Indian Railway Finance Corporation (IRFC), the market-borrowing arm of the railways, which last year raised around Rs 2,000 crore to perform its newly assigned role of project financing, is pulling back. Rampant time overruns and resultant cost escalations in railway projects have forced the corporation, whose principal function is to raise money from the market to part-finance the Plan outlay of Indian Railways used for acquisition of rolling stock assets, has found the new role stressful.
“IRFC won’t be getting into project funding any time in the near future until there’s a clear direction from the railway ministry. Rail projects have very low internal rate of return (IRR) as there are time overruns in implementation of projects leading to cost escalations. All this can affect the credit rating of IRFC, which is AAA at present,” said a senior railway officer, requesting anonymity.
Only last year IRFC ventured into project financing by providing funds for a signalling project. As per the 2011 budget, it was to raise R8,654.38 crore for infra projects but could raise only Rs 2,000 crore.
Railways has the dubious distinction of having the largest number of delayed central sector projects, with cost overruns of over R70,000 or 120% more than the costs determined at the conception stage. The projects are also delayed by up to 216 months that could upset any financial institution funding such projects. In one of the worst cases, a freight operation information system approved in March 1983 at an estimated R520 crore has been delayed by almost 204 months.
“The uncertainties in project financing could increase cost of borrowing for IRFC, thereby adding to the financial pressure on railways and affect its programme on rolling stock,” the officer added.
The officer said the corporation has already aired its objections to the railway ministry. A top railway ministry official said that while IRFC may not be asked for project financing immediately, it could be asked to adopt a gradual approach identifying projects where it could lend without any problems.
In last 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 (RVNL), which invests in various bankable rail-link projects with private partnership and the rest for project financing.
In the current fiscal, IRFC is to raise Rs 15,000 crore, out of which Rs 14,896 crore will go for investment in rolling stock and another Rs 104 crore for RVNL. To raise the money, IRFC would come up with a tax-free bond issue of Rs 10,000 crore by January end.