Pipavav Railway CorporationA Case Study on A PPP Project in India Ranjan Kumar Jain United Nations Economic and Social Commission for Asia and the Pacific Asian Institute of Transport Development November 2008 Pipavav Railway Corporation – Brief History Case Study 1.1 Location Port Pipavav is located at Latitude 20 54 N and Longitude 71 30 E on the west coast of India, in the state of Gujarat. For decades the port was functioning as an anchorage serving the then existing minor Port called Port Albert Victor . It is protected by islands on either side, which act as a natural breakwater making the port safe in all weather conditions. The presence of these islands also leads to the tranquility in the harbour as well as ensures the wave height is less than 0.5m most of the time. 1.2 Background In 1992, it was decided to develop the port as an all weather facility for handling bulk, liquid and container cargo. A private limited company called Gujarat Pipavav Port Limited (GPPL) was incorporated as a joint venture between Sea King Infrastructure Limited and Gujarat Maritime Board, a state owned organization. General cargo handling operations at the Port commenced in November 1996 followed by container handling operations in 1998. Presently, the container terminal offers direct services to Europe, US East Coast, China and the Far East. Port Pipavav is today recognized as one of the principal gateways on the West Coast of India. 1 Pipavav Railway Corporation Limited. A memorandum of understanding (MoU) between Ministry of Railways and Gujarat Pipavav Port Limited was signed on 28 January 2000. With available draft of 13. the Ministry of Railways launched a programme for undertaking rail projects through public private partnership. Detailed feasibility studies and traffic projections established the financial viability of the proposed project. Moller Maersk. The port is being developed for handling 19 million tonnes of cargo per annum including 13 million tonnes of containerized cargo. However. 1. GPPL proposed a joint venture with the Ministry of Railways to undertake the rail connectivity project which would include provision of a rail link of 18 km and conversion of the existing metre gauge line.The original shareholding pattern of GPPL has since undergone a change. Gujarat Pipavav Port Limited. the Port could not be adequately developed.P. there was no rail connection to the port. APM Terminals is making an investment of US$ 245 million to develop the facilities. As a follow up. The above was followed by a host of agreements between various stakeholders – Ministry of Railways. The nearest railhead was located at a distance of 18 km on the Rajula Surendranagar metre gauge line of Western Railway. A Shareholders Agreement between MOR and GPPL was signed on 28 March 2001. Based on the techno economic studies. Pipavav Railway Corporation Limited was incorporated in May 2000 as a joint venture with equal participation between the Indian Railways and the Gujarat Pipavav Port Limited. preferably a broad gauge rail link. beyond which the broad gauge rail network was available. Indian Railways had earlier sanctioned a project to convert the existing Rajula Surendranagar metre gauge line into broad gauge as a part of the railways’ long term plans for broad gauge network on the entire system. a business plan of the proposed joint venture was prepared by financial consultants engaged by GPPL. A. Concession and Lease Agreements between MOR and PRCL on 28 June 2001. In the meanwhile. financial constraints had prevented its timely execution. Moller Maersk has replaced Sea King Infrastructure Limited and holds 50 percent share in the company. 2 . a subsidiary of A. who then obtained formal approval of the Government of India. The management control now vests with APM Terminals. In 1998.P. In the absence of a rail connection. This plan was reviewed in the Ministry of Railways.3 Connectivity Initially. the port is also able to handle Post Panamax vessels. hence its keenness for a proper rail connectivity. Western Railway (a constituent of Indian Railways).5 metres. the President of India through the Ministry of Railways is the ‘Licensor” and PRCL is the “Concessionaire” for the project. Transportation and Traffic Guarantee Agreement: Under this agreement. The Transportation and Traffic Guarantee Agreement was signed between GPPL. the railways would pay to PRCL the apportioned revenue derived from the freight moved on the rail line after deducting the operational expenses. The concession period is for 33 years and permits PRCL to own and operate the project line both for freight and passenger operations.The Construction Agreement for the project between PRCL and Western Railway was signed on 13 March 2002. Agreement Parties to Agreement th Date 1 2 3 4 5 6 7 8 MOR & GPPL MOR (GOI) & PRCL MOR (GOI) & PRCL PRCL & Western Railway (GOI) Memorandum & Articles of PRCL Association of PRCL Operation & Maintenance PRCL & WR (GOI) Agreement Transportation & Traffic GPPL. WR guarantees evacuation of traffic from the port by timely supply of wagons. since there is a heavy subsidy component in the fare structure. and GPPL guarantees traffic of 1 MT in the first year. WR and PRCL Guarantee Agreement Shareholders Agreement MOR & GPPL MoU for formation of SPV Concession Agreement Lease Agreement Construction Agreement 20 January 2000 28th June 2001 28th June 2001 13th March 2002 17th April 2002 January 2003 February 2003 28th March 2001 The Concession Agreement: Under this agreement. Construction Agreement: This agreement enjoins upon Western Railway to design and construct the railway line with the SPV procuring and supplying the construction materials. The revenue derived from passenger services is not apportioned. Failure on the part of either party attracts penalties. 3 . The specifications and standards laid down by the Ministry of Railways were to be followed. Table 1: Contractual Agreements Sl. 2 MT in the second year and 3 MT in the third and each of the subsequent years. In turn. It enjoins upon the SPV to pay lease rent of Rs. Shortfalls in offering of traffic on the part of GPPL or its evacuation by the railways is be converted into ‘deemed traffic’ and proportionate revenue is to be credited to PRCL as compensation. 