Privatization of Indian Railways

WHY IN NEWS?

• The Ministry of Railways has decided to put on hold the tender for running 151 private trains along 109 major routes with an estimated investment of ?30,000 crore and will revaluate the process mainly due to tepid response on the bids from private players.

AN OVERVIEW OF INDIAN RAILWAYS:

• Indian Railways is the 4th largest network by size and the 8th largest employer in the world.
• It has a network of 70,000km and 8,500 stations spanning across the country, carrying over 8 billion passengers and 1.16 billion tons of freight annually.
• Administrative structure of railways:
  • The Railways is headed by a seven-member Railway Board.
  • The country is divided into 18 railway zones, headed by General Managers who report to the Railway Board. South Coast Railway Zone is the most recently formed zone (2019).
  • It also owns various subsidiaries related to rail transport, such as:
    • IRFC, RITES, IRCON (Financing, construction and project implementation)
    • IRCTC (Catering and tourism)
    • CRIS, RCIL (Passenger and freight train operation)
    • DFCCIL, PRCL (Rail infrastructure)
    • KRCL, CONCOR (Passenger and freight train operations)
    • Integrated Coach factories and Locomotive units across the country

BACKGROUND OF PRIVATE SECTOR PARTICIPATION:

• Privatization refers to the transfer of a business, industry, or service from public to private ownership and control.
• Private entities have had limited role in the Indian Rail industry so far. PPP models are used to attract investments in areas such as station development. Private players are also incorporated to run container trains and food catering services.
• Sam Pitroda Committee report, 2011:
  • It had recommended attracting private investment in various areas of railways such as stations & terminals, elevated rail corridors, high-speed rails, and private freight terminals, leasing of wagons, loco & coach manufacturing units, and so on.
• Bibek Debroy Committee on Restructuring of Indian Railways
  • It made some key recommendations on privatization and railway reforms. They include:
    • Encourage Private entry: in running both freight and passenger trains in competition with Indian railways
    • Railway Regulatory Authority of India (RRAI): Establishment of an independent regulator to ensure fair and open access, establish tariffs and adjudicate disputes.
    • Indian Railway Manufacturing Company: Establishment of a government SPV known as the IRMC to manage all the production units.
    • Focus on core activities: Indian Railways should focus on core activities & distance itself from non-core activities such as running a police force, schools, hospitals and production and construction units
    • Investment Advisory Committee: consisting of experts, investment bankers and representatives of SEBI, RBI, IDFC and other institutions to recommend raising new resources.
    • Refinements in the way Indian Railways prepares and maintains accounts, costs, activities and services, recruitment & HR processes
    • Decentralisation of Railways and phasing out of Rail budget
• Ministry of Railways’ Request for Qualifications (RFQ) in 2020
  • Ministry of Railways had invited Request for Qualifications (RFQ) in 2020, for private participation in operation of passenger train services over 12 Clusters comprising for more than 150 Origin Destination pair of routes through introduction of 151 modern Trains.
  • This is the first initiative of private investment for running Passenger Trains over Indian Railways network.
  • The first set of 12 trains is estimated to roll out by 2022-23, thereafter 45 trains in 2023-2024, 50 in 2025-26, and finally the remainder 44 in 2026-27.
  • The private entity shall be responsible for financing, procuring, operation and maintenance of the trains.
  • It shall pay to Indian Railways fixed haulage charges, energy charges as per actual consumption and a share in Gross Revenue determined through a transparent bidding process.

