September 13, 2020

Changing Tracks: Railways restructures its board & invites private participation to make the services modern, efficient & profitable

On September 3, the Union government put into effect a historic decision taken last December towards the much-awaited corporatisation of Indian Railways. The Appointments Committee of the Cabinet formally reconstituted the Railway Board, the 165-year-old organisation’s apex decision-making body, appointing chairman Vinod Kumar Yadav as the board’s first CEO. The 114-year-old, eight-member board, which governs the public transporter, was replaced by a new one that has four members, with clearly defined roles of handling infrastructure, rolling stock, finance and operations. They are led by CEO Yadav, who will be responsible for human resources. Unlike the chairman, who was a first among equals, the board’s CEO has powers to overrule members and take decisions should consensus elude any matter.

The board’s new corporate structure is a critical part of reforms undertaken by the Piyush Goyal-led railways ministry to make the Indian Railways a modern, efficient and profitable public mover. The restructuring is on the lines of railways’ peers in Europe and the US. Goyal’s other bold move of transforming the railways by infusing private capital is also being keenly watched. On July 1, his ministry invited requests for qualifications (RFQs) from investors to not just design, build, finance and operate private passenger trains but also to own them. Since the nationalisation of railways in 1951, passenger trains had been a government monopoly. In October 2019, as a pilot project, the railways allowed its subsidiary IRCTC (Indian Railway Catering and Tourism Corporation) to own the Tejas Express train and have private operators run it on the New Delhi-Lucknow route. But the concept achieved limited success. Now, the proposal for passenger trains both operated and owned by private players promises to be a game-changer.

Towards this, top railways officials held their second round of virtual meetings with the prospective investors on August 13. According to the RFQ document, 151 private passenger trains are planned on 109 routes (slotted into 12 clusters) across the country. Investors will have market freedom to not only set fares but also generate additional revenue from, say, letting out space for advertisements. If all goes according to plan, the first batch of 12 private trains is expected to start running by March 2023, and by end-2027, all 151 trains will be on the tracks. The operators, who will be selected through a bidding process, will be allowed to run trains, with a minimum of 16 coaches, for a period of 35 years. The private trains will give direct competition to the 2,800 express and mail trains run by the railways.

The move couldn’t have come at a more critical juncture. Indian Railways, the world’s fourth-largest rail network that runs 13,523 trains and ferries over 23 million people every day, is severely cash-strapped. Passenger business is a loss-making vertical for the railways. On average, the railways meets about 57 per cent of its operational costs through the sale of passenger tickets. The rest is cross-subsidised through earnings from freight. Last year, the government said the railways would need Rs 50 lakh crore over the next decade to upgrade its creaking infrastructure.

The staggering sum is double the government’s total expenditure across all sectors at present and cannot be sourced from the exchequer alone, private capital is desperately needed. Indian Railways is showing considerable flexibility to attract this investment, which will open up capital for infrastructure upgrades and running more passenger trains. After the first round of pre-application meetings with the prospective investors on July 21, it eased the norms in the bid document to allow operators to lease trains instead of a mandatory purchase of locomotives and coaches, removed the cap on bidding in a maximum of three clusters and also rationalised fee structures.

The private trains plan

It has been a promising start, with the August 13 meeting attracting 23 companies. Among them are French major Alstom’s India arm, Spanish player CAF, Canadian coach-builder Bombardier Transportation, Bharat Forge, GMR Infrastructure, L&T Infrastructure Development Projects, Bharat Heavy Electricals Limited, BEML and IRCTC.

Four of the 12 clusters will be based in Mumbai and Delhi (two each) and the remainder in Jaipur, Howrah, Chandigarh, Bengaluru, Patna, Secunderabad, Prayagraj and Chennai. Sixty per cent of rail traffic is on these routes. The railways expects to free up a lot of capacity for introducing more passenger trains once the first two dedicated freight corridors (DFCs), Dadri in Uttar Pradesh to Mumbai (western) and Ludhiana to Dankuni, near Kolkata (eastern), are commissioned by December 2021, shifting about 70 per cent of the freight traffic. Top railway officials say there has been a 4-6 per cent year-on-year rise in passenger traffic and freight movement. While the DFCs will help in decongestion, the passenger trains will need to run at higher speeds to make the most of track availability. Each new line, the officials say, increases capacity by about 1.6 times.

The railways will be looking to tap this potential with the help of the private operators, who will have to pay haulage charges, a levy for using railway infrastructure, and energy charges as per consumption, as well as give the railways a share of their gross revenues. Yadav told india today that the goal is to issue letters of acceptance by March 2021 so that private trains can start running by 2023.

The railways estimates that private train operators will bring in a capital investment of at least Rs 22,500 crore and boost passenger capacity. A railways report says 50 million passengers could not get train reservations in calendar year 2019, most of them in the 12 clusters identified for private trains. The larger goal is a mega private capital push in railway operations with private freight trains being introduced at a later stage. A group of secretaries, led by Yadav, is working out the modalities. All this also promises to boost private sector manufacturing of locomotives and coaches, setting up a healthy competition with the railways, which has 11 units for producing locomotives, wagons and coaches.

The railways needs big funds to invest in its infrastructure and extend services in remote areas. Through the past decade, its operating ratio has been above 90 per cent, meaning an expense of over 90 paise to earn a rupee. The operating ratio in the last fiscal, ending March 2020, was 97.4 per cent. In comparison, the operating ratios of railways in the US, Russia, China and the EU are 55-60 per cent. But their structures are different, for instance, in most countries, freight and passenger businesses are segregated. Also, Indian Railways pays pensions from its annual earnings (a pension fund was introduced only in 2003), which has a huge bearing on its financial health.

