Thursday, May 16, 2013

Revamp Indian Railways

By S N Mathur     16th May 2013 
Indian Railways is in the news again, but for all the wrong reasons. Is it symptomatic of the malaise gnawing at the vitals of this pre-eminent undertaking of the government? The sores on its body are showing up only now. The organisation is in dire need of reforms. It is time to consider the changes being wrought in some of the other major railway systems.

The recent decision of the Chinese government to dismantle its ministry of railways was not wholly unexpected. Waste, fraud and corruption within the railway system had been rampant, leading to the dismissal of the deputy minister for railways in early 2011. The high speed train crash in July 2011 further dented its image.
With the dissolution of the ministry of railways, its administrative and regulatory functions are being transferred to the ministry of transport. The latter will be responsible for planning and building the country’s railways, establishing and supervising implementation of safety standards, and overseeing labour and health issues. The commercial functions will be taken over by the newly formed state-owned China Railway Corporation (CRC). The rationale behind this move is that government departments should not be running commercial activities. The existing 18 railway bureaus that China Railway operates in different regions will be placed under the new company.
China’s high-speed network is one of the world’s most ambitious public works project. From only 649km of high speed railway in 2008 it has grown to 8,400km today and is planned to reach 19,000km by 2014. However, with charges of corruption and embezzlement of funds in construction of these lines, and accumulation of unsustainable debts, this national programme has inevitably slowed down. The government has decided to open the rail industry to private investment on an unprecedented scale.
Russia has also embarked on a reforms programme with the aim of improving the efficiency and profitability of rail services, and encouraging investment for modernisation. In 2003, the ministry of railways was disbanded and replaced by an independently operating, yet government-controlled Russian Railways (RZD), a joint stock company that assumed all assets and operations of the erstwhile ministry. The ministry of railways was transformed into a regulator and licensing authority, with policy making being transferred to the ministry of transport. Asset unbundling was then carried out on functional lines, and today RZD has a number of subsidiaries such as those for passenger services, selected freight services and non-core business. Russian Railways retains its monopoly on infrastructure, locomotives and most freight business. The non-core operations, including manufacturing subsidiaries, were spun off to privately held firms.
In the second phase of reforms, it is proposed to end cross subsidy from the freight operations to the loss-making passenger transport, releasing funds for investment in infrastructure.
One of the main objectives of the Russian Rail reforms is to promote competition in freight traffic. In 2011, the largest privatisation transaction in the denationalisation of the Russian railway industry took place when Freight One, a subsidiary of Russian Railways, sold 75 per cent of its shares to an independent transport company. Government is veering round to a pact wherein RZD will be controlling both infrastructure and trains, and allowing operations by independent train operating companies under regulated conditions as in Germany and France.
India remains the only major country in the world where the national railway forms part of the ministry of railways. It should now seriously consider emulating China and Russia, and break out of the shackles of a system that can no longer support the financial viability of this behemoth. There is little hope that with the present management structure Indian Railways can turn the tide in any near future and ensure a sustained run of profitability. Substantial investments are the need of the hour, and without funds for investment for maintenance of assets and other modernisation programmes, as also for major projects like the dedicated freight corridors and high speed trains, railways’ future appears bleak.
Indian Railways has been losing market share to road transport, both in the passenger and freight services, and hence the urgent need to improve its commercial orientation. Looking at the attempts being made by other railway systems around the globe in this direction, one will discern some common strands in their restructuring processes. All of them have worked to maintain an arm’s length between the railways and the governments, have encouraged privatisation, and have tried to develop an appropriate business focus by unbundling their non-core businesses. Restructuring has helped railways in several European countries, and also in Japan, to improve their market share, raise employee productivity, bolster infrastructure investments and reduce public subsidies.
In this emerging scenario India should consider splitting up the existing functions of the railway ministry. The newly constituted ministry may confine itself to planning, policy formulation and regulatory control of rail transport; all commercial operations ought to be placed under a new company that can have a measure of autonomy for fixing freight tariffs and passenger fares. The infrastructure may remain under the ownership of this company, and access fees can be collected from private operators who will be licensed to run the freight and passenger trains. Competitive bidding for the passenger and freight markets can yield improved efficiency in train operations, in turn leading to greater public satisfaction. Private investments in creation of new assets and introduction of new services like high speed trains will solve the government’s problem of raising funds from within its own resources, and simultaneously speed up the progress of major projects.
The form of restructuring that the government in India may finally opt for could be unique in its own way, and need not replicate what has been planned in China, Russia or any other country. However, if the three fundamental principles of restructuring that can be the game changers, viz. separation of commercial and non-commercial functions, outsourcing of non-core activities, and competition among operators of freight and passenger services, are adopted, we may still live to see a resurgence of the railways in India.
The author is a former MD of Railway Finance Corporation.


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