Indian Railway Finance Corporation vs PPP, which is a better model?

"A model like Indian Railway Finance Corporation will work better than the PPP or Built-Operate-Transfer model for metro projects"- explain?

What does the Indian rail finance corp do?

it raises money from market to help in railway finances

How does it raise?

it raises through issue of both taxable and tax-free Bonds, term loans from banks/financial institutions and through off shore borrowings

How does it differ from a PPP??

In PPP, the money is raised by the private player himself...

Here, we'll take the BOT model.. The private player has to build, operate and then transfer..

The private player raises all the money for building the project(here, the railway lines, coaches, rail depots, rail stations, etc..) Eg: PPP with L&T in the Hyderabad metro rail project

The govt involvement is not always only funding , the government may support the project by providing revenue subsidies, including tax breaks or by removing guaranteed annual revenues for a fixed time period.

The government may sometimes also help in capital costs in PPP through viability gap funding for not- so-lucrative projects..

The private player operates it for profit... And recovers the capital cost+profits .. This will go on till the concession period ( usually 40 years or 50 years). Then they will transfer the ownership to the government!

In case of rail finance corp, it is the creditor (lender) to the government. In case of PPP, L&T (the private player) is a Part owner..

What are the pros and cons of an IRFC model vis-a-vis PPP..

Pros for PPP:

eliminate the conflict of interest, bring in expertise, and reduce fiscal exposure of govt.

Pros for IRFC:

ease of lending norms, guaranteed credit.

Better repayment options.

No risk for private contractors, since execution of work is per contract.

Cons: increased fiscal and budget constraints for the govt.

Conflict of interest in funding and execution agencies.

IRFC is just raising the money but the work has to still be done by the Railways Ministry only

Both in PPP and an IRFC model, the government is responsible for identifying and allocating the land.. The main difference lies in the revenue model!

In PPP, the private players find innovative ways to reduce the cost- like humped tracks at stations to save fuel, minimize human resource by mechanization, etc.. They find new revenue generating techniques like selling station naming rights (eg: Pepsi Chennai central station)., using excess land on the sides to build malls, and connecting existing malls near stations with skywalks(a bridge connecting an overhead metro station with the upper floors of a mall). So without affecting the consumer , they recover profits..

But it is difficult to attract PPP in metro bcoz the ticket fares contribute only 20% of the overall cost.. Other revenue generating techniques like above should be used .. So it is not that lucrative. Increasing ticket fare is a strict no- no by the government since it is all about political economy.

There is nothing called as Free Lunch.. When you get into PPP - though it appears to be a project for the common man, these Private Organizations will always work out a Revenue Model which is beneficial to all the stake holders..