The story of Indian Railways and its tryst with privatisation -

The story of Indian Railways and its tryst with privatisation


In a country of 1.3 billion, the Indian Railways plays an integral role running the world’s fourth largest rail network in the world—across 64,000km, ferrying nearly 23 million passengers per day in over 13,000 passenger trains daily. With a workforce of nearly 1.3 million, it is also one of the largest employers in the world.

But the railways, in recent years, confronted with its dwindling finances, has been mulling ways of generating revenue through different streams, including the non-fare revenue segment, leasing out its vast pool of vacant land and, most importantly, opening doors for Public Private Partnership (PPP) for its trains and stations. It has felt the need to bring in private investment to upgrade its facilities and infrastructure, with an eye, also, on the competition as domestic airlines take away its AC class passengers and passengers increasingly opt to travel by road for shorter distances.

But at its core, the 167-year-old organisation has largely functioned as a subsidised mode of travel for millions of Indians daily. On an average, the railways recovers about 57% of cost of travel and the remaining is given as subsidy—which means that the institution incurs 43 paise per rupee for each ticket as subsidy. This is not a traditional subsidy, but is instead cross-subsidised from the money railways makes from its freight operations. The unreserved segment has the maximum subsidy of about 43-45%.

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And this is what has led to a fundamental question and animated debate—can the national transporter successfully coexist with a parallel network of private train operations and stations? The answer, perhaps, lies in a slew of recommendations made by several committees over the years and comparing the transition in other countries with similar structures such as China and Japan.

The roots of current reforms

In 2015, a committee led by then Niti Aayog member Bibek Debroy drafted a report for mobilisation of resources for major railway projects and restructuring of THE railway ministry and railway board, giving suggestions for a complete overhaul of Indian Railways, including its 150-year-old governing body—the Railway Board. Its suggestion for the unification of the railway budget with the Union budget was implemented by the National Democratic Alliance (NDA) government in 2016.

The committee noted that there was increasing recognition that the Indian Railways was no longer a monopoly and faced stiff competition from the road sector. It pointed out, “The cross-subsidisation of low passenger fares by artificially high freight rates has led to a shift in favour of road transport, for both freight as well as short distance passenger traffic. It needs to be recognised that most passengers are willing to pay higher fares, albeit only if accompanied by enhanced services.”

The committee said that while it saw liberalisation—and not privatisation—for entry of new operators into railway operations as a viable option for encouraging growth and improving services, a regulatory mechanism to promote a healthy competition and to protect the interest of all stakeholders was an “essential pre-requisite”. It further noted: “It needs to be understood that this Committee does not recommend privatization of Indian Railways. It does, however endorse private entry, which is not ab initio but ab hine – as this is already part of the accepted Indian Railways policy – with the proviso of an independent regulator.”

The Debroy committee said it preferred to use of the word “liberalisation” and not “privatisation or deregulation”, as both the are “apt to misinterpretation.”

Opening up the sector

The NDA government announced the plan for redeveloping the stations during its first tenure in 2016 by leveraging commercial development of spaces around them. In 2017, then Union railway minister Suresh Prabhu launched what he called the “largest transit-oriented development programme ever executed in India” for the redevelopment and complete overhaul of 400 stations. Prabhu envisioned bringing in private operators to emulate the airport model and leasing them out for a period of 45 years.

Over two years later, in October 2019, Niti Aayog stepped in and its chief executive, Amitabh Kant, wrote to then Railway Board chairman VK Yadav about the delay in the implementation of Centre’s plan to redevelop 400 stations and suggested an empowered group of bureaucrats to oversee the redevelopment of 50 of them on a priority basis. “… ministry of railways was required to take up 400 railways station projects to develop them as world-class facilities. Despite the fact that the aforesaid commitment was given for last several years, actual implementation of the same has not happened except for a few isolated cases in which a few stations have been taken up [for redevelopment]…”

The railway ministry, on July 1, 2020, began the formal process of allowing private trains on 109 routes—a process that aims to, for the first time, open up one of the government’s most prominent enterprises.

