Introducing Private Ops in Railways a Masterstroke But Govt Needs to Pay Attention to Snags on the Way

Akhileshwar Sahay
·19-min read

On July 1, 2020, the Indian Railways (IR) unveiled its maiden initiative of ushering in the era of private operations for running passenger trains over its network. Prima facie this author (a keen watcher of IR for the last three and a half decades, first as an insider-outsider and later as an outsider-insider) considers the move as a significant reform initiative of IR at the most opportune moment.

In more than one way, the scheme heralds the 'elephant awakening moment' for this century-and-a-half-old behemoth. This article analyses the entire gamut of issues emerging from the government’s recent decision.

The salient features of the scheme as per information are:

1) For the first time since the reorganisation of Indian railways in the post-independence era, the government is introducing private sector involvement on a limited scale to operate and maintain (O&M) the passenger trains over the IR network.

2) The scheme aims to bring in modern technology in the form of next-generation rolling stock which will also need much lesser maintenance. It seeks to provide reduced travel time and world- class travel and enhanced safety experience to users of train services. Also, IR expects to benefit from the reduction of demand-supply deficit in the passenger transport system as it is estimated that currently more than 8 crore wait-listed people are not able to be accommodated. Finally, the government believes that the scheme shall result in additional job creation.

3) The scheme seeks to introduce 151 private trains over 109 origin-destination pairs of routes, divided across 12 clusters on the IR network. The identified clusters are Mumbai-1, Mumbai-2, Delhi-1, Delhi-2, Chandigarh, Howrah, Patna, Prayagraj, Secunderabad, Jaipur, Chennai and Bengaluru and the number of trains on offer are approximately 5% of the total mail/express trains running across the system.

4) Each train shall have a minimum of 16 coaches and the maximum number of coaches in the train shall not exceed the longest passenger train operating on the route. Based on demand the concessionaire shall have discretion to decide configuration of each train and that of coaches. Also, the trains will have the designed maximum permissible speed of 160 kmph and their booked speed based on finalised train operation plan (TOP) will be such that the their running time between origin-destination points is equal to or less than the existing fastest train of IR in the respective routes

5) The selection of concessionaire is being done through international competitive bidding based on the design, build, finance and operate (DBFO) formula through public-private partnership (PPP) basis where the concessionaire will be responsible for designing, engineering, financing, procurement construction or upgrade, operation and maintenance in accordance with the terms of the concession process. It is understood from the various pronouncements of IR that the concession period is likely to be 35 years.

6) As per the request for quotation (RFQ), the applicants can be a single entity or group of entities comprising a natural person, private entity, government entity or any combination of them who will eventually form a special-purpose vehicle (SPV) to be registered in India if they win the bid. It is important to note that though the bid process is open to applicants from any country, in case of a foreign entity the application of such an entity is subject to the approval of IR from national and public interest perspective (Clause 2.2.11 of RFQ). The author posits that while the subject matter of national interest is generally well understood, the inclusion of public interest perspective can open a Pandora's box unless the clause is transparently defined.

7) Though the RFQ document allows a maximum of six parties to be part of the consortium, for the sake of evaluation of eligibility only those parties will be considered which will subscribe to a minimum of 26% or more of the paid up and subscribed entity of SPV. Further, learning lessons from difficulties encountered in the road concessions of the UPA government era, the proposal provides for international best practices provision for the dilution of equity in the SPV.

8) The most prudent decision of the IR as part of the RFQ is to have a simple qualification criteria of minimum net worth. In all the twelve RFQs, net worth required is around INR 1,200 crore. If the applicant is an alternative investment fund or foreign investment fund, then also the only criteria is around INR 1,200 crore of ACI. Most significant part of the qualification criteria is that the bidder need not necessarily have the O&M experience; instead it is free to engage a competent O&M operator.

9) In another significant move, the concession will be awarded based on a simple, sole criterion, “premium” (defined as share of the gross revenue) offered by the bidder to IR. Also, though a bidder is free to submit bids for many clusters, IR in a move to not put all its eggs in the same basket, makes it clear in the RFQ document that no bidder shall be awarded more than three clusters. In case a bidder is the highest bidder in more than three clusters, it will be awarded the ones where it has quoted the highest premium and for the remaining clusters other highest bidders in priority will be called to match the highest bid

10) The concessionaire will have the right to determine, charge and collect the fare from the users and vary the same from time to time. And in lieu of this right, in addition to the transparently determined premium through the bid process, the concessionaire will also have to pay the IR, fixed haulage charges ( payable for use of stations, transportation, track maintenance and signalling), a variable energy charge as per the actual energy consumed and other charges if any fixed in the concession agreement.

