It is quite apparent that Indian Railways(IR) is in bad straits – with Operating Ratio(Revenues Less Costs) at over 90% in the last several years. This has led to inadequate investments in capacity building. This combined with delayed projects has resulted in IR’s share of freight in the economy dropping from over 60% to 33% since 1980. Also IR’s proportion of passenger traffic is also hovering at around 14%. This is quite shocking considering the Indian Economy’s growth since the 1991 reforms.
Well, there is no need to look deep into the reasons for the state of IR. The singular reason in my opinion is the structure of IR which is antiquated dating back to 1905 when the Indian Railway Board Act was passed. It has clearly outlived its usefulness decades back. Whilst several countries in the last few decades have reformed the way Railways is organized, India has continued with the same industry structure.
The main problem is that IR has a structure wherein the policy, regulation and operations are all mixed up under the aegis of the Railway Board. Because of the inherent conflict in this industry structure, economic reasoning has not been used to set tariffs – passenger fares are heavily cross-subsidized by freight charges. New projects are taken not based on necessity but based on pressures from politicians – most of them don’t even get completed. No wonder, in the last 30 years, as many as 676 projects were sanctioned worth 1,57,883 INR crores. Of these, only 317 projects could be completed and 359 projects remain to be completed
The Modi government has announced 100% FDI in Railways. Also over the last 2 years, Public Private Partnerships have been embarked on – however unless the structure of IR changes, these measures will not succeed – no private player will want to get into a sector which is organized in such a fashion.
The government needs to change the way IR is organized. There has to be an institutional separation of roles into policy, regulatory and management functions. Policy making should be the function of the Ministry of Railways. In fact over a period of time, this ministry should become a part of the Ministry of Transport. A Railway Regulator has to be set-up on the similar lines the Telecom Regulator(TRAI) or Stock Markets Regulator(SEBI) whose role would be to help set tariffs and regulate the market forces to prevent any market failures. The third piece of the Industry – Management of Railways has to be corporatized. Also, there has to be a separation of the entities managing infrastructure and operations. Bharat Railway Network(BRN) should be set-up to own, manage and expand the Railway Network. New corporate entities need to be created to manage the current passenger services and freight services(separate companies). These companies will use the Network by paying access fee to BRN. By introducing this structure, it will become a level playing field for other private players and this will attract a lot of investment. This will also ensure that any subsidies that may be given for passenger fares will be funded by the Government. Also, investments in capacity building will be prioritized based on sound economic reasoning. Any investments because of “social” pressures will be funded by the Government.
BRN can also invite private players to operate several railway stations on a PPP model – the land and air space in the railway stations can be monetized through setting up of shopping malls. Also existing Railway Production Units have to be corporatized and over a period of time privatized. These companies will need to compete with other private rolling stock companies
With this kind of approach, there will be prioritized investments in improving freight network – acceleration of the setting up of Dedicated Freight Corridors, Logistics parks etc. Because of market forces, the Freight operator will re-invent themselves as logistics companies rather than remain as a rail freight company.
Similarly passenger services entities will focus on improving customer satisfaction and ensure on time arrival of trains, good passenger amenities and invest in lines which make economic sense.
What is being recommended here is not rocket science – several countries like Japan, UK, Germany & China have reformed their Railways Sector. Of course there would be resistance from employee unions and vested interests like the politicians and railway contractors. The government will need to convince the employees that this reform will actually result in more jobs as the sector will grow with the reform in the structure. Resistance from politicians can hopefully be managed by the Modi Government which has a majority and is not dependent on coalition partners.
Lets hope that Suresh Prabhu in the Railway Budget embarks on reforming the Railways along these lines. Else instead of helping the Indian Economy Indian Railways can become an albatross and pull the economy down.
gopaldevanahalli 