Rakesh Mohan Committee Report on Indian Railways - A Flawed Approach

The report of the Expert Group (Rakesh Mohan Committee) is a subject matter of much debate among the Railway personnel. Corporatisation/Privatisation is the buzzword of this Report. Is Corporatisation of the Indian Railways the only solution to the ills being faced by the railway organisation today? The Expert Group does not seem to be sure itself when it says, ". ..there could be other approaches".

Though the Committee has drawn the conclusions - which the reading of the report indicates are mostly inconclusive - by looking at other railway systems around the world particularly those of Japan, Germany, France, Britain, and Sweden, they still feel and rightly so "that our solution has to be our own". Then, why suggest a solution of which the Expert Group itself is not sure knowing well that tampering with a system as huge and sensitive as Indian Railways without being confident of the approach of so-called 're-invention' is bound to play havoc not only with the system but also with society and the nation at large for which the Railways playa crucial role.

The confusion in the minds of the Expert Group is perhaps because of the difficult nature of the task entrusted to them. The chairman of Expert Group Shri Rakesh Mohan is honest enough to admit in his forwarding letter while submitting the Report to Minister for Railways that "Indian Railways is a large and extremely complex organisation. ..it is not easy for outside experts to grasp the many complexities that govern the operations of this massive enterprise". Unfortunately, the complexities have not been grasped fully by the Expert Group in spite of the presence of a few retired or soon-to-retire Railway officers in this group composed of 18 experts majority of whom are outsiders and thus non-experts. How can bankers, management consultants, or a representative of an international vendor of locomotives or the head of a little known IT company have the necessary expertise to suggest ways to take the Indian Railways out of the financial morass they are in?

Whether the Railways should be managed by the State or by private companies or a mix of both was the question looked at by an expert committee as far back as 1920.The committee was headed by William Acworth who was a world-renowned authority on Railways. The Acworth Committee consisted of ten members, all experts either in Railway matters or finance and administration. The Committee supported the case for State management of Indian Railways in their report published in September,1921. Landmark decision about separation of Railway Finances from General Finances was also the outcome of this report. The report was accepted in 1924.

It is not our case that what was suitable in 1924 continues to remain suitable for all times to come and one should not review matters in the light of new developments. There is certainly a need to inject some life-saving measures in the system that is so vital for not only national economy but also for security and unity of the country .Is corporatisation the answer? Maybe, if economy is the sole consideration, then economists may well be the right persons to explore the remedy. That is, however, not the only purpose railways are required to serve in this country .They are integral to the unity and security of the nation. Therefore the observation of the Acworth Committee that "if there is one thing the Railway history teaches, it is that Centripetal forces are stronger than Centrifugal forces" remains valid even to-day. The dual nature of the system - a commercial organisation and a public utility service - has caused distortions in the financial management of the Railways. It is possible though to integrate both without causing financial loss to the enterprise and without Corporatisation of Railway administration.

The prescription given by the Committee for curing financial ailment is not even original or the result of any fresh mental application or grasp of the basic problems. World Bank has been suggesting this remedy whenever the Indian Railways approached them for financing of any project in early 1990's. The conditionalities for grant of funds recommended by the World Bank teams have always been: "corporatise its administration, privatize its various ofiline activities as also its captive production units and downsize its numbers." Similar recommendations and concerns were expressed by a Committee in 1997, which, was financed by the Bank to study "organizational structure and management ethos of the Railways. " As a result of all these suggestions some initiatives were taken to spin off some of the non-core activities like catering by setting up a separate corporation. That, there is a legitimate scope for privatization in some of the non-core activities of the Railways cannot be denied.

What exactly ails the Indian Railways? Why has it arrived at this critical period in its financial health? Before looking at this question, let us not forget that the financial health of the Indian Railways is linked to the national economy and vice versa. There are periods of ups and downs in every business including railway business. After State assumed full control in 1924-25,railway development passed through three-phases - exceptional prosperity up to 1930; unparalleled depression and then the phase of the Second World War. The Indian Railways were in such a bad shape in 1930's that moratorium on interest payments had to be declared. At the end of the World War, they were under real strain. They had had no time to recover from the effects of war when country's partition took place.

The regrouping and nationalization of Indian Railways was complete with the integration of Indian princely states and addition of another 7,560 miles to Indian State railway system by the time India became a Republic. All this was possible because of professional approach by the Railway Board and the recommendations of Kunzru Committee in the background canvas of an understanding political leadership. The problems of rehabilitation and replacement carried over from the Depression of 1930's which had remained neglected during the Second World War and the consequent problems of strained railway resources that had got further accentuated in the wake of partition became the immediate concern of the Railway planners.

