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Privatisation of Railways

  • Category
    Economy
  • Published
    1st Aug, 2019
  • The Indian Railways is planning to purchase readymade trains, coaches, train sets, Electric Multiple Units (EMUs) from private manufacturers.
  • Tejas Express train on the Delhi-Lucknow route is likely to become the first train which is to be operated by private entities.

Issue

Context:

  • The Indian Railways is planning to purchase readymade trains, coaches, train sets, Electric Multiple Units (EMUs) from private manufacturers.
  • Tejas Express train on the Delhi-Lucknow route is likely to become the first train which is to be operated by private entities.

Background

  • The Indian Railways is among the world’s 3rd largest rail networks. The Government of India has focused on investing on railway infrastructure by making investor-friendly policies.
  • It has moved quickly to enable Foreign Direct Investment (FDI) in railways to improve infrastructure for freight and high-speed trains.
  • At present, several domestic and foreign companies are also looking to invest in Indian rail projects.
  • So far, the private sector’s participation in railways has been very less in India, compared to sectors like ports, telecom, electricity, airports and roads.
  • Several attempts have been made in the past to involve the private sector in various arenas like wagon procurement and leasing, freight trains and container operations, terminals and warehousing facilities, catering services, and other rail infrastructure through schemes framed by the ministry.
  • But problems like policy uncertainty, absence of a regulator to create a level playing field, the lack of incentives for investors and procedural or operational issues have significantly restricted private sector participation.
  • There are some major factories like Chennai-based Integral Coach Factory (ICF), which is owned by government from which Indian Railways procures trains and coaches.
  • It has also produced the coaches of luxury to high-speed trains including Rajdhani Express, Shatabdi Express and the recently-inducted Vande Bharat Express (Train 18).

Analysis

Reasons of Privatising Indian Railways

  • The Indian Railways is one of the few government-owned enterprises which is incurring losses year-after-year.
  • Indian Railways has not been able to keep pace with modernisation of its infrastructure and services and has not been able to expand at the pace and coverage that a country like India needs.
  • Almost all arms of the railways require modernisation of equipment, processes and training, all of which are still continuing as they have been, through the decades. The result is that the railways continue to be a drain on the exchequer, while continuing to provide vital services inefficiently.
  • Freight fares in railways are kept high to cross-subsidize the passenger segment. Rail Development Authority has been approved to determine rail fares to enhance affordability and utilize capacity in an efficient manner.
  • The perception is that almost all customer facing services like ticketing, ticket checking, porter services, catering and coach maintenance are not meeting people’s expectations and standards as they should be and this is the main reason for public resentment and dissatisfaction with the railways.
  • On the technical side, the railways lacks in providing proper services like track laying and maintenance, signal and transmission, engine & coach design and manufacture, engine and coach maintenance etc. All these services must all be given out to private companies that specialise in these.
  • Railways owns large tracts of land along its tracks, in various parts of the country and this can be optimally monetised by inviting private players to invest, build and manage properties that may be developed on these lands.
  • In this regard, Bibek Debroy Committee was constituted on September 22, 2014 to prepare a blueprint for reforming Indian Railways.

Bibek Debroy Committee

  • The Railway Board had constituted a Committee for mobilization of resources for major railway projects and restructuring of Railway Ministry and Railway Board (Chair: Mr. Bibek Debroy).
  • The Committee submitted its final report in June 2015, which has favoured privatisation of rolling stock: Wagons and Coaches.
  • Committee has looked at the railway restructuring experiences from multiple countries, including Japan, the United Kingdom, Germany, Sweden, Australia and USA.
  • It focussed on the British experiment to achieve two main aims: changing the institutional structure between the government and the Indian Railways and increasing competition.
  • It has also recommended amending the Indian Railways Act to allow the private operators to levy tariff.
  • Committee adds that in case the infrastructure becomes profitable, there is no bar on the government to have its own operator in the interest of competition.

