The potential bidders attending the first pre-bid conference hosted by the Indian Railways (IR) last week had one pertinent question: how can the IR be an operator and also conduct the bidding for private parties to operate trains? A source privy to the details of the pre-bid meeting said that many participants in the conference wondered about such conflict of interest and some tough questions may be posed in writing by them, when the second such conference happens in August.
Uppermost in the minds of many potential bidders is getting the IR to establish a resolution mechanism for resolving future disputes on fares, service standards and other operational parameters, when it offers some of the trains to private operators. In other words, the bidders are seeking a clear regulatory mechanism before they come forward to place bids.
The need for a regulator has been discussed and debated for decades, even when the prospect of private operators was nowhere in the horizon. It has also been underlined for almost two decades by various committees. The first recommendation for an independent regulator was made in 2001 by the Rakesh Mohan committee, which wanted such a body to fix tariffs. This need was re-emphasized by several other panels, the latest being the Bibek Debroy Committee in 2015. In 2017, the Union Cabinet had approved the setting up of a regulator called the Rail Development Authority (RDA). But till date, it remains on paper.
Now, as the IR steams ahead with plans to offer about 5% of its network (151 trains) to private operators, the need for a regulator is being highlighted once again. The IR has initiated a two-stage bidding process to award 12 rail clusters to private operators. The bidder would be free to fix fares as per the concession agreement and levy other charges normally seen in air travel, such as those for preferred seats, luggage etc.
V K Yadav, chairman of the Railway Board, has also subsequently spoken of the need to establish a regulator but details - of the role of this proposed regulator and a timeframe within which it will be established -have not emerged. A spokesperson for the IR remained unavailable for comments.
Globally, rail networks perform efficiently because of independent regulation. Regulators function with different responsibilities across Europe. The ARAFER is the French railway regulator, which regulates fares besides ensuring fair access to the network by ruling on access charging disputes regarding infrastructure and station access. Germany had two separate regulators: 1) The Federal Network Agency BNetzA is responsible for ensuring non-discriminatory access and charges to operate on the network. This includes regulating the cost to operators to use the network (the Track Access Charges), reviewing principles for setting TACs and the allocation of network capacity. 2) The EBA is the regulator for technical and safety aspects.
In Japan, rail services are provided by around 200 companies. The Railway Bureau within the Ministry of Land, Infrastructure and Transport regulates the market through the control of fares (upper limit based on a margin on efficient costs); approving the introduction of new services (noting that new service introduction is a commercial decision by the Companies); and by providing some oversight on access charges. The MLIT is also the safety regulator.
In the Indian context, the approval for setting up of RDA came three years back when it was believed that the IR will continue to function wholly as a government owned entity. At the time, RDA’s role was merely advisory. Its remit included advising the government on pricing of services commensurate with costs; ensuring quality of service; benchmarking of service standards against international norms and enforcing standards on quality, continuity and reliability of services. So will the IR now consider setting up an economic regulator like the Airports Economic Regulatory Authority (AERA) or take up examples from other countries?
Manish Agarwal, Partner at PwC told Moneycontrol, “A typical economic regulator like in power or airports sectors would be ideal but that will require significant reforms in the IR. For example, separation of operations (which will compete with the private operators) and infrastructure management (tracks, signaling etc) could significantly address investor concerns but such sector restructuring does not seem to be on the cards as of now. I think what investors need is an empowered third party which can enforce operational commitments in the agreement and is sensitive to commercial requirements of the investor-operators.”
A stakeholder in the bidding process, who declined to be identified, said it was “critical” to have an independent regulator in place so that potential bidders feel confident of project viability. “This kind of operation is based on performance of both parties involved (IR and private bidder). One party cannot alone ensure quality of service to passengers. IR is providing the infrastructure while the private operator is investing and bringing in trains etc. So the track and signaling must be in good condition – else train punctuality and therefore service standards would suffer. Who will decide which party was at fault? So regulator is definitely needed. This regulator should be empowered to sort out disputes on fares and service parameters”.Ajay Shukla, retired Member (Traffic) of the Railway Board pointed out that only a minuscule number of trains were being offered to private operators, on conditions fixed by IR. “So actually successful bidders may be called contractors working for the IR since performance criteria will be fixed before hand anyway. This includes fares. And if this is the model for bids, then a regulator may have little to do”.