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12 June 2015

Let Railways Make Economic Sense: Debroy Committee

The recommendations are not driven by a doctrinaire free market philosophy. It’s a pragmatic approach towards making the department viable.

I
 have procured a copy of the recommendations of the “Committee for Mobilization of Resources for Major Railway Projects and Restructuring of Railway Ministry and Railway Board” headed by eminent economist and NITI Aayog member Bibek Debroy.
Bibek Debroy
In the report, the advisers recommended an overhaul of the entire system from decision-making structure to accounting systems, from human resource management to budgetary relationship between the government and Railways, from financing to regulation and implementation of policies and programmes.
Advocates of liberal economics who must have turned ecstatic over the talk of trains by private companies in this morning’s newspapers must note that even the existing private domains are functioning below par because of confusion over returns on investment and the uncertainty of political intervention in their work, the committee has observed.
Welfare
In a measure that is bound to irk existing employees of the Railways as well as make it unattractive for candidates who aspire for a job in the sector for its perks and comforts, the Debroy Committee has recommended that all “off-line” activities such as hospitals, clubs, catering, real estate (for example, providing employees with living quarters), etc be delinked from the department. But this would make eminent economic sense, as no state-run public transportation system even of the most welfare-driven socialist states in well managed economies carry this “un-remunerative” burden.
For that matter, since the government does not hire and fire on the basis of need and performance, manufacturing of locomotives, coaches, wagons and their parts wouldn’t be a cost-effective operation. And so they must not be part of the Railway portfolio either, the committee argues.
That does not, however, mean that the committee wants even the welfare measures to disappear. Schools for wards of Railway employees may be moved to Kendriya Vidyalayas, Debroy & Co have suggested.
Similarly, medical care is not being privatised either. The committee “recommends that for functions such as periodic medical examination, pre-employment examination, medical boards, safe water and food supply at stations etc., the GMs/DRMs as well as the employees could be given the choice to opt for services either through IRMS or through private empanelled practitioners. For preventive and curative health care of employees, the choice may be extended to the CGHS framework and subsidized health care in private hospitals should not be restricted only to referral services.”
The BR Singh Hospital in Kolkata, a medical facility of the Indian Railways
As for security, the committee recommends that state governments bear the cost of the Government Railway Police (GRP) while the general managers and divisional railway managers should be free to choose between private security forces and Railway Protection Force (RPF).
Money for salaries and pensions
The Railways has been finding it extremely difficult to pay the ever-burgeoning size of pensioners. If the Sixth Pay Commission made it “unmanageable”, the Seventh in 2016 would threaten to cripple the railway economy. Therefore, for the department’s “long term-economic viability, customer satisfaction and for being adaptive and flexible organization, the Indian Railways should focus on business/customer units like freight business, passenger business, suburban business, parcel business etc.” This happens to be a recommendation of the previous committee on railway reforms, too.
This portion is ambiguously worded. It does not explain where the money for ever-increasing salaries and pension will come from. Is it being suggested that every “business unit”, as the report calls the different wings of the railway department, will be responsible for payment to its respective small units of employees and pensioners? No, assured Bibek Debroy to me. If the government has these small cost centres, if not profit centres, he said, it will get a clearer picture of the earnings and expenditure of each. “At least you know it is becoming clean,” Debroy said.
Now, if the government accepts this recommendation — more on this in the section on decentralisation — the hurdle it has to cross is trade unionism. The unions are expected to misread the new policy as the State asking these units to perform like a market operator, which would mean winding up of some units altogether if they are found unwanted by customers in large enough numbers!
They must note Bebroy’s quote: “We are just flagging (the issue of retirement). It is going to worsen. The bunching of retirement is probably going to be over by 2018. Once you can tide over this period, you will be in better shape. This is not a solution (to paucity of funds for pension); this is just flagging the issue.”
Decentralisation
The money that DRMs have the power to use in projects is available in absolute monetary terms as of now. The committee proposes that this fund be linked to inflation so that the officer on ground is not stuck with paucity when prices of goods involved rise. If the recommendation is approved, the divisions will run as “independent business units”. The panel has further proposed that “the head of the zone (GM) must be fully empowered to take all necessary decisions without reference to Railway Board within the framework of policies”.
But the problem did not lie in money alone. Perpetual centralisation of the department sapped team spirit out of railwaymen and they turned inward, competing with colleagues to be in good books of the bosses and thus turned insensitive to customers (passengers), the committee notes.
To address the issue of intra-departmental squabbles for promotions, the committee has asked for an institutional mechanism to ensure that selected officers once positioned against general management posts continue to perform that role for their residual careers.
Once the zones are made autonomous, the Railway Board will have little role to play in their day-to-day functioning and can become like a corporate board for IR — policy being determined by the Ministry of Railways and competition being ensured by the Railway Regulatory Authority of India (RRAI).
Programme implementation
Among the agencies that execute Railways’ projects, organisations of different zones have been found too “large and unwieldy” to be effective and, hence, recommended to be brought under PSUs such as Rail Vikas Nigam Limited (RVNL) and Indian Railway Construction (IRCON) Company Limited.
