Private Sector to play a Big Role in Redevelopment of 400 Railway Stations

New Delhi: The proposal to let the private sector play a big role in redeveloping 400 railway stations is a very good one given how cash-strapped Indian Railways (IR) is. Even at a conservative estimate of R100 crore per station, the revamp will cost Rs 40,000 crore, which IR is unlikely to be able to spare given its other commitments. In a slightly different approach to PPP (public private participation), IR wants to try out the Swiss Challenge method for bidding out projects.

A couple of states — Gujarat and Rajasthan, for instance — have tried out this route. Typically, such auctions are used to build roads, ports, bridges or railways in the core sector, with the private sector taking the initiative to execute the project. The way this works is that there is first an unsolicited bid which can be subsequently matched, or bettered, by other players, following which the government awards a contract — the idea is to encourage innovation and high-end engineering capabilities.

While on the face of it, re-designing a railway station may not call for a very high degree of skill, it might nonetheless be worthwhile to try out the Swiss Challenge process because accommodating hotels, restaurants, shopping arcades, car parks and so on within the limited space will require enhanced architectural competence, and any innovation cannot hurt.

However, to make sure the PPP route works, IR must ensure the developer has all necessary clearances in hand before the work begins; there’s little point in playing the blame-game after the project is on the verge of being stalled as has happened in some other sectors. Given that the developer will earn the bulk of his revenues by monetising real estate, IR needs to design contracts carefully.

The last thing it wants is the kind of dispute that arose in the case of the Delhi airport where there was a dispute over whether revenues from developing commercial real estate in the airport area were ‘revenue’ or ‘debt’. At the same time, the developer must be allowed to make a reasonable return on the investment because there will be few takers otherwise for such projects in the future.

IR must eschew the typical government mindset which views the private sector suspiciously believing it is out to make a quick buck. Given interest rates remain relatively elevated at 11-12% today, developers would be looking to earn a rate of return of 16-17% for the project to even be worthwhile.

Also, any developer would be looking for a steady stream of business over the next few years, else it would not be worthwhile for it to develop any expertise in the field; IR cannot have rules that cap the number or value of projects that developers can hope to participate in for fear of allegations that it has behaved in a partisan manner. The cash-strapped IR will also do well to keep in mind that modernising railway stations are its best bet for involving the private sector, and will probably involve the least resistance from the unions.