In the First Five Year Plan, the special emphasis was on rehabilitation and replacement. The focus of next two plans was to build up adequate transport capacity so as to meet additional traffic requirements. Fourth Five Year plan renewed emphasis on modernization of railways and improvement of operational efficiency. During all these years, Indian Railways were on the right track. It is, therefore, not correct to say as the report says that " the planning system used by IR is one of the most powerful mechanisms ever designed by mankind to avoid change and embed (sic) the status quo." This is grossly unfair to the visionary planners who were responsible for the remarkable turn-around of IR in the 80's as well as in some other periods of IR's glorious history. It is for nothing that the late Shri Madhav Rao Scindia's period is known as the golden period of Indian Railways. Modernization of Indian Railways with Computerization of Passenger Reservation System (PRS); fast inter-city trains and quality of service did wonders for Railway finances as well as for the morale of the Railway men.

Unfortunately, thereafter the decline started again. As the 'Expert Group' has also realized, 90's were a bad decade for IR. Arbitrary announcement of projects which flouted even the basic procedures of scrutiny were the order of the day. The profligacy in selection of projects was obvious when earlier planning on the basis of 5% growth in freight traffic was altogether shelved and instead the scarce resources were diverted to populist and unproductive schemes like gauge conversions; laying of unremunerative lines; creation of new railway zones etc to suit the political ends of the Railway Minister of the day.

The rot that had set in during the period indicated in the preceding paragraph was so extensive and grave that in the White Paper presented to Parliament in '98, the Railway Minister (Shri Nitish Kumar), listed the number of unviable projects which required a wobbling Rs 30000 Crores to get completed. Today, the funds required for the pending projects are nearing the figure of Rs 40000 Crores, two-thirds ofwhich is for unviable projects.

Thus while the scarce resources were sunk in unremunerative projects, the budgetary support was reduced and the share of IR in the Plan Outlay was drastically cut. Added to this were the rising staff and fuel costs. The situation has come to such a pass that for earning every rupee, IR is spending 99p. Where is the money left, then, for investment on replacements, renewals, modernization and capacity expansion ? The financial crisis is, therefore, very real and staring us in the face. The nature of the ailment would be rather obvious to any aware citizen or intelligent layman. It did not require an Expert Group to identify this. What, then, is the remedy? How to bring about a turn-around? That should be the immediate concern of the nation.

Raise resources, cut down costs. That is, however, possible if IR is given the freedom to raise or reduce fare and freight depending on the pull of market forces. The Expert Group thinks that can be possible only when IR is converted into a Corporation. There will be greater freedom in pricing and Government control will be minimized. This is a fallacious argument. Are the Corporations free from Government control or political interference? Even the Navratna companies are not free from such control or interference. Since public interest cannot be separated from a utility like railways, government control cannot be faulted.

The Expert Group need not have to look around the world to know that. Even the global experience, they are referring to has not been updated by the developments after privatization. Take the case of RailTrack in U.K which has been an utter disaster after privatization so much so that the first step towards renationalization was taken by the U.K Government on October 7 this year when they placed RailTrack under the control of Govt-appointed administrators by obtaining an order from British High Court. The Company was indeed so badly run that it failed in its basic job of moving passengers from A to B. Delays and accidents became frequent because RailTrack kept profits before safety. The horrific accident at Paddington in 1999 and derailment at Hatfield last year convinced the Government that this arrangement had to go. It was an eye-opening major corporate collapse. Even the British Prime Minister said at the Labour Party Conference on 2nd October, that rail privatization was a disaster. It was due to the inherent contradiction between the goal of a company that was to maximise profit and the nature of the business from which public interest cannot be separated. The functioning of privatized RailTrack was termed as 'monumental incompetence'. The fact that the privatized company had to go to Government with begging bowl for subsidy to pay dividend to its Shareholders clearly and abundantly proved that it made no commercial sense to privatize British Rail. It is, therefore, ironical that the Expert Group is proposing for IR from the experience of U.K among others what they disposing off on the basis of their experience post-privatisation. The post-privatisation experience of other countries like Japan is also none too happy.

As for the World Bank formula on Corporatisation/privatization by which the Expert Group is obviously much influenced, one has only to quote Joseph Stiglitz, one time economist of the World Bank and now a Nobel Prize winner in economics. In his very recent interview to the ' Observer' of London (dated October 10), he stated that the World Bank prescribes exactly the same 4-point programme for all nations and ends up destroying their economies. Privatization, which. Stiglitz calls 'Briberization' is one of these. The criticism may sound too harsh but is certainly not without basis.