To address the issue of unwieldiness, the committee also seeks to merge five technical services into one and three non-technical services into another — if bringing them all in one group is found to be not feasible. The five of the first category are Indian Railways Service of Engineers (IRSE), of Signal Engineers (IRSSE), of Electrical Engineers (IRSEE), of Mechanical Engineers (IRSME) and of Stores Service (IRSS). The three of the second are logistical: Indian Railway Accounts Service (IRAS), Personnel Service (IRPS) and Traffic Service (IRTS).
Financing projects
Improvement in internal resource generation and utilization of available resources, and exploration of varied methods of financing are the committee’s solutions for the Railways to emerge from its “precarious” economic condition. It recommends of review of the large shelf of projects that have gone into time and cost overruns “from a zero base budget perspective”. Only the small languishing projects can be fully funded — under the condition that they be completed in two years. Others are no longer commercially viable.
Maintenance
Services such as cleaning of trains and stations, IT initiatives etc are performed in parallel by multiple agencies “resulting in sub-optimal performance”. The committee therefore finds a need to integrate and synergise such functions.
Maintenance staff working on the tracks at an Indian Railways station
Accounting
Since government funding for the Railways has successively reduced as different ministers have all looked for investments from private parties for peripheral-to-core services, bad accounting practices acts as a deterrent for investment — as it confuses the planner about costs and the potential investor about a definite return on investment. The committee has, hence, recommended that Railways switch to commercial accounting. “This Committee recommends establishment of a responsive and transparent accounting and costing system as the first stepping-stone to a commercially viable Railway system,” the report says.
“Until you know what the rate of return is, whether it is public or private money, why should someone come and put his money (into a project)?” Debroy reasons. “I am borrowing, let us say, at 8 per cent — either through IRFC or from the Japanese — I have to repay that. If my average return on a project is less than 2 per cent, how am I going to pay back?”
“Let us prioritise the projects,” Debroy said, “and only choose the ones that are viable or the ones where I have explicit budgetary support — either from the national or a state government concerned.”
On budgets, the panel observes that the government spends so much on revenue expenditure that it has little to pour into capital expenditure. And then, the Railways pays high dividends. As a solution, the committee has proposed a “review the dividend policy for IR and provide it with a GBS (Gold Bullion Securities) net of the dividend payment. This would enable the IR to apportion more money to its DRF (Depreciation Reserve Fund) for asset renewal aligned to its arising.”
“There is plenty of scope for cost saving if you decentralise. Decentralise not only to the level of the DRMs but even further down! You allow the DRM to choose — since he has an independent cost centre — whether, say, he picks security personnel for trains from the RPF or elsewhere.”
Winding up the conversation, Debroy disapproved of the way The Times of India has interpreted the report. The recommendations of the committee have been lying in some computer of the Railway Bhavan for some time. A staffer must have leaked it, resulting in a “petty” story by the said newspaper, the eminent economist believes.
The discontinuation of Railway Budget ultimately and its replacement with a regulator, which the newspapers have talked about, actually figures in this form:
Observing that the private sector entered Railways in 1992, the committee also noted that the schemes for private players “failed to serve the goal due to high costs and lower returns, policy uncertainty, lack of a regulator to create a level playing field, the lack of incentives for investors, and procedural/operational issues have significantly restricted private sector participation.”
To prevent the same organization from dealing with the the prime functions of policy making, regulatory function and operations, the committee strongly recommends establishment of an independent regulator: the Railway Regulatory Authority of India (RRAI), with a separate budget and to be independent of the Ministry of Railways.
“The RRAI will have the powers and objectives of economic regulation, including, wherever necessary, tariff regulation; safety regulation; fair access regulation, including access to railway infrastructure for private operators; service standard regulation; licensing and enhancing competition; and setting technical standards. It will possess quasi-judicial powers, with appointment and removal of Members distanced from the Ministry of Railways. The issues like consumer complaints, including class action complaints will not be addressed by RRAI,” the report reads.
This is the most significant step recommended for depoliticisation of the Railways. After all, a separate Budget for the Railways is a British imperial legacy that has outlived its utility — now only serving the purpose of successive railway ministers (not the current one) brazenly overloading the tracks that pass through (or lead to) their respective home states. The propensity to artificially keep the passenger fares lower has not served the department either, even as the freight service continued to dwindle.
Other panellists in the committee were Kerala State Planning Board’s KM Chandrasekhar, former CMD of Procter & Gamble Gurcharan Das, former MD of the National Stock Exchange Ravi Narain, Prof Partha Mukhopadhyay of Centre for Policy Research, former financial commissioner of the Railways Rajendra Kashyap, Department of Economic Affairs’ Ajay Tyagi and Department of Expenditure’s Ajay Narayan Jha.
On a sombre note, the committee has noted that the recommendations of the previous committees have hardly been implemented.
Report of the Committee for Mobilization of Resources for Major Railway Projects and Restructuring of Railway Ministry and Railway Board: part 1, part 2 and the concluding part.

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Surajit Dasgupta treats no individual, organisation or institution as a holy cow.