High speed Rail System

1. KEY OBJECTIVES
To create high speed railway connectivity (250 km/hr and above) between all major cities;
Only economically viable projects to be implemented.
To develop high speed corridor preferably through Public Private Partnerships (PPPs).


2. ROLE
Carry out Pre-feasibility Studies.
For the economically viable projects carry out the Project Development Activities
including preparation of DPRs.
Acquisition of land for track infrastructure, stations, Utilities and real estate development.
Enter into agreements with State Govts. for part financing the Project Development
activities, land acquisition and funding.
Enter into agreement with Indian Railways for transfer/ and common utilization of
various assets identified for a particular corridor
Select Private Investors for various corridors.
Develop technical standards and specifications for Sub-structure, Super-structure and
Rolling Stock, so that all corridors in future could be inter-operated.
Regulator for interface between Sub-structure, Super-structure and various operators.
One point nodal agency for any interface issue between HSR operator and IR.

1. Funding Strategy

The development of HSR is very expensive as compared to development of Highways or
traditional railway lines. The average cost for development of HSR will be in the range of
Rs.100-125 crore/route km.

For HSR, will be competing with other modes of travel, the fares for HSR have to be
competitive, fares only will not be able to fund the HSR. NHSRA will also need to provide
the VGF support to the PPP developers.

Contribution from State Govts.
State Govts., should provide 50% contribution for following expenses;
DPR
Acquisition of Land
Viability Gap Funding

In case of HSR passing through two or more states, HSR connectivity will not
provide equal benefits to all states. E.g; Any link to Delhi or Mumbai will provide
more economic benefits to the cities/states connecting to Delhi/Mumbai than
Delhi/Mumbai itself. Hence, the cost contribution will in direct proportion to the
expected economic benefits.

Real Estate Development
HSR will be the major catalyst for real estate development in and around HSR
stations, and even new cities/townships on the HSR lines, with connectivity to major
city centre, could also be planned.

NHSRA will identify the real estate potential of each length and try to get generate
atleast 10% of the total projected revenue through real estate activities.

Funding support by NHSRA for PPP Projects
NHSRA, through central govt. can provide funding support to PPP developers
through following routes;
Sourcing soft Multilateral/Bilateral loans by providing GOI guarantees.
Arranging GOI/IIFCL guarantee for Long term Bonds of Project SPVs.
Arranging

Funding Support by NHSRA for Non-PPP Projects
Generally, the non-PPP SPVs will be directly funded by GOI/State Govts., and
NHSRA will not provide any financial support. NHSRA will recover the cost of
Project Development Activities from the SPVs and also the License fee (1-2% of
Revenues) for funding its overall Regulatory and Developmental Role.

Funding of Annuity

For PPP option, especially for Sub-Structure developer, NHSRA will have to pay the
Annuity payment to the PPP developer. Sources of Annuity will be;

o Revenue Share from Train Operator;
o Funding from GOI;
o Market Borrowings in form of Long term bonds, Multilateral loans,
Commercial Borrowings (Market borrowings will be taken to cover up
timing mismatch in Revenue Share from train operators and Annuity
obligations. Generally, revenue share should be able to cover up the market










Sources of Finance
For funding of VGF and construction through EPC, HSRA will raise resources through following
means:
Green Fund: HSR will provide alternative to air travel between cities. High Speed railway
is much cleaner way of commuting than air travel and road. In order to fund HSR, Centre
govt. will create a Green Fund by imposing additional cess on air travel and petrol sales.
Long term bonds.
Multilateral Funding
Budgetary Support
Project specific State Govt. support by land for development of stations and city side
development. Also, part financing of land acquisition for construction of railways.
Act as multimodal agency. part of revenue stream of other modes
Access to project finance
A very important benefit of adopting the PPP route for the provision of infrastructure, considering
that funding is getting increasingly limited from public sector budgets, is the ability to access
capital funding from the private sector. Thus, PPPs allow governments to overcome their
budgetary and borrowing constraints and raise finance for high-priority public infrastructure
projects. Essentially, governments are able to use private finance through PPPs to build
infrastructure projects that would previously have been built by the public sector using public
sector finance. In case of annuity based projects and payment mechanism involving unitary
charges, PPP projects also leverage available public capital by converting capital expenditure into
flow-of-service payments.
4) Optimum Risk allocation
The high degree of economic externality of public infrastructure, and the commercial and socioeconomic
risks involved in developing and operating them, have made it difficult to appropriate returns from
infrastructure investments. The long gestation period of infrastructure projects also requires sustainable
financial and operational capacity. Therefore, there is increasing reluctance in both the public and private
sectors to absorb all the costs and assume all the risks of building and operating these assets alone. PPP
ensures that the risk related to infrastructure finance, construction and operation is transferred to the party
best able to manage it. Since the private sector assumes the risk of nonperformance of assets and realizes
its returns if the assets perform, the PPP process involves a full-scale risk appraisal. This results in better
cost estimation and investment decisions.
Financial scheme for HSR system
1. Major Assumptions

Aspects Assumptions
1 Land Will be provided by IR
2 Concession period 40 Years
3 Debt Equity Raio 70:30
Terms of commercial loan -
Rate
Moratorium
Repayment period

12 %
7 years
15 Years
4 Target Equity IRR of the
private developer
15%
5 Rate of soft loan 8%











