India Law Journal

Introduction

The most publicized success story in recent times has been that of the Indian Railways. In 2001 the Indian Railways was marching towards bankruptcy. But now it has morphed itself from a chronic money drain into what may possibly be the most profitable railway network in the world. With an inventive script written by the hon’ble Railway Minister Mr. Lalu Prasad Yadav for this success story which has also made it to the course curriculum of the Indian Institute of Management (IIM) and Harvard Business School in the form of a case-study, the Indian Railways is a far-cry from its erstwhile days of being a heavily subsidized venture and has dramatically transformed itself into the second most profitable state-owned enterprise after the Oil and Natural Gas Corporation( ONGC ).

In its bid to take this success story forward, the Railway Ministry has elaborate plans in place for increasing the length of the railway lines across the country and dabbling with newer avenues which includes optimal utilization of empty land around railway stations, using taller freight cars enabling the carriage of larger loads, increasing train speeds, reducing unit costs, and most significantly, combining the private and public sectors to optimize the moneymaking potential of the railways. The plans are awe-inspiring but for the successful execution of the said plans the dependence on infrastructure cannot be over-emphasized. World Bank estimates reflect the fact that some US$425 billion must be invested in infrastructure development to keep up with the country’s current level of growth. The global view about India is that it is infrastructure or the lack of it which is impeding India’s economic growth and denting India’s stake as a competitive global entity.

This quest for infrastructure development has sown the seeds for the establishment of Public Private Partnerships (PPPs) in state owned enterprises as it has been rightly understood that the public sector alone cannot carry the burden of US$60 billion which is the estimate of funds which will be required to keep India afloat with its needs for infrastructure as per a report of the Asian Development Bank. These Public Private Partnerships can present the railways with a new lease of life towards its mission of transforming itself into a perennial moneymaker.

Public-Private Partnership

PPP Project means a long term project based on a contract or concession agreement, between the Government or s statutory entity on one side and a private sector company on the other side, for delivering an infrastructure service on payment of user charges. Typically, a private sector consortium forms a special company called a special purpose vehicle (SPV) to build and maintain the asset. The consortium is usually made up of a building contractor, a maintenance company and a bank lender. It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it.

Risk sharing is one of the most important features of a PPP. The PPPs is most likely to succeed incorporate a risk mitigation framework that apportions risk in terms of capacity to bear. The risk mitigation framework is addressed through a bankable concession agreement that clearly delineates project risks and responsibilities. In India, the Noida Toll Bridge was the first successful example of a Public Private Partnership.

PPP and the Indian Railways

Between 2007 and 2015, Indian Railways plans to invest US$81 billion in its infrastructure with more concentration on increasing train freight to maximize its potentiality of being an efficient moneymaker. The increased containerization of cargo is also driving demand for train transport. Until recently, the movement of containers was monopolized by a public sector entity, CONCOR. Last year a major regulatory roadblock to private participation was overcome when container movement was thrown open to competition. Private sector companies were finally given the green signal to own and operate container trains thereby leading to increased capacity and increased rolling stock requirements. The Indian Railways plans to fill this vacuum by setting up new manufacturing units for diesel and electric locomotives, coaches and wheels.

The mammoth financial requirements of mega-budget investments like increasing the manufacturing production and up gradation of operations is far from the reach of the financial capacity of the public sector. Hence, the Railway Ministry is creating a business environment conducive for private sector involvement in manufacturing new rolling stock thus opening a whole new avenue for investors. The Government is adopting a very measured policy in this direction and has already implemented the enabling policy and has created a regulatory framework with the hope of attracting investments in the form of Public Private Partnerships (PPPs) with sound financial and fiscal support.

While presenting the annual Railway Budget on February 26, 2008 the Railway Minster Shri Lalu Prasad Yadav cleared the cloud of suspicion over the involvement of Public Private Partnerships (PPPs) in the Indian Railways and made the Government’s stand crystal clear. Although no new laws have been passed in regards to the Public Private Partnerships (PPPs) for the railways, there is a Cabinet Note which is pending approval. The Ministry has however completed the groundwork by framing the requisite model concession agreements, joint venture agreements and all other legal documentation.

The Ministry is also in the process of considering and putting into place a dependable machinery to develop Public Private Partnerships (PPPs) which includes lease service agreements, build-operate-transfer (BOT), straight licensing and build-operate-own-transfer (BOOT). The effective functioning and subsequent success of Public Private Partnerships (PPPs) depends on the following factors:-

The concept of Public Private Partnerships (PPPs) has also led to certain misgivings among the public about job-losses and has hence has triggered off an intense public debate. But the Ministry has cleared the air on this issue and has categorically assured the public of there being no job-losses thereby assuaging their fears.

