Privatization of Railways

A comparative analysis
Nandini Munda 0043/57
Ashwin Krishnan 0091/57
Premchand Meena 0092/57
Deepthi T S 0338/57
Kushal Pawar 0357/57
INDIA
• Establishment of Railways : Early Progress
– April 1853: First train between Bombay’s Bori Bunder and Thane (34 Km, 400 Passenger)
– Built by East India Company and Great Indian Peninsular Railways (GIPR)
– 1853-1860 : Funded by Private companies guarantied By British Empire to receive hefty ROI
– 1869-1881: British Government took over control of Expansion from external contractors
– 1880: Total length reached 9000 Miles.
– 1896: Popular mode of transport , Capabilities of sending experts to Uganda Railway Construction
– 1900 : GIPR first company to become State owned
– 1901: First time Railways became profitable.
– 1907: GIPR purchased all major lines and began leasing them back to Private operators

• Era of centralization of Indian Railways

– 1901 : Railway Board was established
Include- One government Official
- English Railway Manager
- One agent of each Company Railways
– By 1923 both GIPR and East India Railways were nationalized
– 1924 : Railway budget separated from the general budge

• Electrification and Hard Times

– First Electric train ran between Bombay and Kurla in 1925

– 1929: 66k Km carrying 620 Million and 90 Mill tones of goods annually
– 1930-1947 – Aftershocks of Economic Depression Era, World War II Damage, divergence to military use
– 1947 : Partition meant 40% Railway line went to Pakistan
– Bengal Assam Railway & North Western Railway disconnected and isolated from main IR network
– 1949-1951: Indian Railways took control by acquiring control over Railway franchises, reorganized into Zones
INDIA
• Technology and Phasing out
– 1980: Complete phase out of steam Engines As Electrification was spurred by Energy crisis of 1970s
– 1980-1990 : 4500 Km track electrified; First Metro in 1984 in Calcutta
– 1980s: Economic stagnations and political upheaval slowed down the growth of network
– 1990s: Konkon Railway opened, 783 Km on Western Indian Coast
: 1995- Computerised enhanced Reservation and Ticketing (CONCERT)
– 2002: Corporatisation with IRCTC for Online Reservation & ticketing

• Rakesh Mohan Committee on Indian Railways, 2002

– 1991-2002: IR fallen into vicious circle of Under investment, misallocation of scarce Resources
increasing indebtedness, poor customer service
– Root cause of Decline – Unstable political system driven by short term political compulsions
– Committee recommendations :
A. Indian Railways should eventually be corporatized into the Indian Railway Corporation (IRC)
B. Government to set up Indian Railway Regulatory Authority (IRRA) to regulate IRC
C. IRC governed by Indian Railway Executive Board (IREB) with arm’s distance from Government
D. Government b in-charge of policy making while consulting with IRRA and IREB
E. Permitted private participation in Operation of Railways
F. Facilitated the induction of personnel from outside of Railways
G. Mandated the social responsibilities to the extent of funds provided by the Government
– Report Rejected by entire Railway establishment and hence shelved away.

• National Transport Development Policy Committee (NTPDC) : Ch.- Dr. Rakesh Mohan - 2010
– Aim to provide long term transport policy for country upto year 2029-30
– Suggested increase in in investment from 0.4% of GDP in 11th FYP to 0.8% of GDP in 12th FYP
– Reintroduced the concept of IRC, IRRA and separation of Government from IR; Ministry for policy
– Accounting system to be revamped into company account in line with Indian GAAP
– Construction of 6 Dedicated Freight Cooridors on top Priority ; 15-20 logistic parks at main hubs
– Setting up National Railway Construction Authority, partially independent of Ministry
– Multiple services and cadre of Railways at the management level be rationalized and coalesced into fewer
– They were not able to compete with government regulation
– Improve connectivity to Industry clusters and significant ports, based on projected traffic
INDIA
• Bibek Debroy Committee report on Restructuring of Railways and mobilizing resources, 2014-15
– Encourage private players to run trains and eliminate Railway Budget altogether, no dividends/budgetary support
– Transition to Commercial Account as current account was “very complicated”
– Streamline 8 different group A services and SCRA engineers into Technical and non technical services
– Focus on core business and must handover Hospitals, schools, catering, real estate development and maintenance
– Hand over Railway Protection Force (RPF) & Railway protection special Force (RPSF) to home ministry/ state police
– Merge Railway schools into Kendriya Vidyala set up & subsidize the education of children through other schools
– Indian Railway Manufacturing Company :
All existing production units be placed under govt SPV IRMC with power to determine salary and borrow
– Encourage Private entry into running of both Freight and Passenger trains
Introduce Rail track holding company (public) which remains neutral to IR and private players
– Railways Regulatory Authority of India (RRAI), independent budget to keep it fair and open, set access charges
Tariff Regulation
Safety Regulation
Fair access regulation including to private operators
Service standard Regulation, Setting technical standards
Possess quasi-judicial power to appoint and remove members distanced from Ministry of Railways
– Social cost & JVs to bear them; New Sub-urban lines only as JVs with state government , not otherwise
– Existing Assets Indian Railways be leveraged to raise resources Institutions created like NBFCs, InviT (infra
investment Trust)

