PRIVATISATION

OF RAILWAYS
Department of Soft Skills IV
Centre for Professional Enhancement II
 WHAT IS PRIVATISATION?

Transfer of a business, industry, or service from

public to private ownership and control

Department of Soft Skills IV | Centre for Professional Enhancement II

 POTENTIAL BENEFITS OF PRIVATISATION

• Improved efficiency
(private companies have a profit incentive to cut costs and be more efficient)

• Lack interference
(state-owned enterprises often employ too many workers increasing inefficiency)

• Short term view

(A of political government many think only in terms of the next election. Therefore, they may
be unwilling to invest in infrastructure improvements which will benefit the firm in the long
term) Department of Soft Skills IV | Centre for Professional Enhancement II
 POTENTIAL BENEFITS OF PRIVATISATION

•Shareholders
(Private firm has pressure from shareholders to perform efficiently)

•Increased competition
(Increase in competition that can be the greatest spur to improvements in efficiency.
For example, there is now more competition in telecoms and distribution of gas and
electricity. There is also very little competition within the rail industry.)

•Government will raise revenue from the sale

(Selling state-owned assets to the private sector can raise significant sums for the
government)
Department of Soft Skills IV | Centre for Professional Enhancement II
 BACKGROUND
• The Indian Railways- World’s 3rd largest rail network
• GOI- made investor-friendly policies for better investments

• Foreign Direct Investment (FDI) in railways enabled to improve infrastructure for freight and high-speed
trains
• Private sector’s participation in railways- very less in India, compared to sectors like ports, telecom, electricity, airports
and roads.

• Previous attempts- in wagon procurement and leasing, freight trains and container operations, terminals and warehousing
facilities, catering services etc.

• Problems: Policy uncertainty, absence of a regulator to create a level playing field, the lack of incentives for investors and procedural
or operational issues

• Procurement from: Chennai-based Integral Coach Factory (ICF), owned by government from which Indian Railways
procures trains and coaches; produced the coaches of luxury to high-speed trains including Rajdhani Express, Shatabdi Express and the
Vande Bharat Express.

Department of Soft Skills IV | Centre for Professional Enhancement II

 FACTS

THE IRCTC (INDIAN TRANSPORTS ONE OF THE LARGEST RAIL

RAILWAYS CATERING & ALMOST 2.5 WORLD’S NETWORK IN
RUNNING 11,000
TOURISM CRORE LARGEST ASIA AND THE
TRAIN IN A DAY.
CORPORATION) PASSENGERS EMPLOYERS WORLD’S
WEBSITE GETS CLOSE TO DAILY. WITH OVER 1.4 SECOND
12 LAKH HITS PER LARGEST.
MILLION PEOPLE.
MINUTE.

Department of Soft Skills IV | Centre for Professional Enhancement II

 REASONS OF PRIVATISING INDIAN RAILWAYS
• Indian Railways: one of the few government-owned enterprises incurring losses year-after-year.

• Has not been able to keep pace with modernisation of its infrastructure and services

• Has not been able to expand at the pace and coverage that a country like India needs

• Almost all customer facing services like ticketing, ticket checking, porter services, catering and coach maintenance are not meeting people’s
expectations and standards as they should be (main reason for public resentment and dissatisfaction with the railways)

• On the technical side, the railways lacks in providing proper services like track laying and maintenance, signal and transmission, engine &
coach design and manufacture, engine and coach maintenance etc.

• Railways owns large tracts of land along its tracks and this can be optimally monetised by private players to invest, build and manage properties
that may be developed on these lands.
Department of Soft Skills IV | Centre for Professional Enhancement II
 REASONS OF PRIVATISING INDIAN RAILWAYS
• Indian Railways reported a drop in profitability during the first 5 years of
Modi govt.

• During Modi 1.0, Railways' profitability decreased by 7.8%.

