Why Indian Railways failed to attract private players to run trains?

Relevance: Issues related to Privatization of Railways

Synopsis: Private sector’s interest should be taken care of if Indian railways (IR) wants to attract private capital.

Background

• On July 1, 2020, the Indian Railways launched the formal process of inviting private parties to run trains on the Indian railway system.
• However, hopes of a large participation were dashed as there were no bids for nine clusters and only two bids for three clusters.
• Even for these three clusters, the only serious bid was by Indian Railways’ (IR) own company IRCTC, which in effect negated the basic objectives of bringing in private capital.

Possible reasons

• It is an outcome of the lack of alignment of the interests of IR and the concessioners.
• IR wants the capital and technology without giving up control, while the concessioner wants a far more equal relationship to be moderated by a regulator.
• IR has adopted an organisational design that does not take into account the characteristics and associated risks that will determine outcomes and investment decisions.

Risks and constraints

• The biggest concern is the requirement for a huge investment before a single passenger can be carried. Train sets have to be purchased without really knowing how much traffic the service will be able to attract in the face of rising competition from airlines.
• IR does not guarantee the investor that, in case the concession fails, it will acquire the train sets.
• The other big concern is the absence of a regulator for resolving disputes. The proposed independent engineer is far from satisfactory.

Core issue

The central issue is how to align the three interests:

• India’s need to be capable of designing and manufacturing state-of-the-art rolling stock (rolling stock in the rail transport industry refers to railway vehicles, including both powered and unpowered vehicles, for example locomotives, railroad cars, coaches, private railroad cars and wagons)
• IR’s need for private capital participation
• Private capital’s necessity of earning a profit.

These can be aligned provided the following suggestions are taken care of.

Suggestions

• First, reduce the risks for the concessioners.
  • Requirement of huge investments in train sets can be eliminated by establishing a company that leases rolling stock not only to concessioners but also to IR.
• Second, reduce the period of the concession to around 15 years from 35 bringing in competition.
• Third, establish a regulator and moderate charges like the amount for the maintenance of tracks and stations.
• Fourth, the rolling stock company, apart from leasing train sets, can also be the window for bringing in new technology.
  • For starters, IRFC, which is already into leasing rolling stock, can be that company.
  • However, technology transfer calls for the investment of large sums of money and the involvement of universities, research institutes and national laboratories.
  • For example, for developing high-speed train technology, the Chinese involved 25 national first-class key universities, 11 first-class research institutes, and 51 national-level laboratories for research, development and production. India will also need to do something similar.

Conclusion

With these changes, the plan may still take off. However, the initiative will remain limited to just running trains if there is no long-term vision.