• Privatization : Story so far

– 2006: 14 Private operators allowed to operate Containerised Freight Trains along with CONCOR (19 Now)
– Railways have planned to introduce 150 passenger trains through private operators through PPP
– 2018: IR Finance Corporation (IRFC) to own wagons to private players allowing investment in GPWs (Wagons) (Rs
10Bn)
– 2019: Tejas Train run by IRCTC (Public) introduced as first Semi-Government train or ‘Psuedo-Private’ Train
– Adani logistics and NYK Auto Logistics JV to participate in Automobile Freight train Operator Scheme (25 trains by
2023)
“Indian Railways will never be Privatized. But private investment should be encouraged” – Piyush Goyal, Rail Min.
UNITED KINGDOM
• British Rail prior to privatization
– Combine social interest with a focus on running the railway
– Poor and often criticized organization structure
– Required financing and had a declining share in the transport market
– Was restructured, saw significant improvements and was the most cost efficient European rail

• Why privatization?
– Improve efficiency through privatization as economic theory argues that markets function better than
central organization to manage economic activities
– Management in privatized enterprises has an emphasis on outputs and a commercial focus

• Route followed
– A vertical segregation of the railways took place based on the transaction cost argument
– Infrastructure and maintenance was separated from the suppliers of passenger and freight services.
Similarly, the train operating companies were also made independent

• Outcomes of privatization
– Increase in number of railway accidents, primarily due to segregation making planning more difficult.
The rushed implementation meant that there were issues with development of software required for
planning under the privatized model
– A decrease in number of fatalities due to improvements in technology, an effect which is independent
of privatization as the rolling stock replacement rate stayed roughly the same
– Railways saw increased amounts of traffic post-privatization but also came at the cost of overcrowding
– Deterioration in quality of infrastructure leading to delays
– Government subsidies which initially decreased, likely due to reduced maintenance, began to increase
– Incentives in the privatization contracts were designed such that increases in cost and reduction in
maintenance would follow inevitably as the companies tried to maximize profits
ESTONIA
• Estonian Railways prior to privatization
– Inherited well developed railways system from the Soviet Union
– Fares were nominal and the railways employed 11,000 workers at above average wages
– Break-up of the soviet union reduced import freight which cause the closing of lines and a reduction in the
number of workers needed as well as the ability to pay wages
– The Estonian Railways were horizontally separated intro three state-owned corporations, Estonian Railways,
Southwest Railways and Electric Railway

• Why privatization?
– Wanted to modernize the railways and make them more efficient

• The route of privatization

– The Estonian government tried to privatize the three state-owned railway companies through international
tenders to foreign strategic investors

• Outcome of privatization
– The company that bought Southwest Railways turned out to be owned 80% by two Estonian businessmen
who closed and reduced frequency on several lines and laid-off workers
– The job cuts sparked large scale public protests in Estonia, which was quite rare
– The number of passengers travelling by Southwest dropped once the government announced that the
privatization contract had been fulfilled
– Despite dropping passengers, Southwest continued to receive large amounts of Government subsidies
– The companies continued to request subsidies while at the same time increasing prices
– The privatization served to increase profits for owners at the cost of services for the consumers
– The vertical separation of railways and infrastructure as well as the horizontal separation through creation
of regional rail companies created more problems than they solved
JAPAN
• Japanese Railways prior to privatization
– Japanese National Railway (JNR) held a monopolistic position since the end of world war 2 and until the mid-
1960s
– Growth of other transport options and inefficient management made JNR lose its position

• Why privatization?
– JNR accumulated long-term debt due to financial failure and an inability to keep up with the market
– The company was too large to me managed effectively and was subject to a lot of political pressure which led
to the continued operation of some unprofitable lines
– It was decided to privatize JNR in order to improve customer satisfaction and enhance operational efficiency
– It was hoped that privatization would turn JNR into a competitive entity and reduce huge government subsidy

• The route of privatization

– JNR was divided horizontally but remained integrated vertically
– JNR was not privatized immediately, it was initially publicly held
– JR East stock was offered to the public in 1992
– JR West and Central followed and by 1997, all 3 JRs were on the market