Arguments in Favour of Privatization of Indian Railways

  • Improved Infrastructure
    • A strong argument in favour of privatization is that it will lead to better infrastructure which in turn would lead to improved amenities for travellers.
    • As opposed to mismanagement in form of stinking washrooms, lack of water supply and dirty platforms, it is expected that a private company will ensure better amenities.
    • This would enable the Railways to procure the right global technology available.
  • Balancing Quality of Service with High Fares
    • Probably the most persistent complaint regarding Indian Railways is that the quality of services provided hardly matches up to the phenomenal charges paid by the travellers.
    • Protagonists of privatisation feel that this problem will be solved when private players are allowed to enter the sector since the move would foster competition and hence lead to overall betterment in the quality of services.
  • Lesser Accidents
    • Any train-related mishap is like a nightmare come true for travellers and authorities alike courtesy of the physical, mental and financial trauma that ensues.
    • Because private ownership is synonymous with better maintenance, supporters of privatisation feel that it will reduce the number of accidents, thus resulting in safe travel and higher monetary savings in the long run.
  • Improved efficiency
    • The main argument for privatisation is that private companies have a profit incentive to cut costs and be more efficient. If you work for a government run industry, managers do not usually share in any profits.
    • However, a private firm is interested in making a profit, and so it is more likely to cut costs and be efficient.
  • Shareholders
    • It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover.
    • A state-owned firm doesn’t have this pressure and so it is easier for them to be inefficient.
  • Increased competition
    • Often privatisation of state-owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market.
    • It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and distribution of gas and electricity.
    • However, privatisation doesn’t necessarily increase competition; it depends on the nature of the market. E.g. there is no competition in tap water because it is a natural monopoly. There is also very little competition within the rail industry.

Arguments Against Privatization of Indian Railways

  • Coverage Limited to Lucrative Sectors
    • An advantage of Indian Railways being government- owned is that it provides nation-wide connectivity irrespective of profit.
    • This would not be possible with privatisation since routes which are less popular will be eliminated, thus having a negative impact on connectivity.
  • Fares
    • Given that a private enterprise runs on profit, it is but natural to assume that the easiest way of accruing profits in Indian Railways would be to hike fares, thus rendering the service out of reach for lower income groups.
    • This will defeat the entire purpose of the system which is meant to serve the entire population of the country irrespective of the level of income.
  • Accountability
    • The recent spat in the Tata boardroom is testimony to the fact that private companies are unpredictable in their dealings and do not share their governance secrets with the world at large.
    • In such a scenario it would be difficult to pin the accountability on a particular entity, should there be a discrepancy.
  • Unemployment
    • This move would render thousands of railway employees in production and ancillary units jobless in the long run.
  • Problem of regulating private monopolies
    • Privatisation creates private monopolies and thus, it needs regulations to prevent abuse of monopoly power.
  • Short-termism of firms
    • To please shareholders, the private players may seek to increase short term profits and avoid investing in long term projects.
    • For example, the UK is suffering from a lack of investment in new energy sources; the privatised companies are trying to make use of existing plants rather than invest in new ones.
  • Concerns of a common man
    • In the long-run, privatisation of railways may no longer be a low-cost common man's mode of transport and will be more on the lines of privatised services.

Challenges to privatisation

  • The debate on privatization of Indian Railway services pertains to two aspects. One is the need to bring in private capital and the other is to privatize certain aspects of operation and services.
  • The government needs to take bold steps on both accounts and this call for serious and proactive engagement with trade unions and political parties, to come to a common agreement.
  • The trade unions have been resisting privatisation of existing operations and are also suspicious of any attempt to involve private capital.
  • While this could be a welcome step, a change in thinking by the unions is the need of the day, otherwise the railways will continue to continue to bleed funds.
  • Over the years, no political party has shown the political will to address this issue. As a result, the Indian Railways continues to remain a large and inefficient organisation, executing one of the most important tasks for the nation.

Way Forward:

  • In order to sustain growth, modernisation and efficiency, the Indian Railways must redefine its role and responsibility. It has to completely reposition its operating role from being a direct service provider to being a supervisor of services
  • There is only one flip side to the privatisation of railways in India – and probably the most important one i.e., subsidised fares.
  • In order to keep Indian Railways affordable for the lower strata of the society (post privatisation), the government must offer subsidies and tax incentives to companies that would provide low cost services, similar to low cost airlines, to these very pocket of population.
  • This in the long run would not only make IR the largest but also the most efficient railway network in the World along with materialising the very objective and essence of Indian Railways — 'Lifeline to the Nation'.
  • Railways need to remain affordable as an infrastructure for daily commuters more than anything else. Instead of speed and privatization, efficiency and affordability should be the primary focus.

Learning Aid

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