2 crore (20 million) per year to the Ministry of Railways for the use of land and other assets. followed by Operation and Maintenance Agreement in January 2003. The table below shows the various contractual agreements and the dates of their execution between different parties. PRCL and Western Railway in February 2003. No. To mobilize funds for the project through equity and debt. v. Set up time schedules for activities of suppliers and construction agency. To set up state of art operating and commercial practices and to benchmark them to best practices. iv. Set up accounting and commercial procedures for the project implementation as well as day to day business. Arrange supply of Rail construction material at sites. This was mainly due to the fact that PRCL was the first joint venture under the Ministry of Railways and all agreements had to be evolved ab initio. There was also the usual bureaucratic zeal observed for safeguarding the interests of the government. To ensure against time and cost overruns. Draw up contracts and agreements with supply agencies.Operations and Maintenance Agreement: It lays down the process. Furthermore. with a mindset not fully attuned to the new paradigm of public private partnership. vi. procedure and accountal of operating and maintenance practices to be followed by Western Railway and the SPV. 4 . all agreements had to be vetted by the Ministry of Law. for the benefit of the line staff. After the execution of the above mentioned agreements. etc. To construct a 270 km long rail line to connect Port of Pipavav with the IR network in one year. Government of India. and norms along with vii. laying down the method of calculation. ii. unit cost of operation and maintenance. To establish maintenance and repair standardization of unit costs for them. iii.4 Objectives of JV The first Joint Venture rail project in India that this project emerged under PPP had the following objectives: i. To develop a business plan and establish revenue streams to cater to debt servicing. iii. a detailed procedure order was framed by the Western Railway with the concurrence of SPV. The implementation process involved: i. ii. It would be seen that there was a considerable time lag from the conceptualization of the project to the execution of various contractual agreements specifying the roles and responsibilities of the concerned stakeholders. 1. Set up an organization to supervise and monitor construction work and procurement of materials.400 coaching vehicles and 210. Ministry of Railways: Railways are a fullfledged Ministry with a Minister of Cabinet rank holding charge. It moves over 17 million passengers and 2. Amreli and Bhavnagar districts in Gujarat. liquid 5 .300 locomotives. of India) and GPPL. Level crossing gates are inter locked by signalling with adjoining stations. the existing station buildings were utilised and two new stations were built. Gujarat Pipavav Port Limited: Gujarat Pipavav Port Limited (GPPL) is one of the first private sector ports in India. The alignment traverses Surendranagar. A metre gauge (MG) railway line existed between Surendranagar and Rajula Junction. Standard III inter locking is provided with Multi Aspect Colour Light Signals and token less block instruments. one each at Rajula and Pipavav. Project Profile The total length of project line is 268. A new line of 18 km length was constructed between Rajula and Pipavav station. Establish cost structures for activities. The broad gauge rail line (1. 2. the fourth largest railway network in the world.5 million employees running over 8.000 passenger trains and 5. v. as a joint venture between Sea King Infrastructure Limited (SKIL) and Gujarat Maritime Board for developing and operating an all weather port for handling bulk.000 freight wagons. There are 35 railway stations on the rail route from Surendranagar to Pipavav. Indian Railways (IR).676 mm gauge) was constructed fit for a maximum speed of 100 kmph. vi. The port is connected by a four lane highway to National Highway 6. administered by Railway Board.500 freight trains every day.0 million tonnes of goods daily. The project involved construction of 198 bridges: 32 major and 166 minor bridges on the gauge conversion route and 3 major and 16 minor bridges on the new line section between Rajula and Pipavav. 2.iv. IR is fully owned by the Government of India. This stretch was converted to broad gauge. 4. Its rolling stock fleet includes some 8. In the gauge conversion section (between Surendranagar and Rajula). It was incorporated in 1992. Lay down a procurement and supply procedure for the supply of materials. has a route length of 63.1 PRCL’s Promoters PRCL was promoted by the Ministry of Railways (Govt.500 km. IR has 1.84 km. 10% IDFC Private Equity (IDF) 9% The key developments from conceptualisation of Pipavav port to APMT/Maersk taking over its management control have been as follow: 1986 Gujarat Maritime Board (GMB) initiates development of Pipavav Port February 1992 – GMB enters into an MoU with Sea King Infrastructure Ltd.and container cargo at Pipavav. vi.Moeller Maersk Sealand (APMT/Maersk). (IL&FS) ii.P. The cargo handling operations had commenced in 1998. Leasing & Financial Services Ltd. AMP Capital Investors. New York Life International India Fund. v. Nikhil Gandhi 6 . It holds 50. iii. Unit Trust of India (UTI) and Infrastructure. (SKIL) group led by Mr. Industrial Development Bank of India (IDBI).76% shares. GPPL’s shareholding structure in the financial year 2006 was as follows: Figure 1: GPPL Shareholding Structure (FY 2006) UTI 2% Infrastructure Leasing & Financial Services 4% Industrialisation Fund for Developing Countries (IFU) 6% AMP Capital Investors 9% Others 2% New York Life International Fund 8% A. in Amreli district of Gujarat. GPPL’s principal shareholders are: i.P. A. one of the largest port container terminal operators in the world and the largest container shipping line. with around 20% worldwide market share. iv.Moller-Maersk 50% IDBI Bank Ltd. APMT/Maersk is in the process of developing the Pipavav port into a world class port with state of the art container handling facilities and terminal management. 