Clear the track for private players

Indian Railways is in dire need of funds to enable it to act as the backbone of supply chain systems in India. In this context, the Narendra Modi government’s Rail Budget inviting foreign direct investment is to be welcomed by all stakeholders.

According to industry reports, India loses approximately $65 billion every year due to inefficient supply chain systems.

If corrective measures are not taken, this figure may touch $145 billion by 2020.

Supply chain costs in India are about 12-13 per cent of the gross domestic product compared with 7-8 per cent in developed countries.

Vision 2020 The Railways, which should have formed the backbone of the supply systems in India, has failed to fulfil its role. Since Independence, it has added only 20 per cent — or 10,000 km — to the rail network, whereas traffic has increased ten-fold or 1000 per cent.

Compare this with China which, in the same period, has added about 69,200 km to its rail network.

In order to rectify this situation, the Ministry of Railways came out with the Vision 2020 plan, which expects Indian Railways to add 25,000 km of railway lines and set up six dedicated freight corridors to increase the quantum of freight transported by it.

Vision 2020 entails an investment of ₹13,87,842 crore.

Similarly, accepting the Kakodkar Committee Report on Rail Safety, the ministry seeks to adopt an advance signalling system at an estimated cost of ₹20,000 crore. It also seeks to eliminate all level crossings at an estimated cost of ₹50,000 crore.

Where is the money? That said, the fact is that Indian Railways is in no shape to generate these funds by itself. Its operational costs consume 95 per cent of its revenues, leaving little for any development programme.

This is in spite of the fact that average freight revenue per tonne kilometre of Indian Railways at $395 is almost four times the average freight revenue per tonne kilometre of railway companies in the US. (This is without taking into account the recent rise in the freight charges.)

In this scenario, private investments seem like a good option. Sectors such as airports, ports and roads have benefited from PPP initiatives. The Railways has benefited from private investment in container transport. It opened container transport sector in 2006 and gave licenses to private players for operating container trains on the rail network.

Private players paid ₹640 crore as license fee and invested over ₹4,000 crore in creating infrastructure, including terminals, rakes and handling equipment.

It is anticipated that in the next five years, private players would give ₹3,000 crore to the Railways as haulage charges. However, is the rail sector ready for private investment?

It must not be forgotten that prior to 2006, two initiatives in 1994 and 2004 to invite private investments in container transport failed. Even the experience of private players in the container transport sector post-2006 has not been very positive.

The Railways has shown intense resistance to competition from private players. Instead of partnering private players, it has ended up creating serious obstacles.

For instance, immediately after accepting the license fee from private players and even before signing the concession agreement, the Railways imposed a blanket restriction on transport of coal, coke, iron ore and minerals in container trains.

These four commodities constitute almost 60 per cent of the total goods transported by rail.

Frequent changes in the haulage charges and other terms and conditions make it impossible for private players to enter into long term commitments.

The duration of the concession agreement, at 20 years, is not long enough to induce large investments. Ambiguity regarding the entity which is responsible for implementation of the concession agreement creates an environment of uncertainty.

Steam up Indian Railways wears too many hats – ministry, regulator and operator -- for the comfort of the private investors. The Modi Government will have to overhaul the entire system to induce private players to invest in this sector. The following steps can be considered:

Create a robust and balanced contractual framework;

Establish an independent regulator;

Undertake a competition impact assessment of the existing regulatory framework.

The Railways needs to accept private investors as partners in improving supply chains.

The writer is a senior associate of J Sagar Associates

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