• In 2017-18, the Indian Railways reported its worst ever operating ratio of
98.4, the highest ever since the year 2000-01. (96.2% in 2018-19 and to 95% in 2019-20)
(Which means the Railways spent 98.4 paise to earn Re 1 in the last financial year, implying a tiny surplus.
Operating ratio is used to measure the operational efficiency of an organisation. High operating ratio means a
lower profitability and lower the resources available for expansion, growth.)

Department of Soft Skills IV | Centre for Professional Enhancement II

 REASON – for losses
• HIGHER BORROWINGS to fund expansion
(Financing from banks, institutional financing, and external investments)
Increased reliance on borrowings eventually worsened the financial situation
• Railways struggling with GROWING STAFF AND INCREASING PENSION COSTS after the
execution of the Seventh Pay Commission.

CASE: Sadananda Gowda (Railway Minister 2014- 15)- Budget lacked clarity; pitched for FDI in Railways sector, dedicated
freight corridor, a diamond quadrilateral high-speed rail network, enhanced passenger amenities and augmented cargo-
carrying capacity.
Suresh Prabhu (Union Railway Minister 2014- 2017)- presented a 5-year plan to bring Rs 8.5 lakh crore investments
(increase from Gowda's Rs 65,445 crore)
However, railway finances and infrastructure investment were stuck in a vicious cycle as poor finances didn't allow for
investments and low investments meant that the infrastructure and services took a major hit.
Department of Soft Skills IV | Centre for Professional Enhancement II
 BIBEK DEBROY COMMITTEE (September 2014 )
• Committee for mobilization of resources for major railway projects and
restructuring of Railway Ministry and Railway Board (Chair: Mr. Bibek Debroy).

• Favoured privatisation: Wagons and Coaches.

• 2 main aims: changing the institutional structure between the government and the
Indian Railways, increasing competition.

• Recommended amending the Indian Railways Act to allow the private operators to
levy tariff.
• In case the infrastructure becomes profitable, there is no bar on the government to have
its own operator in the interest of competition.
Department of Soft Skills IV | Centre for Professional Enhancement II
 PROS
1. IMPROVED INFRASTRUCTURE leading to improved amenities for travellers.
2. BALANCING QUALITY OF SERVICE WITH HIGH FARES: Would foster competition and hence lead
to overall betterment in the quality of services.
3. LESSER ACCIDENTS
Because private ownership will bring better maintenance, it will reduce the number of accidents, thus
resulting in safe travel and higher monetary savings in the long run.
4. IMPROVED EFFICIENCY
Private firm is interested in making a profit, and so it is more likely to cut costs and be efficient.
5. SHAREHOLDERS
Private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm
could be subject to a takeover. A state-owned firm doesn’t have this pressure and so it is easier for them to
be inefficient.
6. INCREASED COMPETITION
Increase in competition can be the greatest incentive to improvements in efficiency.
Department of Soft Skills IV | Centre for Professional Enhancement II
 CONS
• COVERAGE LIMITED TO LUCRATIVE SECTORS
Indian Railways being government- owned provides nation-wide connectivity irrespective of profit. This would not be
possible with privatisation since routes which are less popular will be eliminated, thus having a negative impact on
connectivity.

• FARES
Since private enterprise runs on profit, they would tend to hike fares to earn profits, thus rendering the service out of reach
for lower income groups.This will defeat the entire purpose of the system which is meant to serve the entire population of
the country irrespective of the level of income.

• ACCOUNTABILITY
Private companies are unpredictable in their dealings and do not share their governance secrets with the world at large.

• UNEMPLOYMENT
Railway employees in production and ancillary units jobless in the long run.

• PROBLEM OF REGULATING PRIVATE MONOPOLIES

Privatization creates private monopolies
Department of Soft Skills IV | Centre for Professional Enhancement II
 CONS
• SHORT-TERMISM OF FIRMS
To please shareholders, the private players may seek to increase short term profits and avoid
investing in long term projects.

• CONCERNS OF A COMMON MAN

No longer be a low-cost common man's mode of transport

• IMPACT ON THE ECONOMY

Provides low fare transportation to agricultural and industrial trade. Privatisation shall definitely affect the
Indian economy at large.