11) The operations and maintenance of passenger trains shall be governed by IR standards, specifications and requirements and the train operation by the private entity shall conform to predetermined performance indicators ( e.g., punctuality, reliability upkeep of trains, etc. ). It is understood that damage and penalty can be levied on the private entity for not adhering to the performance indicators. Damage and penalty if any payable for not adhering to it side of the bargain are not fully clear.

12) For the operation of these trains, IR will provide to the concessionaire a non-discriminatory access on the route. Though the duration is not exactly clear, it is also understood that for a certain period before and after the scheduled departure of such a train, no other similar train of IR will depart from the origin station. However, it is believed that this restriction on IR will not apply if the capacity utilisation of the concessionaire train is more than 80% in the past three months.

13) Restrictive conditions of the scheme are making it mandatory on the concessionaire to use the existing Indian Railways passenger reservation system for booking of tickets and use of railways locomotives, drivers and guards for hauling their trains where applicable. Equally complicating are the systems of safety certification of the trains by IR and the validation of rolling stock by it. Though the exact contours of these will emerge when the final concession agreement is released at the request for proposal (RFP) stage.

What stakeholders say

Before getting into the nitty-gritty of the likely impact of the scheme and key determinants of making it a success, a few points are worth pondering. The government considers the scheme a game-changer paradigm shift in passenger train operations which will not only bring in the next-generation technology, a new managerial ethos and speed, efficiency and superior comfort for passengers, but it will also bring INR 30,000 crore in private investment. While the scheme per say is laudable, not all stakeholders share the government’s enthusiasm. For example, railway unions for obvious reasons consider the scheme detrimental to the interest of railway workers and the political opposition has dubbed the scheme anti-poor.

Role of private sector in development of Indian Railways

A peek into the past of IR shows that though private passenger train operations present them today as a novel experiment, the history of IR is replete with successful public-public partnership, public-private partnership and private ownership in financing, development, operations and maintenance. In the nineteenth century, a large chunk of IR was developed, operated, and maintained by the private sector.

Also, the railways was developed by princely states and even district boards. Even after progressive mergers and reorganisation of the railways into one vertically integrated monolith post-Independence, this author today gets nostalgic when he recalls his train journeys to the hometown through slow- moving private Martin's Light Arrah Sasaram Railway till the early 1970s. Also, the most shining example of partnership in recent decades, the Konkan Railway, was created in partnership by the Government of India and four state governments and funded through private debt and government equity and is being operated even today as an independent entity.

Continuation of larger reform agenda of Modi government

The author posits that the present move is a continuation of broader reforms unleashed by the government of Prime Minister Narendra Modi after decades of decadence and status quo in IR . During his first term, two committees were set up to bring fast-track changes. While the one-man committee of Metro Man Dr E Sreedharan looked at enhancing transparency and complete decentralisation in commercial decision-making, including tendering and contracts in IR, the high-powered committee led by Bibek Debroy (present chairman of the Prime Minister's Economic Council) dealt with comprehensive reforms and liberalisation in the railways.

Sreedharan committee recommendations led to substantial reduction of railway board involvement in tendering and contracts with concomitant large-scale devolution of powers to General Managers and below. As regards Bibek Debroy Committee, the government over the past six years, have been modularly biting the reforms bullet step by step. Last year, it unleashed two major reforms, one being the rightsizing of the Railway Board and the second being amalgamation of ten railway services (responsible for ‘silo’ based working in railways) into one composite whole.

The latest initiative to bring in the private sector in passenger train operation too is part of progressive implementation of larger reforms recommended by the Debroy committee. And the scheme has evolved over the past two years with the Niti Aayog, Railway Board and an inter-ministerial secretary-level committee working on it diligently. Also, broad contours of the proposal (including draft concession agreement) were put in the public domain for comments of the stakeholders in January 2020 by the Niti Aayog.

But the Devil is in the detail

These are early days. The jury is still out as to what would be the final contour of the scheme. The government has just kicked off the concessioning process with the release of the RFQ document. The preparation of the RFP document and the concession agreement must be in progress. The information readily available is sketchy beyond what is selectively being leaked by IR, and what is provided as part of the RFQ. The only other definitive document publicly available on the subject was a draft concession agreement uploaded by the Niti Aayog earlier this year for stakeholders’ comments.