Indian Railways plans to introduce private trains on its network in phases, with the first dozen due to start running in the 2023-24 financial year and all 151 by 2027. In its pre-bid meeting, Bombardier Transportation India, Siemens Limited, Alstom Transport India Ltd were among the 23 firms that evinced interest in running private trains in India.

The Indian Railways is also considering having private companies operate 90 train stations and is exploring several options—including looking at the arrangements at India’s privately run airports—to determine how best to set up the security infrastructure at these, as HT reported last month. The Railway Board sought the opinion from all principal chief security commissioners of the Railway Protection Force (RPF) and all zonal railways on how the security infrastructure for the 90 stations should be set up.

The question of fares and prices

Ar the heart of the debate against bringing in private players in what has so far remained an almost exclusive public sector preserve is the possibility of increase in prices for citizens.

Will private operations lead to an increase in train fares that have remain largely subsidised in the country?

There are three elements to this. One, the fares for private trains will be decided by the private concessionaire only, the railway ministry had clarified last year in its tender for 151 private trains to all the interested bidders. This means the prices will be determined by the market, which in turn means there is, indeed, a possibility of higher fares for these trains.

However, the second factor is that the operation of private trains is being considered independent to the functioning of regular passenger trains. The ministry has clarified, on several occasions, that this would not impact regular fares.

The third factor is the plan to levy a user fee as part of train fares, as the railways plans to raise funds for redeveloping railway stations and modernising infrastructure. The user fee to be levied by the national transporter for the first time is in line with the user development fee (UDF) paid by air passengers. UDF is charged at various airports and the rate varies from city to city.

In a press conference last year, then railway board chairman VK Yadav said: “We are going to keep a very small amount for the user charge.” Niti Aayog CEO Amitabh Kant too said private investment in Indian Railways will introduce competition and lead to fare reductions in the future. “We want railways to drive India’s growth story. In countries like Japan and South Korea the growth story was also driven by railway infrastructure. We are confident going forward that railways will contribute 1-2% towards India’s growth,” he said at the same press conference.

Experts from the private sector believe that the government has both sound rationale for opening up the sector, and a way of cushioning the majority of passengers from fare hikes such a move may entail.

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“With reduced travel time for passenger trains due to freight traffic moving to dedicated corridors and improved amenities and travel comforts, private passenger trains are likely to compete primarily with budget air travel. With such trains likely to operate only on select routes, the government would continue to operate trains for the cost-conscious segments,” Arindam Guha, Deloitte India’s partner explained. He added that even with regard to modernised stations, much of the investment was likely to be recouped through the development of adjoining land parcels, insulating a large section of passengers from any steep increase in entry fees.

The sources of opposition

But this has not deterred the Opposition, which is concerned about the larger design and implications of the incremental shifts underway in Indian Railways.

Several Opposition parties, during the budget session of Parliament, criticised the government’s plans for privatisation in the rail sector. They alleged that privatisation would favour only a few corporates and lead to a substantial rise in fares.

Union railway minister Piyush Goyal stated that Indian Railways will “never be privatised” but added that private investment should also be encouraged to enhance passenger services and improve infrastructure. “Let me make it clear, the Indian Railways will never be privatised, Indian railways is India’s asset and will continue to remain so and belong to the people…If a railway line is installed should there not be the need to ensure good services to the passengers and higher speed trains? And in that if any private investment comes, I feel it should be welcomed,” Goyal said in Parliament earlier this month.

In a written response to a Lok Sabha question on whether the government received representation from railway employees and representative bodies objecting to the move to allow the private sector to operate 151 trains, the ministry admitted both the recognised federations: All India Railway men’s Federation (AIRF) and National Federation of Indian Railway men’s (NFIR) had initially represented against the decision to permit operation of passenger trains through Public-Private Partnership (PPP) mode.

