Video Summary

[RSTV Policy Watch] Public, Private Partnership In Railways

The finance minister in recent budget gave the highest ever lay out of 1.6 lakh crores to the Indian railways, putting the railways sector in right direction by the long term goal of fueling the economy and meeting the aspirations of people.
By IT's Video Summary Team
August 01, 2019

Contents

  • Introduction
  • PPP railway models in India
  • Where Privatization is not possible?
  • Pros of privatization of Railways
  • Cons of privatization of Railways
  • Suggestions
  • Is there a need for Independent Regulator in railway sector?
  • Why did government set up so many corporations in Railways sectors?
  • Way Forward
  • Key Facts
  • IT’s input
    1. What is Container train operators?
    2. Recommendations of Vijay Kelkar Report (2002)

[RSTV Policy Watch] Public, Private Partnership In Railways

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Introduction:

  • Finance minister in her budget speech said that Indian Railway will use Public Private Partnership (PPP) model to foster development, rolling stock manufacturing and the delivery of freight.
  • The budget allocates the highest ever outlay for capital expenditure to Indian Railways.
  • Railways will need INR 50 lakh crores between 2018 and 2030 to complete the sanctions projects.
  • The railways would invest more in sub-urban railways through special purpose vehicle (SPV) like Rapid Regional Transport System (RRTS).
  • Railways are also expected to launch massive station modernization plan in 2019.

PPP railway models in India:

  • Initially, as a result of the liberalization of Indian economy, the PPP model was adopted in Delhi metro, Konkan railways etc.
  • The biggest model of PPP in the world for rolling stock is in India. The diesel and locomotive rolling stock PPP model will be very soon rolled out at Baroda in Gujarat and Mahadevpura in Bangalore.
  • Other projects include Habibganj railway station in Madhya Pradesh.
  • Indian railways have also port connectivity projects in which they asked companies to share revenue in return of providing railway coaches for freight transportation.
  • Currently, there are lots of private ports in India such as Dharma port in Odisha, Dahej Port in Guajarat, Krishnapatnam port in Andhra Pradesh which works on PPP model.
  • The Container train operators model allowed the entry of private and public sector operators to obtain licenses for running container trains on the Indian Railways. However, it was more failure than success.
  • Now, Indian government is trying to introduced private freight terminals in which anyone can come to a terminal and load his wagon by paying the person who owns that terminal.
  • The government in its 2019-20 budget has proposed 1.6 lakh crores for Indian railways, which is 3.5 lakh crores less to fulfill the 50 lakh crores demand by 2030.
  • Indian government promoted privatization of Indian railways for quite sometimes. However, every time government start privatization of Indian railway, they find a roadblock i.e., the industry changes their demand every time government start privatization.

Where Privatization is not possible?

  • Privatization is not possible in the local pilot of the train, guard or station master. This are highly skilled job and requires lot of training
  • This jobs also requires lots of flexibility as any train pilot can take any train given he/she knows about the track and signals.
  • The safety of the passages cannot be privatized by privatizing signaling system on railway track. Also, it is not possible to privatize the reservation given to the passengers.

Pros of privatization of Railways

  • The government itself cannot put in the amount of money which railway project’s needs. Hence, government has to rely on some kind of external participation. i.e., privatization.
  • Privatization improves the quality. It will also make the fare cheaper due to the comparison with other firms.
  • Currently, government provides 36,000 crores subsidies in railway sector. The government need to reduce cost to compensate those subsidies. However, in private sector, the cost is demand driven as the number of passengers vary on day to day basis. Hence, the economic condition of all the private companies, through railway sector, shows the condition of overall economy in the country.
  • The railways cannot depend only on government has it has its own limitations to invest. Some PPP models in Road sectors shows the successfulness of privatization. similarly, this can be achieved in railway sector.
  • Only with private investments, the growth of the type that will match with the requirement of the country can be achieved.
  • There is a big interests of outside governmental sector in the Indian railways.
  • The most affordable way of transportation in India is railways. Hence, there is need for railways to grow at a rapid pace which askes for privatization.
  • Moreover, the growth and availability of basic infrastructure of railway sector helps the government’s target in achieving $5 trillion-dollar economy.
  • Private ownership can result in safe travel and higher monetary savings in the long run.

