Pipavav Railway Corporation

A 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.

The original shareholding pattern of GPPL has since undergone a change. A.P. Moller Maersk has replaced Sea King Infrastructure Limited and holds 50 percent share in the company. The management control now vests with APM Terminals, a subsidiary of A.P. Moller Maersk. The port is being developed for handling 19 million tonnes of cargo per annum including 13 million tonnes of containerized cargo. APM Terminals is making an investment of US$ 245 million to develop the facilities. With available draft of 13.5 metres, the port is also able to handle Post Panamax vessels.
1.3 Connectivity

Initially, there was no rail connection to the port. The nearest railhead was located at a distance of 18 km on the Rajula Surendranagar metre gauge line of Western Railway, beyond which the broad gauge rail network was available. In the absence of a rail connection, the Port could not be adequately developed; hence its keenness for a proper rail connectivity, preferably a broad gauge rail link. 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. However, financial constraints had prevented its timely execution. In the meanwhile, the Ministry of Railways launched a programme for undertaking rail projects through public private partnership. In 1998, 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. Detailed feasibility studies and traffic projections established the financial viability of the proposed project. A memorandum of understanding (MoU) between Ministry of Railways and Gujarat Pipavav Port Limited was signed on 28 January 2000. Based on the techno economic studies, a business plan of the proposed joint venture was prepared by financial consultants engaged by GPPL. This plan was reviewed in the Ministry of Railways, who then obtained formal approval of the Government of India. As a follow up, 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. The above was followed by a host of agreements between various stakeholders Ministry of Railways, Western Railway (a constituent of Indian Railways), Gujarat Pipavav Port Limited, Pipavav Railway Corporation Limited. A Shareholders Agreement between MOR and GPPL was signed on 28 March 2001, Concession and Lease Agreements between MOR and PRCL on 28 June 2001.

The Construction Agreement for the project between PRCL and Western Railway was signed on 13 March 2002, followed by Operation and Maintenance Agreement in January 2003. The Transportation and Traffic Guarantee Agreement was signed between GPPL, PRCL and Western Railway in February 2003. The table below shows the various contractual agreements and the dates of their execution between different parties.
Table 1: Contractual Agreements
Sl. No. 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 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, the President of India through the Ministry of Railways is the Licensor and PRCL is the Concessionaire for the project. The concession period is for 33 years and permits PRCL to own and operate the project line both for freight and passenger operations. It enjoins upon the SPV to pay lease rent of Rs. 2 crore (20 million) per year to the Ministry of Railways for the use of land and other assets. In turn, the railways would pay to PRCL the apportioned revenue derived from the freight moved on the rail line after deducting the operational expenses. The revenue derived from passenger services is not apportioned, since there is a heavy subsidy component in the fare structure.
Transportation and Traffic Guarantee Agreement: Under this agreement, WR guarantees evacuation of traffic from the port by timely supply of wagons, and GPPL guarantees traffic of 1 MT in the first year, 2 MT in the second year and 3 MT in the third and each of the subsequent years. Failure on the part of either party attracts penalties. 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. 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 specifications and standards laid down by the Ministry of Railways were to be followed.
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Operations and Maintenance Agreement: It lays down the process, procedure

and accountal of operating and maintenance practices to be followed by Western Railway and the SPV. After the execution of the above mentioned agreements, a detailed procedure order was framed by the Western Railway with the concurrence of SPV, laying down the method of calculation, unit cost of operation and maintenance, etc. for the benefit of the line staff. 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. 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, with a mindset not fully attuned to the new paradigm of public private partnership. Furthermore, all agreements had to be vetted by the Ministry of Law, Government of India.
1.4 Objectives of JV

The first Joint Venture rail project in India that this project emerged under PPP had the following objectives: i. ii. iii. iv. v. vi. To construct a 270 km long rail line to connect Port of Pipavav with the IR network in one year; To mobilize funds for the project through equity and debt; To develop a business plan and establish revenue streams to cater to debt servicing; To ensure against time and cost overruns; To set up state of art operating and commercial practices and to benchmark them to best practices; To establish maintenance and repair standardization of unit costs for them; and norms along with

vii. Set up accounting and commercial procedures for the project implementation as well as day to day business. The implementation process involved: i. ii. iii. Arrange supply of Rail construction material at sites; Draw up contracts and agreements with supply agencies; Set up time schedules for activities of suppliers and construction agency;

iv. v. vi.
2.

