General Purpose Wagons : GPWIS Scheme & Potential Private Investment in General Purpose Wagons : GPWIS Scheme & Potential Saurabh Sood GATX INDIA PRIVATE LIMITED 20th NATIONAL RAIL TRANSPORT SEMINAR ON “BUSINESS TRANSFORMATION on INDIAN RAILWAYS” 18 January 2019

Overview Economy & logistic sector Current state & growth prospective Challenges facing logistic sector Indian Railways – A strategic national asset GPWIS: Landmark policy decision to encourage private investment Potential Features Private investment in rolling stock Benefits to the stakeholders/rail ecosystem Positive global experiences Investment in Rolling Stock: Global Scenario Way forward

Indian Economy & Logistic Sector Real GDP for 2018-19 expected to reach $2 trillion. (source: First advance estimates of national income 2018-19). Growth prospective robust Logistics Sector – Critical for economic growth & job creation. Employs 22 million directly or indirectly. Strategically important to ensure global competitiveness of Indian industry. (10% decrease in indirect logistics cost can increase 5%-8% of exports.) Major Challenges: Logistics Cost ~ 13%-14% of GDP Lower modal share for Rail Largely fragmented & unorganized. Need for massive investments to support the projected economic growth

Indian Railways IR a national asset 4th largest rail network in the world Unique characteristics Carries a very large amount of passenger traffic vis-à-vis freight traffic Low modal share of rail for freight traffic Need to subsidize passenger traffic due to social obligations Major Challenges: Congestion in rail network Increasing dependency on budgetary resources and borrowing to meet capex goals Pressure on operating ratio Source: World Bank Source: Indian Railways Source: Indian Railways

GPWIS: Potential for Investment Landmark policy launched in April 2018 allowing private investors to own General Purpose Wagons. General Purpose Wagons (GPWs) Open Gondolas, Covered boxes, Open Hoppers, Tank wagons & Flats etc. Used for transportation of : Ore, Coal, Cement, Petroleum products (All restrictions of commodities removed) Market Potential GPWs carry ~ 1000 million Tons of freight per annum on IR network (85% of the total freight carried on IR network is through GPWs) Estimated incremental demand of ~ 9000 wagons annually(Source: Internal Estimates based on estimates of freight growth of 3% per annum). Commissioning of freight corridors could lead to an increase in demand as well. Additional demand of ~ 5000 wagons p.a. for replacement of rolling stock (Source: Internal Estimates based on closing rolling stock inventory of IR for each year and fresh orders placed) Significant investment requirement.

GPWIS: Positives & Limitation Policy framework ready to allow private investment into GPWs. Availability of a freight rebate albeit with a cap on the freight discount. Reasonable maintenance charges @ 2% of IR’s acquisition cost of similar wagons per annum. Wider pool of wagon designs available for investment. Rakes inducted by private investor would not be merged in IR’s pool of wagons and thus would ensure dedicated operations. Limitations: Reduced economic life of 15 years. Effective rebate for private investor (end user) is affected due to capping of rebate to IRFC lease cost. No incentive for players bringing in more efficiency by way of higher number of trips or lesser empty runs as effective rebate decreases with increasing number of trips. Temporal variation in the induction of rakes would result in different freight rebate to private players due to change in IR’s cost of acquisition or change in IRFC’s cost of capital.

Private investment in rolling stock: Likely Impact Benefits to the stakeholders Indian Railways Enable IR to efficiently allocate financial resources for expansion and modernization of the track network. Enable IR to improve its financial position by not just enhancing revenue but also increasing its profitability/ return on capital Higher number of wagons will result in more freight revenue Reduction in interest costs/lease charges paid to IRFC for procuring rolling stock. Increases its ability to meet its debt obligations and significantly enhances IR’s return on capital. Improves customer retention. Help in addressing the rolling stock requirements Private Investors Increase in the efficiency of operations for end users/private investors. Better monitoring/control of supply chain Increased reliability reduces overall inventory costs Logistics Cost Logistics costs of Indian manufacturing industry is higher than the global average by 5%-6%. Wagon Manufacturers Increases demand for wagons and ensures which incentivize investment in latest manufacturing technologies and wagon designs Impetus to “Make in India” initiative of GoI 1.2 million wagons ~0.8 million wagons ~270 K wagons

Private investment in rolling stock: Likely Impact Benefits to the overall ecosystem Future Ready Investment in Rail sector IR’s latest forecast suggest that DFC would be operational by 2019-20 Private players should be provided the opportunity to invest in a wide range of wagons and provide the industry the ability to develop more efficient wagon designs keeping in mind the following. Ensure effective and efficient utilization of DFC. Adequate quantity of rolling stock with efficient designs and technology is available in time for commissioning of the DFC; development and approval of new wagon designs will have a gestation period of 2-3 years. Globally (US, Europe, Russia), private players own 50%-80% of the wagon fleet. Similar model in Indian would create a new industry of railway wagon owners and operators and lead to higher Foreign Direct Investment (FDI) in the rail sector 8% including CONCOR Private Ownership of wagons

Private investment in rolling stock: Global Experience Experience from Rail Roads in America CAPEX is the key to increasing revenue and ensure safe, cost effective, high quality service to meet current and future freight transportation demands Net Income increased over 230% due in part to an increase in capex on track infrastructure of over 170%. Enabled railroads to keep pace with GDP growth, which grew by over 160% in 1989-2009. Indian Railways needs Private Investment to ensure capacity building and modernization in alignment with transportation requirement of the country.

Private investment in rolling stock: Global Experience Experience from Rail Roads in America As a result of Railroads investments in infrastructure and modernization, the U.S. rail system gained considerable efficiencies. Rail Rates (RR) came down sharply. Railroads gained competitive edge. Trains accidents and injuries reduced by 75%, between 1980-2009. Fuel efficiencies increased by 45% due to investment in new technologies.

Investment in Rolling Stock: Global Scenario North America Europe (Excluding Russia) Russia Wagon owns by railroads less than 25% Private ownership is steadily increasing One of the fastest growing private ownership markets globally Industry estimates: 705,000 Rail wagons in standard gauge countries (management estimate) Approximately 1,2 Million rail wagons (Source: INFOline as of Jan 2014, management estimate) Approximately 1.5 Million total rail wagons (Source: UMLER as of January 2014)

Way Forward Continual improvement in the policy framework. Partnership based capital investment – Efficient capital allocation & growth Fixed assets: Indian Railways, Government Rolling stock: Private investors Increase private ownership of rail wagons in line with global benchmarks. Introduction of innovative wagon designs. Better suited to customer requirements More efficient Equitable distribution of risk and reward Private participation in other areas – Maintenance, Locomotives.

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