Pipavav Railway Corporation

A Case Study on A PPP Project in India

Ranjan Kumar Jain

United NationsEconomic and Social Commissionfor Asia and the Pacific

Asian Institute ofTransport Development

November 2008

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Pipavav Railway Corporation – Brief History

Case Study1.1 Location

Port Pipavav is located at Latitude 20 54 N and Longitude 71 30 E on thewest coast of India, in the state of Gujarat. For decades the port was functioningas an anchorage serving the then existing minor Port called Port Albert Victor . Itis protected by islands on either side, which act as a natural breakwater makingthe port safe in all weather conditions. The presence of these islands also leads tothe tranquility in the harbour as well as ensures the wave height is less than 0.5mmost of the time.

1.2 Background

In 1992, it was decided to develop the port as an all weather facility forhandling bulk, liquid and container cargo. A private limited company calledGujarat Pipavav Port Limited (GPPL) was incorporated as a joint venturebetween Sea King Infrastructure Limited and Gujarat Maritime Board, a stateowned organization.

General cargo handling operations at the Port commenced in November1996 followed by container handling operations in 1998. Presently, the containerterminal 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 WestCoast of India.

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The original shareholding pattern of GPPL has since undergone a change.A.P. Moller Maersk has replaced Sea King Infrastructure Limited and holds 50percent share in the company. The management control now vests with APMTerminals, a subsidiary of A.P. Moller Maersk.

The port is being developed for handling 19 million tonnes of cargo perannum including 13 million tonnes of containerized cargo. APM Terminals ismaking an investment of US$ 245 million to develop the facilities. With availabledraft 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 waslocated at a distance of 18 km on the Rajula Surendranagar metre gauge line ofWestern Railway, beyond which the broad gauge rail network was available. Inthe absence of a rail connection, the Port could not be adequately developed;hence its keenness for a proper rail connectivity, preferably a broad gauge raillink.

Indian Railways had earlier sanctioned a project to convert the existingRajula Surendranagar metre gauge line into broad gauge as a part of therailways’ long term plans for broad gauge network on the entire system.However, financial constraints had prevented its timely execution. In themeanwhile, the Ministry of Railways launched a programme for undertaking railprojects through public private partnership.

In 1998, GPPL proposed a joint venture with the Ministry of Railways toundertake the rail connectivity project which would include provision of a raillink of 18 km and conversion of the existing metre gauge line. Detailed feasibilitystudies and traffic projections established the financial viability of the proposedproject. A memorandum of understanding (MoU) between Ministry of Railwaysand Gujarat Pipavav Port Limited was signed on 28 January 2000.

Based on the techno economic studies, a business plan of the proposedjoint venture was prepared by financial consultants engaged by GPPL. This planwas reviewed in the Ministry of Railways, who then obtained formal approval ofthe Government of India. As a follow up, Pipavav Railway Corporation Limitedwas incorporated in May 2000 as a joint venture with equal participationbetween the Indian Railways and the Gujarat Pipavav Port Limited.

The above was followed by a host of agreements between variousstakeholders – Ministry of Railways, Western Railway (a constituent of IndianRailways), Gujarat Pipavav Port Limited, Pipavav Railway Corporation Limited.A Shareholders Agreement between MOR and GPPL was signed on 28 March2001, Concession and Lease Agreements between MOR and PRCL on 28 June2001.

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The Construction Agreement for the project between PRCL and WesternRailway was signed on 13 March 2002, followed by Operation and MaintenanceAgreement in January 2003. The Transportation and Traffic GuaranteeAgreement was signed between GPPL, PRCL and Western Railway in February2003. The table below shows the various contractual agreements and the dates oftheir execution between different parties.

Table 1: Contractual Agreements

Sl. No. Agreement Parties to Agreement Date1 MoU for formation of SPV MOR & GPPL 20th January 20002 Concession Agreement MOR (GOI) & PRCL 28th June 20013 Lease Agreement MOR (GOI) & PRCL 28th June 20014 Construction Agreement PRCL & Western

Railway (GOI)13th March 2002

5 Memorandum & Articles ofAssociation of PRCL

PRCL 17th April 2002

6 Operation & MaintenanceAgreement

PRCL & WR (GOI) January 2003

7 Transportation & TrafficGuarantee Agreement

GPPL; WR and PRCL February 2003

8 Shareholders Agreement MOR & GPPL 28th March 2001

The Concession Agreement: Under this agreement, the President of Indiathrough the Ministry of Railways is the ‘Licensor” and PRCL is the“Concessionaire” for the project. The concession period is for 33 years andpermits PRCL to own and operate the project line both for freight and passengeroperations. 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 thefreight moved on the rail line after deducting the operational expenses. Therevenue derived from passenger services is not apportioned, since there is aheavy subsidy component in the fare structure.