Establish cost structures for activities; Lay down a procurement and supply procedure for the supply of materials; Set up an organization to supervise and monitor construction work and procurement of materials.

Project Profile

The total length of project line is 268.84 km. A metre gauge (MG) railway line existed between Surendranagar and Rajula Junction. This stretch was converted to broad gauge. A new line of 18 km length was constructed between Rajula and Pipavav station. The alignment traverses Surendranagar, Amreli and Bhavnagar districts in Gujarat. The broad gauge rail line (1,676 mm gauge) was constructed fit for a maximum speed of 100 kmph. Standard III inter locking is provided with Multi Aspect Colour Light Signals and token less block instruments. Level crossing gates are inter locked by signalling with adjoining stations. 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. In the gauge conversion section (between Surendranagar and Rajula), the existing station buildings were utilised and two new stations were built, one each at Rajula and Pipavav. There are 35 railway stations on the rail route from Surendranagar to Pipavav. The port is connected by a four lane highway to National Highway 6.
2.1 PRCLs Promoters

PRCL was promoted by the Ministry of Railways (Govt. of India) and GPPL.
Ministry of Railways: Railways are a fullfledged Ministry with a Minister

of Cabinet rank holding charge. IR is fully owned by the Government of India, administered by Railway Board. Indian Railways (IR), the fourth largest railway network in the world, has a route length of 63,500 km. IR has 1.5 million employees running over 8,000 passenger trains and 5,500 freight trains every day. It moves over 17 million passengers and 2.0 million tonnes of goods daily. Its rolling stock fleet includes some 8,300 locomotives, 4,400 coaching vehicles and 210,000 freight wagons.
Gujarat Pipavav Port Limited: Gujarat Pipavav Port Limited (GPPL) is one

of the first private sector ports in India. It was incorporated in 1992, 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, liquid

and container cargo at Pipavav, in Amreli district of Gujarat. The cargo handling operations had commenced in 1998. GPPLs principal shareholders are: i. A.P.Moeller Maersk Sealand (APMT/Maersk), one of the largest port container terminal operators in the world and the largest container shipping line, with around 20% worldwide market share. It holds 50.76% shares. 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. AMP Capital Investors, New York Life International India Fund, Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and Infrastructure. Leasing & Financial Services Ltd. (IL&FS)

ii. iii. iv. v. vi.

GPPLs 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.P.Moller-Maersk 50%

IDBI Bank Ltd. 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. (SKIL) group led by Mr. Nikhil Gandhi

June, 1992 MoU converted into Joint Venture agreement July, 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, 1998 Concession Agreement based on Model Principles signed September, 1998 Lead promoter SKIL licensed to develop, operate, and maintain the port April, 2005 GoG agrees to change the promoters SKIL group to A.P.Moller Maersk group, Denmark May, 2005 APM Terminals takes full management control of the port GPPL is planning to enhance its cargo handling capacity to 19.16 MT by 2009 10, including 13.70 MT of containerised cargo and 5.56 MT of bulk cargo. The port expansion programme is being taken up in three phases with a capital investment of Rs.1,167.30 crore which is through equity contribution of Rs.200 crore, internal accruals of Rs.289.04 crore and debt of Rs.596.26 crore. A.P.Moller Maersk has committed an investment of Rs.1,200 crore for port infrastructure development. 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. GPPL commenced capital dredging project in December 2005 which was completed by April, 2006 to increase the draft to 13.5 m to handle post Panamax vessels. Maersk Sealand, the port operator, has started dedicated weekly service between Pipavav and Salalah (Oman) and Jebel Ali (United Arab Emirates), which has contributed to increase in container throughput at Pipavav port.
2.2 Legal Aspects

After the agreement to set up the JV Company was finalized, the structure of the Company and roles and responsibilities of the Shareholders was defined in the Shareholders Agreement.
2.3 Shareholders Agreement

The basic structure of the company (PRCL) is defined in the Shareholders Agreement (SHA). In addition, the other formalities like registration of the Company, Memorandum of Articles of Association, registration with various government revenue agencies like Sales Tax etc were also completed. The salient features of the SHA are given in the following table.

