No. 62, January 2016

No. 62
(January 2016):

Railways on Track for Privatization

Part Two

Part Three

 

Constructing Theoretical Justifications to Suppress People’s Social Claims

Part One

Part Two

Part Three

 

 

 

Debroy Committee Report

Railways on Track for Privatization

Part II: Campaigner for privatisation

The latest, and brashest, exponent of the view that the Government lacks funds, and hence must turn to private finance, is the Bibek Debroy Committee on the Railways. The Committee submitted its final report in June 2015.[1] Unusually, it contained no member of the Railway Board; of its eight members, only one had a Railways background (a retired financial commissioner of the Railways); others included a former corporate chief and a former managing director of the National Stock Exchange.

The Committee’s interim report, released in March 2015, unabashedly sang praises of privatization:

A market economy in a free, democratic society is based on the principles of choice, competition and autonomy. Choice enhances the lives of ordinary people by giving them freedom to choose between competing sellers. Competition between providers of services like the Railways, lowers costs and prices, improves customer service, spurs innovation and optimizes the resources of society. Autonomy leads to accountability and efficiency and improves the lives of employees….

In pursuit of these fundamental principles, country after country has broken the monopoly of its state-owned railways. The results of these efforts have been spectacular… services have improved, customers are empowered and happier, balance sheets of the railway companies are stronger, and the state no longer carries the financial burden of subsidies. This experience has also disproved the old myth that the Railways are a natural monopoly. (emphasis added)

And so on, in this vein, for several more pages. This syrupy hymn to markets has been dropped in the final report, and the related matter now appears in an edited form as Chapter 7. Now both Debroy and the Railway Minister are at pains to clarify that they do not propose privatization; they are merely endorsing “private entry”. The report says:

It needs to be understood that this Committee does not recommend privatization of IR. It does, however endorse private entry, which is not ab initio (i.e., from the start) but ab hinc (i.e., henceforth) – as this is already part of the accepted IR policy – with the proviso of an independent regulator. This Committee prefers use of the word liberalization and not privatization or deregulation, as both the latter are apt to misinterpretation.

However, this is mere sleight of words. The report chooses to define “privatization” very narrowly, to mean only sale of shares in the IR to private parties; this alone it does not recommend.[2] In every other respect the report would like “private entry” – in the construction of infrastructure; manufacture of wagons; maintenance of locomotives; joint ventures with private firms for the development of land or other real estate owned by a Railway; contracts for operations and maintenance of a particular activity, or even an entire Railway; leasing of fixed assets to a contractor with freedom to decide all aspects, including staffing and management; and so on. The report even envisages private firms carrying out ticket sales, ticket inspection, and railway security. The form it prefers most is for the private firm to “have complete responsibility for procuring and operating a train or constructing and operating a physical infrastructure (such as terminal or laying of tracks), and financing necessary investment at its own risk,” but other forms devoid of risk to private capital too are welcomed. In brief, the B proposes that, while keeping the shell of the Railways in the public sector, more and more activities of the Railways should be run by the private sector.

In one sense Debroy and co. are correct: the policy of encouraging “private entry” is not new. The Government has been attempting since 1992 to attract private investment in wagons, container trains, special freight trains, automobile freight trains, private freight terminals, and dedicated freight corridors. But the response has been poor, presumably because the returns are not attractive enough in the available schemes. In August 2014, the Government permitted foreign direct investment (FDI) inconstruction, operation and maintenance of high speed train projects, dedicated freightlines, rolling stock, including train sets, signaling systems, and freight terminals.

However, says Debroy, “foreign investment will not come under the present scenario. It will come only if the Railway sector is reformed along the lines discussed in this Report and the change in incentives and structure as proposed in this Report are put in place. The Railway sector will then become worthy of foreign investmentin ancillary production units, terminals, signaling, logistics and the operation of trains.” (emphasis added) In other words, the purported objective of improving and expanding the Railways is now subordinated to the objective of becoming worthy of foreign investment; the ‘reforms’ are designed for the latter objective.

‘Reforming’ railway accounts – for private investors
In order to convince private investors of the attractiveness of the returns on investment in particular activities, Debroy calls for a change in the accounting system of the Railways. It is quite possible that the accounting system of the Railways needs changes, but the objective with which Debroy wishes to do so is quite otherwise, and very specific:

The accounting system followed by IR (Indian Railways) served the objectives for quite some time. Those were the days when external funding support to IR came almost entirely from the General Revenues of the Government in the form of Gross Budgetary Support…. With its infrastructure needs growing, and constraints on budgetary support from the Government not likely to ease in the foreseeable future, the compulsion of IR to attract private investment in diverse forms shall only increase. Whether it is asset creation through the PPP mode, or through FDI or any other mode, including loans from multilateral funding agencies, the investors would need to be provided appropriate levels of comfort if big ticket infusion of capital in the Railway sector has to be facilitated…. Unless the accounting procedures of IR are transparent and intelligible to all, external investors cannot be expected to put in money.

And so the report recommends that the accounting system be changed to provide data as could reveal the profitability of different operations and routes/sections. Eventually, each activity could be organized as a separate profit centre, up to the level of a train. This would help private investors cherry-pick profitable activities in which to invest, or, alternatively, demand State subsidies for carrying out those activities.

The burden of the unprofitable, or less profitable, activities would of course remain with the public sector. A White Paper by IR in February 2015 estimated the social service obligation of the Railways (by carrying passengers and goods below cost) at Rs 25,000 crore.[3] A Committee of Secretaries recommended reimbursement of this cost by the Government, but nothing has come of it. However, if any such activity is transferred to the private sector, the State will certainly wake up and provide “reimbursement”, i.e., subsidies.

Incidentally, if we accept the White Paper estimate of the Railways’ social service obligation, it means that there is virtually no net budgetary support from the Government for the Railways’ annual Plan. The 2015-16 Railway Budget projects Gross Budgetary Support at Rs 40,000 crore. However, in the same period, Railways are budgeted to pay the Government a ‘dividend’ of Rs 10,800 crore on earlier investments, and bear the above-mentioned social service obligation of Rs 25,000 crore, leaving a net support of just Rs 4,000 crore from the Government. This is to be set against a projected investment in 2015-16 of Rs 1,00,000 crore.

[Part III refutes the argument that the Government lacks the funds to invest in the Railways.]

NEXT: Part Three - 'Fiscal constraint', fake alibi

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