Transportation and Traffic Guarantee Agreement: Under this agreement, WRguarantees evacuation of traffic from the port by timely supply of wagons, andGPPL guarantees traffic of 1 MT in the first year, 2 MT in the second year and3 MT in the third and each of the subsequent years. Failure on the part of eitherparty attracts penalties. Shortfalls in offering of traffic on the part of GPPL or itsevacuation by the railways is be converted into ‘deemed traffic’ andproportionate revenue is to be credited to PRCL as compensation.

Construction Agreement: This agreement enjoins upon Western Railway todesign and construct the railway line with the SPV procuring and supplying theconstruction materials. The specifications and standards laid down by theMinistry of Railways were to be followed.

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Operations and Maintenance Agreement: It lays down the process, procedureand accountal of operating and maintenance practices to be followed by WesternRailway and the SPV.

After the execution of the above mentioned agreements, a detailedprocedure order was framed by the Western Railway with the concurrence ofSPV, laying down the method of calculation, unit cost of operation andmaintenance, etc. for the benefit of the line staff.

It would be seen that there was a considerable time lag from the conceptualizationof the project to the execution of various contractual agreements specifying the roles andresponsibilities of the concerned stakeholders. This was mainly due to the fact that PRCLwas the first joint venture under the Ministry of Railways and all agreements had to beevolved ab initio. There was also the usual bureaucratic zeal observed for safeguarding theinterests of the government, with a mindset not fully attuned to the new paradigm ofpublic private partnership. Furthermore, all agreements had to be vetted by the Ministryof Law, Government of India.

1.4 Objectives of JV

The first Joint Venture rail project in India that this project emerged underPPP had the following objectives:

i. To construct a 270 km long rail line to connect Port of Pipavav withthe IR network in one year;

ii. To mobilize funds for the project through equity and debt;

iii. To develop a business plan and establish revenue streams to cater todebt servicing;

iv. To ensure against time and cost overruns;

v. To set up state of art operating and commercial practices and tobenchmark them to best practices;

vi. To establish maintenance and repair norms along withstandardization of unit costs for them; and

vii. Set up accounting and commercial procedures for the projectimplementation as well as day to day business.

The implementation process involved:

i. Arrange supply of Rail construction material at sites;

ii. Draw up contracts and agreements with supply agencies;

iii. Set up time schedules for activities of suppliers and constructionagency;

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iv. Establish cost structures for activities;

v. Lay down a procurement and supply procedure for the supply ofmaterials;

vi. Set up an organization to supervise and monitor construction workand procurement of materials.

2. Project Profile

The total length of project line is 268.84 km. A metre gauge (MG) railwayline existed between Surendranagar and Rajula Junction. This stretch wasconverted to broad gauge. A new line of 18 km length was constructed betweenRajula and Pipavav station. The alignment traverses Surendranagar, Amreli andBhavnagar districts in Gujarat.

The broad gauge rail line (1,676 mm gauge) was constructed fit for amaximum speed of 100 kmph. Standard III inter locking is provided with MultiAspect Colour Light Signals and token less block instruments. Level crossinggates are inter locked by signalling with adjoining stations.

The project involved construction of 198 bridges: 32 major and 166 minorbridges on the gauge conversion route and 3 major and 16 minor bridges on thenew line section between Rajula and Pipavav. In the gauge conversion section(between Surendranagar and Rajula), the existing station buildings were utilisedand two new stations were built, one each at Rajula and Pipavav. There are 35railway stations on the rail route from Surendranagar to Pipavav.

The port is connected by a four lane highway to National Highway 6.

2.1 PRCL’s Promoters

PRCL was promoted by the Ministry of Railways (Govt. of India) andGPPL.

Ministry of Railways: Railways are a fullfledged Ministry with a Ministerof Cabinet rank holding charge. IR is fully owned by the Government of India,administered by Railway Board. Indian Railways (IR), the fourth largest railwaynetwork in the world, has a route length of 63,500 km. IR has 1.5 millionemployees running over 8,000 passenger trains and 5,500 freight trains everyday. 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 vehiclesand 210,000 freight wagons.

Gujarat Pipavav Port Limited: Gujarat Pipavav Port Limited (GPPL) is oneof the first private sector ports in India. It was incorporated in 1992, as a jointventure between Sea King Infrastructure Limited (SKIL) and Gujarat MaritimeBoard for developing and operating an all weather port for handling bulk, liquid

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and container cargo at Pipavav, in Amreli district of Gujarat. The cargo handlingoperations had commenced in 1998.