A careful analysis of that concession agreement by the author makes him shudder due to inbuilt inconsistencies, one-sided liability of concessionaire and relative opaqueness of various contractual provisions. For a complicated concession to run its course successfully for thirty-five years, it must pass the litmus test of fairness, equity and transparency. Without getting into the details here (difficult to compress them in this article) it suffices to say that:

1) The country’s experience with PPP projects across sectors has been mixed. There are many reasons for the same but rigidities inbuilt in the concession agreement too contributed to the problems to a great extent in landing us in a situation where we stand today. It goes without saying that a large part of non-performing assets (NPAs) of banks in the infra sector are due to failed concessions for one or the other reason.

2) In 2006, Indian Railways embarked upon a big-bang, then considered revolutionary, scheme of private participation in running container trains. The scheme saw entry of 16 private players who invested more than Rs 5,000 crore in infrastructure. They also paid substantial recurring haulage charges to the railways. However, the private operators who entered the sector expecting to find the El Dorado soon found it difficult to navigate both on and off the track. Both the difficulties of the concession agreement and the obduracy of babudom of Rail Bhavan contributed to their misery.

3) At least in the freight sector, IR in the past has tried various schemes of private sector participation. The oldest own-your-wagon-scheme was launched in 1992. It was followed by a revised scheme of own your wagon, scheme of leasing of wagons, leasing freight trains, special freight train operations scheme, automatic freight train operator scheme, etc. In addition, many private entities developed the rail infrastructure. One common element found across working of all the schemes is that private parties found it difficult to do business with railways.

4) Nevertheless, there is one silver lining that has emerged most recently: the experience of IRCTC successfully operating two Tejas trains, Delhi-Lucknow and Delhi-Mumbai (the latter with 80% occupancy) and one pilgrim train has shown that it is possible to run private trains and one pilgrim special. In the author's view, the IRCTC status of being a railway subsidiary is besides the point. It is worth noting that the IRCTC had also made a bold statement with assured return of a pre-fixed amount to passengers in case of delayed arrival of the train at the destination. The author believes that while formulating the new scheme, IR must have taken the learning from IRCTC's pilot experience.

Key issues and problems to be resolved

Indubitably the scheme is a masterstroke by the government to inculcate next-generation technology and is aimed at providing a superior experience of dazzling the customer. But there are married issues and problems, some big and some small, to be attended to if the same has to be “win-win” for all the stakeholders. A few of them are:

1) Origin and Destination Time: One key feature of IR Rajdhani and Shatabdi trains is the ease of timing for the business travelers both at the origin and destination points. In the post Covid era for more than one reason, premium train travel may be preferred by the discerning travelers as compared to the compressed air travel by plane. A key point for viability of the new trains will be Rajdhani/Shatabdi type timings.

2) Path: A cursory glance of the RFQ indicates that it provides indicative train start timing and train running timing for every train of all the twelve clusters. Definitely these are not yet final. It is known to all that IR has a clogged network where premier (Rajdhani/ Shatabdi), mail/express, ordinary passenger/shuttle services, local trains and goods trains share the same over-saturated path. Despite all the covenants in the concession agreement, allowing a clear path to the concessionaire train will be a humongous daily battle for train controllers. Needless to add that for not maintaining the path, the concessionaire has to pay a heavy penalty (envisaged as a percentage of haulage charges). If one looks at the running time of new trains, one shudders because more than 50% of them have running time of more than 20 hours and in some cases even 50 hours.

3) Priority: The dispensation of train operations control on IR is such that, it is the section controller in divisional control offices who often becomes the final arbiter of who gets the priority in passage of trains. Whenever there is a clash for priority, say between two superior trains like Rajdhani/Shatabdi and concessionaire trains, it will be truly a Herculean task for the train controller to decide which train shall have the priority.

4) Haulage charges: It is understood that the haulage charges will be fixed in the concession agreement and thereafter will be revised as per a pre-fixed formula. If one recalls the experience of private container train operators, one finds that the haulage charges became a major cause of contention when on a single day, on December 5, 2014, IR increased the haulage charges by 25%. IR with 12 lakh staff and saddled with old infrastructure is inherently an inefficient maintainer and there will be a tendency to fix initial haulage charges high. As all routes are not going to be equally remunerative, if the haulage charges are not reasonable, they will ab initio vitiate the partnership framework. Suffice to say that haulage charges shall form a substantial large chunk of monthly cash outgo of the concessionaire and once fixed they will only go on increasing.

