Indian Railways needs to raise the bar for PPP projects

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The Railways Minister set himself a daunting task when during the Railway Budget he set out a task to double revenue through non-fare sources from the 5% currently over the next five years. Interesting, because increasing revenue through fare revenue - both passenger and freight has been the norm till now.

Raising revenues by 5% over a five-year period isn't an insurmountable target. And as the railways are now seriously considering monetising available resources - infact as recently as late last week, announcements for gaining revenues through leasing out spaces in railway station were made by the Railways.

And if even a part of railways land assets could be monetised, it could change the way Indian Railways is looked at and, who knows, may even have investors making a beeline to be part of the action in the future.

400 of over 7000 railway stations are already being redeveloped so that they can be exploited as a commercial destination. That should help Indian Railways earn annuity rental income. The Indian Railway Station Development Corporation (IRSDC) has been set up and work at the stations has already started. The stations in the initial phase could well become the pilot models for future development, so it will be imperative to closely monitor their progress.

The redevelopment also presents a great opportunity for private companies to partner with Indian Railways to deliver projects that are world class, delivered in time and are customer focused. But, a few key issues will have to be kept in mind even as Indian Railways embarks on its multi-year visionary project that could transform not just itself but also the way it delivers value to the passengers.

Creating a shared vision for the effort that Indian Railways is making is the beginning of a successful partnership between the public and private sector. Monetisation begins with clearly putting on paper not just a vision and an objective as well as expectation, but also detailing the way to reach the set goals. A process document or road-map needs to be drawn up and for that consultation papers can be invited and the Government could create an expert panel from not only the public sector but also experienced consultants with exposure in the segment. 

Preparing for the success of the effort will require very detailed planning and sticking to the execution of the plan. The private company in the project will have its shareholders, investors and lenders to satisfy. Indian Railways has to protect the interests of its own consumers and its board as well.

There are some key risks that both sides will do well to consider. The partners need to sit and discuss the risks associated with the project not meeting the public purpose for which the two sides joined hands. The risks associated with the time, effort and finances being put into the project will need to be detailed so that both sides can weigh it independently and together.

For any project associated with real estate, susceptible to the ups and downs of economic cycles, it is critical that the two sides are committed to the project in the long run. Real estate driven projects, typically, tend to give great returns when the developer can hold it for the long term and Indian Railways can easily wait for that.

A clear and rational decision making process will need to be developed jointly. When the roles of both sides are defined clearly, there is little room for a bottleneck to emerge. The road map for the project could serve as the guiding light when any part of the project threatens to spin out of control.

Each project leaders needs to be assigned specified roles that relate to the resolution of a problem. Such leaders need to be ones who can communicate before a full blown crisis happens. One of the best joint development examples has been the Delhi Metro Rail Corporation (DMRC), which has monetized its land banks beautifully while working well with the developers.  Delhi Metro is a professionally run company that has made a marked difference while delivering on time and setting standards for others to follow. 

Organisations that bring about a change need to build that culture right from the beginning. Indian Railways ferries over 12 million passengers daily and, the scale at which it operates, it can be seen to be very efficient. 

Rail networks around the world have joined hands with realty companies to develop a partnership model, a model that can be aggressively executed at a national scale. The stations are being developed under a build-operate-transfer (BOT) model. Indian Railways land has been sold in the past which may not be required if long term value from the land has to be realised. As the dedicated freight corridor takes shape, Indian Railways may also consider developing commercial and residential real estate in partnership with various companies. The Railway Land Development Authority, set up under the Railway Ministry, must expedite the process of change so that the impact can be seen at the earliest.

The learning from the first few projects could help the top management understand the drivers for change and how it could create value by leasing or partnering with its companies for the land that it owns. It is very important to detail the learning so that its benefits could be applied to the next round of unlocking the value, when it happens.

There is an old saying in the world of project management: A bottleneck is usually at the top. With the rich management experience team that can address issues that can derail a project ahead of time, for Indian Railways this should not be a worry.

First published on www.magicbricks.com on 29/11/2016

Monetizing land assets for Government...