GPPL’s principal shareholders are:

i. A.P.Moeller Maersk Sealand (APMT/Maersk), one of the largestport container terminal operators in the world and the largestcontainer shipping line, with around 20% worldwide market share.It holds 50.76% shares. APMT/Maersk is in the process ofdeveloping the Pipavav port into a world class port with state ofthe art container handling facilities and terminal management.

ii. AMP Capital Investors,

iii. New York Life International India Fund,

iv. Industrial Development Bank of India (IDBI),

v. Unit Trust of India (UTI) and Infrastructure.

vi. Leasing & Financial Services Ltd. (IL&FS)

GPPL’s shareholding structure in the financial year 2006 was as follows:

Figure 1: GPPL Shareholding Structure (FY 2006)

The key developments from conceptualisation of Pipavav port toAPMT/Maersk taking over its management control have been as follow:

1986 Gujarat Maritime Board (GMB) initiates development ofPipavav Port

February 1992 – GMB enters into an MoU with Sea KingInfrastructure Ltd. (SKIL) group led by Mr. Nikhil Gandhi

A.P.Moller-Maersk50%

Infrastructure Leasing & Financial Services

4%Industrialisation Fund for Developing Countries (IFU)

6%

AMP Capital Investors 9%

New York Life International Fund

8%

IDBI Bank Ltd. 10% IDFC Private Equity (IDF)

9%

Others2%

UTI2%

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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 ‘ModelPrinciples’ signed

September, 1998 – Lead promoter SKIL licensed to develop, operate,and maintain the port

April, 2005 – GoG agrees to change the promoters – SKIL group toA.P.Moller Maersk group, Denmark

May, 2005 – APM Terminals takes full management control of theport

GPPL is planning to enhance its cargo handling capacity to 19.16 MT by2009 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 capitalinvestment of Rs.1,167.30 crore which is through equity contribution of Rs.200crore, internal accruals of Rs.289.04 crore and debt of Rs.596.26 crore. A.P.MollerMaersk has committed an investment of Rs.1,200 crore for port infrastructuredevelopment. Three quay cranes will be installed for container handling facilitiesin addition to the existing three quay cranes to enhance the container handlingcapacity to 1 million TEUs. GPPL commenced capital dredging project inDecember 2005 which was completed by April, 2006 to increase the draft to 13.5m to handle post Panamax vessels.

Maersk Sealand, the port operator, has started dedicated weekly servicebetween 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 structureof the Company and roles and responsibilities of the Shareholders was defined inthe 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 theCompany, Memorandum of Articles of Association, registration with variousgovernment revenue agencies like Sales Tax etc were also completed. The salientfeatures of the SHA are given in the following table.

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Table 2: Salient Features of Shareholders Agreement

ShareholderWarrantiesGPPL 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 forsubsequent years till concession period.

MOR All the actions taken by MOR as a shareholder will be commercialacts and not ‘sovereign’ acts.Will provide required wagons to move the guaranteed traffic.

Scope of Business All works of gauge conversion and additional new line fromRajula to Pipavav.MOR through WR to operate and maintain the assets created.PRCL to perform marketing efforts and collect through MOR allthe revenues generated from the facilities created.

Share Capital Authorised capital of PRCL was Rs. 5 crore. (This wassubsequently raised to Rs.300 crore).Shareholding pattern: GPPL 50% and MOR 50%.Expenses incurred by MOR and GPPL on project execution willbe adjusted against their equity.

Management of theCompany.

A Board of Directors will be responsible for management,direction and control of the Company.A management team under a CEO will carry out day to daybusiness. CEO will be ex officio Director on the Board.

Board of Directors. A minimum of four and maximum 12 members. CEO to be aprofessional from open market.A shareholder can nominate one Director for each 8%shareholding.

Meeting of Board. Each Director has one vote.Affirmative vote of at least one nominee Director of each partyrequired 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).

Chairman MOR will nominate a working officer of railways till itsshareholding remains at least 26%.

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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 SurendranagarRajula MG line was an approved work of the WR to be completed at railwayscost. However, it was not a priority line and therefore annual fund allocationswere 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 portdevelopment plans and hence the need for GPPL to contribute to the gaugeconversion costs.

Construction Phase: The construction phase started on the date of signingthe construction agreement on 13th March 2002. Till then WR had been carryingout preliminary works on the erstwhile sanctioned Railway Gauge ConversionProject which mainly related to the strengthening of bridges and structures forBG trains.

The Construction Phase was divided into the following main activities:Procurement of material by PRCLTransportation to sites by PRCLTesting and certification of specifications by WRLabour contracts for track laying and linking by WRSignalling and telecom works, station buildings by WRNew bridges for the new line between Rajula Pipavav by WRConsolidation of track, testing and safety certification by WR

The main items of procurement were the following:RailsConcrete sleepersStone ballastRail switchesRail turnouts and trapsCMS rail crossingsGlued jointsTrack fasteningsSleeper fasteningsSignalling cables

In addition to the above materials, tools and material handling andtransportation equipments like motor trolleys, road trucks and rail grinding anddrilling machines, etc. were also procured for reducing the man powerrequirement 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 tofinalise procurements. Orders were placed and PRCL Board was apprised of theprogress periodically.

Placement of Orders: A strategy of splitting the orders for the same itemamong several suppliers was adopted. Incentives were given to suppliers forsupplies made before time. Since Bhilai Steel Plant and IR had initially regrettedto supply rails, international bids were called for. This process took a long timeas it involved inspection of the mills abroad by RDSO teams, production ofsamples by the mills and their testing as per IR standards. To save time, MORwas requested for a loan of 5000 mt to be replaced later by PRCL supplies. Thiswas done. Later, Railways agreed to release the supply of entire requirementfrom Bhilai.