The initial strategy the Indian Railways plans is to follow is to utilize Public Private Partnerships (PPPs) to build world-class railway stations, provide facilities for the manufacture of diesel and electric locomotives , coaches and wheels. These initial steps will open an entirely new horizon for investments. The Indian Railways is also foraying into medical services with elaborate plans in place for setting up five super specialty hospitals in Mumbai, Delhi, Howrah, Patna and Chennai by using the Public Private Partnership (PPP) model. The lands have already been identified at the respective railway stations and talks are in progress with medicare majors like Fortis, Apollo and Max for establishing these hospitals.

Legal matters involved in a PPP

This partnership is primarily governed by the Indian Contract Act, 1872 and the Indian Partnership Act, 1932. The advent of Public Private Partnerships (PPPs) in the railways also leads to certain legal questions being raised. One of the most fundamental questions being raised is that Public Private Partnerships (PPPs) are forbidden in certain core areas which hint at a legislative change being on the anvil. PricewaterhouseCoopers (PwC), a renowned professional consultancy company and Singhania & Partners, a distinguished legal firm are handling the financial and legal nitty-gritty’s respectively.

These firms are currently in the course of preparing the details of the structure for some of the projects which includes the procedure of the entire bidding process, ownership shares, management, etc which will lay a foundation for future projects of a similar nature. The primary focus of the two firms is on the work related to the establishment of new mainline factories (NMF) and identifying and acknowledging the legal issues that can impact the said ventures, reviewing and preparing the requisite project and transaction documentation, conducting legal vetting, providing valuable advice legal questions in the management of the bidding process collection of significant legal data needed for the successful development of the factories and creation of inventive strategies to manage the bids and pick competent developers for the new factories.

The project is highly multi-dimensional and a plethora of issues like figuring out the most efficient Public Private Partnership (PPP) model, analyzing the contents of the bidding documents and coming to a common and profitable consensus with the successful bidder need to be addressed. While the feasibility of each model is being microscopically examined by the Government, the structure and breakdown of equity participation has not yet been finalized. There are certain other key factors like clear Government commitment, legal and bureaucratic transparency, cost recovery tariffs, the ever-increasing competition from other transportation sectors, which have to be measured out in great detail before signaling a go-ahead to the said ventures as a failure on these fronts can critically damage the partnership and its sustainability in the long run.

The Government can assume a more traditional role by handling land acquisitions, seeing environmental clearances through, looking after necessary legislative changes and in general simplifying the cumbersome procedural requirements. The Public Private Partnership (PPP) framework can also pave the way for greater transparency and accountability with reduced transaction costs. The Government should create legally and ethically acceptable concession agreements which will minimize the risk factor thereby creating a win-win situation for both public and private stakeholders.

PPP- a win-win situation for both

Private operators have been allowed to operate Container Services on Indian Railways. Agreements setting out the terms of such operation have been signed with 15 private operators.

Areas like freight terminals, multi modal Logistics Park, warehouses, ICDs etc. also offer promising possibilities for private investment. Railways could provide land on lease to the private firm for such projects under mutually agreed terms of concession. In addition, Ministry of Railways intends to partner with State Governments, private logistics operators and infrastructure providers to establish multi modal logistic parks equipped with rail sidings with sheds, large inland container depots, warehouses for storage, and office buildings for logistics operators, highway connectivity, and assembly units for processing imported raw materials for export. Such parks could either be built independently at strategic locations or could be built in Special Economic Zones (SEZs).

Conclusion

There are certain elementary hindrances common to all fresh ventures like improper communication which can increase expenses astronomically, lack of transparency, sub-standard contracts, etc which need to be successfully combated. Also a situation of misunderstanding may arise where the Government may expect its private sector partners to bear the entire risk-load. To avoid the creation of such a circumstance, the partners should ensure unmistakable interaction with the Government. All the required benchmarks and expectations should be spelt out in clear terms. Latitude for changes should be clearly set out to ensure maximum transparency.

This first foray into Public Private Partnerships (PPPs) will act as a litmus test for many such ventures in the future. The Public Private Partnership (PPP) model may emerge as the most sought after option for Indian Railways and many infrastructure-driven state owned enterprises-to meet its growth challenges. __________________________________________________________________
VINEET UNNIKRISHNAN is a 3rd year student pursuing B.Com LL.B (Hons) from Gujarat National Law School, Gandhinagar (Ahmedabad).