PM endorses big reform of Railways

PM endorses big reform of Railways

If Prime Minister Manmohan Singh has his way, Indian Railways will undertake major institutional reform over the next 10 years, and the process may start as early as the next railway budget.

The major changes would include creation of an independent tariff regulator, shifting to commercial accounting practices by 2011, attracting more private investments, and spinning off the services function of Indian Railways.

In a letter to railway minister Mamata Banerjee dated 25 October, which has been reviewed by Mint, Singh has endorsed a review undertaken by the Planning Commission that set out detailed milestones for the overhaul of the country’s largest transporter.

Singh also sought a review meeting with the Railway Board’s chairman S.S. Khurana and Banerjee to discuss the response of Indian Railways to these suggestions.

Hindustan Times and The Financial Chronicle had first reported on 18 October the review undertaken by the Planning Commission and communicated to the Prime Minister by Montek Singh Ahluwalia, deputy chairman of the Planning Commission, India’s apex planning agency.

The review underlines the fact that spending by Indian Railways lagged targets. “In the first three years, they have achieved only 48% of the 11th Plan total in constant prices, and even this has only been possible because of higher-than-planned budgetary support," the review said. Only 23% of the Plan was to be financed through budgetary support and the remaining through the railways’ earnings and borrowings. However, Central government support in the first three years was actually at 31%, while the railways, through borrowings and its revenue, contributed 69%.

India’s government departments work with a five-year planning horizon. The 11th Plan refers to the period between 2007 and 2012.

The review also points to issues related to the slow pace of track development, as well as outdated technology, which means India still continues to use substandard freight cars. According to the review, in South Africa, freight cars can carry as much as five times their weight while in India, they do only 2.7 times.

The review says the railways has added only 960km to its network between 1990 and 2007 as opposed to 20,000km added by China during that period. It says India should add about 1,000km every year over the next 10-12 years.

“The Planning Commission has its own recipes and views, and we have our own on the matter," said a railway official who spoke on condition of anonymity. The official said he was aware of the review and the recommendations, but denied knowledge of the letter from the Prime Minister.

The review also seeks to restrict the construction of new unviable lines only to those areas where the states are “willing to bear half the cost".

The commission had also suggested the setting up of high-speed train services in collaboration with private investors for select segments such as Mumbai-Ahmedabad, Chennai-Bangalore, Delhi-Ludhiana and Delhi-Amritsar. It suggests that a dedicated group be set up for developing the projects, which could also be elevated in areas where land acquisition proves to be a problem. To be sure, former rail minister Lalu Prasad had announced these projects last year.

A former railway employee, who did not want to be identified, said this would be the third announcement on the subject. “They have not moved an inch forward. The first feasibility report was conducted by Rites in 2005-06 and another one by SBI Caps in 2007," the official said. Rites Ltd is a state-owned engineering consultant and SBI Capital Markets Ltd is the merchant banking arm of India’s largest bank, State Bank of India.

“The present system of railway fare-setting disincentivizes cost control and it legitimizes reckless monopoly rent-seeking," said Akhileshwar Sahay, a former railway employee who currently works for project management consultancy Feedback Ventures Pvt. Ltd. “Populist tariff-setting has to immediately get out of the system if Indian Railways does not have to go the same way as Air India in the next 10 years." To be sure, the railways have made huge strides in customer interface, but in their internal governance and efficiency in freight operations, the national transporter was lacking, he added.

Other analysts, however, say that setting up regulators was not necessarily the best idea considering many regulators could be seen as non-transparent.