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Railways goes slow on borrowings to finance infrastructure projects

New Delhi, 12/03/2012, The Railways has sharply reduced market borrowings meant for financing infrastructure projects this fiscal.

The Indian Railway Finance Corporation (IRFC), the market borrowing arm of the Railways, had originally budgeted to raise Rs 8,654.38 crore for infrastructure project financing. However, IRFC has raised only Rs 2,000 crore for the purpose so far this financial year, said a Railway source in the know of developments.

IRFC funds have primarily been used to fund acquisition of rolling stock, and this was the first year when as much as 42 per cent of the borrowings were to be used for project financing.


This reduction is seen as a good move for IRFC, say experts . Majority of rail projects have low rates of return, which could in turn jeopardise the credit rating of IRFC. Till now, it has always received investment ratings equivalent to India's sovereign debt.

“Due to project and time overruns, rail projects have huge cost escalations by the time they are implemented. So, they carry much lower levels of internal rate of return (IRR) by the time of implementation,” explained Ms Vijayalaksmi Viswanathan, former Financial Commissioner, Indian Railways.

The Railways is also taking a re-look at the earlier proposal to significantly divert IRFC borrowings to infrastructure. “IRFC funds cost the railways about 8.5-9 per cent. So, we would like to invest them only in those assets that have assured 14 per cent returns. It is easy to convince investors when funds are going for wagons, which are known productive assets,” explained a Railway Ministry source. “But, with project finance in the Railways system, it is difficult to pin-point to the investor as to which of the projects the money will be spent on,” the source added.

Ring fencing

So, the Railways, which was looking to “ring fence” the fund usage for productive assets, has decided to use it in only two kinds of projects — railway electrification and doubling — with identified high IRR. These are identified projects, close to completion, where more freight trains are used.

In the current fiscal, IRFC was budgeted to borrow Rs 20,454.38 crore, out of which Rs 11,800 crore was to be routed to acquire rolling stock for the Railways and another Rs 140 crore for Rail Vikas Nigam Ltd (RVNL), which invests in various bankable rail-link projects with private partnership.