Table 2: Salient Features of Shareholders Agreement Shareholder Warranties GPPL Has necessary licences approvals and consents to carry out its obligations under the agreement. Guarantees minimum annual aggregate quantity of cargo of 1, 2, and 3 MT in the first three years and 3 MT annually for subsequent years till concession period. All the actions taken by MOR as a shareholder will be commercial acts and not sovereign acts. Will provide required wagons to move the guaranteed traffic. All works of gauge conversion and additional new line from Rajula to Pipavav. MOR through WR to operate and maintain the assets created. PRCL to perform marketing efforts and collect through MOR all the revenues generated from the facilities created. Authorised capital of PRCL was Rs. 5 crore. (This was subsequently raised to Rs.300 crore). Shareholding pattern: GPPL 50% and MOR 50%. Expenses incurred by MOR and GPPL on project execution will be adjusted against their equity.

MOR

Scope of Business

Share Capital

Management of the A Board of Directors will be responsible for management, Company. direction and control of the Company. A management team under a CEO will carry out day to day business. CEO will be ex officio Director on the Board. Board of Directors. A minimum of four and maximum 12 members. CEO to be a professional from open market. A shareholder can nominate one Director for each 8% shareholding. Each Director has one vote. Affirmative vote of at least one nominee Director of each party required for making decisions concerning: a. amendment to Articles of Association; b. Commencement of new line of business or change in its nature; c. Merger, bankruptcy, winding up, etc.; d. Deviation from last approved business plan and budget beyond 15% of each line item; e. Formation of Subsidiary or any Joint Venture; f. Sale or disposal of assets (more than 10% of gross assets). MOR will nominate a working officer of railways till its shareholding remains at least 26%.

Meeting of Board.

Chairman

2.3

Implementation Process

There were three phases of the Project: a. Project Development Phase; b. Construction Phase; c. Operations Phase.
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. However, it was not a priority line and therefore annual fund allocations were very meagre. In normal course, if the WR were to complete the conversion, it could take anything between 10 15 years. It was not coinciding with the port development plans and hence the need for GPPL to contribute to the gauge conversion costs.
Construction Phase: The construction phase started on the date of signing

the construction agreement on 13th March 2002. 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. 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, station buildings by WR New bridges for the new line between Rajula Pipavav by WR Consolidation of track, 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, tools and material handling and transportation equipments like motor trolleys, road trucks and rail grinding and drilling machines, etc. were also procured for reducing the man power requirement by mechanization of processes. A Tender Committee was set up
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with Directors of PRCL Board representing MOR, GPPL and the CEO of PRCL to finalise procurements. Orders were placed and PRCL Board was apprised of the progress periodically.
Placement of Orders: A strategy of splitting the orders for the same item

among several suppliers was adopted. Incentives were given to suppliers for supplies made before time. Since Bhilai Steel Plant and IR had initially regretted to supply rails, international bids were called for. This process took a long time as it involved inspection of the mills abroad by RDSO teams, production of samples by the mills and their testing as per IR standards. To save time, MOR was requested for a loan of 5000 mt to be replaced later by PRCL supplies. This was done. Later, Railways agreed to release the supply of entire requirement from Bhilai. Orders for 30,000 mt of rails were placed on SAIL in September 2002 with stipulated supply within 3 months, i.e., by the end of December 2002 at Sabarmati. To reduce the costs of rails, PRCL obtained a license under EPCG scheme which saved payment of Central Sales Tax. Orders for other materials were placed in May June 2002 for supplies to be made between September and December 2002. These included concrete sleepers, stone ballast, rail switches, rail turnouts and traps, CMS rail crossings, glued joints, track and sleeper fastenings and signalling cables. All orders were supplied in time.
Transportation to sites by PRCL: Except for rails all the contracts for supply

were CIF site. The major item for transportation was rails which required two stage movements: from Bhilai to Sabarmati and then to designated sites. Railways provided the BFR rakes at Bhilai which were closely monitored. For transportation to sites from Sabarmati, close circuit MG rakes of BFRs were formed and deployed.
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. 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. These teams, working in tandem, kept WR informed of the arrival dates to ensure inspection and certification. In the case of ballast, several laboratories were approved for testing.

Labour contracts for track laying and signalling and telecom works were fixed by WR including station buildings and staff quarters. Ninety five percent of the works of gauge conversion had been completed by July, 2002. By July 2002, 65% of works on the new line had been completed. The gauge conversion works and construction of new line between Rajula City and

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Pipavav was completed in time by the end of Dec. 2002. Testing and consolidation of track was completed by the end of March 2003 and, after testing, safety certificate was issued by WR. The line was opened to freight traffic w.e.f. 31st March 2003.
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. This was ensured by first technically qualifying the best supplier and then negotiating on prices. There was a system of incentives to promote timely supplies. Staffing the line operations and maintenance functions was benchmarked to best practices and norms of manning. A detailed study was conducted to fix these norms. This resulted in cutting down manpower requirements by half of what obtains on IR system. Against a staff strenghth of about 1,600 persons on the MG line, the new PRCL line operates with less than half this number, approximating 800. Maintenance was mechanized as far as possible. Suitable tools and machines were given to the staff on line to do away with wasteful practices, such as carriage of materials, manual drilling, etc. Multitasking of the workforce was introduced to cut out wastage of time in sending different persons for different small tasks like changing electric bulbs, fixing telephone faults, etc.

