Privatisation of Railway Services: Needed a Pragmatic Approach

December 8, 2014

by Debu C

Indian Railways is the lifeline of the country  and as an organisation it plays an important role that impacts people, logistics, economic, infrastructure and social sectors, while ensuring the flow of people and goods from one part of the country to another.

Indian railways under the British was established to facilitate and consolidate administrative control over India. After Independence, the role and priority changed making it one of the most important commercial activity of the government. Besides providing the mandated services, the Indian Railways today is also the single largest employer in India.
However, the organisation 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 continues to be a drain on the exchequer, while continuing to provide vital services inefficiently.
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.
Debate between social sector responsibility vs commercial efficiency
One side of the debate professes the railway being a core sector service provider has a national and social responsibility to fulfill. The very nature of the service is vital to keep the nation moving at a low cost and the state must absorb or subsidise the cost of services.
For the kind of geography and size that India has and the fact that there are still vast underdeveloped areas, the argument may well be true and relevant. India does need to keep moving and a high cost for the same could negatively impact the pace of growth that the country is struggling to maintain.
However, the other side of the debate argues that the Railways can be run much more efficiently by optimising resource allocation and implementation. The Indian railways has one of the highest man-to-track kilometre ratio in the world and this is unsustainable for a developing economy that has no choice but to push for optimisation of all resource deployment.
The Indian Railways is massively overstaffed and, therefore, burdened with a high cost of social and retirement benefits to employees, both serving and retired. Given the vast benefits enjoyed by the employees, the unions are vehemently resisting any trimming of manpower and is also against any outsourcing of services, as it sees this as a threat to its turf and existence.
Need for Redefining the Role and Responsibility of the Indian Railways
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 provided.
In other words, Railways must outsource most of its services to third parties that may include private companies, public sector corporations or consortiums that combine the two. The railways must restrict itself to funding, supervising and monitoring of services and leave the operation and implementation to the most efficient and competitive service providers.
India is on the cusp of unleashing its entrepreneurial side and opening up of the railways could catalyse growth of the services industry in India. Given it large size, both in terms of volume and geographical coverage, there will be enough room for several players to enter into this field and compete fairly, for maximum business.
Indian Railways requires massive investment and this can come from private capital, but private capital is deployed only in those areas where the return on investment is maximum. Therefore, if the railways has to attract private capital, it has to provide stable long term policies and a level playing field, for investors to earn a fair return on investment.
On the technical side, the railways needs to further open its services not just for implementation but subsequent operation, as well. Activities like track laying and maintenance, signal and transmission, engine & coach design and manufacture, engine and coach maintenance etc, must all be given out to private companies that specialise in these.
It may be a good idea to encourage Indian companies to form joint ventures with leading international firms under the ‘Make in India’ policy, to manufacture and provide maintenance services on a contract basis, while the railways must restrict itself to supervision and monitoring activities only.
The same is true for public facing activities especially station maintenance, station catering, and on-train services like catering and coach maintenance services. All these can and must be outsourced to the best service providers. There is massive scope for all kinds of related professional services, both on-train and in-station, and this can be a large opportunity to create region-based direct and indirect employment.
Maximum outsourcing of technical and non-technical services can drastically cut down the number of employees in the railways and help in reducing operating and social service cost per employee.
Raising resources through optimisation of available infrastructure
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.
Unfortunately, there is a lobby that has been professing sale of surplus railway land to private players, as one of the options for raising resources. However, the railways must ensure that the land remains its property and is leased out to private investors who can then invest, build and operate the property, while sharing revenue with the railways.
As in other areas, the railways has directly entered and is operating several mineral water bottling plants. While this is a synergistic thing to do, directly investing and operating the plants is not a good idea. The railways should offer its land and allow private sector players to invest and operate the plants, while railways receive a share of the revenue. This way larger private players could be involved and the range of products can be widened to cover other types of bottled drinks like juices and health drinks. This could open up large possibilities for revenue and employment generation.
Similarly, there are several avenues for revenue generation by allowing private players to enter into operating private trains on certain sectors that may be related to freight, tourism or even medical services. The potential is immense.
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 calls 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. Such is the suspicion that two of the four largest unions have recently offered their provident and pension funds to be invested in the railways, rather than allow the government 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.