Modi need not privatise Rlys, but he would still need to corporatise it

Privatisation of the Indian Railways, probably the world’s largest public sector enterprise outside the oil industry, was never on the cards, so one wondered why Narendra Modi had to re-emphasise this point yesterday (25 December) in Varanasi.

This is what he said, reports DNA: “There is a misunderstanding that the railways are being privatised. However, I want to make it clear that we are not privatising the railways. We cannot go in this direction. You don't have to worry. It is neither our wish nor thinking.”

The only possible constituency that needed this additional assurance must have been the railway unions, which have been restive ever since the government announced plans to invite foreign direct investment (FDI) in railways. And this is probably why he specifically asked the unions why they should worry if the investments come in pounds or dollars?

 Modi need not privatise Rlys, but he would still need to corporatise it

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In fact, if Modi had had any idea about privatising the railways, he would not have given a committee led by Bibek Debroy one year to give him suggestions on restructuring the Railway Board and streamlining its operations. The committee was formed in September, and its other members were Gurcharan Das, former CEO of Procter & Gamble, cabinet secretary KM Chandrasekhar, Ravi Narain, former Managing Director of the National Stock Exchange, and two others.

The earliest we will know what the committee will recommend is March or April 2015, when it plans to put its draft report on a website for public comments. After that it may take another six months for its final report. The unions need not fret till then.

However, given the size and scale of the railways, one wonders how FDI can be invited in its core operations without substantially corporatising it – unless the intent is only to allow FDI in completely new projects.

According to FDI policy announced in August, the government will allow 100 percent foreign ownership in projects like high-speed train systems, suburban corridors, and dedicated freight projects, but not in core train operations and safety.

The Indian Railways’ experience in corporatised projects has been rather good. It has already happened in some urban railway projects like the Delhi Metro and in the Konkan Railway Corporation. In fact, where the railways didn’t corporatise – as in the Kolkata Metro – the project costs bloated and delay was the norm.

The successful execution of the Konkan Railway and Delhi Metro projects – both overseen initially by the redoubtable E Sreedharan – shows what really needs to be done with the main Indian Railways itself.

First, the Railways need to be a corporatised. Not only at the apex level, but at the divisional and sub-divisional level, too, so that each new corporatised section is run by a competent boss and CEO. Currently, the Indian Railways is organised into 17 zonal divisions, with some of them existing only because various railway ministers wanted a division to be headquartered in their constituency. When corporatisation happens, these divisions need to be rationalised to reflect logical synergies in management. The key question the Debroy committee should ask itself is this: should the corporations be based on region or similarity of operations? For example, it may make sense to group all urban metro projects into one corporation, rather than run them separately.

Second, the railways must make way for the entry of lateral talent at the top. Currently, all recruitments are done through the normal route at the entry level – and they rise to the top over time. The top bosses are usually people who have served the Indian Railways all their lives. While this can be a strength, it also means the system will resist change. The Railways needs new talent and this cannot happen if it can only draw upon the internal pool.

Third, not privatising should not mean no private investment in the core operations of the railways. Once divisions are corporatised, it would be a relatively easy affair to list the companies on the stock exchanges and seek minority investments. FDI may not come in this way, but there is no reason why Indian investors will not be interested in investing in profitable railway corporations. A listing will also make the management more accountable.

Fourth, the policy-making function of the railway ministry needs to be separated from its role in the day-to-day running of a commercial railway organisation through the Railway Board. This will become even more important when private players are allowed to set up their own dedicated lines for passenger or freight trains. You can’t then have the ministry/Railway Board both making policy and running the railways. There would be a conflict of interest, just as there is in the civil aviation ministry which makes policy and also runs Air India. Luckily, this aspect is a key focus area for the Debroy committee.

Fifth, given that the Indian Railways will, in the foreseeable future, be a monopoly, we need a regulator for it – not just to decide what is the right fare or freight (that is done by the tariff authority), but to ensure that the monopoly is not abused and customers – commuter of goods shippers – are not shortchanged. We need an ombudsman who will listen to passenger and shipper complaints as part of the regulatory process.

Privatisation of the railways is not needed as long as competitors are allowed an entry. But if there is going to be competition, the railways should not be allowed to use monopoly power to stamp them out or remain uncompetitive by staying unreformed.

We know what happened to BSNL, MTNL, and Air India when competition was allowed in but the state player remained unreformed.

Modi needs to ensure that even if the Indian Railways remains in the public sector, its hands are not tied to an extent where it cannot offer a competitive service.


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Updated Date: Dec 26, 2014 12:58:39 IST