Railway reforms will remain a chimera after a gravy train of rich possibilities – evoked by an interim report submitted by the Bibek Debroy committee in March this year – appears to have rolled off the tracks.
In its final report submitted earlier this month, the Debroy committee executed a neat little pirouette and arrived at the conclusion that “no privatisation needs be contemplated, at least initially. That would be premature. However, some dilution of equity through initial public offerings (IPOs) is indeed possible”.
It seems a far cry from the interim report which had green-lighted the immediate rollout of private trains and freight cars. Back in March, it had proposed “open access for any new operator who wishes to enter the market for operating trains with non-discriminatory access to railway infrastructure and a level playing field”.
But in its final report, the Debroy committee nuanced its recommendations carefully. “This committee does not recommend privatisation of the Indian Railways (IR). It does, however endorse private entry as this is already part of the accepted IR policy – with the proviso of an independent regulator. This committee prefers use of the word liberalisation and not privatisation or deregulation, as both the latter are apt to misinterpretation.”
It isn’t clear what prompted the committee to make that volte-face but the term privatisation has always raised the hackles of the workforce in the Indian Railways – most notably when Rakesh Mohan came up with his radical reform proposals in 2001.
The Debroy committee has opted to play safe by frontloading three “building blocks” for the restructuring of the railways: a transition to commercial accounting, effecting changes in area of human resource management, and the formation of an independent regulator. All of these will be taken up in the first five years – with the more unpalatable measures pushed into some indeterminate time horizon.
The committee had initially wanted to “unbundle” the railways by carving up IR into two independent organisations: one responsible for the track and infrastructure and another that will operate trains and bring in competition. That won’t happen now for at least five years.
In the first two years, the committee has suggested that the reforms should focus on the transition to commercial accounting, greater decentralization of zones and divisions, and cleaning up the of finances between the Centre and the railways. In the remaining three years, it wants the authorities to wrestle with the legislative task of forming the independent Railway Regulatory Authority of India (RRAI).
It is only after the regulator has started functioning that the government should think about bifurcation of the railways into an infrastructure corporation and train operating entity to take on competition from private operators.
“The report sets the milestones to be achieved for restructuring the Indian Railways organisation and the railway sector in general to bring about efficiency in rail transportation. Significant non-IR participation in Indian Railways is likely to happen only when structures are in place for a level playing field like commercial accounting, independent regulator. The report does not recommend privatisation period,” said Professor Partha Mukhopadhyay, senior fellow, Centre for Policy Research, and member of the committee.
After the five-year period, the committee suggests three courses of action. First, the existing production units of the IR should be exposed to competition from the private sectors. To face the competition, the existing production units may be placed under a government-run special purpose vehicle (SPV), known as Indian Railway Manufacturing Company (IRMC).
Second, the railway budget – the holy cow that owes its origins to the Acworth committee’s recommendations in 1921 – should be phased out with the gross budgetary support to the railways mentioned merely as a paragraph in the general budget.
But before that happens, it says the dividend policy of the railways needs to be revised.
“Dividends are paid because of the capital that the Union government has invested in IR. In other words, the budgetary support from the Union government is not for revenue expenditure, but for capital expenditure and the creation of assets and this is treated as a loan in perpetuity… Dividends are interest paid on that perpetual loan, the principal never being extinguished. On the face of it, the rate of dividend now paid is 5 per cent,” says the report.
Once the regulator begins to function and resolves the access to track for private train operators and IR zones, a case for bifurcation may be considered between the Indian Railways Infrastructure Corporation (IRIC) and rest of IR as train operators in competition with private operators, the report said.
“Several proposals in the report have merit because the Indian Railways needs a huge amount of money for upgradation and modernisation, which will come from private players. However, at the end of the day, all will depend on how much of this report is accepted and implemented by the government,” said Devendra Kumar Pant, chief economist and senior director (head – public finance) at India Ratings & Research.
In the report, Debroy committee has looked at the railway restructuring experiences from multiple countries, including Japan, the United Kingdom, Germany, Sweden, Australia and USA. In these countries, which opened up to competition, the entry of competitors lowered prices and led to better services.
In the UK, the privatisation of railways was rolled out in 1993 with the separation of railways into 25 train operating companies, which were privatised, followed by separation of infrastructure from operation and appointment of a regulator which granted licences.
“The key lesson from the UK is to retain the rail-track and infrastructure as a publicly-owned monopoly, while opening up rolling stock operations for passengers and freight to the private sector,” the report said.
R.C. Acharya, former member of the Railway Board, said: “The profits of train operating companies in the UK are mainly made by a hidden subsidy of low track access charges levied by Network Rail (NR), a government entity which manages the infrastructure. These access charges have over the years been reduced and are now half of what it was at the start of privatisation.”
He added: “While the private sector which took over the train operations in the UK have made all the profit, the infrastructure entity once again owned by the government as the private sector had failed to maintain its safety standards continues to be subisidised by the tax payer, soaring to nearly 4 times the level since the privatisation began. It is a scenario which IR may soon find itself in.”
Even though it has taken care not to talk about privatisation, the railway unions are already up in arms and plan to observe June 30 as a Black Day.
They are uneasy about the plan to unite the railway workforce under one or two cadres and fear that the entry of private companies could jeopardise jobs and further erode the railways’ financial health. “The report’s insistence that it doesn’t recommend privatisation is just an eyewash,” says Shiv Gopal Mishra, general secretary of the All India Railwaymen’s Federation. (Courtesy: R.Suryamurthy, Deputy Bureau Chief, The Telegraph)