Cons of privatization of Railways

  • An advantage of Indian Railways being government- owned is that it provides nation-wide connectivity irrespective of profit. This would not be possible with privatization since routes which are less popular will be eliminated.
  • It will also render some parts of the country virtually inaccessible and omit them from the process of development.
  • Given that a private enterprise runs on profit, it is but natural to assume that the easiest way of accruing profits in Indian Railways would be to hike fares, thus rendering the service out of reach for lower income groups.
  • Private companies are unpredictable in their dealings and do not share their governance secrets with the world at large. In such a scenario it would be difficult to pin the accountability on a particular entity in case of any discrepancy.
  • The privatization will decrease the amount of subsidies provided by the government. For example, one has to pay more for travelling in high speed train running on a dedicated high speed train corridor.

Suggestions:

  • The government needs to take precaution before providing privatization by ensuring that country is prepared for privatization in railways.
  • The main area in which Indian railway ministry has to invest is in water, rivers, education and health sector. Through this investment, money can be diverted into increasing the facilities of railways.
  • A good incentive to fund the Indian railways is asking the private companies to invest in railways. The management skill of private players combined with the experience of government handling railway sector can work very well.
  • Private management consultancy for the quality controls is the great opportunity for railway and private sector to work together.
  • The government needs to modify its polices so that it doesn’t look that government has sell out all railways services to private players.
  • The superfast trains are not able to run to their maximum speed due to the slower train running ahead of it on the same track. Hence, there is need to develop the land capacity for railways. However, the government had already made a Dedicated Freight Corridor Corporation of India Limited (DFCCIL) in 2006 to augment the land capacities.
  • Government and private companies can work in harmony. For instance, Government can help in procuring land if the private companies are allowed to laid the Dedicated Freight Corridor railway track. Then private companies can take track access charge for making profit.
  • The government need to focus on the freight transport, Rapid rail transit system and Urban Transport as the maximum revenues will come from those areas.
  • The current expectation of the passenger has been increased as the current generation is moving all over world where they see different facilitates being provided in railways. For this, railways can give hospitality sector to private players such as catering.
  • There are enough recommendations for implementation of PPP model such as Kelkar committee report (2002). The need of the hour is to decide which recommendations should be implemented at what stage.

Is there a need for Independent Regulator in railway sector?

  • There is a demand from private companies to set up an intendent regulator in railway sector as it is seen in telecom, aviation etc. sectors.
  • However, currently, there is monopoly of government in railway sector as well as absence of any competition. Hence, it is possible to bring in independent regulator once there is a privatization.
  • Currently, most of the railways fares are cheap. However, when the private companies come, they want return on their investments which might increase the fare price. Hence, the independent regulator will only be necessary once there is privatization in railways.
  • Independent regulators are only need when there are 3-4 private companies handling a train network. This situation is yet to come in India.

Why did government set up so many corporations in Railways sectors?

  • The government has set up various corporation such as Container Corporation of India Ltd, Indian Railway Stations Development Corporation, Rail Vikas Nigam Limited, Dedicated Freight Corridor Corporation of India, Pipavav railway corporation limited etc.
  • The main purpose behind creating such corporation is that the financial institutions such as World bank and technology providers such as Japan International Cooperation Agency, easily provide loans to the corporation/company rather directly lending to the government.
  • However, the loan must have sovereign guaranty, in other words, government must support that loan.

Way Forward:

  • The finance minister in her budge speech put the railways sector in right direction by the long term goal of fueling the economy and meeting the aspirations of people by giving the highest ever lay out of 1.6 lakh crores to the Indian railways.
  • However, there is need to implement the technology that is appropriate for the current time. The old technology can’t be used now just to show the developmental changes in railways.
  • The government failure led to the privatization. Now, if there is lack of skills in the railway, then again PPP model will fail which will pose a great challenge for both the parties.
  • Hence, apart from investment, it is equally important to have a skilled officers to steer the direction of the sector.

Key Facts:

  • The biggest PPP railway model is Japan Dedicated Freight Corridor which is supported by World bank.

IT’s input:

What is Container train operators?

