Reforms in Indian Railways: Here’s why private trains are a win-win proposition

directly address the key challenges of the railways, namely of becoming operationally efficient and investing in expansion and upgradation of the network.”>Another criticism has been that allowing the private sector to operate trains that will service the highest end traveller segment, does not directly address the key challenges of the railways, namely of becoming operationally efficient and investing in expansion and upgradation of the network.

By Manish Agarwal

The Indian Railways (IR) have invited the private sector to own and operate passenger trains on over 300 paths, bundled into 12 clusters. It is estimated that each cluster would entail an investment of Rs 2,000-3,000 crore in procurement of rolling stock, and can cumulatively add significant capacity of AC coaches in the country. There is some level of skepticism about the success of the move, given the railways’ patchy track record with the private sector, in private Container Train Operations and with the four models for PPP in railway lines.

Another criticism has been that allowing the private sector to operate trains that will service the highest end traveller segment, does not directly address the key challenges of the railways, namely of becoming operationally efficient and investing in expansion and upgradation of the network. But other than the anticipated benefit of attracting air and luxury-bus travellers to trains, there are three broader benefits that are possible from the proposal. Reaping these benefits would also require the Indian Railways to take initiatives that address investor concerns.

First, the private sector’s success would depend critically on IR’s operations of track and station access. The bidders will probably require very clear operating procedures, responsibility allocation and high penalties for non-performance by IR. This last element (i.e compensation for non-performance) has been weak in PPP contracts in India. If the threat of penalties indeed acts as a deterrent, it could lead to use of technology for better scheduling. Improved and more predictable scheduling would lead to better track utilisation, and could benefit everyone, including freight operations.

Second, the track access charges (known as haulage charge) to be paid to IR will be key to the viability of private operators. Ideally, a transparent allocation of IR’s capital and operating costs to various activities would enable a clear determination of the components of the network costs. The process of transparent cost-allocation would help to identify hidden inefficiencies, which can form separate efficiency-improvement projects for the railways. Having determined the full cost of tracks, the key question then would be the quantum of the track access charge to be levied on the private operator as a fixed cost. To provide a level-playing field where private operators compete with premium trains of the railways, it would be important to determine how much of the infrastructure costs are loaded into the pricing of IR’s premium trains. This exercise would lead to more transparent understanding of unit-economics of the business, and the extent of subsidies being provided to or earned from premium passengers. This would also provide clearer price-cost benchmarks that the private operators would need to beat, to demonstrate their added-value.

Third, as private trains get launched, their planning and operations will help in understanding price elasticity of demand, and affordability of different technology and service levels. Besides demonstrating sources of efficiency, the data from these operations could also inform the debate on affordability of fare increases (though, of course, the politically sensitive class of travellers may remain out of the target segment).

The aforementioned issues will also be key concerns for bidders, i.e. enforcement of IR’s performance, extent of fixed costs to be committed, and the high risk associated with traffic guesstimates. The extent of bidder interest after the shortlisting stage will depend on the comfort IR is able to provide on these factors (among others). So, addressing these is essential to the success of the proposal. The additional benefits of more disciplined operations and better understanding of economics of serving different segments would also hugely impact the journey towards reforming the rail sector.

The writer is Partner – Infrastructure, PwC India