Orders for 30,000 mt of rails were placed on SAIL in September 2002 withstipulated supply within 3 months, i.e., by the end of December 2002 atSabarmati. To reduce the costs of rails, PRCL obtained a license under EPCGscheme which saved payment of Central Sales Tax.

Orders for other materials were placed in May June 2002 for supplies to bemade between September and December 2002. These included concrete sleepers,stone ballast, rail switches, rail turnouts and traps, CMS rail crossings, gluedjoints, track and sleeper fastenings and signalling cables. All orders weresupplied in time.

Transportation to sites by PRCL: Except for rails all the contracts for supplywere CIF site. The major item for transportation was rails which required twostage movements: from Bhilai to Sabarmati and then to designated sites.Railways provided the BFR rakes at Bhilai which were closely monitored. Fortransportation to sites from Sabarmati, close circuit MG rakes of BFRs wereformed and deployed.

Testing and certification of specifications by WR: A team of engineers of WRwas formed to be available at sites at the time of arrival of consignments. Amonitoring team was in position in PRCL office to watch day to day arrival ofdifferent materials at various sites and a team of supply ‘chasers’ was deployedat important suppliers’ locations. These teams, working in tandem, kept WRinformed of the arrival dates to ensure inspection and certification. In the case ofballast, several laboratories were approved for testing.

Labour contracts for track laying and signalling and telecom works werefixed by WR including station buildings and staff quarters. Ninety five percent ofthe works of gauge conversion had been completed by July, 2002.

By July 2002, 65% of works on the new line had been completed. Thegauge 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 andconsolidation 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 DecemberJanuary

2003February

2003March2003

April May

Formation _ ____ ____ ____ ___ ____

BridgesLand for newlineSuppliesRailsSleepersBallastPoints &crossingsFasteningsCablesGaugeconversionNew linelinkingTestingSafetyCertificateCommissioningInauguration

Innovative features in project implementation

Procurement of all the material was done on lines followed by theprivate sector in getting best prices without compromising onquality. This was ensured by first technically qualifying the bestsupplier and then negotiating on prices. There was a system ofincentives to promote timely supplies.

Staffing the line operations and maintenance functions wasbenchmarked to best practices and norms of manning. A detailedstudy was conducted to fix these norms. This resulted in cuttingdown manpower requirements by half of what obtains on IR system.Against a staff strenghth of about 1,600 persons on the MG line, thenew PRCL line operates with less than half this number,approximating 800.

Maintenance was mechanized as far as possible. Suitable tools andmachines were given to the staff on line to do away with wastefulpractices, such as carriage of materials, manual drilling, etc.

Multitasking of the workforce was introduced to cut out wastage oftime in sending different persons for different small tasks likechanging 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 maintenancematerials and staff to sites instead of waiting for passenger trains.

3. Strengths of the Project

Both shareholders, namely, MOR and GPPL have gained substantially bythe Joint Venture arrangement of implementation.

Gains to MOR:

It would have completed the gauge conversion at its own cost in duecourse of time as it was an approved work included in WR’s worksprogramme. The WR would have incurred an expenditure of overRs. 400 crore at present day costs. With the JV arrangement, projectwas completed with the total expenditure of only Rs. 98 crore whichMOR contributed as equity. The remaining funds came from otherpartner and through debt from open market, servicing of which wasnot MOR’s responsibility.

The project was completed in less than 2 years of contributing equitymoney and started paying revenues to MOR as freight.

MOR recovered Rs. 50 crore as value of released material from theMG line.

MOR was losing Rs. 20 crore per year on operating this uneconomical branch line. Losses of three years would wipe out thecumulative loss of Rs. 60 crore. Thus, MOR recovered the totalcontribution made for the project in less than three years.

MOR got a guarantee of 6 MT of traffic in the first three years andthereafter a guarantee of 3 MT every year. This would not have beenpossible without the JV arranagement.

Gains to GPPL

GPPL got rail connectivity to the port in time – in fact, much beforeport was ready for producing guaranteed traffic volumes of 3 MT.

Port connectivity cost to GPPL was only Rs. 98 crore. Otherwise, theywould have had to construct the entire line at their expense as aprivate 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 asan agency of GOI. For a private party, it would have taken muchlonger.

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3.1 Problems faced in implementation

There were problems encountered during the implementation, most ofwhich were new both to the Railways as well as to the private investor, since itwas the first joint venture. The majority of problems related to the signing ofagreements with Railways which involved delays. Main delay was in the signingof 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. Thisprocess took inordinately long. The Railways wanted the passenger trainoperations to continue which conflicted with the freight operation requirementsof GPPL and costs of implementing with passenger traffic requirements. TheSaurashtra region of Gujarat is mainly served by MG passenger services and thegauge conversion of an ‘Island Stretch’ would separate and fragment the MGnetwork. Therefore, there was need to convert the adjoining links to Bhavnagar(Dhola Jn. – Bhavnagar), to Mahua (Rajula Jn. – Mahua), and to Palitana (SihorPalitana). These conversions had to be financed by WR alone. Planning for thesetook time and affected the signing of the construction agreement.