  • In India, railways are under the control of the government which is the sole provider of the infrastructure, operations and regulatory functions.
  • Private participation, though very limited, was largely in the domain of infrastructure creation.
  • In January 2006, in a landmark initiative to introduce competition in the container operations segment, the Ministry of Railways allowed the entry of private and public sector operators to obtain licenses for running container trains on the Indian Railways (IR) network.
  • Until then, the Container Corporation of India, a subsidiary of IR, was the monopoly operator of container trains in India.
  • This initiative was the first significant move of its kind where private parties were allowed to make entry in the domain of railway operations with direct customer interfacing.
  • The response to the policy was good and 15 new entrants obtained licences to run container trains.
  • Due to lack of clarity or inconsistency in matters pertaining to haulage charges, maintenance of wagons, transit guarantees from IR and terminal access charges, this model somewhat failed.

Recommendations of Vijay Kelkar Report (2002):

  • The Vijay Kelkar committee was constituted in 2015 to review the experience of PPP Policy and suggest measures to improve capacity building in Government for their effective implementation.

Revisiting PPPs: Achievements and Challenges

  • Contracts need to focus more on service delivery instead of fiscal benefits
  • Better identification and allocation of risks between stakeholders
  • Prudent utilization of viability gap funds where user charges cannot guarantee a robust revenue stream
  • Improved fiscal reporting practices and careful monitoring of performance

Urgency for India to get Infrastructure PPPs

  • Given the urgency of India’s demographic transition, and the experience India has already gathered in managing PPPs, the government must move the PPP model to the next level of maturity.
  • Maturing the PPP model in India is an urgent priority to take advantage of this historical conjunction of India’s infrastructure needs and the availability of long-term funding.
  • PPPs have the potential to deliver infrastructure projects both faster and better.

Re-balancing of risk Sharing:

  • An assessment needs to be carried out regarding the relative ease and efficiency of managing the risks by the entity concerned.
  • Cost effectiveness of managing the risk needs to be evaluated.
  • Sophisticated modelling techniques are prevalent to assess probabilities of risks and the need to provision for them.
  • The final decision for a renegotiated Concession Agreement must be based on.

– Full disclosure of long-term costs, risks and potential benefits;

– Comparison with the financial position for government at the time of signing the Concession Agreement;

– Comparison with the financial position for government at the time prior to renegotiation.

Resolving Legacy Issues

  • An Infrastructure PPP Project Review Committee (“IPRC”) may be constituted to evaluate and send its recommendations in a time-bound in any Infrastructure Project developed in PPP mode.
  • An Infrastructure PPP Adjudication Tribunal (“IPAT”) should be constituted.

Generic, Including Legacy Projects

  • Sector specific institutional frameworks may be developed to address issues for PPP infrastructure projects.
  • Learnings from the Highways sector to be utilized for other sectors to customize and adopt such frameworks.
  • Umbrella guidelines may be developed for stressed projects that provide an overall framework for development and functioning of the sector specific frameworks.
  • Unsolicited Proposals (“Swiss Challenge”) to be discouraged to avoid information asymmetries and lack of transparency.
  • PPP structures not to be adopted for very small projects in view of the transaction costs involved.

Strengthening Policy, Governance and Institutional Capacity

  • Amend the Prevention of Corruption Act, 1988 to distinguish between genuine errors in decision-making and acts of corruption.
  • Set up an institution for invigorating private investments in infrastructure, providing guidance for a national PPP policy and developments in PPP etc.
  • The 3P-I institute for PPPs announced in 2014 may be set-up without delay.
  • An institutionalized mechanism like the National Facilitation Committee (NFC) to ensure time bound resolution of issues including getting timely clearances/approvals during implementation of projects for smooth running of such projects.
  • Ministry of Finance to coordinate with other implementing ministries may develop a policy to promote secondary market for operational assets.

Scaling- Up Finance

  • Restrict the number of banks in a consortium.
  • Banks to build up their own risk assessment/appraisal capabilities.
  • RBI may provide guidelines to lenders on encashment of bank guarantees in line with ICC norms.
  • Equity in completed, successful infrastructure projects may be divested by offering to long-term investors.
  • Ministry of Finance to allow banks and financial institutions to issue Zero Coupon Bonds which will also help to achieve soft landing for user charges in infrastructure sector.

 

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