The wrong track

Last week, the Union railways ministry officially put out a request for private participation in passenger train services. The idea is for private companies to provide rolling stock and operate train services to 109 pairs of destinations, and through 151 trains. The ministry says that this would raise private sector investment of about Rs 30,000 crore, and also claims that the “majority” of the trains would be manufactured domestically. Besides a certain fixed charge and a variable energy charge, the remainder of the payment from the private participant would be through revenue sharing, the proportion of which is to be determined through competitive bidding. From one point of view, the railways’ plan is timely. The dedicated freight corridors connecting metropolitan cities may well create some capacity on an otherwise congested network, and alongside the creation of some new track, this should allow for the running of some more fast trains. The railways has also been squeezed in terms of internal resources for capital expenditure in recent years, and has had to depend upon general budgetary support. Given the overall fiscal problems the government is facing at this time, an inflow of Rs 30,000 crore or so would not be unwelcome.

However, as a long-term solution, this plan has severe problems that are tied up with the nature of the railways sector. Any plan that depends upon private operators running on state-run infrastructure is problematic. In the UK, for example, the combination led to chronic underinvestment in basic infrastructure by state-owned Network Rail, while ticket prices have exploded. What makes it even more problematic in this case is that the railways will be both the provider of the infrastructure and a competitor from the point of view of attracting passengers. If the private operators are properly profit maximising, then they will naturally be drawn to the most remunerative sectors — thereby depriving the railways of much-needed revenue. There will be considerable internal pressure, regardless of what is written in the contract, for the network operator to favour its own trains in crucial decisions. This will make it hard for private operators to compete, especially given the soft budget constraint faced by their state-owned rival. In other words, the malign impact of Air India on the civil aviation sector will be mirrored in the rail sector. Supervising this will not be easy.

Indeed, dispute resolution overall will be extremely difficult. The government has not moved further towards creating an independent regulator, which could perhaps thrash out some of the disagreements that are inevitable in public-private partnerships. The question of pricing power for the operators is also not clear. Will that be set by a regulator? If so, as in the electricity sector, will the supposedly independent regulator be captured by the political class? Even if not, how much capacity could a regulator possibly have when it comes to addressing the problems that will arise almost daily in a system which is running 151 private trains, with multiple opportunities for disputes as to precedence and delays on each trip? In the end, without an independent regulator, all stakeholders — the railways, the companies, and passengers — will suffer. Thus, it is important that some of these operational issues are first addressed.

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