04 crore and debt of Rs.P. Maersk Sealand. The port expansion programme is being taken up in three phases with a capital investment of Rs. Three quay cranes will be installed for container handling facilities in addition to the existing three quay cranes to enhance the container handling capacity to 1 million TEUs. 2006 to increase the draft to 13. 7 .289. GPPL commenced capital dredging project in December 2005 which was completed by April. 1992 – MoU converted into Joint Venture agreement July.5 m to handle post Panamax vessels.3 Shareholders Agreement The basic structure of the company (PRCL) is defined in the Shareholders’ Agreement (SHA).2 Legal Aspects After the agreement to set up the JV Company was finalized. 1997 – Government of Gujarat (GoG) announces BOOT Policy June 1998 – GMB divests its entire equity in favour of SKIL Group July 1998 – GoG declares ‘Model Concession Principles’ for ports September. In addition. 1998 – Lead promoter SKIL licensed to develop. 2. The salient features of the SHA are given in the following table.200 crore. Denmark May.26 crore. A.30 crore which is through equity contribution of Rs. registration with various government revenue agencies like Sales Tax etc were also completed. 2005 – APM Terminals takes full management control of the port GPPL is planning to enhance its cargo handling capacity to 19. the port operator.167. 2.200 crore for port infrastructure development.70 MT of containerised cargo and 5. 2005 – GoG agrees to change the promoters – SKIL group to A. internal accruals of Rs.Moller Maersk group.P. and maintain the port April. 1998 – Concession Agreement based on ‘Model Principles’ signed September.596.June.1.Moller Maersk has committed an investment of Rs. has started dedicated weekly service between Pipavav and Salalah (Oman) and Jebel Ali (United Arab Emirates).56 MT of bulk cargo. Memorandum of Articles of Association. the other formalities like registration of the Company.1. which has contributed to increase in container throughput at Pipavav port. operate. including 13.16 MT by 2009 10. the structure of the Company and roles and responsibilities of the Shareholders was defined in the Shareholders Agreement. MOR Scope of Business Share Capital Management of the A Board of Directors will be responsible for management.300 crore). c. Shareholding pattern: GPPL 50% and MOR 50%. etc. Board of Directors. winding up. Each Director has one vote. e.Table 2: Salient Features of Shareholders Agreement Shareholder Warranties GPPL Has necessary licences approvals and consents to carry out its obligations under the agreement. f. 2. CEO will be ex officio Director on the Board. b. Expenses incurred by MOR and GPPL on project execution will be adjusted against their equity. direction and control of the Company. All works of gauge conversion and additional new line from Rajula to Pipavav. All the actions taken by MOR as a shareholder will be commercial acts and not ‘sovereign’ acts. Chairman 8 .. (This was subsequently raised to Rs. Sale or disposal of assets (more than 10% of gross assets). Guarantees minimum annual aggregate quantity of cargo of 1. Meeting of Board. A shareholder can nominate one Director for each 8% shareholding. amendment to Articles of Association. MOR will nominate a working officer of railways till its shareholding remains at least 26%. Merger. Formation of Subsidiary or any Joint Venture. CEO to be a professional from open market. Will provide required wagons to move the guaranteed traffic. A minimum of four and maximum 12 members. Authorised capital of PRCL was Rs. PRCL to perform marketing efforts and collect through MOR all the revenues generated from the facilities created. Company. A management team under a CEO will carry out day to day business. 5 crore. MOR through WR to operate and maintain the assets created. and 3 MT in the first three years and 3 MT annually for subsequent years till concession period. d. Deviation from last approved business plan and budget beyond 15% of each line item. bankruptcy. Commencement of new line of business or change in its nature. Affirmative vote of at least one nominee Director of each party required for making decisions concerning: a. b. The Construction Phase was divided into the following main activities: Procurement of material by PRCL Transportation to sites by PRCL Testing and certification of specifications by WR Labour contracts for track laying and linking by WR Signalling and telecom works. testing and safety certification by WR The main items of procurement were the following: Rails Concrete sleepers Stone ballast Rail switches Rail turnouts and traps CMS rail crossings Glued joints Track fastenings Sleeper fastenings Signalling cables In addition to the above materials. Project Development Phase. were also procured for reducing the man power requirement by mechanization of processes.2. if the WR were to complete the conversion. Construction Phase. c. A Tender Committee was set up 9 . Till then WR had been carrying out preliminary works on the erstwhile sanctioned Railway Gauge Conversion Project which mainly related to the strengthening of bridges and structures for BG trains. Project Development Phase: The gauge conversion of the Surendranagar Rajula MG line was an approved work of the WR to be completed at railways cost. tools and material handling and transportation equipments like motor trolleys. However. Operations Phase. In normal course. etc. station buildings by WR New bridges for the new line between Rajula Pipavav by WR Consolidation of track. Construction Phase: The construction phase started on the date of signing the construction agreement on 13th March 2002.3 Implementation Process There were three phases of the Project: a. It was not coinciding with the port development plans and hence the need for GPPL to contribute to the gauge conversion costs. it could take anything between 10 15 years. it was not a priority line and therefore annual fund allocations were very meagre. road trucks and rail grinding and drilling machines. 