Indian Railways (IR) have drawn up two distinct financing models to partner private sector players in its ambitious plan to add 25,000 km to its rail network of 64,000 km by 2020. Under both the models, the Railways would form special purpose vehicles (SPVs) with private players, but will have different revenue-sharing patterns and land acquisition methods.

Rail network expansion, hitherto being done through IR?s own funds and borrowings, is the single largest component of the proposed Rs 14-lakh-crore expansion of the railway infrastructure over the next 10 years.

By one financing model proposed in the ministry?s draft policy, the Railways will contribute 26% equity in the SPV. The land will be acquired by zonal railway at SPV?s cost but its ownership will vest with the Railways. In return to laying the rail lines, the SPV will get a share in the revenue for 25 years. For project related traffic, the SPV will get 95% of freight apportionment less maintenance cost for the first 10 years and 90% of freight allotment less maintenance cost for next 15 years. Of non-project related traffic, the company will receive 80% of the freight traffic after deducting the maintenance cost for 25 years.

The second model is what is called the ?private line model?. Here, the private players will lay down new lines on their own land and will share the revenue for 30 years with IR, after which the ownership of the line and land will go to the Railways.

?Only those new line proposals which are 20 km or more in length shall be eligible under this policy. Further, the new line proposal would require to have an acceptable rate of return of minimum 14 %. This policy shall not be applicable to lines intending to provide connectivity to coal mines and iron ore mines directly or indirectly,? the draft policy states.

The Railways have added only 180 km a year on an average since Independence, when the rail network was 53,596 km. It now has a backlog of 11,985-km projects stuck for want of funds.

?Our target is to add 25,000 km of new lines in the next 10 years. This has to be achieved by removing various constraints. We have to make a beginning. The time has come for the business community to come and join hands to build partnerships with railways,? railway minister Mamta Banerjee had said while announcing Rail Budget 2010-11 in February.

?We are seeking suggestions from private players on the proposed financing models. The discussions with private parties will be held on April 17,? a senior rail ministry official said. The Railways? various expansion projects ? which include buying wagons, building new railway stations, freight terminals and auto hubs? are expected to cost Rs 14 lakh crore by 2020. Its current resources, which include gross traffic receipts and budgetary allocation, are hardly enough to meet the ambitious expansion plan.

The Railways will invest Rs 4,362 crore for constructing new lines in 2010-11, a 31% jump from 2009-10.

The Railways have also prepared a draft policy on allowing private players set up freight terminals. As per the draft, a logistic services provider with three years? experience and a minimum net worth of Rs 10 crore at the end of previous financial year will be allowed to set up such terminals.

The terminal management company will also be entitled to handle third-party cargo against payment of applicable charges, including terminal charges, wharfage charges and charges for other value-added services. Depending on market, the company will be free to fix tariff for such services, as per the draft.