The Indian Railways’ proposal to allow private participation in 50 high-demand passenger routes marks an exciting change in track. As the modalities of this gets worked out, a few factors need to be kept in mind.

Efforts on this count so far have been limited to luxury trains—where private companies provide hospitality services—and freight. The specifics of the model concession are not public, but it is likely that private operators would get the freedom to fix fares, import coaches and locomotives, or get to lease them from Indian Railways.

The proposed initiative is undoubtedly a positive step to enhance private participation in the railways sector. However, for it to bear fruit, Indian Railways needs to develop a clear and unambiguous programme for opening up routes to the private sector. Further, the best practices from public-private partnership models from other sectors need to be inculcated in the project structure for private passenger train operations. Such practices may, inter alia, include easy exit clauses and substitution, equitable risk sharing on termination, clearly defined obligations of the concessioning/ contracting authority.

To shore up private sector interest in passenger train operations, the haulage fees to be charged would require to be adequately fixed. Generally, in such models, the haulage rates should be fixed not according to cost recovery but the market situation, taking into account what the operators can pay and remain competitive. It should be considered that a private player who may import/lease rolling stock for introduction of such services will need to manage operational expenses, administrative expenses, lease charges/interest as well as profit margins from the revenues after deduction of haulage charges.

A robust regulatory mechanism should be put in place for determination of tariffs in the railways sector. The absence of an independent regulator in this area will make a well-defined and convincing dispute redressal mechanism imperative.

It is expected that consortiums of financial investors, train operators, and rail equipment manufacturers will be interested in bidding for the operations. Therefore, consortiums should be allowed to bid. Further, the railways can explore the possibility of bundling various routes and offering them to private players, similar to the toll-operate-transfer model that has been followed by the National Highways Authority of India in the roads sector. This will enable cross-subsidisation between routes and ensure that the railways is not left to shoulder the low profitability/cost recovery routes alone.

It is expected that the private players would be allowed to deploy their own rolling stock to offer better services to the passengers and/or to optimise operating costs. However, for this to be a viable option, the approval process of the Research Design and Standards Organisation needs to be made time-bound, with a lower gestation period.

Jagannarayan Padmanabhan is director and practice leader—transport and logistics, Crisil Infrastructure Advisory.

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