• Outcome of privatization
– There were large scale productive efficiency gains as a result of privatization
– While fares had been continuously increasing before privatization, there was only one instance of fare
increase after privatization took place and the average fare per kilometer was also declining on real terms
– A flatter organization was formed and there was also an improvement in management-labor relationship
– Frequency of trains improved among JRs, however car availability did not improve
– Wages increased after privatization, possibly as incentive to carry out work efficiently
– The JRs had also seen an improvement financially as a result of cost changes
– There was no improvement in terms of the debt outstanding but that was a result of government inaction
rather than an issue with privatization
USA
• Establishment of railways
– When land was annexed at the establishment of the nation the government provided incentives for private
players to construct rail lines.
– Land grants provided first proved to be a successful public private partnership
– The federal government provided right of way and large tracts of land
– All the other aspects were fully privately owned
– They were also obliged to provide freight service free of charge to the government

• Regulation
– Market Power became a concern and was addressed in the Interstate Commerce Act, 1887
– A regulated privatized railway network meant that market power would not disadvantage sections of
people depended on people
– Given the technology progress, this model was a success

• Deregulation
– Soon with the advent of the motorcar & advanced motorway system in the US, the railways faced pressure
– They were not able to compete with government regulation
– Inelasticity and inflexibility were major concerns of private players
– The Government took note and soon deregulated the country
– Market oriented procedures were adopted and the private players were allowed to enter into contracts
freely
– The Government made the railways into a deregulated competitive service that suited the needs of the
country with well developed motorway and airways.
Pakistan
• Pakistan Railways prior to privatization
– Pakistan railways was operating under considerable losses and decreased operation since independence in
1947
– Establishment of the National Logistics Cell by the military complex in 1978 that took away considerable
traffic from Pakistan Railways

• Why privatization?
– Pakistan accumulated considerable losses, faced dwindling sustainability, reduction in lines, revenue and
passengers
– Causes attributed to dwindling sustainability are lack of attention, poor policies, corruption and
mismanagement
– The National Logistics Cell was also blamed to be taking considerable freight traffic from the railways
– It was hoped that involvement of private players would make the railways more competitive

• The route of privatization

– PR used the PPP model to improve its poor and worsened infrastructure
– Private parties had operational rights on state owned railway lines and government infrastructure
– According to the plan they had to pay a fixed amount for the use of mile
– PR ‘unbundled’ a ‘vertically integrated’ railway

• Outcome of privatization
– There has been limited interest in bidding for these operation rights
– Due to low maintenance there is high capex requirements from private players to make profits
– Its PPPs ended up as court cases with both parties blaming the other for failure
– The Government has seen some expansion in Railway networks over the year 2013 to 2017
– The Railways faced fundamental problems of governance and substandard infrastructure.
– The Government toyed with the idea of privatization of the whole railways but has not gone forward due to
vested interests and opposition.
Switzerland
• Establishment of railways
– Private railways were established with the country in 1848
– By the end of the century some players got into trouble
– Some big players were nationalized to save the important service for the country
– The country was willing to intervene whenever the players faced loses

• Subsidies
– As car transport increased over the 1970s and 1980s, Swiss railways started running a deficit
– Subsidies for railways were institutionalized in the legal framework since then
– The private players had to follow obligatory rules by the government
– The railways was not lead to market forces and were obliged to serve remote areas and in off times

• Efficiency
– The Swiss railways operate under non-optimal efficiency both cost and scale wise
– The Switzerland government has taken a conscientious step to stop market forces from affecting what they
perceive as a public good
– The profits are shared between private players and the government in proportion to ownership
– The losses were foot by the Cantons and the Confederation- i.e. the government
– The Government took not and soon deregulated the country
– Subsidies are provided for reduced tariffs to rural and alpine regions
– The railways are given a strict timetable that serve regularly even during off-hours and subsidies are used to
compensate them for that
 Mexico

• Scenario prior to privatization

– Mexico’s Secretariat of Communications and Transportation (SCT) owned FNM-a vertically integrated
monopoly offering domestic and international freight services and limited intercity passenger services.
– By the early 1990s, FNM was operating with an annual deficit of over a half billion US dollars – the equivalent
of 37% of its overall operating budget.

• Why privatization?
– Underperforming FNM, competition from trucks, economic crisis of 1994-95.
– Enable railways to get a financial footing and reduce govt. subsidies.

• Route followed
– Division was based on geography and key freight markets.
– 3 major concessions were given to KCSM, Ferrosur, Ferromex.
– For Mexico city, a neutral track was managed by a terminal company TFVM jointly owned by the 3
concessionaires and the government to ensure equal access.
– Railway Transport Regulatory Agency of Mexico (ARTF) was established in 2015. It’s a decentralized govt. body
under SCT to serve as dedicated regulator of Mexican Railways.

