Is privatisation the way forward?

A government panel constituted to suggest ways to overhaul the Indian Railways has recommended the entry of private players to run passenger trains. While there was also talk of an eventual private sector role in freight, this is the first time a move is being contemplated to bring it into the running of passenger trains. The panel headed by NITI <g data-gr-id="61">Aayog</g> member Bibek Debroy has recommended the entry of private companies in operation and maintenance of railways, and has pitched for attracting talent from outside for a radical overhaul of the state-owned white elephant. As India struggles to deal with the monolithic mammoth (railways), it could perhaps look towards the West for answers. 

The National Railroad Passenger Corporation, doing business as Amtrak in the USA, is a publicly funded railroad service operated and managed as a for-profit corporation. As of 2014, Amtrak posted record ticket revenues for its Fiscal Year 2014 ending September <g data-gr-id="38">30,</g> and achieved an increase in ridership over the prior fiscal year, reflecting strong continued demand for passenger rail. Britain’s experience in this regard is also quite instructive. The Railways Bill, published in 1993, established a complex structure for the rail industry. British Rail was to be broken up into over 100 separate companies, with most relationships between the successor companies established by contracts, some through regulatory mechanisms (such as the industry-wide network code and the multi-bilateral star model performance regime). Contracts for the use of railway facilities - track, stations and light maintenance depots - were to be approved or directed by the Office of Rail Regulation, although some facilities were/are exempt from this requirement. This step was important as a policy move because it unbundled tricky layers in the corporation. Contracts between the principal passenger train operators and the state were to be called franchise agreements, and were first established with the Office of Passenger Rail Franchising (OPRAF), then its successor the Strategic Rail Authority and now with the Secretary of State for Transport. 

Britain’s experience with privatisation is symptomatic of the larger debate surrounding the pros and cons of increasing and decreasing public sector spending. A landmark study by economists Latika Chaudhary and Dan Bogart in this regard analysed the challenges faced by the Indian railways during the British Raj and came up with the following insights. Using a novel data set on the principal Indian railway systems and by comparing changes within systems, they found a switch from private to state ownership reduced working expenses by a massive 14 percent-controlling for a variety of factors including railway specific trends. The results were not due to anticipation effects or short run cost reductions at the expense of long-run cost increases or safety. In other <g data-gr-id="44">words</g> the switch did not have the anticipated side effects. 

A switch to state ownership reduced costs for a period of 20 years. After taking over private companies, the erstwhile British Government of India achieved cost declines by reducing employment of all workers <g data-gr-id="41">and in particular</g> European workers. Moreover, these gains did not come at the expense of quality. The economists attributed their results to a combination of weak regulatory incentives, oversight and enforcement under private ownership and strong state objectives to minimize costs under state ownership. When the government took over private companies, they were finally successful in introducing stronger incentives to improve efficiency that lead to significant cost declines. Overall the Indian case supports the view that as regulatory capacity, accountability and fiscal effectiveness improves, incentive structures become stronger and cost efficiency increases. What the studies essential takeaway is this: state ownership in some cases is much more beneficial than privatisation. State ownership may not necessarily mean inefficiency in the long run. Any which way in the immortal words of John Maynard Keynes, “In the long run we are all dead”.