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Periodical tasks like repair of furniture, petty repairs to buildings, etc. were outsourced. Road vehicles were deployed to quickly transport maintenance materials and staff to sites instead of waiting for passenger trains.
3. Strengths of the Project

Both shareholders, namely, MOR and GPPL have gained substantially by the Joint Venture arrangement of implementation. 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 WRs works programme. The WR would have incurred an expenditure of over Rs. 400 crore at present day costs. With the JV arrangement, project was completed with the total expenditure of only Rs. 98 crore which MOR contributed as equity. The remaining funds came from other partner and through debt from open market, servicing of which was not MORs responsibility. The project was completed in less than 2 years of contributing equity money and started paying revenues to MOR as freight. MOR recovered Rs. 50 crore as value of released material from the MG line. MOR was losing Rs. 20 crore per year on operating this un economical branch line. Losses of three years would wipe out the cumulative loss of Rs. 60 crore. Thus, MOR recovered the total contribution made for the project in less than three years. MOR got a guarantee of 6 MT of traffic in the first three years and thereafter a guarantee of 3 MT every year. This would not have been possible without the JV arranagement. Gains to GPPL GPPL got rail connectivity to the port in time in fact, much before port was ready for producing guaranteed traffic volumes of 3 MT. Port connectivity cost to GPPL was only Rs. 98 crore. Otherwise, they would have had to construct the entire line at their expense as a private siding. Early connectivity enhanced the share value of GPPL. Port got traffic clearance guarantee from MOR. Land acquisition for new line was expedited as it was done by WR as an agency of GOI. For a private party, it would have taken much longer.

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3.1

Problems faced in implementation

There were problems encountered during the implementation, most of which were new both to the Railways as well as to the private investor, since it was the first joint venture. The majority of problems related to the signing of agreements with Railways which involved delays. Main delay was in the signing of construction agreement with the Western Railway which took over one year. These issues are discussed below.
3.2 Signing of Construction Agreement

Immediately after signing of the Shareholder and Concession Agreements, GPPL started pressing for the finalization of the construction agencies. This process took inordinately long. 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. Therefore, there was need to convert the adjoining links to Bhavnagar (Dhola Jn. Bhavnagar), to Mahua (Rajula Jn. Mahua), and to Palitana (Sihor Palitana). These conversions had to be financed by WR alone. Planning for these took time and affected the signing of the construction agreement. During 2001 2002, discussions were held at different levels to decide upon the modality of choosing a construction agency. Possibility of engaging a private sector contractor was also explored by PRCL. PRCL found that at that time there were few contractors who could take up the work of this magnitude. The costs and time frames quoted were also not favourable. It was finally decided to entrust the job to WR whose construction organization was already in place. Considering the very tight time schedules of the project completion which was set as December 2002, 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, as against the government procedures which are time consuming. It was a new concept where Indian Railways agreed to work as a contractor for a Private Sector Company. This was a path breaking agreement signed in March 2002. This agreement opened up the Railways responding to the schedules set up by a private entity and deliver. The work was completed in March 2003, within one year. The line was opened to traffic and formally inaugurated in May 2003. The main features of the agreement which helped were: i. ii. Identify where Indian Railways are weak on project management: Procurement:

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PRCL to procure all P Way and signalling & telecom material, including rails, sleepers, ballast, fastenings, etc. 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.
Project completion schedule: WR to try to complete the project by December

2002. Monitoring Progress: i. ii. iii. Central Project Review Board (CPRB) was set up with PRCL & Railway representatives. 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, WR to take written consent of PRCL. No departmental charges to be paid by PRCL but D&G charges to be paid subject to a maximium of 6% of the estimate. Any work constituting material modification and of a value more than Rs 1.5 million would need prior consent of PRCL Any rail material being disposed by WR would not be credited to project account.