Can private capital transform railways?

Experts say while private capital can create headroom by pumping in money to increase capacity and upgrade services, the real transformation of railways will only come through wide-ranging reforms. A former railway minister says reforming this complex organisation requires an attitudinal change among its 1.3 million employees. The railways will need to unbundle its multiple functions, running operations, framing policies and doubling up as a regulator, get leaner and run like a corporate entity. In the past three decades, at least 12 committees have presented reports on what ails Indian Railways, the most recent one being the Bibek Debroy panel report in June 2015. The Debroy committee recommended structural changes, making railways leaner and opening it up for private capital. Most other committees agree substantially on the basic problems, though they offer varying solutions.

Goyal, who took over from Suresh Prabhu in September 2017, has drawn up a broad vision for the railways. He picked up some of the toughest reforms to start with, such as merger of services, creating more space for private players and a corporate working structure. But to ensure a smooth entry for private players into passenger operations, Goyal will have to accelerate critical reforms, especially those of setting up a rail regulator, integrating the workforce, corporatising both operations and manufacturing, turning the railways from a departmental enterprise to a PSU, cleaning up the fiscal mess and executing infrastructure projects faster.

Needed: A level playing field

The private sector’s experience with the railways has been a bitter one since 2006, when the Lalu Prasad Yadav-led ministry opened up freight movement. Sixteen private players entered with an investment of around Rs 6,000 crore. Data from the Association of Container Train Operators shows that as of August 2020, they had suffered accumulated losses of Rs 600 crore. Operators cite the doubling of haulage charges in the past 14 years as the main reason for losses. Haulage charges now make up 60-70 per cent of their operating costs.

“Such factors (what happened with freight operators) create doubts in the minds of private players keen on investing in the passenger train segment,” says Rajaji Meshram, a partner at EY. For instance, operators want clarity on haulage charges. For private passenger trains, the railways fixed haulage charges at Rs 52.31 per train km for 2019-20, with inflation indexed. Investors are also concerned that revenues from passenger trains will depend on the allotted time slots, route congestion and the value-added features they can provide.

Yadav says that bid documents are being fine-tuned as per consultations with the stakeholders. But it is not clear how transparency would be ensured in the allotment of running slots. At present, trains run on an annual time-table. “In case of disputes, how will things be resolved?” asks a CEO, emphasising that time slots are key to traffic and revenue projections.

Bharat Salhotra, former MD of Alstom’s India and South Asia businesses, says things may remain unpredictable till the time a rail regulator is set up. In April 2017, Prabhu secured the Union cabinet’s approval for setting up a regulator, the Rail Development Authority, to rationalise fares and freight tariff, protect customer interests and set performance benchmarks. The authority is yet to see the light of the day. “We would have figured out the regulator concept by the time private trains start in 2023,” assures Yadav.

The regulator’s role encompasses the politically contentious issue of rationalising passenger fares and freight charges. In 2012, then railways minister Dinesh Trivedi lost his job over a proposal to increase fares by two paise per km. Every year, the government massively cross-subsidies passenger fares. In the previous fiscal, the railways reported total revenues of Rs 1.43 lakh crore, of which only Rs 56,000 crore came from passenger fares. It earned Rs 1.44 per km for moving an average tonne of freight, but only Rs 0.35 for a passenger. A rail regulator would be expected to fix such anomalies by cutting cross-subsidies. This January, Goyal increased passenger fares per km by a paisa for non-AC trains and two paise for AC trains, which is expected to bring in an additional Rs 2,312 crore.

A key issue for private operators will be how accommodating the railways is to their needs. By one estimate, running 151 private trains would require a timely supply of at least 3,000 new coaches and 400 locomotives. This is another area where the railways eyes private investment.

setting its house in orderFor the railways, revenues have not been increasing at the envisaged pace. Its consistently high operating ratio worryingly indicates poor capability in achieving operational surplus. In 2019-20, the railways generated a surplus of Rs 3,774 crore only. Around 65 per cent of the capital expenditure is made through extra-budgetary funds, which the railways sources from the market. These are projects in which the railways’ projections of return on investments would be in double digits. Now, with a restructured board in place, Indian Railways needs to sooner or later evolve into a PSU as this will not only open up avenues for more funds but also boost transparency, efficiency and competitiveness.

Yadav says investment in new tracks, gauge conversion and electrification has been ongoing. The railways had identified 58 projects as super-critical and prioritised them, 21 projects have been completed and another three will be over by December. While Covid brought passenger movement to a crashing halt, the lockdown gave the railways a window to complete various projects, such as yard remodelling, repair and regirdering of bridges, doubling and electrification of rail lines and renewal of scissor crossovers.

Of the 12 clusters, private players are most keen on the busiest Delhi-Kolkata and Delhi-Mumbai routes. For the past two years, these are being upgraded, with budgetary allocations of Rs 6,000 crore for each. “Corporates are confident of traffic [volumes] on these routes. With revamped infrastructure, it should get a good response,” says Meshram. All of this should count as the Indian Railways works to put private trains on its tracks. Goyal wants to see the railways becoming an efficient entity running on commercial principles in the next five years. It’s a goal that will require fast-paced and continuing reforms.


Subscribe to Newsletter