2002. Railways provided the BFR rakes at Bhilai which were closely monitored. stone ballast. Orders were placed and PRCL Board was apprised of the progress periodically. In the case of ballast. The gauge conversion works and construction of new line between Rajula City and 10 . track and sleeper fastenings and signalling cables. The major item for transportation was rails which required two stage movements: from Bhilai to Sabarmati and then to designated sites. To save time. Since Bhilai Steel Plant and IR had initially regretted to supply rails. Labour contracts for track laying and signalling and telecom works were fixed by WR including station buildings and staff quarters. To reduce the costs of rails. By July 2002. All orders were supplied in time. production of samples by the mills and their testing as per IR standards. Testing and certification of specifications by WR: A team of engineers of WR was formed to be available at sites at the time of arrival of consignments. several laboratories were approved for testing. Ninety five percent of the works of gauge conversion had been completed by July. This process took a long time as it involved inspection of the mills abroad by RDSO teams.e. close circuit MG rakes of BFRs were formed and deployed. PRCL obtained a license under EPCG scheme which saved payment of Central Sales Tax. Orders for 30. These included concrete sleepers. CMS rail crossings. rail turnouts and traps. Transportation to sites by PRCL: Except for rails all the contracts for supply were CIF site. Later. These teams. Incentives were given to suppliers for supplies made before time. Railways agreed to release the supply of entire requirement from Bhilai. glued joints. i. rail switches. Orders for other materials were placed in May June 2002 for supplies to be made between September and December 2002. Placement of Orders: A strategy of splitting the orders for the same item among several suppliers was adopted. A monitoring team was in position in PRCL office to watch day to day arrival of different materials at various sites and a team of supply ‘chasers’ was deployed at important suppliers’ locations. For transportation to sites from Sabarmati. by the end of December 2002 at Sabarmati.. 65% of works on the new line had been completed. kept WR informed of the arrival dates to ensure inspection and certification. This was done.000 mt of rails were placed on SAIL in September 2002 with stipulated supply within 3 months. working in tandem.with Directors of PRCL Board representing MOR. GPPL and the CEO of PRCL to finalise procurements. MOR was requested for a loan of 5000 mt to be replaced later by PRCL supplies. international bids were called for. Testing and consolidation of track was completed by the end of March 2003 and. after testing. etc. manual drilling. 2002. This resulted in cutting down manpower requirements by half of what obtains on IR system. Maintenance was mechanized as far as possible. There was a system of incentives to promote timely supplies.Pipavav was completed in time by the end of Dec. 11 . fixing telephone faults. Against a staff strenghth of about 1. the new PRCL line operates with less than half this number. Table 3: Progress of Works Work March _ April ____ May ____ June ____ July ___ August ____ September October November December January February 2003 2003 March 2003 April May Formation Bridges Land for new line Supplies Rails Sleepers Ballast Points & crossings Fastenings Cables Gauge conversion New line linking Testing Safety Certificate Commissioning Inauguration Innovative features in project implementation Procurement of all the material was done on lines followed by the private sector in getting best prices without compromising on quality. safety certificate was issued by WR.600 persons on the MG line.e. such as carriage of materials. Multitasking of the workforce was introduced to cut out wastage of time in sending different persons for different small tasks like changing electric bulbs. Suitable tools and machines were given to the staff on line to do away with wasteful practices. A detailed study was conducted to fix these norms.f. Staffing the line operations and maintenance functions was benchmarked to best practices and norms of manning. approximating 800. The line was opened to freight traffic w. This was ensured by first technically qualifying the best supplier and then negotiating on prices. 31st March 2003. etc. servicing of which was not MOR’s responsibility. The remaining funds came from other partner and through debt from open market. This would not have been possible without the JV arranagement. With the JV arrangement. were outsourced. Port connectivity cost to GPPL was only Rs. MOR recovered the total contribution made for the project in less than three years. they would have had to construct the entire line at their expense as a private siding. Gains to MOR: It would have completed the gauge conversion at its own cost in due course of time as it was an approved work included in WR’s works programme. 98 crore which MOR contributed as equity. Port got traffic clearance guarantee from MOR. MOR got a guarantee of 6 MT of traffic in the first three years and thereafter a guarantee of 3 MT every year. The WR would have incurred an expenditure of over Rs. much before port was ready for producing guaranteed traffic volumes of 3 MT. Gains to GPPL GPPL got rail connectivity to the port in time – in fact. Early connectivity enhanced the share value of GPPL. 12 . 3. MOR and GPPL have gained substantially by the Joint Venture arrangement of implementation. Thus. Road vehicles were deployed to quickly transport maintenance materials and staff to sites instead of waiting for passenger trains. namely. MOR was losing Rs. etc. 20 crore per year on operating this un economical branch line. 98 crore. 60 crore. Land acquisition for new line was expedited as it was done by WR as an agency of GOI. MOR recovered Rs. Losses of three years would wipe out the cumulative loss of Rs. Otherwise. 400 crore at present day costs. 