NEED OF PRIVATE SECTOR PARTICIPATION IN RAILWAYS

• To ensure improved competition and quality:
  • More players in the railways can ensure better competition. This can ensure competitive pricing, improved quality and better choices for travellers.
• To meet the growing demand:
  • Increasing urbanisation and rising income is driving growth in passenger segment.
  • India is projected to account for 40% of the total global share of rail activity by 2050.
  • According to Railway Board, five crore intending passengers could not be accommodated during 2019-20 for want of capacity, and there was 13.3% travel demand in excess of supply during summer and festival seasons. 
• Need for better infrastructure:
  • Indian Railways has not been able to keep pace with modernisation of its infrastructure and services and has not been able to expand at the pace and coverage that a country like India needs.
  • A strong argument in favour of privatization is that it will lead to better infrastructure which in turn would lead to improved amenities for travelers.
• To mobilize resources:
  • Rakesh Mohan Committee had noted that Railways has fallen into a vicious cycle of under investment, misallocation of scarce resources, increasing indebtedness, poor customer service and rapidly deteriorating economics.
  • According to estimates, railway infrastructure will need an investment of ?50 trillion between 2018 and 2030.
  • Given that the capital expenditure outlays of Railways are around ?1.5 to 1.6 lakh crores per annum, completing even all sanctioned projects would take decades.
• To reduce political interference:
  • Indian Railways has often been used as a tool for political patronage, especially during poll years.
  • Due to this, several economically inefficient initiatives and projects were established in the past. Privatisation can reduce this political influence in Railways and bring better efficiency to the system.
• To ensure better rail safety:
  • An accident can hamper the image of a private entity and thereby erode their profits. Thus, private entities will be extra cautious in ensuring rail safety, which can help improve the safety standards in India.
• Loss of passengers to air traffic:
  • Railways’ share in the transportation of surface freight has declined from 86.2 per cent in 1950-51 to mere 18 percent in 2020.
  • Between 2013 and 2018, reserved passenger traffic on Indian Railways grew at less than 5%, on average compared to a 13% growth in air traffic during the same period.
• Better Innovation:
  • Private participation can lead to the infusion of modern corporate practices, technological infusions and capacity building within Indian railways. For instance, Tejas trains have adopted the baggage pickup services used in Shinkansen trains of Japan, where luggages are picked up by service providers and left at the destination of the passenger’s choice, enabling the travelers to travel hassle free.
• Revenue for government:
  • Through privatisation, government can earn valuable revenue, which can help bridge the revenue deficit.
  • This will in turn help improve India’s credit rating, which will help improve foreign investments into the country. It also helps government to move from an active market player to a regulator.
• To improve the overall economic growth:
  • It was estimated that a one rupee push in the railway sector would have a forward linkage effect of increasing output in other sectors by Rs.2.50.
• Higher operating ratio of Indian railways:
  • Operating ratio is the amount spent to earn every ?100. The lower it is the better.
  • It is used to measure the operational efficiency of any organisation. Higher the operating ratio, lower the financial resources available for expansion and growth.
  • The Railways recorded an operating ratio of 98.44 per cent in 2017-18 which is the worst in the previous 10 years.
• High freight fares to cross-subsidise the passenger segment:
  • The Railways has also been unable to meet its operational cost of passenger services and other coaching services.
  • Almost 95 per cent of the profit from freight traffic was utilised to compensate for the loss on operation of passenger and other coaching services.

ISSUES ASSOCIATED WITH PRIVATIZATION:

• Complexity of railways:
  • It is difficult to privatise a portion of the Railways’ operations (total privatisation is not even being contemplated) as it is strongly vertically integrated.
  • There are but few organisations with manpower as large as the Indian Railways. Hence with the arrival of more players, integration between them becomes a major challenge.
• Hinder the social obligation of railways:
  • As private entities are profit motive, they will raise the existing fares to economically viable levels.
  • This will render the service out of reach for lower income groups. This can hinder the social obligation of railways as the carrier of India’s poor men.
• Absence of independent regulator:
  • The Railway Board has the unique distinction of being the rule maker, operator and the regulator which is a clear conflict of interest as pointed out by Bibek Debroy committee.
• Impact on the economy:
  • Indian Railways is the backbone of India’s economy as it provides low fare transportation to agricultural and industrial trade. Therefore, privatisation of Indian railways can have ripple effect on several components of Indian economy.
• Global experiences are mixed:
  • Rakesh Mohan committee report had pointed out that the international experience on privatising railways showed that it was “exceedingly difficult and controversial”.
  • For instance, when Britain privatized its railways, it offloaded assets including tracks and routes which led to an underinvestment in infrastructure.
  • However it was highly successful in Japan.
• Concerns over coverage:
  • The present system provides nation-wide connectivity irrespective of profit.
  • This would not be possible with privatisation since routes which are less popular will be eliminated, thus having a negative impact on connectivity.
  • It will also render some parts of the country virtually inaccessible and omit them from the process of development.
• Accountability:
  • With different components of the system being owned by different entities (Eg: Tracks by Railways and rolling stock by a private player), it would be difficult to hold one accountable in case of any discrepancies or accidents.

WAY FORWARD:

• Create an Independent Regulatory Body
  • It should also create an independent regulatory body to avoid fears to corruption, crony capitalism and ensure a level playing ground for all.
• More clarity:
  • The clear cut delegation of roles and responsibilities between entities, the allocation of deliverables within a predefined timeline and ensuring transparency and accountability in the tender monitoring process is way forward for successful participation of private players.
• Sustainable Pricing:
  • There is a need to revisit the Indian Railways pricing model to make the passenger and freight segments sustainable. The tariffs should be competitive with the cost of road transportation.
• Modernization of Railways:
  • There is a need to implement the recommendations of the Bibek Debroy committee, such as the expansion of Indian Railways manufacturing company, Corporatization of core functions of railways, etc.

PRACTICE QUESTION:

Q. ‘Indian Railways is a strategic resource for the nation and provides a vital public good’. In the light of this statement assess the merits and demerits of privatizing passenger train services in India