Imperatives of reforms
By S N Mathur
23rd June 2012 12:11 AM
Some of the chronic problems being faced by the railways in many countries are: persistent financial deficits, increasing requirements for government subsidies, and low operating efficiency. State monopoly of railways has been at the root of many of these problems.
It was widely believed that monopolies can serve public interest better by providing more effective service and price. Over time, it became clear that monopolies have failed to ensure low cost, affordable transport without compromising on the financial viability of these enterprises. Also, there was intense competition emerging from air and road which threatened to erode rail’s share in transport, and made the railways heavily dependent on government subsidies. The governments gradually realised that the financial burden of operating the railways and maintaining the quality of service to customers was becoming unsustainable.
In consequence, over the past few decades, railways in several countries have introduced economic and structural reforms to improve their financial and operational performance. Broadly, the rationale for reforms has been: improving competitiveness of railways vis-á-vis other modes of transport; privatisation of railway services and fostering competition; reducing government subsidies; and, greater safety and better punctuality of passenger services.
To meet these objectives, some railways carried out horizontal separation of their established structures, through either a geographic distribution with vertically integrated services, or segregating passenger and freight services and offering franchises to private parties to promote competition. Quite a few opted for vertical separation, or unbundling of activities, in which the ownership of infrastructure gets delinked from operations: different train operators then pay access charges to the infrastructure controlling authority and compete among themselves to get a share of the traffic offering. Instances of a few major railways will illustrate the broad approach to the reforms programme and the extent of success achieved.
British Rail was the first to initiate reforms in 1980s by introducing ‘sector management’ – a business led approach – without dismantling the regional structure. Between 1994 and 1997 the infrastructure management was separated from other activities such as train operation, rolling stock ownership and track maintenance. Within each of these areas of service, a number of companies were allowed to operate that would compete with each other. However, problems developed in sustaining a proper working relationship between track authorities and train operating companies. An evident lack of investment and maintenance by the infrastructure authority also caused a widespread feeling that the UK railway reforms were fundamentally flawed and the privatisation process was ill-conceived. The fault apparently lay in excessive fragmentation and lack of coordination among the hundreds of firms that operate Britain’s trains. Railtrack, the infrastructure company, collapsed because of safety failures and has been replaced by another company with greater regulatory controls. It is also alleged that rail privatisation was introduced with too much haste, without realising that this was an experimental process and had to be implemented with caution. Eventually this led to a regulatory failure too. There was, of course, a noticeable rise in the figures of passenger kilometres, but that could have also resulted from higher economic growth. Increased congestion on roads too may have made people opt for rail.
Railways in the European Union (EU) had been experiencing a gradual fall in the share of rail transport. A set of reform measures was, therefore, put into effect, through a legislative order, for revitalising the railways. Vertical separation was viewed as an inevitable first step of reforms towards greater efficiency and to enhance on-rail competition between different rail operators. However, the costs of such separation turned out to be far greater than anticipated because of a lack of coordination between infrastructure companies and train operators, resulting from vertical unbundling.
Besides, some governments have been failing to pay the cost of passenger services operated under the public service obligations. Inadequate investments on infrastructure and poor maintenance of assets led to the deterioration in the quality of assets, which has dented the competitive strength of railways in an inter-modal scenario. Japan National Railways (JNR) began the process of privatisation in 1987, propelled by the repeated failure of nationalisation and continued operating losses since mid-1960s. Inducting private equity into the management of rail services became necessary in order to reduce the huge government subsidies to the JNR and to improve its efficiency.
Consequently, the national undertaking was partitioned into six regional passenger companies, and a single nationwide freight company that would pay track usage fees to passenger companies. The freight company was vertically separated, freeing it from it from the heavy financial burden of infrastructure, but passenger companies remained vertically integrated corporations. The restructuring strategy adopted by the Japanese did lead to increased productivity, reduced operating deficits and marginal improvement in services. However, this success has been limited to only the three major passenger companies that achieved true privatisation, largely because they had a very good market and extremely dense population along the routes. The other passenger companies and the freight company have not been profitable.
In a long-term scenario, learning by experience and by devising newer managerial, regulatory and operating procedures they are bound to overcome the initial setbacks. Regrettably, one does not discern a similar ideological approach in India where Indian Railways, which has had numerous consultants and committees in the past to suggest measures for reforms, has lacked the will to implement the more substantial of these recommendations. The private sector will be an increasingly dominant factor in reshaping the evolutionary process of the railways in the foreseeable future.
S N Mathur is former MD, Indian Railways Finance Corporation.
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