• Outcomes of privatization
– A conducive legal environment for private sector participation-liability-free concessions, regulatory freedom
to set tariffs.
– Traffic volumes doubled from 1995 to 2015, and over the same timeframe, the rail market share compared to
road has increased from 19% to over 25%.
– Subsidies from the govt. have almost been eliminated.
– Productivity improved and remained steady, renewal of rolling stock, reduced fleet size.
– Labor productivity increased.
– Tariffs have decreased substantially and are both in line with North American freight rates and competitive
with road, particularly over long distances.
 Argentina

• Scenario prior to privatization

– By 1980s, the state railway of Argentina had become the single largest drain on the national treasury.
– Freight volume fell to about ten million tons and passenger ridership also plummeted.

• Why privatization?
– Reduce the subsidy burden.

• Route followed
– Five freight concessions were each designed for a 30-year duration with an optional 10-year extension.

• After privatization
– Demand was greatly overestimated by bidders in Argentina compared to Brazil and other Latin American
countries, and Argentina’s rail markets simply did not generate the revenues to support the agreed investment
levels, even though traffic levels rose sharply.
– Economy went into a deep recession in 1999 and contracted by 11% and the new concessions performed even
worse. Since 2002, however, the Argentina economy has again rebounded and, once again, railway traffic
responded strongly.
– Tariffs in passenger services remain controlled by Government, with close monitoring of service performance
and an array of penalties for not meeting standards.
– Passenger services have simply not paid the access fees per the concession agreements, arguing that
concessionaires have not made the investments required to enable proper passenger service to be offered.
Australia

• Scenario prior to privatization

– Australia’s railways, in the early 1990s and before, were characterized by poor profitability and
performance. While some railways had significantly improved financial and operation performance through
reforms under government ownership, others lagged well behind comparable best practice performance.

• Route followed
– Australian National was unbundled into four core business units and offered for sale-long distance
passenger rail, SA rail, Tasrail, AN Track access.

• Outcomes of privatization
– The long distance passenger services have benefited from the private owner’s focus on the high-end tourist
market using refurbished rolling stock.
– The new owners of Tasrail cut costs and improved efficiency and customer focus, and made the railway’s
first ever recorded profit. However, after a few years it became clear that the railway was not earning
enough to cover the long term maintenance of infrastructure.
 De-Privatization: Case
of Melbourne
• Before Privatization
– Before 1999 the passenger rail services in Melbourne, Australia, was operated by a public sector entity.
• Why privatization?
– The Government felt it was difficult to extract further efficiency improvements under government operation.
– The final decision was influenced by a prominent tram strike. The Government saw privatization as a means of reducing its exposure to
financial and other risks.
• Route followed
– Vertical integration. This avoided problems where operators felt they had insufficient control over their total costs and insufficient influence
over maintenance and investment decisions.
– An obligation to provide new rolling stock, all risks were assigned to the private operator other than sovereign (policy) risk, latent defects in
infrastructure, and narrowly defined unforeseen events.
– The concessionaires were Nation Express and Connex.
• What went wrong?
– Bidders’ over optimistic revenue projections.
– A change soon after privatization to a new government that had opposed it, and were ideologically uncomfortable with it.
– Flaws in some of the concession arrangements such as inter-operator and intermodal revenue sharing, monitoring the condition of
infrastructure, problems with the ticketing system, etc. giving rise to disputes.
• Outcome
– At the end of 2002, National Express, the larger of the two metropolitan train (and tram) concessionaires withdrew, taking a write-off of the
order of $300 million including forfeit of their performance bond. Its concession was then managed by an administrator, with day-to-day help
from government officials and Connex.
– Government negotiated with Connex operate Melbourne's entire metropolitan train network, from April 2004-2009, but with substantially
modified conditions.
 Insights
• European experience
– Vertical segregation with right of passage on one hand and operations on another
– Political promise for privatization was to increase efficiency and rationalize cost
– But contract incentives of privatization in the case of vertical segrigation lead to profiteering
– Loss of economy of scope due to lack of synergies value creation; vertical segregation cons
– Fundamental theory – Theory of transaction costs, but it didn’t materialize; govt ended up subsidizing
– Rise in accidents and lack of infra maintenance due to decentralized planning & overview ; No coordination

• Japan
– Additional motivation: Japan railways was too large and burdened by beaurocracy,
– They went for horizontal segregation while maintaining vertical integration
– Whatever cost to be incurred, to be paid out of operational profits, no subsidy
– Results as expected, better labor relations, Increased wages, improved efficiency

• Switzerland model
– Interventionism with government and private joint ventures and shared revenue
– The new owners of Tasrail cut costs and improved efficiency and customer focus, and made the railway’s
first ever recorded profit. However, after a few years it became clear that the railway was not earning
enough to cover the long term maintenance of infrastructure.

Learnings
• Vertical integration has proved to be beneficial (Japan, Switzerland) compared to segregated (Australia, European
experience)

• Tariff regulations has hampered the program in the form of government subsidies

• PPP model failed in Pakistan due to infrastructure burden being put on private sector
THANK YOU!