5) Absence of regulator: IR today is a policy framer, infrastructure owner, operator and regulator bundled in one. If one goes by the past, IR has not been a fair partner to private participants. It has also not even been a benevolent owner to its own PSUs. With the upcoming dedicated freight corridors, high-speed passenger line, existing freight line SPVs and new private operators, IR is reverting to its past of company railway owned operations where its real earning will be from its “landlord” status where the haulage charges will constitute the core of earning. In such a situation an effective regulation is the basic prerequisite. A glance at the draft concession agreement circulated by the Niti Aayog indicates regulation in private sector passenger train concessions is proposed through the concession agreement more particularly through the instrumentality of an independent engineer and through the process of an arbitration tribunal. The experience of the country in regulation through the concession agreement has not been good. It makes eminent sense now itself that the instrument of a robust rail regulator is put in place much before the concession agreements are signed. The talk of an independent rail regulator has been in the air now for years. Also, while setting up the rail regulator it must be ensured that the problems noted in running of other sectoral regulators is addressed ab-initio.

6) Safety: Broad contours of the tendering process available indicate that IR shall be the 'master of safety' with the specific role of 'commissioner rail safety' where the Railway Act mandates. One party to the contract being the final arbiter of safety does not bode well for the concessioning process. Suffices to say here that IR's own track record on safety has been less than flattering. The high-powered committee on safety constituted under noted scientist Dr Anil Kakodkar in 2012 after comprehensively analysing safety regulations across the world had recommended a robust and truly independent new safety architecture on lines of th British Rail Safety Authority. The time is apt to implement the Kakodkar Committee recommendation now.

7)Railway inspections: Even a cursory glance of the draft concession agreement indicates that for every conceivable thing, the railways has reserved the right for inspection and for levying damages and penalties. The author trusts that in the final documents the 'inspection and permit raj' shall be pruned to what is absolute must and nothing more. Too much of residual powers to the railway inspector will make the concessioning prone to rent-seeking.

8) Penalties: It is understood that for the right reason, IR in the concession agreement will have the provision of penalty on the concessionaire for not adhering to the key performance indicators. It is understood that such parameters are punctuality, reliability, upkeep of trains and ISO certification among others. It is ascertained from the publicly available documents that for every breach/ not meeting key performance indicator, the concessionaire will need to shell out 5% of the haulage charges. The haulage charges themselves as per available documents are high at INR 668 per km. Penalties if any for IR not complying with its side of the bargain under various clauses of the concession agreement is not ascertainable as yet.

9) Weather conditions: While extremely adverse weather conditions appear to be part of the 'non-political force majeure event', it is common knowledge that for a significantly large part of winter in the bottom half of the country, fog is a big spoiler to the movement of all modes of transport. Trains which run on narrow fixed path suffer the most from fog conditions. Any equitable concession agreement shall need to specifically dwell on it as in the absence of that the concessionaire will be forced to pay penalty for not meeting the punctuality.

Conclusion: The scheme is the boldest move so far by the government to modernise passenger train operations even if the number of trains and routes are limited. Unlike competition for the market, the move for the first time interjects competition in the market. In addition, both IR and private trains will need to be always fighting fit to wage the bigger war of fast losing passengers to road and air.

A truly transparent bidding process and a robust concession agreement is a prerequisite for success. The author hopes that during the RFP stage, IR goes the extra mile to make the document truly world class. However, a caveat is in order. As the Kakodkar Committee noted, “Indian Railways suffers from the implementation bug”; mandarins at Rail Bhawan are fully capable of ensuring that such a concession does not succeed.

The author hopes IR has learnt lessons from the past and has also included the positive lesson from the recent good experience derived from running of prototype Tejas Express by IRCTC. Needless to say, that to make a 35-year concession work, the concession agreement should be so robust that it provides for imponderables which cannot be anticipated today, and pathway must be available to handle such situations if they occur. After all, who could predict six months back that the world today would be facing the once-in-a- century black-swan moment unleashed by the coronavirus.

The author, an ex-railway official, is a railway expert. Views are personal.