iv. v. vi.
3.3

Problems in Procurement

This was the first big rail project under private sector and most rail project suppliers had committed supplies to IR. Being behind schedule for supplies to Indian Railway, they were not able to commit timely supplies to PRCL. Problem was particularly grave for procuring rails of which there was only one supplier in the country, namely, Bhilai Steel Plant of SAIL (Steel Authority of India Ltd.). 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. Therefore, the request of PRCL to the MOR for releasing a quantity of 30,000 MT of class one rails from Bhilai Steel Plant was initially not accepted. Same was true of other critical items like points and crossings, turnouts, concrete sleepers and ballast. Despite all these difficulties, 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. Other than shortage of materials, there were other critical issues of non availability of railway wagons for transporting rails from Bhilai, track machines for the newly laid track, etc. due to pending works of IR itself.

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After a protracted process, the efforts of taking international supplies failed due to non conformity to IR standards and the tender was cancelled. Considering the importance of the first JV project of MOR and to meet the timeline, MOR finally agreed to release rails from Bhilai. Accordingly, orders were placed. No track work could be done since the MG line was in operation and passenger trains were running. The passenger traffic was to remain suspended for more than 6 months for the construction. At the same time, 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. Heavy materials like rails, sleepers, ballast and cables, etc. were difficult to transport on the entire length of the alignment by road since the road network did not connect the entire stretch. Another major concern was carriage of rails from the steel plant to the welding plant and then after welding to several designated sites. 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. Options were to first take the rails to Sabarmati in the WRs flash butt welding plant, unload, have three rail panels welded, load on rail wagons, transport the panels to several sites on the MG rail track, unload and stack them for laying on the formation. Other option was to organize welding at a site on the line by using mobile welding plants. In 2002, mobile welding plants were not easily available. Therefore, welding was organized at Sabarmati. The plant had limited capacity and was overloaded with the pending work of WR. It was, therefore, necessary to increase the capacity of the plant which was done at PRCL cost.
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. Each item of maintenance had to be analysed and bench marked with the best practices. Help was taken from the Konkan Railway to define the elements and put down norms and unit costs. Staff costs being the major cost, tremendous efforts were required to set manning norms at half of what is followed on IR. There were problems of redeploying surplus staff. The process of redeployment was started early in 2001 and by 2004 it was possible to relocate most of the surplus staff. Help of WR was invaluable in this regard. This manning norm and practice became a benchmark for WR also for their future projects.
4. Funding Arrangements

The Project line has been funded through a mix of equity and debt. The total project cost of Rs. 373 crore, was met by equity of Rs.196 crore and a debt of Rs.173 crore. The completion cost was lower at Rs. 367 crore.

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Table 4: Project Funding

Source Amount in crore Percentage Actual amount received Percentage

MOR equity GPPL equity Total Equity Debt Total 4.1

98.00 98.00 196.00 173.00 369.00

26.6% 26.6% 53.1% 46.9% 100.0%

95.66 98.00 193.66 173.00 366.66

26% 27% 53% 47% 100%

Means of Finance

PRCL being an equal partnership between MOR and GPPL, the capital cost of Rs. 373 crore was financed by equity contribution of Rs. 196 crore on 50 50 basis by the two promoters and the balance by raising debt from the open market. The debt equity proportion was approved at 2:1 but actually it was maintained at 0.86:1. The means of finance are given in the table below:
Table 5: Means of Finance
Sl. No. Particular Amount (in crore) % of project cost

1. (a) (b) 2.

Equity Ministry of Railways & its PSUs GPPL & its Associates Debt from FIs and Banks Total

100 100 173 373.0

27 27 46 100

Equity funding: As discussed earlier, this is a joint venture company with

an authorised capital of Rs. 200 crore. As on date, the company has received Rs.193.66 crore as contribution towards equity. The promoters, MOR and GPPL, were required to contribute equally to the tune of Rs.98 crore each. The equity contribution by MOR till date is Rs.95.66 crore and the balance investment of Rs.2.34 crore from MOR is to be capitalised from current liabilities of PRCL for project construction related expenses. GPPL, including its assigns GIC, NIA and IL&FS Investment have contributed their portion of the share capital, i.e., Rs. 98 crore. Until March 2005, GPPL was in default of not paying nearly Rs. 26 crore of its share capital amount, which it has subsequently paid.
Debt funding: PRCL has availed long term loans amounting to Rs.173 crore

from various banks/financial institutions, details of which are set out in the table below. PRCL had taken an initial loan of Rs.173 crore with a moratorium period ending on 31st March 2005 and repayment in 7 years starting from 1st April 2005. However, the company had renegotiated with the lenders and got a further extension of moratorium period from the lenders till 31st March 2007. Also, the lenders reduced the interest rate to 8 percent instead of the original interest rates. Now this loan is repayable in seven instalments starting from 1st April 2007. The lenders have also agreed for deferment of interest on term loan for the period January 2005 to March 2007.This amount will be treated as Funded Interest on