The central and state governments are faced with an acute challenge of raising revenues. With the Central Government committed to lowering Direct taxes and rationalizing Indirect Taxes through implementation of GST, resources are becoming scarcer. The Government needs to come up with newer ways of managing its cash flows without burdening the common man. 

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One of the most underutilized assets in the country is Land. This is also because land for India and Indians is a very emotive subject causing strong feelings amongst people. Monetization of land assets is usually unpopular, a long drawn process and does not have any clear process. Therefore land as an asset is hardly ever monetized until and unless the situation is really dire. 

Asset monetization is basically a business transaction that converts a dead/idle asset into an income generating one. This “unlocking of value” where economic benefits can be derived from embedded operational assets should be undertaken only after due diligence and the viability and benefits are demonstrated

Till date the land asset monetization was heard of only in context of recapitalization of the Non-performing/stressed assets for the banking system. But, slowly and surely this is changing and today it is also being heard of in the context of unlocking value from a zero-revenue asset.

An approach that is process-driven to monetizing the realty assets of Government(land and buildings) could help drive significant annuity revenues for the government. If thorough processes can be put in place to help drive the entire exercise, it could serve as a benchmark for others who may want to unlock similar values.

Land monetization has suddenly caught people’s fancy and there are all sorts of numbers being bandied around on how for example, even if a parcel of the total land can be monetized, its value will be bigger than India’s GDP. Some other numbers state that around 4000 sq kilometers of land is lying idle with state government PSUs itself. One needs to be careful of the numbers since it isn’t an easy 2+2 that makes 4 here. Not all land can be monetized equally and this is something that all analysts seem to have completely forgotten. 

A process needs to be set up by which, as a first measure, detailing the land assets for all government organizations should be undertaken. Once a detailed list of all such assets can be streamlined, it will help bring transparency to the process. 

Only after a thorough mapping, will the question of what can be monetized come up. Consulting companies could then get involved in the process so that the type of “value that can be unlocked” can be detailed for different parcels of land. These could be the very foundation on which public/private participation could be sought. 

Realty companies may be interested in being a part of such an exercise since it gives them an entry into locations that are developed and may help drive businesses. Ultimately, that should be the sole aim of the exercise – the government should help drive businesses and raise annuity revenues for itself in the bargain. 

For example, government-run company MTNL, which operates telecom services in Delhi and Mumbai, has a reported 250 acres of land in two of the biggest metros in India. Partnering with a company that can help lease the office space to companies could help the struggling company with a healthy annuity income. BSNL is reported to have carried out some work for identifying and monetizing land parcels across the country. Both the telecom companies under the Communications Ministry could focus on a turnaround strategy after such rental income can add cushion to their balance sheet. 

There has been a move in the past to monetise surplus land parcels with government owned companies. According to one estimate, 60 sick government companies together owned nearly 50,000 acres of land that could be monetised. Opposition from labour unions is often cited as one problem that has plagued the effort. If all the workers can be part of the solution and can see their own benefit in the changes that are sought to be brought about, it may be possible to get their buy in.

Land parcels like these can be used to bring around a sea change in the residential or commercial landscape of major cities. Should it be so devised, they could be used for budget housing projects with some commercial real estate opportunities so that it can be monetised too. If the government does go ahead with a project of this kind, it will need to be executed with clockwork precision so that the cost does not spiral out of control. The social implications of such a landmark could set a benchmark for various state governments too, if executed well.

The government can consider a lease-only model so that it can reap the benefits of annuity income. If one successful project can be showcased, its learning can be used to drive other similar projects in states. 

Earlier efforts to raise resources through disinvestment have kicked up storms over allegations of assets being undervalued and the process being fixed. In order to prevent a repeat of the past, sufficient checks and balances should be incorporated in such an exercise and all the stakeholders including the public should be sensitised. If properly implemented then monetisation of land can be a game changer for Government revenues.

First published in ET Real Estate

http://realty.economictimes.indiatimes.com/realty-check/monetizing-land-assets-for-government/1837