Private Rail in India: The Shift to Privatization
Indian Railways is opening up to private operators for the first time since nationalization in 1951. From March 2024, private companies will be allowed to operate passenger services on one of the world’s largest networks, which handle around 8.4 billion people annually.
The plan was announced earlier this summer by the current owner and operator, India’s Ministry of Railways. The scheme, which was initially set to launch in March and subsequently postponed due to the Covid-19 pandemic, is expected to play a key role in the government’s ‘Make in India’ initiative and its aim to attract investments in the country to pull.
However, political and industry commentators are currently debating the potential consequences of inviting private companies to India, with some calling for a reform of the network and others warning that this could be the first step towards full privatization of the railways.
Within the Indian Railways plan
Despite the delays caused by Covid-19, the summer of 2020 marked the beginning of a new era for the Indian Railways, which is expected to attract investments of at least Rs 30,000 crores from private entities.
To do this, the operator has made available 151 new trains that will run between 109 origin-destination route pairs. These are grouped into 12 clusters to cover most of the network.
“Indian Railways faces chronic underinvestment.”
Originally scheduled to start in April 2023, future operators will instead start their contracts in March 2024 with a 35-year concession period. The delay was due to an upcoming major infrastructure upgrade that will bring the network up to date with the latest technological developments.
At the time of writing there are more than 20 potential bidders have already shown interestwith Bombardier, Alstom, Siemens, NIIF, GMR and ISquared Capital all currently in the running to run some or all of the clusters.
The measure is expected to give Indian Railways compensation for electricity and lending of its infrastructure, as well as a share of total future revenues. In return, the state operator promises to grant “non-discriminatory access” to private trains, thus preventing its own trains from being unfairly advantaged.
According to Mihir Swarup Sharma, a senior fellow at the Delhi-based Observer Research Foundation, the initiative is long overdue. “Indian Railways faces chronic underinvestment,” he notes.
“Railways and trains are overloaded and the government’s efforts to remedy this – by planning to deploy Rs 50 trillion over the next decade – have ended in a major shortfall in tax revenue after the introduction of a new indirect tax regime few years ago (and that) explains the timing.”
That of the government Union Budget 2019 even mentions that only part of that Rs50 trillion can come from sovereign wealth funds, so private investment is essential to deliver the promised reform. As Sharma puts it: “unless the railroads somehow tap into private financing, there will be no investments.”
There is also a logistical reason. December 2021 is expected to mark the launch of the Dedicated Freight Corridors, a series of freight-only rail lines that will free up capacity alongside the passenger network for the first time in fifteen years. The new corridors, which are expected to accommodate nearly 70% of the freight trains currently operating in India, will leave room for the 151 new trains.
Private operators: who benefits?
It is expected that passengers will be the main beneficiaries of the project. “The Indian railway service has been behind its potential for decades, especially when it comes to passenger services,” said KE Seetha Ram, senior consulting specialist for capacity building and training projects at the Asian Development Bank Institute (ADBI). “There is a lot of potential, but Indian Railways has failed to meet the demand to the extent that it is a missed opportunity.”
It is hoped that attracting private investment will make up for these missed opportunities, encouraging competition, more and different services and more users to the network. “Indian Rail is already trying out some small changes in cabin services, food, catering, digital bookings (and so on),” he added. “These are huge improvements in terms of passenger satisfaction, but (what they need now is) improvement in terms of punctuality, comfort, rolling stock and so on.”
“Indian Railways have failed to meet the demand to the extent that it is a missed opportunity.”
As Sharma explains, private entities are expected to improve service even further, allowing “rail to compete with air travel for the first time in recent decades.”
Besides increasing passenger ratings, Seetha Ram says private investment will catalyze economic growth. “It’s kind of a virtuous cycle where if you have good transportation infrastructure, you get better supply chains, better operations (and) better income growth,” he says.
He adds that Indian Railways could have an opportunity to learn from the example of the Indian telecom sector. “The telecom sector receives virtually no financial support from the government; it is delivered entirely by the private sector and regulated by government, providing customers with excellent services, value for money (and boosting global competition), he explains.
“This will be an opportunity for Indian Railways to welcome the private sector and offer differentiated value-added services. Hopefully that will also pave the way for some kind of larger institutional reform that will take a step back.”
The case against private railway services
Not everyone is in favor of inviting private operators. “The railway is a public service and not a profit-generating enterprise,” said the Politburo of the Communist Party of India (Marxist) said earlier this year. “Such privatization undermines the basic principles of a self-sufficient economy.”
“Previous attempts to open up to private companies have set a precedent that should not be ignored.”
Several local unions have echoed this sentiment. while National Federation of Indian Railways president Guman Singh said earlier this summer: “While moving towards privatization, the government will destroy the railways and make travel more expensive. We roundly condemn the government’s measure.”
Mihir Swarup Sharma also believes that the benefits to private operators remain unclear as they will “essentially compete with (Indian Railways) own products while being subject to (Indian Railways) infrastructure and decision-making.”
He also warns that previous attempts to open up to private companies have set a precedent that should not be ignored. “Private airlines in India in the 1990s (…) significantly improved the passenger experience,” he explains. “But dealing with state-run competition (Indian Airlines and Air India) within the state-run infrastructure network (the Airports Authority of India) was impossible, and none of them survived until 2020.”
Is full privatization on the agenda?
For now, it does not appear that Indian Railways is on track for full privatization.
The Narendra Modi government is indeed considering this the possibility of privatization (or strategically divest from) various sectors, including airports, banking, insurance, petroleum and defense equipment. The railways have so far been excluded from this group, although unions fear that the current initiative could be the starting point for a future denationalization of the sector.
“Indian Railways needs a complete reorganization and a more autonomous and private sector vision.”
According to both Sharma and Seetha Ram, reforming the industry is much more urgent than privatization. “Indian Railways needs a complete reorganization and a more autonomous and private sector vision,” says Sharma. “The Ministry of Railways in New Delhi should be closed down, but total privatization may not make sense.”
He adds that a Deutsche Bahn-inspired model – where the German government is the sole shareholder of the privately held public company Deutsche Bahn AG – would be a suitable alternative.
Seetha Ram agrees that such a model would be a better fit for the network. “India likes (creating) special purpose vehicles that are somewhat autonomous in a sense, or where the government is a major shareholder and acts like a mini-company,” he concludes. “This allows it to offload autonomous entities (and create some) that can gradually function as the private sector. That is the direction (for the government) we need to take.”
“Private rail for India: a positive step towards long-awaited reforms?” was originally created and published by Railway technologya brand owned by GlobalData.
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