During 2001 2002, discussions were held at different levels to decide uponthe modality of choosing a construction agency. Possibility of engaging a privatesector contractor was also explored by PRCL. PRCL found that at that time therewere few contractors who could take up the work of this magnitude. The costsand time frames quoted were also not favourable.

It was finally decided to entrust the job to WR whose constructionorganization was already in place. Considering the very tight time schedules ofthe project completion which was set as December 2002, WR suggested thatprocurement of all materials required be done by PRCL which may have moreflexibility in finalizing purchase orders and arranging transportation of materialsto site, as against the government procedures which are time consuming. It was anew concept where Indian Railways agreed to work as a contractor for a PrivateSector Company. This was a path breaking agreement signed in March 2002. Thisagreement opened up the Railways responding to the schedules set up by aprivate entity and deliver. The work was completed in March 2003, within oneyear. The line was opened to traffic and formally inaugurated in May 2003.

The main features of the agreement which helped were:i. Identify where Indian Railways are weak on project management:ii. 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 WRWR to provide schedule of supply to PRCL and locations ofdeliveryPRCL to arrange transportation to sitesPRCL to arrange welding of rail panels in WR Sabarmati weldingplant and bear the cost of augmentation of the welding capacity ofthe plant.

Project completion schedule: WR to try to complete the project by December2002.

Monitoring Progress:i. Central Project Review Board (CPRB) was set up with PRCL &

Railway representatives.ii. WR to provide progress reports to CPRB and PRCLiii. In case cost increased by more than 10% excluding the works

executed already and excluding the cost of material supplied byPRCL, WR to take written consent of PRCL.

iv. No departmental charges to be paid by PRCL but D&G charges to bepaid subject to a maximium of 6% of the estimate.

v. Any work constituting material modification and of a value morethan Rs 1.5 million would need prior consent of PRCL

vi. Any rail material being disposed by WR would not be credited toproject account.

3.3 Problems in Procurement

This was the first big rail project under private sector and most rail projectsuppliers had committed supplies to IR. Being behind schedule for supplies toIndian Railway, they were not able to commit timely supplies to PRCL. Problemwas particularly grave for procuring rails of which there was only one supplier inthe 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 IRwhose 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 MTof class one rails from Bhilai Steel Plant was initially not accepted. Same was trueof other critical items like points and crossings, turnouts, concrete sleepers andballast. Despite all these difficulties, PRCL had to supply all the materials at sitewithin a period of 4 months if the target of December 2002 was to be met. Otherthan shortage of materials, there were other critical issues of non availability ofrailway wagons for transporting rails from Bhilai, track machines for the newlylaid track, etc. due to pending works of IR itself.

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After a protracted process, the efforts of taking international suppliesfailed 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 thetimeline, MOR finally agreed to release rails from Bhilai. Accordingly, orderswere placed.

No track work could be done since the MG line was in operation andpassenger trains were running. The passenger traffic was to remain suspendedfor more than 6 months for the construction. At the same time, the MG line hadto be kept running till all the P way and other material had reached thedesignated sites along the 271 km stretch. Heavy materials like rails, sleepers,ballast and cables, etc. were difficult to transport on the entire length of thealignment by road since the road network did not connect the entire stretch.

Another major concern was carriage of rails from the steel plant to thewelding plant and then after welding to several designated sites. Rails weresupplied in 13 m lengths from the Bhilai Steel Plant and were to be convertedinto three rail length panels by welding through a special process (flash buttwelding) which requires a special set of equipment. Options were to first take therails to Sabarmati in the WR’s flash butt welding plant, unload, have three railpanels welded, load on rail wagons, transport the panels to several sites on theMG rail track, unload and stack them for laying on the formation. Other optionwas to organize welding at a site on the line by using mobile welding plants. In2002, mobile welding plants were not easily available. Therefore, welding wasorganized at Sabarmati. The plant had limited capacity and was overloaded withthe pending work of WR. It was, therefore, necessary to increase the capacity ofthe plant which was done at PRCL cost.

O&M Agreement: The fixing of the elements of fixed costs to be paid to WRfor O&M of the line was the main concern. Each item of maintenance had to beanalysed and bench marked with the best practices. Help was taken from theKonkan Railway to define the elements and put down norms and unit costs. Staffcosts being the major cost, tremendous efforts were required to set manningnorms at half of what is followed on IR. There were problems of redeployingsurplus staff. The process of redeployment was started early in 2001 and by 2004it was possible to relocate most of the surplus staff. Help of WR was invaluable inthis regard. This manning norm and practice became a benchmark for WR alsofor their future projects.