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Term Loan (FITL) and added to the loan amount which will be payable over the period of the loan term. Apart from the above loans the company had taken a short term loan of Rs.25 crore from IRFC (Indian Railway Finance Corporation) due to delay in receiving Railways share of equity, which was repaid during 2005 06. The total debt is Rs. 204.70 crore inclusive of FITL and would be repaid in seven years starting from FY08.
Table 6: PRCLs Long Term Debt (Rs. 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 PRCLs Project Structure

50.00 30.00 25.00 24.00 24.00 10.00 10.00 173.00

9.16 5.50 4.58 4.40 4.40 1.83 1.83 31.70

59.16 35.50 29.58 28.40 28.40 11.83 11.83 204.70

8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%

Figure 2: PRCLs 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) & its Assigns GIC, NIAC & IL&FS

TTGL

Lenders IRFC, Union Bank, Central Bank of India, State Bank of India, Bank of Maharashtra, General Insurance Corporation, New India Assurance

Debt

PIPAVAV RAILWAY CORPORATION LIMITED

Construction Contract O&M Agreement

Tariff Other Users

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5.1

Project Cost and Financing Structure Table 7: Capital Cost

Sl. No.

Item

Amount: Rs. in crore

1. 2. a. b. c. d. e. f. 3. 4. 5. 6. 7. 8. 9. 10. 11. a. b. c. d. 12. 13. 14.

Formation Permanent Way Rail fastenings Sleepers and fastenings Points and crossings Ballast Road crossings & foot over bridges Miscellaneous Sub Total Bridges Stations & stn. Machinery Signalling & telecom Electrical works Mechanical works Direction & general charges Dismantling charges Misc. fixed assets (furniture, fixtures, office equipments, cars) Preliminary and Preoperative expenses: Tech. studies Other preliminary & preoperative expenses Deposit for rental premises Interest during construction Sub Total Contingency Working capital Debt Service Reserve Account Total

16.4 111.3 69.9 9.6 34.6 0.9 0.4 226.8 33.4 3.1 37.1 3.0 0.4 19.0 1.1 0.7 0.4 5.1 0.1 10.1 15.7 7.6 0.4 8.2 373.0

6.

Traffic Guarantee Agreement

PRCL entered into a Traffic Guarantee Agreement (TGA) with GPPL and MOR. As per the terms of this agreement, GPPL has to provide 1 million tons (MT) of cargo in the first year of operation (2003 04), 2 MT in the second year of operation and 3 MT from the third year onwards. So, 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). In case there is any shortfall in the traffic, PRCL will be compensated for any shortfall by GPPL. While Railways also at
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times defaulted in 100% evacuation, the port traffic was continuously low over the years. GPPL was required to pay the minimum guarantee amount to the company.
6.1 Traffic Guarantee revenue

As per the traffic projections, GPPL is required to pay the traffic guarantee amount for FY06 and FY07. The traffic guarantee shortfall is to be calculated as follows: Traffic shortfall for the year = Traffic guarantee during the year. Actual traffic achieved

The amount of traffic shortfall is calculated by multiplying traffic shortfall @ Rs. 0.74 per ton per km. Any variable cost saving due to traffic shortfall is calculated based on the variable cost per MT for the year. Net traffic guarantee = Traffic shortfall amount Variable cost saving. The net traffic guarantee so calculated is payable by GPPL as the base traffic.
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. Traffic projections were based on the port traffic projections given by GPPL. It was understood that the project line would fully depend upon the port traffic. Some corrections were made to make the projections more realistic by moderating and scaling them down.
Traffic Performance: The actual traffic on Pipavav Railway was 0.36 MT in

the first year of operation (2003 04) which went up to 0.88 MT in 2004 05. The principal commodities moving on the corridor are containers, gypsum, coal, foodgrains, salt, and fertilisers. The projected cargo for 2005 06 was estimated at 1.38 MT and 1.59 MT was achieved by the company for this period. 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

0.26 0.13 0.39

0.10 0.78 0.88

0.55 1.02 1.57

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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

