Monday, November 4, 2013

Need to regulate Railway tariff
By SN Mathur
Published: 04th November 2013

There is a serious mismatch between the rail freight charges and the passenger fares. The ratio of the average freight tariff to average passenger fare in India is one of the highest among major railways in the world. Because of low passenger fares the traffic volume for this segment of rail operations is very high but the revenues are disproportionately low. As a result, losses in this area have been mounting and are expected to touch Rs 25,000 crore in the current financial year.
Cross-subsidising these losses from freight earnings necessitate scaling up of freight tariff each succeeding year, not only at the time of presentation of Railway Budget but often during the year also. This proves counter-productive as railways lose their competitive edge to road. The Rakesh Mohan Committee Report (2001) also pointed out that the financial crisis faced by the Railways was, to a large extent, due to its low quality and over-priced freight services and a lack of market incentives.
Currently, there is no regulation of freight or passenger tariffs on Indian Railways (IR). The Railway Board can change tariffs within its discretion but always subject to political oversight. While presenting the Rail Budget for 2012-13, the minister had proposed setting up of a Railway Tariff Regulatory Authority (RTA), an independent body that will suggest the level of tariffs both for freight and fares. Earlier, the finance ministry had also made a recommendation for such an authority on the ground that the Railways being a monopoly, there is need for an independent regulatory mechanism for fixing tariff which will help railways to rein in productivity loss and improve performance. The RTA is expected to tackle the distortions between IR’s freight and passenger activities by delinking the process of passenger fare increases from political decision making and bringing it into line with the market realities. This is expected to be a major step forward in reforming railway finances, as politicians will then find it extremely difficult to overrule its recommendations.
The Planning Commission’s Working Group Report for XII Plan, however, strikes a different note. It is of the view that since IR has a social obligation to provide transport at affordable cost to weaker sections of society it cannot function entirely on commercial lines. Also, there is stiff competition from both road and aviation sectors, neither of which has any regulatory body to fix transport prices. This would call for a flexible and competitive policy on pricing, with the result that the RTA role will get limited to only setting down the tariff fixation parameters and it will not be able to guide IR towards a more economic and efficient operation. The working group, therefore, considers that under the present organisational structure of the Railways, there appears to be no rationale for setting up the proposed authority.
Notwithstanding this, in August the cabinet had decided that the RTA will be set up with full powers to fix and notify rates. It had also approved a draft amendment Bill seeking changes in the Railways Act, 1989, which will tantamount to vesting in RTA full powers of fixing and notifying tariffs. The rail ministry has all along been against such a move, preferring only an advisory role for the regulatory body. It harbours a fear that the manner in which the cabinet note has been framed the RTA’s role will not be that of an advisory body but final authority to decide tariffs, thus usurping the powers vested in the ministry under the Indian Railways Act. Efforts are being made to overcome this problem by introducing a clause in the Rail Tariff Authority Act that would allow IR to supersede the policy directives of the RTA in certain exceptional situations, akin to a provision that resides in the Telecom Regulatory Authority of India Act, 1997.
International experience shows railway regulatory procedures are closely linked to its structure. The parallel, privately-owned railway lines in USA were, for many years, controlled by the Interstate Commerce Commission which strictly regulated the tariffs and other aspects of service. These restrictions dampened the commercial initiatives, led to poor financial returns, and inadequate investments, finally culminating in bankruptcy of several railways. A new approach to regulation (Staggers Act) was adopted in 1980- designed to balance financial viability of the railways and the interests of shippers. Railways are now free to set tariffs within a wide range, with the proviso that they do not abuse market power over a particular shipper, and the regulator intervenes only in response to complaints. As a result, financial results of the railways have improved, average tariff has come down and traffic volumes have increased substantially.
In Europe, most countries had traditionally regulated entry into the rail market, allowing only the state-owned vertically integrated railways to operate train services. Recently, however, the European Union has permitted third party access to the monopoly railway infrastructure (tracks). This is based on the premise that since railway undertakings are now operating in a competitive market, the focus of regulation must change from controlling the behaviour of the vertically integrated railways to controlling the actions of the monopoly infrastructure provider and promote competition among the operating companies.
IR, like other vertically integrated freight railways, maintains its monopolistic character, and competes for traffic only with other modes of transport, predominantly road. Several recommendations have been made in the past for restructuring the Railway Board but these have systematically been stonewalled by the rail ministry. The result is IR continues to plod along with an outdated business structure and without clearly defined commercial objectives. It has also not adopted the modern accounting system that could generate cost information specific to passenger and freight movements, and to different services within the two segments. Owing to the multi-product nature of railways’ activity, it is often difficult to allocate total operating costs to each service because of the presence of a number of joint costs that must coexist with variable costs attributable to them individually. It is, therefore, hard to see how tariffs could be regulated in any rational manner by the proposed authority.
If IR is to achieve the twin objectives of improving operating efficiency and financial viability, it must allow some form of competition. A regulator may then become a necessity, but for now it will only add to the administrative mess that this premier transport undertaking is already in.
The author is a former MD of Railway Finance Corporation.


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