Thus the solution to IR ills as suggested by the Expert Group is a borrowed one and stands largely discarded because of bitter experience with privatization in this sector. The Expert Group, it seems, could not think of any solution relevant to "socio-economic realities" of India and has gone by what has already been handed out or adopted for the sectors like the Telecom Sector with a Corporation and a regulatory authority (TRAI) in place. There too the functioning of the sector and the role of regulatory authority has not inspired much confidence. The Expert Group accepts that the arrangements put in place in Telecom Sector in India is also "in some process of flux". Then, why recommend such an arrangement for the Railways?

Another thought that has gone into this recommendation is the inability of the Central exchequer to meet with the requirement of funds for IR in view of its own none-too-happy fiscal condition where the abnormal increases in its non-plan expenditure has left it with limited funds to spare for IR. The Expert Group assumes that after conversion into a corporation, IR would be able to raise resources from the public. Is this not too facile an assumption, if not altogether unrealistic? Railway business can never be that profitable so as to attract investors with large portfolios for investment. Thus the amount of money required for what the Group calls 'strategic high growth scenario' to the tune of Rs 199,630 crores cannot come by from external sources. Borrowing from external sources would mean placing heavy debt burden on the system that it may not be able to meet in spite of the ambitious scenario envisioned by the Group. The Expert Group itself concedes that governmental support is absolutely necessary during the initial phase of restructuring which would require an estimated expenditure of 70,000 crores for the first five years of the High Growth Scenario. The share of GOI has been recommended to be 40% as preference capital to be serviced at 1 %. This 40% comes to be Rs 28,000 crores. From where GOI with its own ailing fInances will provide this staggering sum? Such a recommendation, once again clearly demonstrates the casual and unrealistic nature of the whole exercise.

The theme goes on like this: Central exchequer cannot help the Railways because of its own bad fiscal condition but it should help the IR in the initiaJ year of its 're-invention' as a corporate body. As if Indian Railways re-christened into Indian Railways Corporation with the Railway Board revamped as the Indian Railway Executive Board and a Rail Regulatory Authority in place will work as Aladdin's lamp to pave the way to a cave full of gold! The institutional separation of roles mechanism is flawed in its very nature. The Expert Group itself is doubtful of the credibility of the model suggested by them. That is why, on the one hand they are suggesting a model drawn from 'global experience' and on the other hand they themselves reject those compulsions, which drove Europe to privatization not being applicable to this country. In the face of doubts, contradictions and uncertainties expressed in the Report, are the' conservatives' not genuinely alarmed that the Indian Railways are simply too important to be experimented with. Billions of passengers, 1.5 million employees and 40% of the nation's freight cannot be made guinea pigs.

What the Indian Railways, therefore, require is 'Repairing' rather than 'Reinventing'. When the sickness is diagnosed properly, then the right cure would also be available. While IR may have no control over staff costs, some areas can still be identified for pruning the expenditure on establishment. For example, why have so many Recruitment Boards when one Railway Staff Commission on the pattern of Staff Selection Commission would suffice .In the light of modernisation and computersation, a large number of posts must have become redundant. Some of the non-core activities like sanitation, catering, Yatri Niwases etc can be privatized. The Expert Group has included in the list identified by them of non-core activities railway hospitals, research and production units and security too .If the railway employees do not have their hospitals, where do they go for medical facilities. The pressure on the inadequate medical infrastructure in the country will go up. Similarly, security is one item, which cannot at all be shunted out in the present day world of terrorism. After September 11 , many of the world' s airlines had to greatly tighten their security . Other modes of transport are also attractive targets for terrorists. As we are all well aware, trains in India have already been targets of many blasts. How can in such a scenario of insecurity Indian Railways can spin off their security concerns to private players? As regards production units, these can be corporatised but then the Indian Railways remain the sole buyers of Rolling Stock from these units with its own attendant problems in such an arrangement.

Indian Railways are passing through a bad phase. The Government should realize it and bring it back to health. Rationalizing fares and freight; scrapping of unviable projects; support of funds for accelerated completion of remunerative projects and catching up with renewal and replacement work would nurse IR back to health. Indian Railways also require a new vision - not the one recommended by the Expert Group (it is a blurred one). In the post-September 11 world, airline travel has become highly unsafe, inconvenient and costlier. Here is an opportunity for IR to capture the Upper Class travellers by providing faster, comfortable and safe travel. Look at AMTRAK of U.S.A post-September 11. A new challenge has been thrown upon it and it is carrying more passengers than it ever could think of. The future of IR lies in passenger traffic and that too the long distance one. It is high time that a roadmap for meeting this requirement is drawn up. It is in this area that the Indian Railways have to 're-invent' themselves. Suggesting corporatization for Indian Railways, so vital to the unity and integrity of the nation is somewhat like suggesting corporatizing the defence forces of the country because running the IR network requires similar kind of discipline and commitment. !

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Mrs Aarti Khosla,

IRAS (retired)