0.39 0.88 1.57 2.28 2.18 0.87 8.16

1.0 2.0 3.0 3.0 3.0 1.3 13.3 5.14

PRCL business plan was kept in line with the traffic projections of GPPL. Eighty percent of APMs container traffic is expected to move on the Pipavav Railway project line. PRCLs traffic projection, which is based on APM/GPPL projections for the period 2006 07 to 2010 11, is presented in Table 10 below:
Table 10: PRCLs 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 6.4

1.00 1.66 1.80 2.13 2.13 2.13 2.13

0.90 1.52 1.52 1.52 1.52 1.52 1.52

0.10 0.14 0.28 0.61 0.61 0.61 0.61

132,281

45,191

45,191

22,663 01,685 06,839 52,068 60,106 72,132 59,339

2.89 5.22 6.59 8.48 9.88 11.34 12.47

3.89 6.88 8.39 10.61 12.01 13.47 14.60

166,141 117,772 17,772 202,419 152,210 52,210 246,666 202,701 02,701 300,618 229,744 29,744 366,694 252,719 52,719 403,359 277,990 77,990

Source: PRCL and APM

Financial Performance

PRCLs profit and loss statements and balance sheet for 2003 04 and 2004 05 show that PRCL has incurred losses of Rs.32.96 crore and Rs.24.72 crore for the years 2003 04 and 2004 05, respectively. The principal reason for this is the low cargo originating/destined from GPPL. The traffic on the corridor was 0.39 MT and 0.88 MT during 2003 04 and 200 05 as against the traffic guarantee of 1 MT and 2 MT, respectively. The unique feature of PRCLs existing business is that GPPL would pay for the shortfall in traffic. However, in the past two years, GPPL has not paid the traffic shortfall of Rs.27 crore and the company had to struggle hard to resolve this issue. Also, GPPL had defaulted on the payment of

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their portion of share capital which has been subsequently received by the company.
6.5 Revenue Stream Freight Revenue: Bulk traffic for PRCL mainly consists of coal and

fertilizers. The MOR notifies the commodity wise tariff rate for all railway lines across the country. 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 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. Apart from the above revenue, PRCL would also receive handling charges for one terminal, which would be Rs.42 per tonne. The tariff rate for each of the commodity, the lead km and the net revenue per km tonne is given in the Table 11 below:
Table 11: Tariff Rates (Rs.)
Bulk Lead Kms Tariff rate Handling charges for PRCL Handling charges payable Rate for project distance/MT

Coal Fertiliser

(A) 600 600

(B) 501.80 358.40

(C) 42 31

(D) 74 62

(B D) X269/A +(C) 233.80 165.89

Operation and Maintenance Costs: O&M cost is one of the essential

parameters, which will determine the viability of the project. As per Section 3 of the Operations and Maintenance Agreement, PRCL is bound to pay WR an O&M cost for carrying out the O&M of the project railway. The O&M cost consists of two parts, namely, the fixed cost and the variable cost.
Fixed staff cost: This cost head refers to the railway employees who are

posted for managing this line. The number of staff has been worked taking the assumption that the entire line will be under fully mechanised maintenance. At present, 650 staff are working on this line. The staff are to be deployed in line with Konkan railway staffing pattern and the total staff numbers would go up to 833. It is assumed that in the next two years the staff would increase from 650 to 833.
Fixed material cost: The material cost for the FY 05 was Rs.3.2 crore per

year.
Variable cost for train operations: The variable cost consists of fuel and crew

costs, locomotive & wagon hire charges, documentation charges, etc. and is linked with the freight traffic handled on the project railway. Variable costs for container traffic will exclude locomotive and wagon hire charges. The operations

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and maintenance agreement specifies the principles governing the variable costs. The cost of operations for the bulk cargo and cost of operations for the containers were calculated on different basis. The variable costs are estimated as follows: Based on the traffic estimate, the required number of loaded trains to carry the traffic is calculated. The number of trains which will be required empty to carry the cargo is also calculated. Based on the above calculations, the total number of trains which will run on the line for the year is calculated. The number of trains will give the total GTKMs for both loaded and empty trains. Based on the number of wagons and the estimated hours of wagon running on the line, the total number of wagon days are calculated. Based on the number of trains, the loco km. and loco hours are worked out The above units are multiplied by the respective cost per unit to calculate the total variable cost. 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 SFC for diesel traction per 1000 GTKM is 2.54 while the diesel cost has been assumed at Rs.30 per litre. Also, a certain element of administration cost is added to the total cost. So, the cost of fuel would be Rs.76.3 for every 1000 GTKM. The GTKM has been worked out for each year based on the volume of traffic expected to be running on the project line.
Cost of Lube: The cost of lube has been taken at Rs.3.01 per loco km. The

