Railway regulator on the anvil

By Governance Today
In Issue 6
March 7, 2016

Revolutionary reforms being planned for the railways will see power to fix fares being transferred from politicians to technocrats and based on economics rather than populism

Railway regulatorThe Indian Railways has typically been exploited by successive governments as a tool of dispensing patronage with scant regard for its economic well being. The outcome: fares haven’t kept pace with inflation, leaving the railways with exceedingly poor financial parameters, a squeaking infrastructure and little or no funds to invest in safety and passenger amenities. As a matter of fact, the transporter’s estimated losses in passenger segment is estimated over Rs 30,000 crore in 2015-16 coupled with the steady decline of the share of railways in freight traffic from 89 per cent in 1950-51 to approximately 36 per cent in the last few years.

On the anvil is an independent authority for the Indian Railways that will be vested with powers to undertake various developmental activities. This in essence is the outline of a breakthrough reform being planned for the railways that will see power to fix fares being transferred from politicians to technocrats and based on economics rather than populist considerations. The proposed body – Rail Development Authority of India – is in keeping with the master strategy of technocrat Railway Minister Suresh Prabhu who is said to be keen to effect far reaching changes in the country’s largest employer without raising the hackles of its well entrenched unions, bureaucracy and the political class.

The IR has come out with a concept paper in this regard, according to which the proposed body will be an independent and quasi-judicial one with four key functions — recommending tariffs, ensuring fair play and level playing field for private investment in railways, determination of efficiency and performance standards, and dissemination of information such as statistics and forecasts related to the sector. The RDA would be housed outside the Ministry of Railways but funded through the annual railway budget sanctioned by the Parliament. The approved Budget would be placed at the disposal of the regulatory authority. It would also be permitted to arrange funds through adjudication fees, penalties levied and any other source as specified in the proposed Act.

According to officials involved with the drafting of the concept paper, “The proposed authority will be like any other regulator and have sufficient teeth to bite in case of noncompliance. The view is to expand the body beyond conventional regulatory work and increase its scope to make it more comprehensive. It is going to be one of the most crucial reform measures of the government.” The regulator’s task, as per officials, will also be to resolve disputes and ensure a level playing field for private investors. The presence of a regulator, they believe, will go a long way in improving the financial health of the railways and make it more attractive for private investment. The authority would also supervise private parties such as container train operators and those with whom the railways have signed licence agreements, such as vendors.

Union Minister for Railways Suresh Prabhu in his speech for Rail Budget 2015-16 had said that for orderly development of infrastructure services, enabling competition and protection of customer interest, it is important to have a regulation mechanism independent of the service provider. The concept paper has been prepared in line with that vision.

This time too, while presenting the Rail Budget for 2016-17 the Railway Minister emphasized the role of the proposed body. He said that the draft bill will be ready after holding extensive stakeholder consultations and a transparent and streamlined selection process will be taken up keeping Ministry of Railways at an arms length. He further said that this single initiative will provide immense confidence to the stakeholders.

The need for a Rail regulator has long been identified. The Rail Tariff Enquiry Committee 1997-80 emphasized requirements of a regulatory body entrusted with the task of expert examination (not a judicial examination) of tariff revision matters. Similarly, the Railway Convention Committee (2000) in its report endorsed the recommendation of Planning Commission for setting up of such an authority on the lines of Telecom Regulatory Authority. Dr Rakesh Mohan Committee which was set up to examine the revamping of Indian Railways had also reiterated the need for such an authority. The 10th Five Year Plan of Government of India while doing detailed appraisal of the 9th Five Year Plan had highlighted the need for a Rail regulator for fixation of rail tariffs and regulation of the activities of Indian Railways.

The Ministry of Railways itself had proposed to set up a Rail Tariff Authority through a Cabinet note in January 2014. The National Transport Development Policy Committee (NTDPC) report of 2014 had recommended setting up of a Rail Tariff Authority which should finally become the overall regulator encompassing other regulatory functions in addition to tariff. The report gad further recommended that an institutional mechanism to gather, analyse and use cost data and market intelligence needs to be established. Later the Bibek Debroy Committee report (2015) went into the detailed rationale and role for a rail regulatory authority and recommended a regulator with overarching functions.

Many of the countries like UK, Russia, US, Australia, Germany have regulatory structure in some form or the other.

The authority will discharge functions in a manner to protect the interest of consumers, ensure quality of service, promote competition, encourage market development, ensure efficient allocation of resources, provide non-discriminatory open access specially on Dedicated Freight Corridor (DFC) and will benchmark service levels for ensuring quality, continuity and reliability of service. The authority will initially be set up through an executive order and can be subsequently strengthened through legislative process.