50 crore as value of released material from the MG line. For a private party. it would have taken much longer. The project was completed in less than 2 years of contributing equity money and started paying revenues to MOR as freight. Strengths of the Project Both shareholders. project was completed with the total expenditure of only Rs. petty repairs to buildings.Periodical tasks like repair of furniture. to Mahua (Rajula Jn. GPPL started pressing for the finalization of the construction agencies. there was need to convert the adjoining links to Bhavnagar (Dhola Jn. 3. During 2001 2002. within one year.2 Signing of Construction Agreement Immediately after signing of the Shareholder and Concession Agreements. most of which were new both to the Railways as well as to the private investor. The work was completed in March 2003. – Bhavnagar). This agreement opened up the Railways responding to the schedules set up by a private entity and deliver. Therefore. Possibility of engaging a private sector contractor was also explored by PRCL. This was a path breaking agreement signed in March 2002. – Mahua). The main features of the agreement which helped were: i. Considering the very tight time schedules of the project completion which was set as December 2002. The Railways wanted the passenger train operations to continue which conflicted with the freight operation requirements of GPPL and costs of implementing with passenger traffic requirements. The Saurashtra region of Gujarat is mainly served by MG passenger services and the gauge conversion of an ‘Island Stretch’ would separate and fragment the MG network. These issues are discussed below. PRCL found that at that time there were few contractors who could take up the work of this magnitude. It was a new concept where Indian Railways agreed to work as a contractor for a Private Sector Company. These conversions had to be financed by WR alone. This process took inordinately long. as against the government procedures which are time consuming. The majority of problems related to the signing of agreements with Railways which involved delays. It was finally decided to entrust the job to WR whose construction organization was already in place. and to Palitana (Sihor Palitana).1 Problems faced in implementation There were problems encountered during the implementation. Main delay was in the signing of construction agreement with the Western Railway which took over one year.3. Planning for these took time and affected the signing of the construction agreement. The costs and time frames quoted were also not favourable. Identify where Indian Railways are weak on project management: Procurement: 13 . discussions were held at different levels to decide upon the modality of choosing a construction agency. WR suggested that procurement of all materials required be done by PRCL which may have more flexibility in finalizing purchase orders and arranging transportation of materials to site. since it was the first joint venture. ii. The line was opened to traffic and formally inaugurated in May 2003. iv. Monitoring Progress: i. No departmental charges to be paid by PRCL but D&G charges to be paid subject to a maximium of 6% of the estimate. Despite all these difficulties. including rails. Central Project Review Board (CPRB) was set up with PRCL & Railway representatives. PRCL had to supply all the materials at site within a period of 4 months if the target of December 2002 was to be met. WR to take written consent of PRCL. ii. v. etc. Bhilai Steel Plant of SAIL (Steel Authority of India Ltd. there were other critical issues of non availability of railway wagons for transporting rails from Bhilai.000 MT of class one rails from Bhilai Steel Plant was initially not accepted. track machines for the newly laid track. 3. fastenings. Other than shortage of materials. Therefore. etc.).PRCL to procure all P Way and signalling & telecom material. ballast. the request of PRCL to the MOR for releasing a quantity of 30.5 million would need prior consent of PRCL Any rail material being disposed by WR would not be credited to project account. they were not able to commit timely supplies to PRCL. Bhilai could not supply rails to any other buyer without the written consent of IR whose own requirements were much more than Bhilai was able to produce. WR to provide progress reports to CPRB and PRCL In case cost increased by more than 10% excluding the works executed already and excluding the cost of material supplied by PRCL. Project completion schedule: WR to try to complete the project by December 2002. turnouts. Same was true of other critical items like points and crossings. Problem was particularly grave for procuring rails of which there was only one supplier in the country. iii. sleepers. vi. Being behind schedule for supplies to Indian Railway. Materials to be inspected by WR WR to provide schedule of supply to PRCL and locations of delivery PRCL to arrange transportation to sites PRCL to arrange welding of rail panels in WR Sabarmati welding plant and bear the cost of augmentation of the welding capacity of the plant. due to pending works of IR itself. 14 .3 Problems in Procurement This was the first big rail project under private sector and most rail project suppliers had committed supplies to IR. namely. Any work constituting material modification and of a value more than Rs 1. concrete sleepers and ballast. Heavy materials like rails. Accordingly. O&M Agreement: The fixing of the elements of fixed costs to be paid to WR for O&M of the line was the main concern. were difficult to transport on the entire length of the alignment by road since the road network did not connect the entire stretch. have three rail panels welded. The plant had limited capacity and was overloaded with the pending work of WR. Help of WR was invaluable in this regard. Rails were supplied in 13 m lengths from the Bhilai Steel Plant and were to be converted into three rail length panels by welding through a special process (flash butt welding) which requires a special set of equipment. The process of redeployment was started early in 2001 and by 2004 it was possible to relocate most of the surplus staff. necessary to increase the capacity of the plant which was done at PRCL cost. In 2002. Other option was to organize welding at a site on the line by using mobile welding plants.173 crore. transport the panels to several sites on the MG rail track. therefore. Funding Arrangements The Project line has been funded through a mix of equity and debt. The total project cost of Rs. This manning norm and practice became a benchmark for WR also for their future projects. It was. ballast and cables. load on rail wagons. At the same time. 4. unload and stack them for laying on the formation.After a protracted process. Each item of maintenance had to be analysed and bench marked with the best practices. orders were placed. unload. tremendous efforts were required to set manning norms at half of what is followed on IR. 373 crore. the MG line had to be kept running till all the P way and other material had reached the designated sites along the 271 km stretch. Considering the importance of the first JV project of MOR and to meet the timeline. the efforts of taking international supplies failed due to non conformity to IR standards and the tender was cancelled. No track work could be done since the MG line was in operation and passenger trains were running. etc. was met by equity of Rs. welding was organized at Sabarmati. There were problems of redeploying surplus staff. Therefore. 