“Thereafter, several meetings have been held with the Federations to explain the rationale behind this PPP initiative and the fact that the existing passenger train services shall not be affected by the operation of passenger train services through PPP mode,” the ministry said.

It clarified: “These services to be operated through PPP mode shall be additional trains and are aimed at increasing the availability of train services to the public. As such, the interest of employees working for the operation of existing train services over Indian Railways will not be affected.”

Global comparison

As India debates the entry of the private sector in the railways, it is instructive to look at other examples for a comparative perspective.

China’s rail network, the second largest in the world and the longest in high-speed rail, is run by a state-owned company—the China State Railway Group Company Limited. The company was created in March 2013 after China decided to dissolve its railway ministry and convert it into a joint-stock company under its finance ministry in 2019.

In 2014, the government began pushing Chinese rail projects towards the private sector. The Communist Party of China subsequently drafted a reform master plan seeking to let market play a decisive role in fostering growth and creating jobs. In 2017, the China Railway Corporation said it would spin off some businesses to allow private investors to participate.

In Japan, the trajectory was different. In 1987, amid demand for the reform of the Japanese National Railways (JNR), eight Japan Railway (JR) companies were created based on the geography and functions. JNR was privatised in 1987 and broken into six regional rail companies and one freight company. Currently, five of those companies—JR East, JR Central, JR West, JR Kyushu, and JR Freight—are in the black while the JR East, West, Central, and Kyushu are publicly traded.

According to a working paper series by the Asian Development Bank Institute the socio-economy of Japan has undergone drastic changes with population aging and shrinking. “Had it not been for privatisations and resultant diversification and transformation of business models, they would have not been profitable and dynamic as today. The consequences from privatisation of JP (Japan Post) and JR are still evolving and could serve important references for developing countries on how to reforms of major SOEs could be done with structural reform and technology development.”

The JRs subsequently ventured into commercial and real estate businesses, increasing its non-transport revenues substantially. JRs also have the Shinkansen bullet trains as their primary business and express trains that subsidise other smaller, unprofitable lines.

“The JR companies have had to become extremely efficient on their most profitable lines (Shinkansen) due to competition from air travel. JR Central estimates that a Tokyo-Osaka trip takes 2 hours and 22 minutes on the Shinkansen, and 2 hours and 40 minutes on a plane, including travel time to the airport. This has helped the profitable JRs rely on little to no subsidies from the central government,” the Tokyo Review non-profit publishing platform wrote in 2018. But the paper acknowledged the costs of rail privatisation in Japan. “The government took on trillions in long-term JNR debt, putting a ¥14 trillion burden on taxpayers. Privatisation also cost tens of thousands of jobs.” Till 2019, six JR companies have obtained net profits and began exporting its technology and operating system.

To take another example, in United Kingdom, the government subsidised National Rail to the tune of £4.2 billion in 2016-2017, and gave £5.7 billion in loans to Network Rail, the public body that manages the UK’s rail infrastructure.

“As long as privatisation is done in a manner that it leads to competition and not just transfer of a public sector monopoly to a private sector monopoly, privatisation will be effective. Also, privatisation should lead to cost rationalisations and we should begin to see freight rates dropping. Railway transportation should be cheaper than trucking but high cost and service that requires further improvement, has pushed cargo to trucking, increasing logistics costs in the country and also increasing pollution. We strongly believe that privatisation will mitigate these issues,” said Jaijit Bhattacharya President, Centre for Digital Economy Policy Research.

It is in this complex web—of a shift in international practices, enhanced revenue crisis, need to keep up with the competition and alternatives easily available to passengers, and an ideological make up which is open to involving the private sector in key areas—that explains the government’s willingness to open up what was once considered the most critical of India’s public enterprises, because of its daily mass interface—the Indian Railways. But precisely because of this daily mass interface, the need to come across as sensitive to pricing issues and to the more vulnerable segments who use the mode of transport, and the political importance of the railways that the government is keen to emphasise that it is opening up the sector, but not privatising it.



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