Why user fee is a pivot in railway station privatisation

Railway stations in India are ready to shed their long-standing image of a staid, socially committed enterprise and metamorphose into a capital-rich commercial enterprise. After Mumbai and New Delhi, the two largest railway stations in India, were tossed up for private participation, at least 100 more stations are now ready to commence their journey on the bidding route in the next two months. More importantly, the government is all set to notify the quantum of user fee to be collected from passengers and passed on to the developer for the redevelopment and modernisation of each station.

Indian Railway Stations Development Corporation (IRSDC) and Rail Land Development Authority (RLDA) are working furiously to take the identified 123 large stations through the bidding process before March 31, 2021. Some are already at the qualification stage, while several others are just getting ready to roll out the red carpet for private capital. Jaipur, Hyderabad, Bengaluru, Nagpur, Bandra Terminus, Kalyan, Lokmanya Tilak Terminus, Tirupati, Dehradun, Nellore, Puducherry, and Ernakulam are among the first lot that are going under the hammer.

S.K. Lohia, managing director and CEO of IRSDC, told Fortune India that the government notification on the user fee is expected anytime soon. The user fee, which is likely to be in the range of ₹10-₹50 per passenger per trip, will make the rail fare a little expensive. Lohia, however, refused to quantify the user fee band proposed by the ministry of railways.

Lohia said the user fee would provide a steady revenue stream for the developer while revenues from real estate development continue to be volatile. “It makes the project financially viable as banks are more comfortable with the user fee structure,” he said.

Rajaji Meshram, partner, strategy and transaction services, EY India, agreed. “The user fee will form a predictable revenue component for the developer, making it comfortable for the lenders to fund the project. The commercial rental and other income from various real estate projects within the station complex will add to the kitty, but depend heavily on the market conditions,” said Meshram.

The user fee is the prime differentiator now as compared to the earlier privatisation efforts initiated more than five years ago, without much success. A departure from the established revenue models adopted by the Indian Railways so far, the adoption of user fee is of course revolutionary and strategically important from the point of lenders. The move comes close on the heels of opening up of train operations partially to private participation in 2020.

While many companies are interested in station redevelopment, two of them—the Adani Group and the GMR Group—are aggressively looking to foray into the new sector. The two have already shown keen interest on Mumbai, New Delhi, and Ernakulam Junction redevelopment projects, which are at the pre-bid stage. Each of these stations have drawn a good number of private companies at the qualification stage.

Lohia said the model concession agreement has almost been finalised after consultations with the finance ministry, urban development ministry, and other departments. AECOM India, the consultant for the station development project, is preparing the detailed project report (DPR).

“As per the model concession agreement, annual concession fee will be the bidding parameter. In some cases, surplus revenue can be generated on account of real estate, user fee, and others. So, the bidder will have an option for proposing an upfront fee in addition to the maximum annual concession premium,” he said.

Every successful bidder will also have to pay a project development fee, which is a fixed component. The developer will rebuild the station under the Design, Build, Finance, Operate and Transfer (DBFOT) model, and operate and maintain it for 60 years. According to the plan, core operations such as train and parcel movement, signalling, and ticketing will continue with the Indian Railways.

The first two stations that were given to private players a few years ago, Habibganj (Madhya Pradesh) and Gandhi Nagar (Gujarat), have seen delays in the completion of their work, primarily due to the pandemic. “Habibganj will be completed by March. Gandhinagar is also nearing completion,” said Lohia.

Habibganj, which is being built by the Bhopal-based Bansal Group, will have an array of facilities such as food stalls, parking, and restrooms. The redeveloped Gandhinagar, which is being built by the Leela Group, will boast a five-star hotel above the rail tracks for the first time in the history of the Indian Railways. As station redevelopment projects are now classified as infrastructure sector projects, banks will be happy to roll out funds at a cheaper rate as compared to real estate projects that raise capital from non-banking finance companies at a high rate. The ministry officials said that the rush of private sector players to Mumbai’s Chhatrapati Shivaji Maharaj Terminus (CSMT) recently at the Request for Qualification (RFQ) stage has buoyed the station privatisation programme. IRSDC received 10 applications from developers and fund houses showing keen interest to develop the 132-year-old station formerly known as Victoria Terminus.

The participants include Adani Railways Transport, GMR Enterprises, Godrej Properties, Oberoi Realty, Kalpataru Power Transmission, Moribus Holdings, and Brookfield Infrastructure Fund IV, among others. For redeveloping CSMT station, which caters to over one million commuters daily, IRSDC has pegged the total cost at ₹1,642 crore and the cost of real estate around the station at ₹1,433 crore. It has identified 2.5 million sq. ft. of built-up area on leasehold basis for 60 years for commercial development (including some properties for residential development up to 99 years) on selected plots at CSMT and around. The redeveloped station will function like a city centre mall complete with retail outlets, eateries, souvenir shops, entertainment facilities, and hotels, among others.

The developer has been prevented from doing any work on the old structure, which is a UNESCO World Heritage site. The developer can demolish the nearby buildings that house administrative offices. The project will integrate various modes such as the proposed Harbour Line fast track and the metro line, to make it a transport hub. Also, the plan is to segregate arrival and departure terminals.

The New Delhi Railway Station (NDLS) redevelopment project is also on a fast track. Nine companies, including Adani Railways Transport and GMR Highways, had participated at the RFQ stage. The RLDA, which oversees NDLS’ redevelopment, will float the request for proposal (RFP) soon for selected participants who get qualified in the technical process. The redevelopment cost of the station, which caters to 450,000 passengers daily, is pegged at around ₹5,000 crore. According to the plan, the station will be redeveloped into a world-class station with dome-shaped terminal buildings with two arrivals and two departures at the concourse level, two multi-modal transport hubs on each side, 40-floor high-rise twin towers (with hotels/offices and retail at podium) and a pedestrian boulevard with high-street shopping.

Another relatively smaller railway station redevelopment project at Ernakulam Junction attracted 15 companies at the RFQ stage recently. According to the RLDA, companies including Kalpataru Group, Anchorage Infrastructure, I Squared Capital, Adani Group, and GMR Group have come forward. The project cost is estimated to be ₹229 crore. The project is likely to open final bids on March 5, 2021.

If the Indian Railways continues as a regulator as well as a player and competes with the private companies, there is likely to be unavoidable friction. So, the government is planning to convert the existing Rail Development Authority to a regulator. The most sensitive issues related to pricing and competition can be monitored by the new regulator.