4. Funding Arrangements

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

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Table 4: Project Funding

Source Amount in crore PercentageActual amount

receivedPercentage

MOR equity 98.00 26.6% 95.66 26%GPPL equity 98.00 26.6% 98.00 27%Total Equity 196.00 53.1% 193.66 53%Debt 173.00 46.9% 173.00 47%Total 369.00 100.0% 366.66 100%

4.1 Means of Finance

PRCL being an equal partnership between MOR and GPPL, the capitalcost of Rs. 373 crore was financed by equity contribution of Rs. 196 crore on 50 50basis by the two promoters and the balance by raising debt from the openmarket. The debt equity proportion was approved at 2:1 but actually it wasmaintained at 0.86:1. The means of finance are given in the table below:

Table 5: Means of FinanceSl. No. Particular Amount (in crore) % of project cost

1. Equity(a) Ministry of Railways & its PSUs 100 27(b) GPPL & its Associates 100 27

2. Debt from FIs and Banks 173 46Total 373.0 100

Equity funding: As discussed earlier, this is a joint venture company withan authorised capital of Rs. 200 crore. As on date, the company has receivedRs.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 equitycontribution by MOR till date is Rs.95.66 crore and the balance investment ofRs.2.34 crore from MOR is to be capitalised from current liabilities of PRCL forproject construction related expenses. GPPL, including its assigns GIC, NIA andIL&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. 26crore of its share capital amount, which it has subsequently paid.

Debt funding: PRCL has availed long term loans amounting to Rs.173 crorefrom various banks/financial institutions, details of which are set out in the tablebelow. PRCL had taken an initial loan of Rs.173 crore with a moratorium periodending 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 furtherextension of moratorium period from the lenders till 31st March 2007. Also, thelenders 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. Thelenders have also agreed for deferment of interest on term loan for the periodJanuary 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 theperiod of the loan term.

Apart from the above loans the company had taken a short term loan ofRs.25 crore from IRFC (Indian Railway Finance Corporation) due to delay inreceiving Railways’ share of equity, which was repaid during 2005 06. The totaldebt is Rs. 204.70 crore inclusive of FITL and would be repaid in seven yearsstarting from FY08.

Table 6: PRCL’s Long Term Debt(Rs. crore)

LenderLoan

amount

Fundedinterest term

loanTotal loan

Rate ofinterest

Union Bank of India 50.00 9.16 59.16 8.00%Indian Railway FinanceCorporation Ltd.

30.00 5.50 35.50 8.00%

Central bank of India 25.00 4.58 29.58 8.00%State Bank of India 24.00 4.40 28.40 8.00%Bank of Maharashtra 24.00 4.40 28.40 8.00%General Insurance Corporation 10.00 1.83 11.83 8.00%New India Assurance Company 10.00 1.83 11.83 8.00%Total 173.00 31.70 204.70

PRCL’s Project Structure

Figure 2: PRCL’s project structure is given in the figure below:

PIPAVAV RAILWAY

CORPORATION LIMITED

50% Equity

Other Users

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

Construction Contract

Western Railways (WR)

Gujarat Pipavav Port Limited (GPPL) & it’s Assigns – GIC, NIAC & IL&FS

Ministry of Railways (MOR)

Land Lease Agreement

Tariff

Concession Agreement

O&M Agreement

50%Equity

Debt

Transportation Traffic Guarantee Agreement

TTGL

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5.1 Project Cost and Financing Structure

Table 7: Capital Cost

Sl.No.

ItemAmount:

Rs. in crore1. Formation 16.42. Permanent Way

a. Rail fastenings 111.3b. Sleepers and fastenings 69.9c. Points and crossings 9.6d. Ballast 34.6e. Road crossings & foot over bridges 0.9f. Miscellaneous 0.4

Sub Total 226.83. Bridges 33.44. Stations & stn. Machinery 3.15. Signalling & telecom 37.16. Electrical works 3.07. Mechanical works 0.48. Direction & general charges 19.09. Dismantling charges 1.110. Misc. fixed assets (furniture, fixtures, office equipments, cars) 0.711. Preliminary and Preoperative expenses:

a. Tech. studies 0.4b. Other preliminary & preoperative expenses 5.1c. Deposit for rental premises 0.1d. Interest during construction 10.1

Sub Total 15.712. Contingency 7.613. Working capital 0.414. Debt Service Reserve Account 8.2

Total 373.0

6. Traffic Guarantee Agreement

PRCL entered into a Traffic Guarantee Agreement (TGA) with GPPL andMOR. 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 ofoperation and 3 MT from the third year onwards. So, from 2005 06 GPPL wouldbe required to provide at least 3 MT cargo for the project line and MOR/WR aspart of this agreement has to provide sufficient rolling stock for evacuation ofminimum 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 overthe years. GPPL was required to pay the minimum guarantee amount to thecompany.

6.1 Traffic Guarantee revenue

As per the traffic projections, GPPL is required to pay the traffic guaranteeamount for FY06 and FY07. The traffic guarantee shortfall is to be calculated asfollows:

Traffic shortfall for the year = Traffic guarantee Actual traffic achievedduring the year.

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 thevariable cost per MT for the year.