15 . Another major concern was carriage of rails from the steel plant to the welding plant and then after welding to several designated sites. The passenger traffic was to remain suspended for more than 6 months for the construction. sleepers. MOR finally agreed to release rails from Bhilai. Help was taken from the Konkan Railway to define the elements and put down norms and unit costs. Options were to first take the rails to Sabarmati in the WR’s flash butt welding plant. 367 crore.196 crore and a debt of Rs. The completion cost was lower at Rs. mobile welding plants were not easily available. Staff costs being the major cost. 00 196. (a) (b) 2. 196 crore on 50 50 basis by the two promoters and the balance by raising debt from the open market.0 27 27 46 100 Equity funding: As discussed earlier.6% 53. 26 crore of its share capital amount.2. However.9% 100. As on date.This amount will be treated as Funded Interest on 16 . GPPL was in default of not paying nearly Rs. The means of finance are given in the table below: Table 5: Means of Finance Sl.0% 95. 98 crore. Until March 2005. the company had renegotiated with the lenders and got a further extension of moratorium period from the lenders till 31st March 2007.. details of which are set out in the table below.66 173. Particular Amount (in crore) % of project cost 1. were required to contribute equally to the tune of Rs. Equity Ministry of Railways & its PSUs GPPL & its Associates Debt from FIs and Banks Total 100 100 173 373.193. No. GPPL.1 98. The equity contribution by MOR till date is Rs.00 26.00 193. Debt funding: PRCL has availed long term loans amounting to Rs. the capital cost of Rs.e.95.66 crore as contribution towards equity.6% 26. PRCL had taken an initial loan of Rs.98 crore each.00 369. Now this loan is repayable in seven instalments starting from 1st April 2007. 200 crore.34 crore from MOR is to be capitalised from current liabilities of PRCL for project construction related expenses. The promoters.00 98. this is a joint venture company with an authorised capital of Rs.86:1. i. The lenders have also agreed for deferment of interest on term loan for the period January 2005 to March 2007. 373 crore was financed by equity contribution of Rs.00 366.66 98. The debt equity proportion was approved at 2:1 but actually it was maintained at 0. NIA and IL&FS Investment have contributed their portion of the share capital.66 crore and the balance investment of Rs.173 crore from various banks/financial institutions. the lenders reduced the interest rate to 8 percent instead of the original interest rates.173 crore with a moratorium period ending on 31st March 2005 and repayment in 7 years starting from 1st April 2005.Table 4: Project Funding Source Amount in crore Percentage Actual amount received Percentage MOR equity GPPL equity Total Equity Debt Total 4.66 26% 27% 53% 47% 100% Means of Finance PRCL being an equal partnership between MOR and GPPL. including its assigns GIC.00 173. which it has subsequently paid. Rs.1% 46. MOR and GPPL. Also. the company has received Rs. which was repaid during 2005 06.70 8. Central Bank of India.00% Figure 2: PRCL’s project structure is given in the figure below: Ministry of Railways (MOR) Land Lease Agreement Concession Agreement Transportation Traffic Guarantee Agreement Western Railways (WR) 50% Equity 50% Equity Gujarat Pipavav Port Limited (GPPL) & it’s Assigns – GIC. crore) Lender Loan amount Funded interest term loan Total loan Rate of interest Union Bank of India Indian Railway Finance Corporation Ltd. Central bank of India State Bank of India Bank of Maharashtra General Insurance Corporation New India Assurance Company Total PRCL’s Project Structure 50.00 24.40 4. Apart from the above loans the company had taken a short term loan of Rs.83 1.25 crore from IRFC (Indian Railway Finance Corporation) due to delay in receiving Railways’ share of equity.00% 8.00 10.00% 8.40 11.00 24.00 9.58 4.00% 8.00 173. General Insurance Corporation.58 28. Bank of Maharashtra.00 10.00% 8. Table 6: PRCL’s Long Term Debt (Rs. 204. State Bank of India.50 29. NIAC & IL&FS TTGL Lenders IRFC.50 4. Union Bank. The total debt is Rs.83 11.16 35.00 30.83 31.40 28. New India Assurance Debt PIPAVAV RAILWAY CORPORATION LIMITED Construction Contract O&M Agreement Tariff Other Users 17 .70 59.16 5.00% 8.00 25.83 204.00% 8.Term Loan (FITL) and added to the loan amount which will be payable over the period of the loan term.70 crore inclusive of FITL and would be repaid in seven years starting from FY08.40 1. b. cars) Preliminary and Preoperative expenses: Tech.2 373. Formation Permanent Way Rail fastenings Sleepers and fastenings Points and crossings Ballast Road crossings & foot over bridges Miscellaneous Sub Total Bridges Stations & stn. d.4 5.4 226. PRCL will be compensated for any shortfall by GPPL. b. 5.9 9. Traffic Guarantee Agreement PRCL entered into a Traffic Guarantee Agreement (TGA) with GPPL and MOR.1 Project Cost and Financing Structure Table 7: Capital Cost Sl. studies Other preliminary & preoperative expenses Deposit for rental premises Interest during construction Sub Total Contingency Working capital Debt Service Reserve Account Total 16.1 0.6 0. a.3 69. 11. 10. As per the terms of this agreement. Machinery Signalling & telecom Electrical works Mechanical works Direction & general charges Dismantling charges Misc.1 15. So.6 0.7 7.1 37. Item Amount: Rs. 12.4 8. c. 9. 2 MT in the second year of operation and 3 MT from the third year onwards.0 0. 6. d. GPPL has to provide 1 million tons (MT) of cargo in the first year of operation (2003 04).9 0. from 2005 06 GPPL would be required to provide at least 3 MT cargo for the project line and MOR/WR as part of this agreement has to provide sufficient rolling stock for evacuation of minimum guaranteed traffic (MGT). While Railways also at 18 .8 33. fixtures.1 10.0 6.4 111. e. 14. 