Why Indian Railways Can No Longer Be Allowed To Keep Competition Out
Rail bureaucracy failed government's effort to attract private investment in passenger traffic.
Time for the Modi government to go for more radical view on rail sector reforms.
In 2013, the year Xi Jinping took over as President, China initiated a radical rail sector reform. It began with dismantling the rail ministry and transferring 900 civil servants.
The option might strike the imagination of Prime Minister Narendra Modi after the rail bureaucracy foiled his attempt to attract an estimated Rs 30,000 crore investment in the loss-making passenger traffic segment. For rail bureaucracy, however, this is business as usual. They have been foiling reform opportunities in the rail sector for four decades.
In July 2020, the Ministry of Railways invited pre-qualification bids from private players to own and operate 151 modern trains in 109 pairs of routes, spread over 12 railway clusters, for 35 years. The investor had the freedom to procure the train from a source of their choice and fix the price of tickets.
The success of the scheme could have far-reaching impacts. First, it would have ensured passenger comfort, which is distinctly low in India. Second, the decision to give the operator choice of coaches would have challenged the monopoly of railway coach factories, inviting fresh investments in the sector.
Elbowing Out Investors
The private operator didn’t have a free run though. They were supposed to follow the railway safety protocol. The driver and guard were to be deployed (on payment) by railways and revenue from ticket sales were slated to be shared between the two.
At least 14 Indian companies qualified for bidding. Some of these companies — like L&T, GMR and the state-owned BHEL — are infrastructure giants. Others are major players in the logistics sector.
But as the tender closed on 23 July 2021, there were only two contenders — Indian Railway Catering and Tourism Corporation Limited (IRCTC) and Megha Engineering and Infrastructures Limited (MEIL) — bidding for a total of 29 pairs of trains in three clusters (Mumbai-2, Delhi-1 and 2).
MEIL submitted bids for two clusters offering as little as 0.5 to 2 per cent revenue to railways. IRCTC, a wholly-owned subsidiary of Indian Railways, was the only enthusiastic participant that offered to share 6-18 per cent revenue. This was over and above the fixed haulage charge.
Clearly, IRCTC was an exception. To understand what went wrong for others, one must look at the tender. The routes and timings are to be decided by the railways. Ticket prices can be increased by 2 per cent a year. But the revenue share of railways has to increase by 6 per cent a year.
This is a “heads I win, tails you lose" proposition. Ever since the discussion began last year, prospective investors urged railways to be flexible on route and timing issues as they are directly linked to asset utilisation and revenue. The mismatch in passenger fare and revenue share escalation clauses was also pointed out. But railways didn’t budge.
The investors argued that they were taking a risk by entering uncharted territories. As a general trend, railways are losing both cargo and passengers to road and air (passenger). Of every rupee spent on passenger movement, 43 paise is lost. Except for chair-car and 3rd AC no other classes make a profit.
According to the World Bank, with the rapid expansion of highways, the road became the lifeline of the nation carrying 60 per cent cargo and 85 per cent passengers. The volume of air passengers doubled from 82 million to 164 million between 2014 and 2018. In contrast, volume traffic (passenger-km) has been stagnant in railways since 2012.
Evidently, passengers are giving the railway a miss, ignoring cheap fare. If the railway wants to improve its operating ratio from a dangerously high 97-98 per cent (against the minimum requirement of 85 per cent), it has to win back a section of the traffic by improving efficiency and comfort.
Protecting Narrow Interests
Private operators wanted to take that risk, provided railways play the role of a facilitator. Railways elbowed them out for IRCTC. There is no clue how IRCTC finds the tender exceptionally lucrative, except one — as a family member, they may have untold advantages.
Railways may give them the same space, as they gave to another family member, Container Corporation (CONCOR). Ask top logistics companies, running freight trains across the world, including in China, why they don’t do so in India, and you will know the answer.
CONCOR was incorporated in 1988. In the following years, there had been several proposals to attract competition in the sector. The United Progressive Alliance (UPA) government (2004-2014) introduced three schemes between 2006 and 2010, for special freight train operation. All failed. They were designed to fail.
The end loser is the national economy. Coal price nearly doubles on a 1,000-1,500 km journey. From private to public — business is unhappy with rail. Some are forced to use it, due to the nature of cargo (like coal). Those who have the option, shift to the road.
Ideally, rail should be way cheaper than the road. But check India’s rail connected border outposts with Nepal and Bangladesh, together importing Indian goods worth nearly $17 billion, and it’s all about the road. It means, for practical purposes rail is costly and our exports are losing much of the price advantage due to high logistics costs.
Need For Radical Reform
The Narendra Modi government initiated the proposal to attract private investment in passenger train service at the right time. The failure had robbed that advantage. It now has the option to go for a repeat tender or prove its intent by taking more radical measures.
History tells us railway bureaucracy has mastered the art of preventing reforms. There were endless committees for railway reforms over the last four decades. Two of them headed by H C Sarin (1981-85) and Rakesh Mohan (2001) made wide-ranging recommendations, most of them remained on paper.
It is time to do something harsher. Ideally, the railways should own the tracks and stick to its core competence of operating the rail network, everything else may go to private.
If the political reality doesn’t permit that, we can take a leaf out of China. Post reforms, numerous rail companies under the state-owned China Railway Group Limited are competing tooth and nail for cargo and passengers. India can convert railway zones into full-fledged rail companies.
The bottom line is clear. The nation cannot afford an inefficient state monopoly that is working overtime to keep competition out and making the nation pay for its inefficiencies. We need competition.
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