Net traffic guarantee = Traffic shortfall amount – Variable cost saving. Thenet 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, GPPLrevised the traffic projections to make them more realistic. Traffic projectionswere based on the port traffic projections given by GPPL. It was understood thatthe project line would fully depend upon the port traffic. Some corrections weremade to make the projections more realistic by moderating and scaling themdown.

Traffic Performance: The actual traffic on Pipavav Railway was 0.36 MT inthe first year of operation (2003 04) which went up to 0.88 MT in 2004 05. Theprincipal commodities moving on the corridor are containers, gypsum, coal,foodgrains, salt, and fertilisers. The projected cargo for 2005 06 was estimated at1.38 MT and 1.59 MT was achieved by the company for this period. The trafficperformance of the company for the first three years was rather poor as shownbelow:

Table 8: PRCL traffic performance (in MT)

Item 2003 04 2004 05 2005 06Dry Bulk 0.26 0.10 0.55Containers 0.13 0.78 1.02Total 0.39 0.88 1.57

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Table 9: The trend of low traffic has continued in the subsequent yearsalso:

YearCargo in million

tonnesTraffic guarantee Shortfall

2003 04 0.39 1.02004 05 0.88 2.02005 06 1.57 3.02006 07 2.28 3.02007 08 2.18 3.02008 09 (up to August 08) 0.87 1.3Total 8.16 13.3 5.14

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

Table 10: PRCL’s Traffic Projections

Container Volumes Total

YearBulk

Volumes(MT)

CoalFertilizer APM M

TEUs

OtherTEUsSingleStack

OtherTEUs

DoubleStack

TEUs MT

TotalCargo(MT)

2006 07 1.00 0.90 0.10 132,281 45,191 45,191 22,663 2.89 3.892007 08 1.66 1.52 0.14 166,141 117,772 17,772 01,685 5.22 6.882008 09 1.80 1.52 0.28 202,419 152,210 52,210 06,839 6.59 8.392009 10 2.13 1.52 0.61 246,666 202,701 02,701 52,068 8.48 10.612010 11 2.13 1.52 0.61 300,618 229,744 29,744 60,106 9.88 12.012011 12 2.13 1.52 0.61 366,694 252,719 52,719 72,132 11.34 13.472012 13 2.13 1.52 0.61 403,359 277,990 77,990 59,339 12.47 14.60

Source: PRCL and APM

6.4 Financial Performance

PRCL’s profit and loss statements and balance sheet for 2003 04 and 200405 show that PRCL has incurred losses of Rs.32.96 crore and Rs.24.72 crore for theyears 2003 04 and 2004 05, respectively. The principal reason for this is the lowcargo originating/destined from GPPL. The traffic on the corridor was 0.39 MTand 0.88 MT during 2003 04 and 200 05 as against the traffic guarantee of 1 MTand 2 MT, respectively. The unique feature of PRCL’s existing business is thatGPPL 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 tostruggle 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 thecompany.

6.5 Revenue Stream

Freight Revenue: Bulk traffic for PRCL mainly consists of coal andfertilizers. The MOR notifies the commodity wise tariff rate for all railway linesacross the country. The tariff rates are based on the telescopic rate as fixed by therailways whereby the rate is fixed as per the lead distance expected to betravelled by the cargo. The telescopic fares are adjusted for the terminal loadingand unloading charges and the net fare is apportioned between the projectdistance and total lead distance. Apart from the above revenue, PRCL would alsoreceive handling charges for one terminal, which would be Rs.42 per tonne. Thetariff rate for each of the commodity, the lead km and the net revenue per kmtonne is given in the Table 11 below:

Table 11: Tariff Rates (Rs.)

BulkLeadKms

Tariff rateHandling

charges forPRCL

Handlingchargespayable

Rate for projectdistance/MT

(A) (B) (C) (D) (B D) X269/A +(C)Coal 600 501.80 42 74 233.80Fertiliser 600 358.40 31 62 165.89

Operation and Maintenance Costs: O&M cost is one of the essentialparameters, which will determine the viability of the project. As per Section 3 ofthe Operations and Maintenance Agreement, PRCL is bound to pay WR an O&Mcost for carrying out the O&M of the project railway. The O&M cost consists oftwo parts, namely, the fixed cost and the variable cost.

Fixed staff cost: This cost head refers to the railway employees who areposted for managing this line. The number of staff has been worked taking theassumption that the entire line will be under fully mechanised maintenance. Atpresent, 650 staff are working on this line. The staff are to be deployed in linewith Konkan railway staffing pattern and the total staff numbers would go up to833. It is assumed that in the next two years the staff would increase from 650to 833.

Fixed material cost: The material cost for the FY 05 was Rs.3.2 crore peryear.

Variable cost for train operations: The variable cost consists of fuel and crewcosts, locomotive & wagon hire charges, documentation charges, etc. and islinked with the freight traffic handled on the project railway. Variable costs forcontainer 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 containerswere calculated on different basis.

The variable costs are estimated as follows:

Based on the traffic estimate, the required number of loaded trains tocarry the traffic is calculated. The number of trains which will berequired empty to carry the cargo is also calculated.

