In September 2014, the ministry of railways had constituted a committee for making recommendations for mobilisation of resources for major railway projects and restructuring of the ministry and the Railway Board. The committee submitted its interim report recently.
One of the major recommendations of the committee is unbundling of the vertically integrated network of the railways and creation of a separate railway infrastructure company that will be responsible solely for the management of infrastructure consisting of tracks, signalling and terminals. It will be distinct from the authority controlling the passenger and freight train operations. The committee has made a strong pitch for introducing competition in rail services, emphasising that “the experience in country after country, which opened up to competition, has shown that the entry of competitors has lowered costs and prices, led to better services, and thrown up innovative solutions to customer needs”.
While shying away from using the word “privatisation” and calling it “liberalisation” instead, the committee presents three modes of liberalisation under which private entities could be allowed to take over train operations. First, a competitive award of concession to the bidder who offers the lowest price or the best service for a selected route; second, to allow more than one vertically integrated railway operator to compete over a segment; and third, once the railway infrastructure company has been unbundled, to allow open and non-discriminatory access for any new operator which wishes to enter the market for operating trains. The committee favours the third option, arguing that there are instances of this type in other countries, too, hinting thereby that the Indian Railways will stand to gain by following suit.
The British Railways were the first to introduce a reform of this nature very early in 1993. The infrastructure company created was privatised, and was in line with the overall philosophy of privatisation that the government then in power followed. It continued to function that way for several years. However, when a new government took charge, this “private monopoly” was done away with and a new entity called Network Rail was set up, which though intrinsically a private sector organisation, has its debts underwritten by the government.
The train operations continue to remain under the control of British Rail. The passenger services are divided into a number of regional franchises that are run by privately managed Train Operating Companies (TOCs) which have secured the franchises through competitive bidding. In addition, there are operators who run their own services on payment of access charges to the Network Rail.
The question remains: Has the British government benefited by this restructuring? Whereas the official version holds that the strong competition has helped to drive away inefficiencies, lowered the costs to customers and has improved service quality, there are divergent views, too. Take, for instance, the report from the Centre for Research in Socio-Cultural Change (CRESC) titled “The Great Train Robbery: Rail Privatisation and After”, which highlights how by lowering the access charges on train operators, the authorities have allowed heavy losses to be suffered by Network Rail.
These arguments are buttressed by the critique contained in the command paper (commissioned by the British government in 2012) which states that because the open access operators are being charged much less than what the franchised service operators are asked to pay, the franchise bidders, perceiving a risk of open access competition undercutting them on costs, are likely to offer much lower bids. This detrimentally impacts on the taxpayer’s interest by putting further pressure on fares and making it harder to deliver the rail upgrades that passengers want. The command paper, therefore, concludes that “given the UK’s financial position, Government does not at this stage support an increase in open access competition”.
It also observes that there has been no significant improvement in the quality of passenger services, the overall fare levels have been growing faster than inflation for some years, overcrowding continues to be an issue on too many services, and the punctuality and reliability of services has been a cause for concern.
In Europe, too, there are voices of opposition to the vertical separation of infrastructure and operations. Indeed, not long ago, both the French and German national railway companies had strongly pressed the European policymakers not to force the companies to separate infrastructure and operations, arguing that in countries with integrated rail operations—including the United States, Canada and Japan—there has been steady growth in investment, as also in passenger and cargo traffic, in contrast to the sluggish European market.
The French Railways have now gone a step further: in open defiance of the EU diktat, they have decided on reintegration of infrastructure and operations, by creating two subsidiaries—the national operator (SNCF) and the infrastructure manager (RFF)—under a single state-owned holding company. The government believes that this reorganisation will bring in major benefits in terms of better quality of service for customers and substantial productivity gains.
Let it also be stated that competition is not be treated an end in itself but simply a means of achieving a more efficient railway. And vertical separation could, in some cases, actually lead to higher transaction costs between the infrastructure manager and the incumbent operator, leading to a loss in efficiency.
The Indian Railways should, therefore, tread with caution before separating the managements of infrastructure and operations, and further, to allow private operators to compete for passenger services on payment of access charges to the infrastructure company. The Indian Railways is far bigger in size, and the number of train services many times more than in any single European country. It also serves regions and population that bear no comparison to its counterparts elsewhere. And, while competition in train operations may have resulted in a few improvements in rail services in smaller countries, it will be unrealistic to expect a similar outcome on larger rail networks. The Indian Railways should also try to introspect why its scheme of private sector entry into container train operations, introduced a few years ago, never really took off the ground and has remained mired in controversies.
The author is a former MD of Railway Finance Corporation.
E-mail: mathur.surendra@gmail.com