Railway Privatisation And Other Pipe Dreams

The railways were introduced in the country by the British over 160 years back. Some 144 expert committees later, attempts are again being made to put the Indian Railways (IR) on track. That's because rather than running smoothly, the organisation — which undoubtedly is a life line for the country — is in free fall. In order to put a halt to this perilous state, Bibek Debroy and a team of 7 experts manned the 145th committee, which was set up last year by the Modi government to come out with a blue print to reorganise and restructure the IR once and for all!

Despite being the fourth-largest rail network in the world, with interests ranging from construction, manufacturing to financing, medical care for employees and yes, running trains, currently, the state of affairs of IR is so bad that it has no money to spend on capital expenditure. Ergo, the list of over 110 recommendations form part of an interim report before a final report is made.

In the exhaustive list of recommendations made, there are two critical ones that draw attention — Liberalisation, or the allowing of private entry and converting the organisation over a period of time to a government-owned company — like a good PSU running efficiently. In fact, the first is listed as an immediate need, while the second is more of a long-term or gradual process of say after seven years along with other reform measures.

Let's limit ourselves to the immediate one — that on the recommendation that the private sector should be allowed in running both freight and passenger trains in competition with IR, for which there should be "open access for any new operator who wishes to enter the market for operating trains with non-discriminatory access to the railway infrastructure and a level playing field" says the committee.

The rationale for allowing private entry in running rolling stock using the existing rail is well understood and appreciated. For starters, IR's spending "…is such that it doesn't have funds capital expenditure… IR spends so much on revenue expenditure that it is unable to invest in capital expenditure". In 2014-15, "46% of the resources for financing plan expenditure came from budgetary support, 3% from the Railway Safety Fund, 23% from internal resources and 27% from extra-budgetary resources" says the report.

The Union government has no money. So IR really can't borrow from them. Raising fares is a tricky affair. And there is limit for that as well. And then you also can't borrow from the market despite the IR having a separate budget with assets spread across the length and breadth of the country.

This is because IR doesn't have a commonly recognised balance sheet (with a profit & loss statement) to directly borrow money from the market. In IR "one doesn't know how much a specific train costs, one doesn't know how much of profits a specific train brings in" say the report.

A sample of five Durontos (introduced barely 8 years back) — running over 1,500 km — show that each of them operate on losses. Every time they run non-stop from their point of origination to their destination — they incur a loss. Granted some sections or lines may not be remunerative — like in any other business — but are needed as a social service. Yes any government sponsored activity would have positive externalities — but they don't really always enter the pocket of implementing organisation.

While the jury is still out on how to impute the real value of starting a service and benefits thereof, the important point to make is: Is open access as demonstrated in Britain going to work in IR? It hasn't worked in other sector — like in the electricity sector of the country — where open access was allowed by law more than a decade back.

The same questions arise. For instance, would there be a surcharge?

Why is a surcharge needed? First, treat it as a compensation to meet the upkeep of the network as well as compensation of loss of revenue for IR themselves when passengers or freight opt for the private option. Second, what surcharge would IR levy to allow open access — or in other words what fee would IR charge to allow a private operator run its own train — from say X to Y? If the surcharge is such that it makes it financially unviable to start a train with all the services better than a Rajdhani (assuming that is the best currently) — then open access won't work.

For example: if it costs say Rs 90/per passenger to run a private train and make a small profit by recovering a charge of Rs 95 per passenger (assuming the train doesn't always run on full capacity) — then a surcharge of Rs 5 over Rs 90 would not allow the new private operator to start a new train. To compound the problem what if IR ran a similar from train departing say 20 minutes before or later and charges Rs 92?

Yes, there is a need for a rail regulator, but the surcharge he would sanction is the real dilemma. Then there's the example of Delhi's Airport Express Metro, where the infrastructure was built by Delhi's metro rail company while the operations or rolling stock was bid out to private players. The successful bidder suspended services barely two years of operations over disagreements on speed and safety of the structure. How does one tackle that? Yes plenty questions can be raised. Finding viable answers is going to be the key test going further.

IR is at a critical junction where its unique way of accounting doesn't allow it to raise money from the market. Neither does the government have money to keep putting in money in IR where payments are not predictable. Nobody would disagree if one were to say "... it is right and proper that the tax-payer, the State, should get a fair and stable return from the money it has spent on its Railways". But that was said some 90 years back by the British government that prompted to start a distinct railway budget to keep track of the growth and finances of what had become an important life line those days.

The concept of rail budget has been retained but reduced to a political gimmick of announcing schemes aimed at the pleasing the voter — some of which never even get implemented on ground. Taking that chance away from the future politicians is a real challenge. In 2007 the then rail minister Lalu Prasad claimed a turnaround of the railways with a surplus of Rs 20,000 crore (which many noted experts said was profits. Well, the railways don't have a profit & loss statement). The minister got his headline and attention. His logic behind the budget was if you don't milk a cow completely or properly — it would fall sick!

But today the organisation has operating ratios of 90-95% (you spend all you earn). Using the logic of milking a cow, you can't do it beyond a particular point. If you do so, it will not survive. It would be quite tempting for the present Modi government to quickly start reform and allow private trains and open access. And leave the rest for later. That won't do. The Debroy committee warns that their recommendations should be implemented as a package rather than by a process of 'pick and choose'.

Will it be done?