Based on the above calculations, the total number of trains which willrun on the line for the year is calculated. The number of trains willgive the total GTKMs for both loaded and empty trains.

Based on the number of wagons and the estimated hours of wagonrunning on the line, the total number of wagon days are calculated.

Based on the number of trains, the loco km. and loco hours areworked out

The above units are multiplied by the respective cost per unit tocalculate the total variable cost. The items of variable cost are:

Cost of fuel: The cost of fuel has been estimated as per Specific FuelConsumption for 1000 GTKM freight multiplied by the cost of fuel. The SFC fordiesel traction per 1000 GTKM is 2.54 while the diesel cost has been assumed atRs.30 per litre. Also, a certain element of administration cost is added to the totalcost. So, the cost of fuel would be Rs.76.3 for every 1000 GTKM. The GTKM hasbeen worked out for each year based on the volume of traffic expected to berunning on the project line.

Cost of Lube: The cost of lube has been taken at Rs.3.01 per loco km. Theloco km has been estimated based on the number of trains, which will run on theproject line.

Wagon hire charges: The wagon hire charges have been worked out on thebasis of wagon days and wagon rate per day. The wagon rate per day as notifiedby the MOR is Rs. 158.

Wagon repair cost: The wagon repair cost has been worked out on the basisof wagon days and wagon repair cost per day. The wagon repair cost per day asnotified by the MOR is Rs. 18. In case of container wagon the wagon maintenancehas been calculated as Rs.101 per wagon days.

Loco hire charges: The loco hire charges have been calculated based on thenumber of hours the loco runs on the line. Loco hire charges are Rs.547.12 perhour as notified by the MoR.

Crew cost: The crew cost has been worked for every 1000 GTKM. The rateof 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 upof the overheads is as under:

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

1. Pension & Retirement benefits 36.922. DCRG 14.093. RPF Personnel 9.724. (i) Accounts 7.92

(ii) Personnel 11.425. Medical 15.93

Total Overheads 96.00

For general calculations, the overheads can be averaged at Rs. 0.96 croreper year.

Lease Rent: As per the Lease Agreement signed between PRCL andWestern Railways, PRCL can utilise the existing assets and the newly acquiredland on the project route. For this right, PRCL has to pay WR an annual leaserental of Rs.1.97 crore per annum.

Administrative Expense: The administrative expenses for the company havebeen 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 therevenues, the Profit and loss Account projected for the next 7 years looks like thefollowing:

Table 13: Profit and Loss account: Rs. crore

Profit and Loss account FY07 FY08 FY09 FY10 FY11 FY12 FY13Revenue from Traffic 74.73 122.43 146.80 182.70 205.62 229.63 247.97Revenue from Containeroperation 0.00 0.00 0.00 0.00 0.00 0.00 0.00Other Income 5.58 0.00 0.00 0.00 0.00 0.00 0.00Total Income 80.31 122.43 146.80 182.70 205.62 229.63 247.97Cost of container operation 0.00 0.00 0.00 0.00 0.00 0.00 0.00Cost of other operations 38.14 55.43 65.18 78.74 87.55 96.78 104.05Other admin expenses 4.55 4.62 4.70 4.77 4.85 4.93 5.01Operating expenses 42.69 60.06 69.88 83.51 92.40 101.70 109.06PBDIT 37.62 62.38 76.92 99.19 113.22 127.93 138.91Depreciation 16.09 16.09 15.98 15.98 13.98 13.98 13.94PBIT 23.63 48.39 62.95 85.21 99.24 113.95 124.97Finance charges 16.14 16.43 14.09 11.75 9.41 7.07 4.73PBT 7.49 31.96 48.86 73.47 89.84 106.89 120.24Tax 0.63 2.69 4.11 6.18 7.56 8.99 10.12PAT 6.86 29.28 44.75 67.28 82.28 97.89 110.13

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7. Successes of the Project

Project was completed within one year of signing the constructionagreement;

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 Agreementwith Western Railway. It took one year to get it signed.

The finalization of Operations and Maintenance Agreement withWestern Railway also took long.

There was a serious problem and delay in finalizing the order forrails; first Railways agreed to supply, then withdrew the offer. Therewas again a delay in finalizing an international tender for rails.Subsequently, after 6 months of delay, Railways agreed to the supplyof rails from Bhilai steel plant.

The most serious weakness of the project was its inability to get theprojected traffic. Even guaranteed traffic of 1, 2 and 3 MT in the firstthree years respectively did not materialize. This created a seriousproblem of inability to service the debt. Failure to do so would haverendered the Company as an NPA and could have resulted inbankruptcy.

All this was due to the fact that GPPL went under restructuring andreplacing the original promoter SKIL with AP Moeller. The newmanagement of GPPL dithered in honouring the commitments madeby GPPL toward payment of traffic guarantees.

A major gap in equity funding happened because GPPL did notbring in the full equity in time.

The port development was tardy and even bulk traffic like coal andfertilizers could not be handled resulting in poor materialization oftraffic.

The pace of port development is still slow till the writing of thisreport.