4. in crore 1. In case there is any shortfall in the traffic.0 1.6 34.4 19. 8.1 3.1 0. 7.5. No.7 0. office equipments.4 3. a. fixed assets (furniture. f. c. 3. 2. 13. Any variable cost saving due to traffic shortfall is calculated based on the variable cost per MT for the year.times defaulted in 100% evacuation. The traffic performance of the company for the first three years was rather poor as shown below: Table 8: PRCL traffic performance (in MT) Item 2003 04 2004 05 2005 06 Dry Bulk Containers Total 0.59 MT was achieved by the company for this period. 6. Net traffic guarantee = Traffic shortfall amount – Variable cost saving.1 Traffic Guarantee revenue As per the traffic projections.74 per ton per km. GPPL is required to pay the traffic guarantee amount for FY06 and FY07.88 MT in 2004 05. It was understood that the project line would fully depend upon the port traffic. the port traffic was continuously low over the years. 0. foodgrains. and fertilisers.39 0. The traffic guarantee shortfall is to be calculated as follows: Traffic shortfall for the year = Traffic guarantee during the year.78 0. Traffic Performance: The actual traffic on Pipavav Railway was 0.10 0. coal. GPPL was required to pay the minimum guarantee amount to the company. The net traffic guarantee so calculated is payable by GPPL as the base traffic.13 0. Some corrections were made to make the projections more realistic by moderating and scaling them down. Traffic projections were based on the port traffic projections given by GPPL.02 1. The projected cargo for 2005 06 was estimated at 1. gypsum. salt.88 0. 6.2 Traffic Projections In view of poor performance in the first three years of operation. GPPL revised the traffic projections to make them more realistic.55 1.36 MT in the first year of operation (2003 04) which went up to 0. Actual traffic achieved The amount of traffic shortfall is calculated by multiplying traffic shortfall @ Rs.57 19 .38 MT and 1.26 0. The principal commodities moving on the corridor are containers. 88 1.663 01.72 crore for the years 2003 04 and 2004 05.Table 9: The trend of low traffic has continued in the subsequent years also: Year Cargo in million tonnes Traffic guarantee Shortfall 2003 04 2004 05 2005 06 2006 07 2007 08 2008 09 (up to August 08) Total 0.34 12.3 13.28 2.4 1. respectively. Eighty percent of APM’s container traffic is expected to move on the Pipavav Railway project line. Also.141 117. respectively.61 0.13 2.0 3.744 366.88 MT during 2003 04 and 200 05 as against the traffic guarantee of 1 MT and 2 MT.96 crore and Rs.28 0.16 1.60 166.618 229.132 59.00 1. in the past two years.191 45.990 77.66 1.0 3.719 52.744 29.419 152. is presented in Table 10 below: Table 10: PRCL’s Traffic Projections Container Volumes Year Bulk Volumes (MT) Coal Ferti lizer APM M TEUs Other TEUs Single Stack Other TEUs Double Stack Total Total Cargo (MT) TEUs MT 2006 07 2007 08 2008 09 2009 10 2010 11 2011 12 2012 13 6.39 MT and 0.52 1.701 02. The traffic on the corridor was 0. The principal reason for this is the low cargo originating/destined from GPPL.48 9.839 52.61 0. However.80 2.01 13.359 277.10 0.068 60.339 2.27 crore and the company had to struggle hard to resolve this issue.39 10.0 1.0 3.13 2.685 06.47 3.694 252.14 PRCL business plan was kept in line with the traffic projections of GPPL. GPPL has not paid the traffic shortfall of Rs. The unique feature of PRCL’s existing business is that GPPL would pay for the shortfall in traffic.191 22.3 5.18 0.52 1.47 14.52 0.59 8.666 202.61 132.281 45.89 5.106 72.61 0.52 1.772 17. GPPL had defaulted on the payment of 20 .87 8.24.210 52.89 6.14 0.772 202.210 246.22 6.13 2.701 300.39 0.57 2.52 1.90 1.13 0.719 403. which is based on APM/GPPL projections for the period 2006 07 to 2010 11. PRCL’s traffic projection.52 1.88 11.32.61 12.990 Source: PRCL and APM Financial Performance PRCL’s profit and loss statements and balance sheet for 2003 04 and 2004 05 show that PRCL has incurred losses of Rs.88 8.0 2. 80 165. the fixed cost and the variable cost. The tariff rate for each of the commodity. The number of staff has been worked taking the assumption that the entire line will be under fully mechanised maintenance. Fixed staff cost: This cost head refers to the railway employees who are posted for managing this line.42 per tonne.5 Revenue Stream Freight Revenue: Bulk traffic for PRCL mainly consists of coal and fertilizers. locomotive & wagon hire charges. Fixed material cost: The material cost for the FY 05 was Rs. and is linked with the freight traffic handled on the project railway. 6.80 358. The staff are to be deployed in line with Konkan railway staffing pattern and the total staff numbers would go up to 833. The operations 21 . Apart from the above revenue. The tariff rates are based on the telescopic rate as fixed by the railways whereby the rate is fixed as per the lead distance expected to be travelled by the cargo. The MOR notifies the commodity wise tariff rate for all railway lines across the country. PRCL is bound to pay WR an O&M cost for carrying out the O&M of the project railway.40 (C) 42 31 (D) 74 62 (B D) X269/A +(C) 233. which will determine the viability of the project.) Bulk Lead Kms Tariff rate Handling charges for PRCL Handling charges payable Rate for project distance/MT Coal Fertiliser (A) 600 600 (B) 501.3. The telescopic fares are adjusted for the terminal loading and unloading charges and the net fare is apportioned between the project distance and total lead distance. Variable costs for container traffic will exclude locomotive and wagon hire charges. which would be Rs.2 crore per year. etc. The O&M cost consists of two parts. 