Sunday, September 20, 2015

Last week, Prime Minister Narendra Modi hinted that his government would welcome greater private investment in Indian Railways. Meanwhile, in Britain, the Labour Party’s PM-designate Ed Miliband came under pressure to commit to re-nationalising the railways if his party came to power.

There could not be a sharper divergence of opinion in two countries that began with a common rail history.

The history of rail in India
The first steam engine train ran in Britain in 1825. Three decades later, the British built the first rail in India, between Mumbai and Thane.

Some people believe the colonial government did India a great favour by building the railways. They are wrong. For one, the British built the railways not for philanthropic purposes, but to support the colonial economy, which required such infrastructure for the movement of goods and people. Two, it was not the government, but private railway companies that built and operated the first rail lines in India. But because they performed disappointingly, the government took them over. By 1910, the government owned the bulk of India’s railways.

A study by economists Dan Bogart and Latika Chaudhary found that contrary to conventional wisdom, which credits the private sector with greater efficiency, in the railway sector in British-ruled India, “the move to state ownership decreased operating costs by 14%”.

They argue this was primarily because the colonial state relied on railways for revenue generation, and did not have to fulfill the demands of the Indian citizenry. “The Government’s fiscal reliance on railways meant it had a greater incentive to operate railways at low cost. Moreover, the colonial nature of the Government meant it was unencumbered by labour unions demanding higher wages or more employment. It was also largely free from local constituents demanding specific services not justified on efficiency grounds. In short the Government of India had the flexibility to make unpopular decisions.”

The debate in Britain
The government of Britain, apparently, did not have the same flexibility. And so, the railways in Britain remained in private hands. It was only after they lost control of the railways in India that the British government moved to take control of the railways back home, nationalising the country’s railways in 1948.

In the 1960s, doubts over the merit of the move began to surface. A report recommended the closure of a third of passenger services and more than half of the stations.

But railway privatisation did not have many takers. Even Margaret Thatcher, an advocate of minimal government, was against privatising the railways. It was the post-Thatcher Conservative government led by John Major that ended the government’s ownership of the railways, by hiving it off to 25 franchises in 1993.

Initially, private companies were allowed to operate trains on tracks owned by a public corporation by paying a stipulated fee. Later, even the track-owning company was privatised.

Two decades later, there is intense public debate in the country over the outcomes of railway privatisation.

Some have argued that a government monopoly over the railways was replaced by local private monopolies. Ian Taylor, the co-founder of a transport think-tank, told the BBC that inefficiencies created by railway fragmentation had led to wastage mounting to “over £1bn per year, enough to cut fares by 20% if the railway were reunified as a public company.”

He also pointed out that most rail franchises in UK are run by companies owned by other countries. “So, if you are reading this on an overcrowded train with a ticket that made a painful hole in your wallet, take heart from your generous contribution to the improvement of Germany’s fine publicly-owned railway.”

Ben Southwood of the Adam Smith Institute, however, argues that rail traffic went up after privatisation. Instead of reverting to "state bungling", he said the country should “end the practice of franchising, which creates private monopolies, and allow real competition and diversity.”

The journalist Brendan Martin takes a more nuanced view. In this essay, he writes, “three factors – new trains, better public information about services and some fare reductions – contributed to what has been the major success claimed for privatisation, increased passenger usage.” But it came at the cost of reduced safety. The number of railway accidents rose. “Railway privatisation ‘broke traditional bonds and practices of passing on skills and experience’, as the Financial Times – no opponent of privatisation in general – put it...At the same it introduced hard-nosed commercial tensions into relationships that often needed to be co-operative.”

The debate in India
Just when Britain, a country that has had private railways for two decades now, is veering towards a return to government ownership, in India the demand for the privatisation of the railways is picking up steam.

In 2011, the railway board published a draft policy that said, “Ministry of Railways wishes to attract private capital for accelerated construction of fixed rail infrastructure.” It laid out different models of private sector participation investment: special purpose vehicles, build-operate-transfer models, railway lines entirely built and operated by private companies, not just for freight transport but also passenger services.

Additionally, the government opened up the rail freight transport sector to private companies in 2006. Fifteen companies signed agreements to run container trains to transport freight. “It was expected that opening the segment of container train operation to private players will increase the share of rail in total container traffic operation to a target 50% from the current 25-30%,” said this report published in 2013. But that did not materialise, as roughly half of the contracted companies have not even begun to operate.

The only successful private enterprise in the railways has been in the ‘non-core’ sector: the Indian Railway Catering and Tourism Corporation (IRCTC), which takes care of online railway reservations, food plazas at railway stations and packaged mineral water on the trains.

By hinting that his government is open to more private sector involvement in the railways, Narendra Modi has renewed the debate over privatisation. But it is unlikely that his government’s rail budget would go beyond the recommendations made by an expert group created to look at the modernisation of Indian railways in 2012. The group recommended public-private partnerships for the development of high-speed passenger corridors and world-class railway stations, but it did not go as far as to recommend private passenger trains.

For now, the trains in India remain in the hands of people responsible to citizens, not shareholders.

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