Privatising the Railways

It’s common knowledge that the finances of Indian Railways have been severely stressed for several years. Its internal generation of revenues has been inadequate and profits abysmally low. The government, too, is unable to provide the required budgetary support through its Plan fund allocations. In order, therefore, to revive the fortunes of railways in India, the present government has laid great emphasis on encouraging private sector participation, especially in capital-intensive projects, through the PPP (public-private partnership) route, so that infrastructure expansion can take place and the rapidly growing demands of the economy can be met soon. Unfortunately, PPP’s track record with Indian Railways has so far been dismal, though the ever-optimistic Planning Commission continues to provide for substantial outlays under this head in the railway’s Five-Year Plans.

A principal cause of failure of the PPP model in the railways has been its failure to nurture the joint partnership the way it should have. Primarily, it is the complex regulatory framework that has deterred private players from joining hands with the railways. Borne out of past experience they also fear they will not be allowed a level playing field, and the conditions governing the partnership shall remain heavily biased in favour of the railways. With a view to setting things right, the railway minister had recently announced that new policies are being devised, procedures being simplified and greater decentralisation of decision-making being introduced to remove hurdles in doing business with private investors. He also said that five different PPP models have been prepared that are open for investment for station development, construction of freight terminals, and new lines to provide for port connectivity. One hopes the minister’s assurances get translated into practice, and pave way for breathing new life into projects that have been languishing for want of funds.

Railways should also explore the possibility of opening up train operations—both passenger and freight—to the private sector. Introduction of market competition is seen as a good way for achieving higher efficiency in rail transport and several systems have opted for it. Two good examples are Japan and Britain, both of which have experimented with privatisation of train services, and despite mixed outcomes, have retained much the same structure created at the time of privatisation some decades ago.

The state-owned Japanese National Railways was functioning as a monopoly for years, which is why perhaps it was plagued with low productivity, high labour costs, loss of share of transport markets and accumulation of massive long-term debts. In 1987, the government decided to privatise rail operations by splitting passenger services into six vertically integrated networks and creating a single national freight operator that pays access charges to the passenger companies. The government views the outcome of privatisation as a success. Traffic has grown, especially on the three larger passenger rail systems; there has been no significant tariff increase ever since; staff strength has reduced and productivity has more than doubled. A major factor that has contributed to reducing the costs of operation is the replacement of a vertically integrated monopolistic structure with competition among vertically integrated privately-owned train firms.

In contrast, the privatisation of rail operations in the UK did not come up to expectations. The main principle driving the British rail policy of the 1990s was not change of ownership, from public to private, but the establishment of competition. It aimed at achieving cost efficiency through maximisation of opportunities for effective competition while retaining its natural monopoly in infrastructure. The new policy was successfully implemented and started to produce some remarkably good results. But, shortly thereafter, there was a change in policy (mainly because of a change in government) under which competition in passenger train services was moderated for the reason that the monopoly profits that the railways were earning on certain routes and using them to subsidise losses on others had come down. Hence, after initial improvements, the service quality deteriorated considerably. Congestion began to interfere with train reliability, and punctuality suffered. It was commented that the failure of railway privatisation in the UK was because of the government’s attempt to create a legal fiction that something was competitive when it was really a monopoly.

Competition for British Rail’s freight services has, however, worked reasonably well. There has been significant innovation in both the nature of services offered and methods used, resulting in a marked improvement in performance, productivity, efficiency and customer service. Freight volumes have grown by 50% in the past 10 years, reversing four decades of decline. It was said “the success of Rail Freight points to harnessing market forces and creating appropriate incentives rather than regulatory or structural change as the way to improve performance”.

Indian Railways has already taken some steps in this direction by granting licences to private operators to run container train services, and permitting them to compete with the Container Corporation of India (CONCOR), which was the monopoly operator of these trains. The share of rail increased even on routes where CONCOR services existed. Faced with competition, CONCOR was forced to improve its services and reduce its tariffs to remain competitive. With the Dedicated Freight Corridors coming up, the trains that will be running on the new routes can also be offered to private players similarly.

Short distance inter-city passenger services, wherever considered feasible, could also be handed over to private operators, following the British model where infrastructure is owned by the railways, but trains are operated by private companies. Since there are large sunk costs in railway infrastructure, these companies may be asked to pay access charges for track usage. Experience of rail privatisation in Britain can be helpful in steering clear of the problems faced by the British Rail. The privately-owned trains could either be given exclusive rights for the selected routes or be permitted to compete with Indian Railways.

Times are changing, and the monopolies in public services have become anachronistic. By switching over to a system where private players are allowed to compete for market share, Indian Railways can look forward to evolving itself into a more efficient and commercially viable organisation. There should be better days ahead.

The author is a former MD of Railway Finance Corporation.

E-mail: mathur.surendra@gmail.com