Railways FDI: Who benefits from this opportunity?

It is clear that the Modi government has stepped up its hunt for foreign funds. On Wednesday, the Union Cabinet cleared 100 percent foreign direct investment (FDI) in railway infrastructure and other areas and 49 percent FDI in some strategic areas

Will this move attract foreign funding which the Railway Minister says is needed to revive Indian Railways? What are the companies that are likely to benefit most?  Colonel L.V.Raju, MD,  Kernex Microsystems and Manish Agarwal, PWC India joined the debate to find the answers.  Here are few excerpts/transcript of Colonel L.V.Raju and Manish Agarwal.

Question: If you can quickly identify for us what this means 100 percent FDI in railway infrastructure, 49 percent in some strategic areas of this. Who benefits from this opportunity?

Agarwal: Several kind of projects have been talked about and the way in which each type of project will become ready for private investment will be different. If we think about high speed rail, dedicated freight corridor, suburban rail, there is a mention of those. These are very large projects, these are Rs 20000 crore to Rs 60000 crore kind of projects. In the model that the government comes up with, we will still put in 50 percent or 60 percent of the money and allow the rest to be private investment! So, for example if the trains that run on the metro systems or on the high speed rail systems they can be privately owned then the revenue will be sufficient to service that capital and that could benefit somebody like Hitachi, somebody like SNCF or people who actually manufacture high speed rails.

Question: There are metro projects that are being done as PPP projects or that are being done to put it simply I joint venture with private parties, the Mumbai Metro for that sense. So, are you saying then, for instance, in the Mumbai Metro it is Reliance, are you saying that a Reliance kind of company would then be able to invite foreign participation into the company and through that into the project or can they invite foreign participation directly into the project and make it a three way joint venture with the state or with the state development agencies? How would it work?

Agarwal: All of that is permitted. However, the point I am making is that Mumbai Metro is not a typical project. In Mumbai Metro there is a very large Viability Gap Funding (VGF) component, that component is much larger in other similar projects and it could be as high as 50-60 percent. When we are thinking of high speed rail, the operating cost is probably all that can get covered from fares.

Question:  Could you talk us through where you see projects opening up because of this 100 percent FDI policy announcement?

Raju: A mere policy is not helpful because by the time they work out the business models and implement the process and organise, it will take pretty long time. Therefore there is a requirement of making Indian Railways as one of the frontline ministry and if you keep it just a normal ministry like how it is all these years, it will not be helpful. You have to have a make it a frontline ministry.

Question:  Are you suggesting that none of this is going to fructify into any immediate term opportunities. What we are trying to understand is, for instance your company’s stock is up 2-4 percent today. Investors are clearly seeing opportunities, do you see them?

Raju: Many foreign companies which want to come into India, cannot start from the scratch. They would like to have joint ventures with many companies like ours in security, signalling and safety and other related operations. Therefore there is great opportunity being thrown up by this FDI. But what we have to see is how fast it can take off.