On a different track

The Railway budget’s emphasis on wooing private capital threatens the Railway’s long-term financial health.

Published : Jul 23, 2014 12:30 IST

Railway Minister D.V. Sadananda Gowda at the Mandya railway station on July 13.

Railway Minister D.V. Sadananda Gowda at the Mandya railway station on July 13.

THE Narendra Modi government’s first budget for the Indian Railways, the biggest nationally owned enterprise, is most notable for the manner in which it has undermined the very notion of a budget. Sadananda Gowda, the former Chief Minister of Karnataka known for his ever-smiling demeanour, presented a budget that the media unequivocally endorsed for emphasising fiscal rectitude over populism (whatever that may mean) and for being realistic about the enormous challenges facing the Railways, and welcomed for its aggressive wooing of private and foreign investment.

But if a budget is essentially a statement of how the government proposes to raise resources and about how it prioritises expenditure, even if governments also use the heightened attention that the exercise attracts to make significant announcements of policy, this exercise by Gowda was significantly emasculated. On the revenue side, he had announced three weeks before the budget presentation a 14.2 per cent increase in passenger fares and a 6.5 per cent increase in freight tariffs.

This exercise, which pre-empted his first budget, will be enough to barely meet the revenue estimates projected by his predecessor. But even more significantly, the sting in the tail of the pre-budget announcement was that a portion of the increase would be in the form of the Fuel Adjustment Component, meaning that that fraction (1.5 per cent in the case of freight tariffs and 4.2 per cent in the case of passenger fares) would increase automatically to reflect changes in the price of fuel, mainly diesel. In effect, Indian passengers can no longer expect train fares to behave predictably and remain stable. The new “dynamism”, the media welcomed, would now ensure that the Railways behaved like a true commercial enterprise, a theme that became central to Gowda’s budget three weeks later.

The Railways’ gross traffic earnings are projected to increase by 14 per cent (over the revised figures for 2013-14). Significantly, Gowda emphasised that the projections depended critically on periodic revisions that would be triggered by the cost of fuel.

Gambling on PPP

But so ingenious is Gowda’s budget that he has managed to avoid even his budget-making responsibilities on the expenditure side. This he has achieved by transferring most of the new projects to public-private partnerships (PPP) and into channels that will depend on foreign direct investment. Meanwhile, the Railway Minister has promised that existing railway projects will be prioritised, instead of “spreading resources too thin”, exposing himself to the serious risk that if the PPP-based projects fail to take off, infrastructure development will suffer. Gowda has proposed to implement 8-10 “capacity augmentation” projects in PPP mode using the build-operate-transfer route and the annuity route. These projects on “congested routes” would relieve serious bottlenecks, he said.

There are several problems associated with choosing the PPP path as in the case of many infrastructure projects such as airports and roads in the past several years. But even more significantly, he announced that the projects aimed at modernisation, enhancing safety and making train travel a cleaner experience were all to be implemented in PPP mode. The problem with PPPs can be broadly set under two heads: those that make accountability difficult and those that actually impair the long-term financial health of the Railways as an institution. The belief that investors will come flocking to any offer of PPPs is completely misplaced for the simple reason that they will tend towards choosing those projects that offer the most juicy returns on their investment.

Take the case of the proposed freight corridors. Given that most of the existing freight routes are close to saturation, and given that the Railways is attracting a declining share of goods movement in the country, private investment will tend to choose those projects that are more likely to draw freight immediately, thus ensuring faster returns. This has two major implications for not only the health of the Railways but also transportation in the country.

First, the very design of PPPs is such that they will be outside the framework of Railway finances since these enterprises will function as Special Purpose Vehicles, or, to put it simply, as private entities. In other words, once they are established, they will no longer be part of Gowda’s budgetary exercise. Most significantly, the revenues they earn will be outside the pale of his budgetary exercise since the Indian Railways will only earn a fraction of the earnings (depending on the government’s equity share in the SPVs) from the most lucrative projects. Obviously, this has implications for the Railways’ long-term vitality, apart from triggering an increase in the cost of transportation.

But that is not all there is to such PPPs. Since only the most lucrative projects will get chosen immediately, the government will willy-nilly be forced to implement projects that private investors choose instead of setting its own priorities. Thus, a line that may not lie on a major traffic-bearing trunk route, but which may be necessary from an infrastructure development standpoint, may well be starved of funds. This will be a major consequence of accepting the logic of what is euphemistically described as letting “markets” perform the role of setting priorities. Never mind also the fact that such a “pure” model of infrastructure development is nowhere to be found. Business commentators have pointed to the “lack of clarity” in the budget about the exact extent of funding for the proposed Diamond Quadrilateral and the network of high-speed trains connecting major centres. The fact of the matter is that the uncertainty is entirely because of the government’s newfound reliance on the whims of private capital operating in the guise of PPPs. It is obvious that the Railways cannot make its own investment plans without first finding out what projects private investors may favour or reject.

Lack of accountability

The second aspect of the zeal with which PPPs are being pursued is that the Indian Railways may well be forced to spend far more on such projects than may have been the case if it had chosen to implement them as it has traditionally done. Projects that the private sector finds less “bankable” would require subsidies of some sort to private entities. Described as Viability Gap Funding, such financial outgo will be difficult to track, which has made monitoring and accountability key concerns about such projects. In fact, Gowda has promised to use PPPs not only for new corridors and projects but also for initiatives that will leave hygiene at stations and trains, catering and even provision of Wi-Fi at stations to private entities. The mind boggles at how a passenger in a hurry at a station will be able to voice a complaint about poor services from a private contractor.

Gowda laboured the issue of how the Indian Railways had for years—an oblique reference to the United Progressive Alliance regime —failed to balance social welfare objectives with the objectives of a commercially run enterprise. However, this self-critical exercise, instead of resulting in a more serious effort by the Union government to back a critical infrastructure, was used merely as an excuse to initiate steps that will set the Railways on a dramatically different course.

Perverse populism

Contrary to the gleeful reception to the budget accorded by the media, Dinesh Mohan, Volvo Chair Professor Emeritus at the Transport Research and Injury Prevention Programme at Indian Institute of Technology Delhi, says: “Who says the Railway budget is not an exercise in populism? It is only a different kind of populism, one that is not focussed on the poor or the weak but on the rich, the influential and the powerful.” Referring to the case of the bullet train proposed between Ahmedabad and Mumbai, Wi-Fi services at stations, and trains to pilgrimage centres, Dinesh Mohan, who has served on the National Transport Development Policy Committee, pointed out that the same set of Railway Board officials who were earlier sceptical about bullet trains “are now singing a different tune”. The insignificant investment in safety measures, despite the recommendations made by several committees, was a major disappointment, he observed. The slackening pace of the economy offered the Modi government an opportunity to increase investments in the critical infrastructure. Instead, it has chosen to tread the dangerous path of privatising a key national enterprise.

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