Reforms in Indian Railways: Here’s why private trains are a win-win proposition

The Central Government’s idea of inviting the private sector to own and operate passenger trains on over 300 paths, bundled into 12 clusters has been both appreciated and criticized. So, what is in the background of the decision? Mr. Tribhuvan Darbari said that this decision has been taken after a lot of research and analysis. Several committees have gone into the expansion and the modernization of Indian Railways. In 2015, the expert panel chaired by Bibek Debroy constituted by the Ministry of Railways a year earlier, recommended that the way forward for the railways was “liberalization and not privatization” in order to allow entry of new operators “to encourage growth and improve services.” It also made it clear that a regulatory mechanism was a prerequisite to promote healthy competition and protect the interests of all stakeholders.

Tribhuvan Darbari further added that there is another major reason behind it. He said according to an analysis of passenger and freight operations in the Railways, taken note of by the Economic Survey and the erstwhile Planning Commission, showed that a steady shift to other modes of travel for both categories was affecting economic growth: by as much as 4.5% of GDP-equivalent. It was estimated in the report that a one-rupee push in the railway sector would have a forward linkage effect of increasing output in other sectors by ₹2.50. Tribhuvan Darbari also mentioned the Debroy Committee report. He said that the Debroy Committee report found this initiative significant to take the ‘Make in India’ objective forward. The panel also noted that passengers were willing to pay more if they had guaranteed and better quality of travel and ease of access. The move to augment capacity virtually overnight through private capital in train operations pursues this line of reasoning.

According to the article published in Financial Express – It is estimated that each cluster would entail an investment of Rs 2,000-3,000 crore in the procurement of rolling stock, and can cumulatively add significant capacity of AC coaches in the country. There is some level of skepticism about the success of the move, given the railways’ patchy track record with the private sector, in private Container Train Operations and with the four models for PPP in railway lines.

Another criticism has been that allowing the private sector to operate trains that will serve the highest end traveler segment, does not directly address the key challenges of the railways, namely of becoming operationally efficient and investing in expansion and upgradation of the network. But other than the anticipated benefit of attracting air and luxury-bus travelers to trains, there are three broader benefits that are possible from the proposal. Reaping these benefits would also require the Indian Railways to take initiatives that address investor concerns.

First, the private sector’s success would depend critically on IR’s operations of track and station access. The bidders will probably require very clear operating procedures, responsibility allocation and high penalties for non-performance by IR. This last element (i.e compensation for non-performance) has been weak in PPP contracts in India. If the threat of penalties indeed acts as a deterrent, it could lead to the use of technology for better scheduling. Improved and more predictable scheduling would lead to better track utilization and could benefit everyone, including freight operations.

Second, the track access charges (known as haulage charge) to be paid to IR will be key to the viability of private operators. Ideally, a transparent allocation of IR’s capital and operating costs to various activities would enable a clear determination of the components of the network costs. The process of transparent cost-allocation would help to identify hidden inefficiencies, which can form separate efficiency-improvement projects for the railways. Having determined the full cost of tracks, the key question then would be the quantum of the track access charge to be levied on the private operator as a fixed cost. To provide a level-playing field where private operators compete with premium trains of the railways, it would be important to determine how much of the infrastructure costs are loaded into the pricing of IR’s premium trains. This exercise would lead to a more transparent understanding of the unit economics of the business, and the extent of subsidies being provided to or earned from premium passengers. This would also provide clearer price-cost benchmarks that the private operators would need to beat, to demonstrate their added value.

Third, as private trains get launched, their planning and operations will help in understanding price elasticity of demand, and affordability of different technology and service levels. Besides demonstrating sources of efficiency, the data from these operations could also inform the debate on the affordability of fare increases (though, of course, the politically sensitive class of travelers may remain out of the target segment).

The aforementioned issues will also be key concerns for bidders, i.e. enforcement of IR’s performance, the extent of fixed costs to be committed, and the high risk associated with traffic guesstimates. The extent of bidder interest after the shortlisting stage will depend on the comfort IR is able to provide on these factors (among others). So, addressing these is essential to the success of the proposal. The additional benefits of more disciplined operations and a better understanding of the economics of serving different segments would also hugely impact the journey towards reforming the rail sector.