Creating competition for Indian Railways
Private investors will enter the industry only if a level-playing field is guaranteed to them
As mentioned in the first part of this series, market competition is the best way to ensure autonomy of the Indian Railways. As far as freight trains are concerned, there is sufficient inter-modal competition to let Indian Railways decide freight tariffs. In the case of passenger trains—and especially for long-distance travel—one has to think of creating intra-modal competition. And surely, there is no harm in having Indian Railways compete with private train operators for freight business as well.
According to the government’s own concept paper dated 1 January, “Investors have generally been shy of investing in an industry where far too much is still being done or controlled by government and the risk/return trade-off is not always favourable.” Private investors will enter the industry only if a level-playing field is guaranteed to them. The structure of rail sector in India, as it exists today, certainly does not allow a level-playing field. Take, for instance, this statement made in the 2012 report of the High Level Safety Review Committee chaired by Anil Kakodkar: “The Railway Board has the unique distinction of being the rule maker, operator and the regulator, all wrapped into one.” While a number of schemes have been framed over the years to encourage private participation, not much has materialized; the absence of an independent regulator being a very important reason.
An independent regulator is a necessary if not sufficient condition to create the level-playing field. Unsurprisingly, the government’s concept paper quoted above deals with creation of a regulator which they call Rail Development Authority. The regulator will ensure, among other things, fair access to tracks, stations, warehouses, terminals and other infrastructure and services. While private investment is allowed in a number of industries associated with the railways, for creating competition in the delivery of transportation services, I am more concerned about two vertically linked streams—railway infrastructure and operation of trains. The connection between these two also determines the challenges for the regulatory institution whose creation is currently underway.
To induce competition, one can study two broad models followed globally. The first one is vertical integration—followed by the US and Canada. In this model, the competitors do both—own the infrastructure as well as operate the trains. There is, of course, sporadic coordination between different competitors like using each other’s tracks for short distances. The regulator’s job is to ensure this happens at a fair price and at arm’s length. The other model is vertical separation—followed by the UK. Here the infrastructure is separated from the operation of trains. In general, the rail infrastructure is owned by a single entity since it has the characteristics of a natural monopoly. But this opens up the upstream business—of operating trains—to competition. The regulator ensures fair access to all participants.
There are two other variants which crop up because of the problems with the above two models. The vertical integration model is poor in exploiting the economies of density. It also wastes precious resources as it involves duplication of infrastructure on a large scale. With high cost of capital and multiple competing demands over a small pie of resources, India cannot afford this extravagance.
Mexico’s alternative to vertical integration—for freight traffic—is to follow a model of “geographic competition”. Major industrial and logistics centres are connected to ports via more than one route, thus offering some bargaining power to the transporters. Besides, one port can also be a substitute for the other. In the words of Russell Pittman of the Antitrust Division at the US Department of Justice, this is a “workable”, if not a perfect model of competition. But Mexico is much smaller than India. And the model it follows is restricted to freight trains where developing intra-modal competition is not a great concern for India.
So, why not go for vertical separation? Because, one, it takes away the benefits of economies of scope by separating the infrastructure from the operation of trains. Two, the competition in operation of trains is good but not as good as competition in both operations and infrastructure. The rail sector is unsuited for competition in ownership of infrastructure and hence, will reap fewer gains than such separation in electricity or telecom sector. And remember that separation comes at a cost which has to be justified by gains made. Three, a vertically separate system is a lot tougher to regulate. Jose A. Gomez-Ibanez, professor at Harvard University, has pointed out that the wheel-rail interface is much more difficult to manage than the rubber tire-asphalt interface of the highways. The wear and tear involved in the former makes the task of calculating the access charge for different train operators for using the interface a lot more difficult.
Europe has partially solved the problem by opting for partial vertical separation—which is also, roughly speaking, the model suggested by the Bibek Debroy Committee. A part of the loss of economies of scope can be restored by allowing the owner of infrastructure with the licence to operate trains. This, however, doesn’t exactly make the task of a regulator easy because fair access in such a model will remain a festering issue. In case of India, it will mean Indian Railways owning the infrastructure and being the most dominant player in the operation of trains. This makes the case for an independent regulator even more vital for generating competition. Independent and fair regulation—and this will also require a high degree of expertise—is the only guarantee for potential private entrants against unfair distribution of high-cost infrastructure.
If India manages the issues around tariffs (highlighted in the previous part of the series) and creates market competition by building a robust regulatory structure, the minister of railways will not have to be involved in getting Indian Railways out of trouble in future.
This is the second in a two-part series on Indian Railways.