2. Financial models - For various forms of PPP
Options



Parameters

AS a Single
project -PPP

Un-bundling of Project -PPP

Un-bundling of Project - Hybrid
Project All components -Civil (Sub- -Systems -Civil (Sub- Systems
component as one project structure)
Earth work,
Tunnel, Bridges
etc.
stations, depots
and trains
structure)
Earth work, Tunnel,
Bridges etc.
stations, depots
and trains
Developer DBFOT by
single private
developer
Built and
transfer (B&T)
by Private PPP
annuity
DFOT IR DFOT
Sources of
Finance

Multilateral
loans
80 % of project
cost as soft loan.
Repayment in 30
years after
moratorium period

Commercial
borrowings
Major share Part share Major source - Major source
VGF 35 % of project
cost
20 % - - -
Soft loan 20 % of total
debt
20 % of total
debt

Interest cost @ 1.4 %+ Hedging
cost @ 3 %

Project IRR 14 %
Equity IRR 15 % 15 % To IR -7%
Revenue
collection
By private
developer
train and real
estate revenues
By private
developer train
and real estate
revenues

Advantages
Interface risk No Yes, Minimal Yes, Minimal
Revenue Risk


Disadvantages
Capacity No appetite
Risk mgm.

Cost over-run
risk
High risk for
private
operator
Private entity Private entity State Private operator
Revenue Risk Private
operator
- Private
operator
- Private operator
Financial risk Private entity Private entity Private
Operator
NIL Private Operator
O &M Low - Private
Operator
Low Private Operator

CHALLENGES IN EXECUTION OF THE INFRASTRUCTURE
PROJECTS
a) The key issues for finance professionals, for the coming
times would largely be focused on (i) identifying and
allocating project construction and operation risks (ii) attracting
private equity investment in the high risks perception amongst
investors(iii) achieving financial closure with lenders support
after the issues at No. (i) and (ii) are professionally addressed.
b) The long construction period, risks emanating during
construction of theproject and weak investment appetite
amongst the international investors and funds as well as the
domestic market needs unorthodox solutions to attract interest
of equity investors unless the equity issues are addressed, the
availability of debt would also get difficult.
c) The developers have not yet received the advantage of single
window clearance concept because of multiplicity of regulative
agencies whose controls rest with different levels of
government, i.e. Central, State, or local.
d) A look at the last year of the Eleventh Plan 2011-12 would
reveal certain troubling facts (from CMIE database of projects):
about Rs 5 lakh crores worth of investments (in 500 projects)
were shelved in 2011-12.
Reasons for closing 20 shelved projects constituting 68% of
the total cost of shelved projects were: Land acquisition
problems (10 out of 20), lack of Coal linkages (3 of the 20),
Mining ban (1 of 20), end of Tax holiday policy (1 of 20).
EQUITY INVESTMENTS :
1. FDI
During eleventh plan, net FDI inflow was 1.1% of GDP as a
whole. The target for Twelfth Plan is 1.0% (inbound of 1.8% of
GDP and outbound of 0.7% of GDP) of GDP as a whole. The
uncertainty in the global financial market, Euro zone crisis and
risks in domestic economy led to volatile trend of the Inflows
under capital and financial account.On domestic front,
uncertainty about proposals on retrospective taxation on capital
gains, imposition of General Anti-Avoidance Rule (GAAR) and
taxation of short-term capital gains of foreign portfolio equity
inflows have further impacted FDI inflows.
1.1 Equity
In Equity market, investors have been extra cautious due to low
revenue visibility of the infrastructure projects. Valuations
mismatch between companies and investors on the capital
markets has meant that the private equity (PE) investors, which
are a source of equity for companies, have effectively lost an
important exit route. Banks have been insisting on equity
commitments from promoters before the sanction of funds.
Infrastructure companies have suffered as the consolidation
has not occurred and the opportunities for PE investors have
not met the expectations.

REDUCING RISK OF EQUITY INVESTORS
Investment projects have long gestation periods. During the
construction phase, there are no returns to the investors and
they have to undertake huge risks inherent in the construction
stage. While, the equity investment cannot be made risk free
completely but our specific requirement of huge equity in a
short span for projects with long gestation calls for certain
unorthodox solutions. For example, a concept of deferred
dividend on equity can be thought of, which will allow certain
return to equity investors during construction period of project
but the same will only be capitalized as enhanced equity. The
final realization of the same would depend upon the successful
commissioning and commercially viable operations of the
project. Further, the participation of the retail investors into
equity of infrastructure projects also needs tax incentives and
special incentives.
Measures such as relaxations/amendments in the pension/PF
regulations to permit higher investments in equity, especially
infrastructure sector companies must be undertaken. Unless
the equity portion is adequately arranged, the financial closure
of the project would be difficult and delayed. This would have
cumulative effect to encourage more private sector investment
in the infrastructure projects/companies.
12
th
Plan High Speed

Develop High Speed Rail Corridors and Upgradation of Speeds
a. Conducting pre-feasibility studies for development of HSRC in 6 corridors and
the viability of each corridor to be ascertained. Plans to undertake at least 2
DPRs and 1 corridor of 500 km for construction.
b. NHRSA for implementation of these projects.
Characteristics of Infrastructure Financing
Infrastructure projects differ in some very significant ways from manufacturing projects and
expansion and modernisation projects undertaken by companies.
Longer Maturity: Infrastructure finance tends to have maturities between 5 years to 40
years.
Larger Amounts:
Higher Risk: Since large amounts are typically invested for long periods of time it is not
surprising that the underlying risks are also quite high.
Fixed and Low (but positive) Real Returns:
Mumbai Ahmedabad train

The project is estimated to cost Rs. 60,000 crore. For financing while one option is to execute it on a PPP
model, the other is on government to government model.