The proposed regulator will consist of chairman and four other members who have experience and knowledge in railways, infrastructure, finance, law, management and consumer affairs. As per the draft, the selection committee for these positions will comprise Cabinet Secretary of the central government, a member of the Union Public Service Commission (UPSC) to be appointed by the UPSC chairperson, the chairperson of Rail Development Authority and where there is no such chairperson, the senior most member thereof (only for members of the authority), and the Chairman of Railway Board.

It may be noted that the preceding United Progressive Alliance (UPA) government had proposed to set up only a tariff regulator. But the present government has widened its scope to other areas in order to usher in private sector investments in the sector. At present, the tariff is set by the Union government. Earlier, the revised tariff was usually announced by the Union Railway Minister in Parliament but this practice was discontinued after protests by the Members of Parliament over any proposal to hike tariff. Recently, the government had increased tatkal booking charges by up to 33 per cent for travel in sleeper class, AC-III tier, AC-II tier and executive class through an executive order.

Keeping fares within affordable limits has led to cross-subsidisation of passenger services leading to erosion of railway’s market share in freight. The share of railways in the total freight transportation has declined from 89 per cent in 1950-51 to 36 per cent in 2007-08.

The authority will set tariff based on cost recovery principle and “what the traffic can bear.” All the direct and indirect costs such as pension liabilities, debt servicing, replacements and renewals along with productivity parameters, market-driven demand and supply forces and future investments will be considered by the regulator before setting tariffs.

Another command of the authority is to ensure level playing field for investors and it will be authorised to penalise cartelisation, abuse of dominance and other unfair market mechanisms. This will go a long way in facilitating investment in this sector whose full potential has not been tapped as “investors have generally been shy of investing in an industry where far too much is still being done or controlled by government and the risk or return trade-off is not always favourable.”

With financial health of railways taking precedence, the draft says that if the government does not accept the tariff suggested by the regulator, it will have to compensate the organisation appropriately, “possibly through increased allocations in the gross budgetary support or through a suitable mechanism”.

An appellate body is also proposed to be formed and the role, structure and composition of the body will be similar to regulators set up by the government in telecom and electricity sectors.

The bottom line is that it is a logical idea to establish an independent tariff and freight regulator for the railways which should have been done long back. An independent regulator will lessen the possibility of the railways being used as a political instrument by doling out freebies that are financially and commercially unfeasible. It will end the practice of freight and upper class passengers subsidising lower-class fares, and tariffs will reflect actual costs. Significantly, realistic tariffs will help rejuvenate freight transport by rail.

Guiding principles

The Rail Development Authority will exercise, perform and discharge the powers, functions and duties in a manner which it considers is best calculated:

  • to protect the interests of all consumers, by ensuring quality of service and cost optimisation;
  • to promote competition, efficiency and economy and prevent market domination, cartelisation and anti-competitive behaviour and for orderly growth of railways in India;
  • to encourage market development and participation of private sector in the rail sector for ensuring a fair deal to the customers;
  • to ensure adequate investment and promote an efficient allocation of resources in the sector;
  • to benchmark, where feasible, the service providers in the sector against international standards and specify and enforce standards with respect to the quality, continuity and reliability of service provided by them;
  • to provide non-discriminatory open access to the infrastructure, for use by any other licensee or consumers as the case may be, on payment of fee to be determined by the regulator; and
  • to promote equity of access and equitable geographical dispersion of services.

Role & Scope

The role of the Authority would have to be clearly demarcated. The areas which would NOT be within the purview of the Authority are –

  • Policy making: This is prerogative of the legislature and ministry and should remain so.
  • Financial / Expenditure management: Although the authority could suggest benchmarks that can guide decision making, the responsibility would remain with Indian Railways.
  • Setting technical standards: Though internationally, many regulators handle this responsibility, it is proposed to keep this out of the authority’s scope to begin with, but this could be included at a later stage, if required. Currently, this responsibility in Indian Railways is being fulfilled by Research Design and Standards Organisation (RDSO) and efforts are on to improve the processes. Further, the expertise developed by RDSO over the years, would be difficult to replicate in a short time frame with the regulator.
  • Compliance of safety standards and practices: Currently safety/technical standards are laid down by Indian Railways, while clearances/permissions are obtained from the Commissioner of Railway Safety, an independent body under the Ministry of Civil Aviation. The Commissioner of Railway Safety also investigates railway accidents/mishaps independent of Railways. This mechanism ensures independence while retaining the core knowledge required to audit railway safety operations.