on which will lead to densification of traffic and therefore a higher utilisation of the existing assets.

This will hopefully therefore lead to a larger amount of revenue coming in which connects back to your question about how do we generate more revenues from freight. If you are able to use our existing rolling stock in a more efficient manner then there is possibility of improving freight load on the railways.

Also the common complaint that you will hear from the users of freight on railways is that it is not really user friendly. It takes a lot of effort to be able to deal with railways to get the freight from point A to point B and neither point A nor point B is a door to door delivery. So, if the railways can move ahead and have a complete freight experience from door to door that will lead to a lot of freight shifting back to railways.

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First Published on Feb 25, 2016 04:38 pm
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