• DIFFICULT TO PRIVATIZE A PORTION OF THE RAILWAYS’ OPERATIONS

Strongly vertically integrated. (Ownership and maintenance of the rail and associated infrastructure, all is
vested under the Ministry of Railways.)

Department of Soft Skills IV | Centre for Professional Enhancement II

 WAY FORWARD:
• Must redefine its role and responsibility, must reposition its operating role from being a direct service
provider to being a supervisor of services

• Must offer subsidies and tax incentives to companies that would provide low cost services, similar to low
cost airlines

• Instead of speed and privatization, efficiency and affordability should be the primary focus.

• Core Railways functions can be Corporatizied rather than Privatized.

(Corporatization refers to the restructuring or transformation of a state-owned asset or organization into a corporation. These organizations typically
have a board of directors, management, and shareholders. However, the government is the company's only shareholder, and the shares in the
company are not publicly traded.)

• The peripheral function of railways (cleanliness, ticket disposal, traveler’s amenities), must be privatized.
Department of Soft Skills IV | Centre for Professional Enhancement II
 BUDGET (2019-20)
• Budgetary allocation on Railways- (Rs 65,837 crore- 2019, Rs 55,088 crore- 2018)
• Highest ever outlay for capital expenditure (Rs 1.60 lakh crore- 2019, Rs 1.48 lakh
crore- 2018)
• 200% increase in funds for passenger amenities
(Rs 7,255 crore- construction of new lines, Rs 2,200 crore- gauge conversion, Rs 1,750 crore- signalling
and telecom)
• Allocation for rail passenger comfort: (Rs 3,422.57 crore- 2019, Rs 1,657 crore-
2018)
• Rs 267.64 crore for Nirbhaya Fund, Rs 250 crore for Video Surveillance System, Rs
17.64 crore for Konkan Railway Corporation Ltd.

Finance Minister Nirmala Sitharaman said the railway infrastructure would need an investment of Rs 50 lakh crores
between 2018 and 2030 and proposed that a public private partnership (PPP) be used to unleash faster development
and delivery of passenger freight services for railway projects to boost connectivity.
Department of Soft Skills IV | Centre for Professional Enhancement II
 RECENT NEWS
(October 23, 2019)
Source: The Hindu

Railway Minister Piyush Goyal

said a big NO to privatisation

• Looking at investment flow in the railways through public-private partnerships.

• Govt. to form empowered group to privatise 150 trains, 50 rly stations.
• Said “We are not selling off government assets. Everybody's jobs will be
protected. Like we have IRCON, RITES, they are all corporatised government
companies”.
• Planning to provide WiFi service inside trains in the next 4-5 years.

Presently available at 5150 railway stations

Target to cover all 6,500 stations by 2020 end.
Department of Soft Skills IV | Centre for Professional Enhancement II
TEJAS EXPRESS: Pseudo-Privatisation

• India's first train operated by

private operators, IRCTC, a
subsidiary of Indian Railways.

• India's first semi-high speed

fully air-conditioned train

• Inaugurated on 4 October 2019

• Lucknow to Delhi
Department of Soft Skills IV | Centre for Professional Enhancement II
 THE JAPANESE CASE
• The Japan Railways Group (JR), consists of seven for-profit companies that
took over most of the assets and operations of the government-owned
Japanese National Railways in 1987.

• Ownership: In 1987, the government of Japan took steps to divide and

privatize JNR. While division of operations began in April of that year,
privatization was not immediate: initially, the government retained
ownership of the companies. Privatization of some of the companies began
in the early 1990s. By October 2016, all of the shares of JR East, JR Central,
JR West and JR Kyushu had been offered to the market and they are now
publicly traded. On the other hand, all of the shares of JR Hokkaido, JR
Shikoku and JR Freight are still owned by Japan Railway Construction,
Transport and Technology Agency, an independent administrative
institution of the state.

Department of Soft Skills IV | Centre for Professional Enhancement II

 THE JAPANESE CASE

• The end of the government-owned

system came after charges of serious
management inefficiencies, profit
losses, and fraud.

