Project Management Institute

India's rail travails

An express train travels between Sawai Madhopur and Fatehpur, Uttar Pradesh, India

An express train travels between Sawai Madhopur and Fatehpur, Uttar Pradesh, India.

One of the world’s largest railway systems is in dire need of a makeover. India’s creaky, colonial-era railway network covers 65,436 kilometers (40,660 miles) and moves 8.4 billion people annually. The government has called for INR2 trillion in investments to bring the system into the 21st century, but modernization is no small feat: Politically sensitive low fares prevent the system from being able to fund capital projects, and a nettlesome bureaucracy slows down their execution.

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“There is nothing in this entire budget which tells you how they will make it attractive for private sector.”

—Manish R. Sharma, PwC India

Newly elected Prime Minister Narendra Modi announced his solution to these formidable challenges in July: public-private partnerships (PPP). Announcing a new budget, his railway minister said he expects US$1 billion in private investment during the fiscal year ending 31 March 2015 to inject capital in projects expanding freight and passenger rail services and introducing high-speed rail. To reach this goal, the government has for the first time allowed 100 percent foreign direct investment in rail projects.

Reaction to the PPP strategy was mixed, however. Harsh Dhingra, chief country representative for Bombardier Transportation India, echoed the optimism of some investors when he called the Modi administration move “a win-win situation for private players and the Indian Railways” in an interview with The Hindu. His company set up a plant in the Indian state of Gujarat in 2008 to build trains for the Delhi metro, and is now bidding for similar projects in other major Indian cities. But Manish R. Sharma, executive director of capital projects and infrastructure at PwC India, voiced skepticism: “There is nothing in this entire budget which tells you how they will make it attractive for private sector,” he told Reuters.

INR2 trillion
Cost of modernizing India’s rail system
US$1 billion
Private investment in rail projects the Indian government expects during fiscal year 2015
8
Number of rail projects in a government PPP database of 1,339 projects
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“If there is a good project with low risk, I don’t think there will be any dearth of investment.”

—Abhaya Agarwal, Ernst & Young, New Delhi, India

Risky Propositions

PPP rail projects aren’t likely to sell themselves because of India’s poor track record on railway projects, including rampant delays due to land acquisition problems and costly time and budget overruns. The PPP model has worked well for port and road projects but is relatively uncommon in rail. The government’s database lists 1,339 PPP projects—eight of which are railway projects. Five of those have been completed, while three remain under construction due to delays. One project began in 2007 but stalled in 2009 due to objections from people whose land had been acquired for the project. The government only recently approved compensation payments.

Success for future PPP projects comes down to how well the government crafts contracts, industry analysts say. It must correctly define technical specifications, accurately estimate project costs and detail all risks the private sector is expected to assume.

The successful Delhi Metro project could serve as a model for PPP projects

The successful Delhi Metro project could serve as a model for PPP projects.

“The private sector will only take on certain types of risks,” says Arvind Mahajan, head of infrastructure and government services, KPMG, a PMI Global Executive Council member, Mumbai, India. Mr. Mahajan says the private sector is well-suited to take on the operation of rail lines or to replicate successful projects such as the Delhi Metro, but it is less equipped to handle land acquisition, safety issues or first-time initiatives like high-speed rail, for which cost and project outlays are difficult to estimate.

Abhaya Agarwal, partner, infrastructure and PPP advisory, Ernst & Young, New Delhi, India, says the state-owned Indian Railways should demonstrate the potential of PPP projects through “low-hanging fruit” such as station development projects. “If there is a good project with low risk, I don’t think there will be any dearth of investment,” he says. Yet the burden is on the government to prove it can avoid past obstacles to modernization, which include “misplaced investment priorities” and a “lack of organizational reforms,” according to Ernst & Young. The Ministry of Railways seems aware of its shortcomings, moving to decentralize the project design approval process and establishing five distinct PPP models for the rail sector.

INTO HIGH GEAR

India’s railway system has no high-speed lines—but that could change if investors respond to the government’s call for private and foreign funding.

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img Mumbai-Ahmedabad line: The 545-kilometer (339-mile) “showpiece project” that Prime Minister Modi is keen on would be the country’s first high-speed line. A study of the INR600 billion project is scheduled to be completed in May 2015.

img New Delhi-Patna line: The proposed 1,044-kilometer (649-mile) project would cost an estimated INR1,300 billion. A project prefeasibility study has been completed by U.K.-based engineering firm Mott MacDonald.

img Diamond Quadrilateral (Delhi-Mumbai-Chennai-Kolkata): The massive high-speed project, which the new government voiced support for in June, would lay at least 6,500 kilometers (4,039 miles) of track so trains could travel more than 300 kilometers (186 miles) per hour among India’s four major cities.

India’s creaky, colonial-era railway network covers 65,436 kilometers (40,660 miles) and moves 8.4 billion people annually.

For Mr. Mahajan, the major PPP push will only succeed if investors feel they have a full grasp of project risks. “The government has to understand what the risks of the projects are and what type of risks it is possible for the private sector to take on. That includes doing thorough economic feasibility studies so that project costs are properly estimated,” he says. “It’s so important how you incubate projects before they are put out to bid to the private sector.” —Ambreen Ali

SEARCHING FOR ‘SYSTEMNESS’

With the U.S. economy on the mend, healthcare cost increases are accelerating. The cost of medical care delivered through private insurance plans is projected to rise 6.8 percent in 2015, up from 6.5 percent projected for 2014. Yet a return to the double-digit price inflation experienced by many in the 1990s and early 2000s is unlikely because healthcare organizations are looking inward for projects delivering new operational efficiencies, instead of pushing increased costs onto U.S. customers, according to PwC. “They are seeking a ‘systemness’ that will allow them to operate as one fully integrated entity,” says Ceci Connolly, managing director, PwC Health Research Institute (HRI), a PMI Global Executive Council member, Washington, D.C., USA.

To achieve “systemness,” newly enlarged organizations created through mergers and acquisitions are turning to high-value IT projects. Hospitals and health systems that recently consolidated to obtain economies of scale are now working to rationalize a patchwork of disconnected IT systems to manage employee, financial and patient data, Ms. Connolly says. Organizations are also challenged by federal legislation requiring more efficient and robust IT systems. For example, hospitals must implement electronic medical record (EMR) systems to track patient data and make it accessible at the point of care.

These requirements, along with the need to mitigate upward cost pressures, are pushing organizations to improve IT infrastructure. “It is driving a height-

RISKY OIL PROJECTS RISE

As oil becomes harder to find and costlier to produce, oil companies are spending more money on risky new projects. The cost of exploration and production by major oil companies has climbed 14 percent each year since 2005, while combined production has actually fallen, according to Bloomberg Businessweek.

Of the 20 priciest projects under consideration by big oil companies—totaling US$90.7 billion—nine are located in Canada, according to U.K. think tank Carbon Tracker Initiative, which compiled the recent report. The projects are notable for their harder-to-reach nature: Sixteen involve drilling deepwater wells or processing oil sands.

Saddled with greater costs and risks, these projects are also shouldering serious concerns over their long-term business value: Many of the projects would need oil prices to settle higher than US$110 a barrel to break even, according to Carbon Tracker Initiative. That means lower demand, carbon restrictions or any number of other factors that might nudge crude prices lower would threaten the benefits realized from these riskier projects. —M. Wright

A handful of black oil-rich sand from Alberta, Canada

A handful of black oil-rich sand from Alberta, Canada

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM NETWORK DECEMBER 2014 WWW.PMI.ORG
DECEMBER 2014 PM NETWORK

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