governance, political economy, institutional development and economic regulation

Rebranding Indian Rail

IR1

Indian Railways: Lifeline of the Nation” — runs the bold title of a 2015 government white paper. But the reality is that post-1991 the Indian Railways (IR), whilst retaining its high ritual status, ceded ground to competition from road transport.

Too many consultant chefs

It has only itself to blame. The railways steadfastly stonewalled all attempts to reform its operations. Over the past 15 years, railway operations have been studied by no less than six high-level committees, under Rakesh Mohan (2001), Sam Pitroda (2012), Montek Singh Ahluwalia (2014), Rakesh Mohan (National Transport Development Committee, 2014), D.K. Mittal (2014) and Bibek Debroy (2015). There was no committee chair from the railways.

There are seven executive members of the Railway Board, its highest body, that functions directly under the railway minister. There are 9,124 senior Group A railway officers who are specialists in finance, commercial services, maintenance, operations, construction and production of rolling stock. It’s odd, therefore, that the government has never trusted these professionals to come up with a vision of what “the lifeline of the nation” should look like. In fact, this illustrates that reform was never an internally driven priority.

No internal support for reform in IR

Admittedly, with a large workforce of 1.3 million, unionisation in the railways is strong. George Fernandes, former railway minister (1989-1990) and Janata Party luminary, sowed his wild oats as a firebrand, railway union leader. But this is exactly why the Narasimha Rao brand of “reform by stealth” cannot work for the Indian Railways. The bottomline is that in such huge industrial enterprises there is no alternative to a broad consensus around reform and approaching it head-on.

Road wins versus rail

Truck

The railways languished in the post-reform era as it was unable to build private partnerships and leverage its assets. The government too seemed to have given up on it and turned its attention to building highways instead. So as rail passenger transportation doubled, road passenger transportation has trebled since 1990-91. The railways’ share of freight decreased from 53 per cent in 1986-87 to less than 30 per cent today.

The Indian Railways lost ground as it got mired in its own corrosive image of a government entity focused on social objectives — providing cheap, even free, travel. Thus, it lost sight of its mission to become the “economic lifeline” of the nation. Communist China moves less passengers kilometre per kilometre of its rail network than India. But it moves four times more freight kilometer per kilometre of its network than India. The India Railways’ priorities are time-warped around passenger traffic.

The seamless movement of freight over long distances can cut the cost of production and make industry competitive. Long-distance freight is best moved by rail. But the Indian Railways lost the freight business due to a monopolistic tariff policy for bulk freight, such as for coal, iron ore, cement and foodgrains. It is similar for the power sector. Bulk consumers like industry are still charged at penal rates to cross-subsidise rural and retail consumers.

Fuzzy mission

Railway minister Suresh Prabhu, like several of his predecessors, is articulate, public-spirited and full of ambitious programmes spelt out in his Railway Budget speech this year. On offer is more public investment to remove the choke points which congest and slow down traffic; a more extensive search for alternative revenues from station redevelopment and the monetisation of assets; better passenger facilities and continued implementation of the dedicated freight corridors.

SPrabhu

But clarity on the Indian Railways’ core mission is missing. This has to be, first and foremost, the movement of freight and increasing the railways’ market share in the city and suburban passenger traffic.

Three reform measures are preconditions for success.

City and suburban travel

metro

First, it is SMART to switch city and suburban passenger traffic to rail from road. The savings on travel time and the avoided cost of air pollution justify such investments. But this is an option only if we can make these systems attractive for private investment and management. Assured viability gap funding on the back of regular adjustment of tariff is a must. The experience of “independent” regulators in electricity shows that in large metros, with high income levels, cost-reflective tariffs can work, if customers can transparently see for themselves the value proposition the service offers.

Use scarce capital to move freight

IRFreight

Second, allocation of public capital across competing projects has to be “value for money”. The railways’ passenger and freight businesses should be insulated silos for accounting purposes so that costs and revenues can be allocated to each service. Our rail freight tariff is on average 40 per cent more than China’s. But our passenger tariff is on average 75 per cent cheaper. Investing to make freight move four times faster at 100 km per hour instead of 25 km per hour makes sense as there is room to reduce tariffs and expand business. Investing to move passengers at 130 kmph, instead of 70 kmph, makes no sense because although passengers are willing to pay for it the Indian Railways is not willing to charge for it.

Go for partnerships

Third, the Indian Railways must think of itself as part of a supply chain rather than a stand-alone competitor. It must seek partnerships with air, road and marine transporters, and with traffic aggregators that can yield better returns. This is possible through transparent contracts, even as the railways remains a government entity.

In 1990-91, India had few choices except to reform by stealth. We have moved on since then. The reform constituency has grown. The real concern now is how to insulate losers from the pain of change and development. Loss of employment or of land must be fairly and adequately compensated. Using scarce fiscal resources for this purpose aligns with equity and is more efficient to bump up aggregate demand than across-the-board public sector pay increases.

Adapted from the authors article in The Asian Age, July 27, 2016  http://www.asianage.com/columnists/3-reforms-put-railways-fast-track-019

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