• The new companies introduced

competition, cut their staffing, and
made reform efforts.

The basis of railway companies in Japan is they think they will contribute
forever. They feel they have a responsibility to local societies. This kind of
mindset is quite important to make a successful railway business.
Department of Soft Skills IV | Centre for Professional Enhancement II
 1. Tracks were split from the trains,
and the rolling stock was split
from railway operations.
2. Today, the tracks are publicly
owned by Network Rail.
3. Companies regularly compete for
franchise areas such as the West
Midlands, leasing their rolling
stock from another company.

4. Ideological goal in mind:

competition.
The vision of those who privatised the service was
not just to introduce a profit motive, but for
different companies to run trains on the same

RAILWAYS IN BRITAIN tracks, competing for customers. It was hoped that

the regular fight for franchises would drive down
costs.

Department of Soft Skills IV | Centre for Professional Enhancement II

BRITISH EXAMPLE

• Independent studies would indicate that the British public has generally
been satisfied with the experience of privatisation, its satisfaction level
being ahead of France, Germany and Italy and behind only Finland.

• Safety on British railways has improved after privatisation.

Government subsidy per journey has fallen, but expectations of cost-
cutting under private operation did not materialise. The train
company’s operating cost per passenger mile has reduced.

• It was expected that privatisation would remove the railways from

short-term political control, but this has not happened.

• Also, many of the private franchisees are owned by foreign government

companies. So privatisation, in a sense, has not taken place in the UK.

Department of Soft Skills IV | Centre for Professional Enhancement II

 CHINA
• New plans to partially privatise the country’s industrial champions
• China Railway Corporation, which runs the world’s largest high-
speed railway network would spin off some businesses to allow
private investors to participate, following a “mixed ownership reform”
plan
• Beijing also made it clear that the controlling power of China’s
industrial conglomerates would be firmly in the hands of the
government, or the ruling Communist Party.
• The latest ‘reforms’ are not intended to ‘weaken state-owned
enterprises’ or ‘to seek a complete privatisation
• China aimed to improve its state firms so they could better serve
China’s socialist system and facilitate the “rejuvenation of the
Chinese nation”
Department of Soft Skills IV | Centre for Professional Enhancement II
 POSITIVE CHANGES TILL NOW
• HIGHER INVESTMENT IN INDIAN RAILWAYS
Highest ever capital expenditure of Rs 1,60,176 crore in 2019-20 budget

• BEST EVER SAFETY RECORD

Best ever safety record with zero passenger fatalities during April-August 2019

• SECURITY FIRST
First Railway Commando Battalion ‘CORAS’ to tackle the menace of terrorism and naxalism

• INCREASE IN SPEED
The national transporter has approved the raising of speed to 160 kmph on Delhi-Mumbai and Delhi
Howrah routes by 2022-2023. Also, 60% increase in average speed of passenger trains has been
approved.

• NEW RAIL LINES

• FASTER CONSTRUCTION
Doubling and Gauge conversion and development of new lines has increased by 36%. Also, the
elimination of manned level crossings increased by 220% Department of Soft Skills IV | Centre for Professional Enhancement II
 POSITIVE CHANGES TILL NOW
• GREEN ELECTRIFIED RAILWAYS
A total of 1,106 RKM has been electrified across the entire Indian Railways
network.

• NEW COACHES AND TRAINS

Indian Railways is all set to start the second Vande Bharat Express service soon.
As many as 95 trains have been upgraded to Utkrisht standard. Also, there has
been a 29 per cent increase in the production of coaches.

• PASSENGER SERVICES
Food packet system with QR codes linked to live kitchen feed has been introduced
along with the commencement of Rail Neer Plant Mandideep, Bhopal. Free high-
speed WiFi facility provided across 4,100 stations.

• SWACHH BHARAT, SWACHH RAILWAYS

From April-August 2019, a total of 24,493 bio-toilets were installed in trains.
Also, single use plastic material has been banned from 150th Gandhi Jayanti on
2 October 2019.

Department of Soft Skills IV | Centre for Professional Enhancement II