loco km has been estimated based on the number of trains, which will run on the project line.
Wagon hire charges: The wagon hire charges have been worked out on the basis of wagon days and wagon rate per day. The wagon rate per day as notified by the MOR is Rs. 158. Wagon repair cost: The wagon repair cost has been worked out on the basis

of wagon days and wagon repair cost per day. The wagon repair cost per day as notified by the MOR is Rs. 18. In case of container wagon the wagon maintenance has been calculated as Rs.101 per wagon days.
Loco hire charges: The loco hire charges have been calculated based on the

number of hours the loco runs on the line. Loco hire charges are Rs.547.12 per hour as notified by the MoR.
Crew cost: The crew cost has been worked for every 1000 GTKM. The rate

of crew cost per 1000 GTKM has been assumed as Rs.30.

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Overheads: The overheads for the project were well defined. The break up

of the overheads is as under:

Table 12: Overheads
Sl. No. Description of Overheads Cost (Rs. in lakh)

1. 2. 3. 4. (i) (ii) 5.

Pension & Retirement benefits DCRG RPF Personnel Accounts Personnel Medical Total Overheads

36.92 14.09 9.72 7.92 11.42 15.93 96.00

For general calculations, the overheads can be averaged at Rs. 0.96 crore per year.
Lease Rent: As per the Lease Agreement signed between PRCL and

Western Railways, PRCL can utilise the existing assets and the newly acquired land on the project route. For this right, PRCL has to pay WR an annual lease rental of Rs.1.97 crore per annum.
Administrative Expense: The administrative expenses for the company have

been about Rs.2.2 crore. The above amount includes the office rent, travel, communication, and consultancy expenses, etc. The Project line has been insured. Annual premium is Rs.250,000.
Profit and Loss Account: Based on the estimated expenditure and the

revenues, the Profit and loss Account projected for the next 7 years looks like the following:
Table 13: Profit and Loss account: Rs. 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

74.73 0.00 5.58 80.31 0.00 38.14 4.55 42.69 37.62 16.09 23.63 16.14 7.49 0.63 6.86

122.43 0.00 0.00 122.43 0.00 55.43 4.62 60.06 62.38 16.09 48.39 16.43 31.96 2.69 29.28

146.80 0.00 0.00 146.80 0.00 65.18 4.70 69.88 76.92 15.98 62.95 14.09 48.86 4.11 44.75

182.70 0.00 0.00 182.70 0.00 78.74 4.77 83.51 99.19 15.98 85.21 11.75 73.47 6.18 67.28

205.62 0.00 0.00 205.62 0.00 87.55 4.85 92.40 113.22 13.98 99.24 9.41 89.84 7.56 82.28

229.63 0.00 0.00 229.63 0.00 96.78 4.93 101.70 127.93 13.98 113.95 7.07 106.89 8.99 97.89

247.97 0.00 0.00 247.97 0.00 104.05 5.01 109.06 138.91 13.94 124.97 4.73 120.24 10.12 110.13

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7.

Successes of the Project

Project was completed within one year of signing the construction agreement; There were no cost overruns; Manpower requirements were scaled down to 50% of railway norms; New standards of maintenance practices were introduced.
7.1 Weaknesses of the project

There was serious delay in finalizing the Construction Agreement with Western Railway. It took one year to get it signed. The finalization of Operations and Maintenance Agreement with Western Railway also took long. There was a serious problem and delay in finalizing the order for rails; first Railways agreed to supply, then withdrew the offer. There was again a delay in finalizing an international tender for rails. Subsequently, after 6 months of delay, Railways agreed to the supply of rails from Bhilai steel plant. The most serious weakness of the project was its inability to get the projected traffic. Even guaranteed traffic of 1, 2 and 3 MT in the first three years respectively did not materialize. This created a serious problem of inability to service the debt. Failure to do so would have rendered the Company as an NPA and could have resulted in bankruptcy. All this was due to the fact that GPPL went under restructuring and replacing the original promoter SKIL with AP Moeller. The new management of GPPL dithered in honouring the commitments made by GPPL toward payment of traffic guarantees. 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. The pace of port development is still slow till the writing of this report.

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