The Curious Funding Of Konkan Railway

With the 20 kilometer stretch between Sawantwadi and Pernem in Goa ready for regular traffic, the ambitious Konkan Railway project comes to its grand finale, nearly three years after its original scheduled date and with a 222 per cent cost over run. In the seven years that it took to finish the construction of the rail line between Roha and Mangalore, the Konkan Railway Corporation (KRC) had to face as many technical problems as financial ones. In retrospect, the project is as fascinating for its engineering feat as it is for its financial endeavors.

A quick look at the statistics is sufficient to highlight the engineering feat of the project: it comprises 760 km of broad gauge rail line, involving the construction of 179 major bridges, 1,819 minor bridges, 92 tunnels and 88.77 million cubic meter of earthwork. The longest tunnel is 6.50 km - the longest railway tunnel in this part of the world. It reduces the distance between Mumbai and Mangalore by 1,127 km and the time by 26 hours.

 

On the finance side, it was obvious right from the beginning that the project would have to rely on market sources, as the governments concerned were in no position to shell out the money. The KRC, which was incorporated in 1990 as a public sector undertaking of the Central Government, has in the last seven years tried every means of finance for the project, ranging from public issue of bonds, private placement, secured and unsecured loans, bridge finance, sale and lease back and external commercial borrowings. It also tried out an index linked bond, but realised that the market was not ready for such a new instrument.

As liquidity conditions in the market kept shifting, the corporation kept shuffling the instrumentality for raising resources. As one of the first infrastructure projects to be commercially financed, its funding pattern has been, well, curious -- but it also has relevance for other similar projects.

In fact, it was financial compulsions that led to the formation of KRC. The Indian Railway Finance Corporation (IRFC), which was initially entrusted with the job of raising finance for the Konkan Railway project, soon found itself unable to give it the time and resources it needed.

KRC Ltd is a joint venture between the central government and the state governments of Maharashtra, Karnataka, Kerala and Goa. Though the railway line does not enter Kerala, the local government was convinced of the benefits that Konkan Railway would have for its economy and the people; so it decided to join as a shareholder. But the state governments have either been unwilling or not been able to raise enough money to take their full portions of the capital. As a result, the funds flowed in driblets. Even today, as the project nears completion, KRC has not received full contributions from all shareholders. The authorised share capital was raised in 1996-97 from Rs 600 crore to Rs 800 crore, with the government of India taking a 51 per cent share, while the rest went to Maharashtra (22 per cent), Karnataka (15 per cent), Kerala (6 per cent) and Goa (6 per cent). So far, however, the corporation has only received Rs 746.40 crore by way of paid-up capital.

Financial resources have actually remained the greatest challenge for the KRC throughout, points out B Rajaram, managing director, Konkan Railway Corporation. The IRFC, which was originally mandated to raise Rs 350 crore from the market through tax free bonds in 1990, could only manage to garner Rs 131.14 crore in the three-year period between 1990-91 and 1992-93. It was then that the government of India decided to hand over the financing of the project to KRC, in addition to its execution.

Initially, KRC toyed with the idea of privately placing bonds, but soon realised that the attempt was futile. For one, the market was not familiar with infrastructure projects then. For another, liquidity conditions were not conducive to raising large sums of money. So, it opted for the public issue route. The maiden issue of 10.5 per cent tax free bonds was floated in November 1993. And realising that institutional support could not be relied upon, KRC went the whole hog to tap retail investors through a large publicity campaign, which also meant a high marketing cost. Against the targeted amount of Rs 320 crore, KRC managed to raise Rs 230 crore.

Since then, the tax free bond became the biggest money mobiliser for KRC, accounting for 61.5 per cent of the total amount of Rs 3247.90 crore that the corporation has raised so far. But the market response to these flotations was different at different periods of time. Year after year, the authorised amount kept increasing, but the corporation kept missing the target, the gap being large in years of tight liquidity. In the past eight years, the corporation had been authorised to raise Rs 2,070 crore through tax free bonds, but raised an overall sum of Rs 1,996.50 crore. The last issue, floated towards the end of 1997, was that of 9.25 per cent infrastructure bonds. In the market with high liquidity, the bond received a good response. We had targeted Rs 100 crore but received Rs 250 crore, says Rajaram.

The heavy reliance on bonds also meant that KRC had to rely on other more expensive resources in years when liquidity was tight. For example, when the market was easy in 1993-94, the corporation was successful in placing its bonds privately. It almost fulfilled the yearly target then. And as the liquidity position continued to be easy in 1994-95, KRC managed to sell bonds at a premium. However, 1995-96 proved a disaster year with a severe liquidity crunch when interest rates soared. That year, KRC managed to garner just Rs 180 crore from the market, the lowest in the four-year period.

This situation often compelled KRC to resort to short term sources of funds like inter-corporate loans and bridge financing, which involved higher costs. This is clearly reflected in the fact that of the total cost of Rs 3,350 crore, financial charges amount to Rs 950 crore - a whopping 28 per cent.

Over a build-operate-transfer (BOT) concession period of 10 years, the internal rate of return (IRR) for the project works out to 14 per cent. However, this has been aided by a revision in the traffic projections made last year. As Rajaram explains, there was natural scepticism about the project in the beginning, but as it made progress and particularly when pockets of lines started becoming operative, industries started coming up along the lines. It was therefore logical to revise the traffic projections.

In addition to the revised traffic projections, the project has been helped in no small measure by the fact that it enjoyed government patronage. It carried a letter of comfort from the Centre in all its bond and external commercial borrowing (ECB) issues. Moreover, the Konkan Railway will be charging 45 per cent higher rates compared with the railways norms on chargeable rates to distance. Rajaram claims that he is allowed to charge upto 50 per cent more, rates which have been allowed to new railway lines.

Rajaram is even more optimistic. There is a move to link this stretch of railway with trains coming from the north and going east before heading down south. It would result in considerable saving in time and cost for both cargo and passenger traffic going from north to south. And as he points out, there is already a proposal with the Railway authorities to divert as many as seven express trains to this route. The result: there would be a 40 to 45 hour saving in the traffic from the north to the south and additional earning for the Konkan Railway to the tune of Rs 1.5 crore per day.

The KRC has also derived certain external benefits from the execution of the Konkan Railway. It has been awarded the tunneling work for the Mumbai-Pune express way. The KRC had last year put in a bid for a railway project in Bangladesh, and though its lost the bid to a Korean syndicate, it can look forward to undertaking with profit similar projects in other countries.

A moot point is, could the delay in the project have been avoided? The delay is attributed mainly to two factors: the tunnel in Goa took longer than expected because the soil there turned out to be softer than assessed; and the resistance of a section of local populace delayed the project beyond all expectations.

The Railways normally undertake such projects on a build-operate-lease-transfer basis. Such an approach puts a strict time discipline on the contractor with penalty clauses in-built. But Rajaram says: There is no private party which has the kind of expertise required for this project. Konkan Railway was built by engineers and other personnel belonging to the Indian Railways. And as another expert puts it, No railway line has ever been built in seven years.