650 staff are working on this line. At present. namely. It is assumed that in the next two years the staff would increase from 650 to 833. Variable cost for train operations: The variable cost consists of fuel and crew costs. PRCL would also receive handling charges for one terminal. documentation charges. the lead km and the net revenue per km tonne is given in the Table 11 below: Table 11: Tariff Rates (Rs.89 Operation and Maintenance Costs: O&M cost is one of the essential parameters. As per Section 3 of the Operations and Maintenance Agreement.their portion of share capital which has been subsequently received by the company. and maintenance agreement specifies the principles governing the variable costs. The loco km has been estimated based on the number of trains. Crew cost: The crew cost has been worked for every 1000 GTKM. the required number of loaded trains to carry the traffic is calculated. Based on the number of wagons and the estimated hours of wagon running on the line. Cost of Lube: The cost of lube has been taken at Rs. the total number of trains which will run on the line for the year is calculated. Also. In case of container wagon the wagon maintenance has been calculated as Rs. The number of trains which will be required empty to carry the cargo is also calculated. 158. The items of variable cost are: Cost of fuel: The cost of fuel has been estimated as per Specific Fuel Consumption for 1000 GTKM freight multiplied by the cost of fuel. The cost of operations for the bulk cargo and cost of operations for the containers were calculated on different basis. and loco hours are worked out The above units are multiplied by the respective cost per unit to calculate the total variable cost. which will run on the project line. The GTKM has been worked out for each year based on the volume of traffic expected to be running on the project line. The variable costs are estimated as follows: Based on the traffic estimate. The number of trains will give the total GTKMs for both loaded and empty trains. The SFC for diesel traction per 1000 GTKM is 2. a certain element of administration cost is added to the total cost.101 per wagon days. The rate of crew cost per 1000 GTKM has been assumed as Rs. Wagon repair cost: The wagon repair cost has been worked out on the basis of wagon days and wagon repair cost per day.30.547. the total number of wagon days are calculated. Wagon hire charges: The wagon hire charges have been worked out on the basis of wagon days and wagon rate per day.54 while the diesel cost has been assumed at Rs.3 for every 1000 GTKM. Based on the number of trains. So. the loco km. 18.3.01 per loco km. Loco hire charges: The loco hire charges have been calculated based on the number of hours the loco runs on the line. The wagon repair cost per day as notified by the MOR is Rs. The wagon rate per day as notified by the MOR is Rs. the cost of fuel would be Rs.30 per litre. Based on the above calculations.12 per hour as notified by the MoR. 22 .76. Loco hire charges are Rs. 43 0.63 6.Overheads: The overheads for the project were well defined.00 78. The break up of the overheads is as under: Table 12: Overheads Sl.11 44. The Project line has been insured. Pension & Retirement benefits DCRG RPF Personnel Accounts Personnel Medical Total Overheads 36. 3.55 42.97 0.43 31.98 113.43 0.98 85.00 5.51 99. the overheads can be averaged at Rs. 0.00 87.92 11.92 14.93 96.00 122.73 0.96 crore per year.70 69.97 crore per annum.06 62.55 4.00 0.42 15. crore Profit and Loss account FY07 FY08 FY09 FY10 FY11 FY12 FY13 Revenue from Traffic Revenue from Container operation Other Income Total Income Cost of container operation Cost of other operations Other admin expenses Operating expenses PBDIT Depreciation PBIT Finance charges PBT Tax PAT 74.00 For general calculations. 2.2.43 4.73 120.97 0.74 4.14 4.63 16.2 crore.22 13.28 146.24 9.72 7.78 4.95 7.99 97.96 2.70 127.21 11.18 67.89 8.98 62.93 13.97 4.98 99.77 83.09 9.07 106.95 14.14 7.00 55. PRCL can utilise the existing assets and the newly acquired land on the project route.00 0.00 38.38 16.63 0. Description of Overheads Cost (Rs.63 0. Lease Rent: As per the Lease Agreement signed between PRCL and Western Railways. in lakh) 1.62 0.09 23.09 48.85 92.62 0.01 109.86 4.00 205. Profit and Loss Account: Based on the estimated expenditure and the revenues. and consultancy expenses.94 124.00 104.00 0.88 76.19 15.1.86 122.75 182.80 0.69 37.80 0.250.00 96. communication. The above amount includes the office rent.69 29.13 23 .39 16.09 48.000.00 182. For this right.62 60.00 0.70 0.00 65. No.28 229.91 13.12 110.05 5.75 73.00 0.93 101.00 229. Annual premium is Rs.28 205.00 0.40 113.41 89.92 15. 4.70 0.31 0.06 138.18 4.62 16. the Profit and loss Account projected for the next 7 years looks like the following: Table 13: Profit and Loss account: Rs.58 80.00 146. travel.49 0.84 7. etc. Administrative Expense: The administrative expenses for the company have been about Rs.56 82. PRCL has to pay WR an annual lease rental of Rs.89 247. (i) (ii) 5.00 247.47 6.24 10. There was a serious problem and delay in finalizing the order for rails. Manpower requirements were scaled down to 50% of railway norms. A major gap in equity funding happened because GPPL did not bring in the full equity in time. The port development was tardy and even bulk traffic like coal and fertilizers could not be handled resulting in poor materialization of traffic. All this was due to the fact that GPPL went under restructuring and replacing the original promoter SKIL with AP Moeller. The most serious weakness of the project was its inability to get the projected traffic. The new management of GPPL dithered in honouring the commitments made by GPPL toward payment of traffic guarantees. The finalization of Operations and Maintenance Agreement with Western Railway also took long. Even guaranteed traffic of 1. Railways agreed to the supply of rails from Bhilai steel plant. Successes of the Project Project was completed within one year of signing the construction agreement. 7. It took one year to get it signed. There were no cost overruns. then withdrew the offer. The pace of port development is still slow till the writing of this report. Subsequently. This created a serious problem of inability to service the debt. There was again a delay in finalizing an international tender for rails. first Railways agreed to supply. New standards of maintenance practices were introduced. 2 and 3 MT in the first three years respectively did not materialize. 24 . Failure to do so would have rendered the Company as an NPA and could have resulted in bankruptcy.7.1 Weaknesses of the project There was serious delay in finalizing the Construction Agreement with Western Railway. after 6 months of delay.
Report "Pipavav Rail Corporation-ppp Case Study 2008"