Introduce Regulator in Indian Railways by U.S.Jha. IRTS M.Phil PGPPM

Introduce Regulator in Indian Railways

With the growing trend of globalization, privatization and liberalization since 1980 government in many countries have recognized the need to reassess the performance of the infrastructure sector- until recently, infrastructure services including railways were developed and provided by natural monopolies. However, the experiences of many countries have shown that a competitive market can deliver these services in an effective manner. Private investment and separate regulation, a new form of governance in infrastructure sectors, which evolved during the last few decades in the U S, U K, and some Latin American countries, are required to be pursued even in India. It may be noted that the attempt of private investment in the Indian Railways (IR) and creation of a regulator is not going to be a smooth sailing and the barriers and challenges to such initiatives are going to be many, especially where there is no long history of good governance. However, one need not to be pessimistic and despite all odds India can develop own Indian model and can make it successful.

When one look around, in the initial years of regulatory experience in India, the general perception is that regulatory agencies have had little positive influence on sectoral growth and development. The causes are complex and sector-dependent, but include, among others, a combination of lack of regulator independence, credibility, enforcement authority and accountability. Despite some amount of participation by the private sector in the recent past, infrastructure industries in India are dominated by state-owned entities. They have been, no doubt, undergoing some transformation, through increased private participation and market development. In this process regulation has been and will continue to be essential to bring credibility, certainty and sound rationale to the terms and conditions of private sector involvement and market development, while also insulating them from government interference. Where privatization and private investment takes place, the contract negotiation process is often politicized and opaque. As experienced in other countries, regulation has leaned heavily toward private sector promotion and protection, often without much success, and at the expense of consumer interests. Virtually there are insufficient checks and balances in the current regulatory framework (even though lip service to that effect exists in various applicable laws) to protect consumer interests. Regulatory procedure needs to be better formalizing into a more transparent and accountable process of governance (Narasimha Rao and Subhashish Gupta, 2005).

Meaning of Regulation

Before one enters in this debate it would be interesting to analyze the meaning of regulation. According to Selznick, regulation is sustained and focused control exercise by a public agency over activities that are valued by a community. For Baldwin and Cave regulation is an activity that restricts behaviour and prevents the occurrence of certain undesirable activities. Regulation may also be enabling of or facilitative to conduct operations in an ordered manner rather than left to the potential chaos of an uncontrolled market (1999, PP-2). Motives for regulation can be different from the technical justification. Whenever there is monopolistic or natural monopolistic situation with windfall profit or prevalence of externalities, information inadequacies, anti competitive behaviour and predatory pricing, unequal bargaining power, scarcity or question of continuity and availability of services, coordination and planning the need for regulation arises. There are several theories to explain regulation. Public interest theorists (J. M. Landis, I. McLean and C. Foster etc.) believe that the purpose of regulation is to achieve certain publicly desired results in circumstances where, the market would fail to yield these. Interest group theorists (Mitnick, M. H. Bernstein, G. Wilson, Francis, P. Self, O. Newman, L. Hancher and M. Moran) see regulatory developments as the product of relationships between different groups and the state from open-ended pluralism to corporatism. Private interest theorists (George Stigler and Sam Peltzman, R. Posner, W.A. Jordan, G. Becker, etc.) stress the extant to which regulatory developments are driven by the pursuit not of public or group but of private interests. Institutional theorists (J. March, and J. Olsen, J. Meyer and B. Rowan, W. Scott, T.A. Koelble, etc) centre on the notion that institutional structure and arrangements, as well as social processes, significantly shape regulation – that there is more deriving regulatory developments than mere aggregations of individuals preferences.

A state or other agency adopts the following methods for regulation: -

• To command – where legal authority and the command of law is used to pursue policy objectives.
• To deploy wealth – where contracts, grants loans, subsidies, or other incentives are used to influence conduct.
• To harness markets-where governments channel competitive forces to particular ends.
• To inform – where information is deployed strategically.
• To act directly – where the state takes physical action itself.
• To confer protected rights – where rights and liability rules are structured and allocated so as to create desired incentives and constraints. (Baldwin and Cave, 1999, PP: 3-45)

Thus, regulation provides perspective for private investment, safeguard of investors’ interest and protection of consumer interest.

Railways in India

Although railways in India started as private initiatives, it was nationalized during the British period itself in the year 1886 with a view that the facilities required for rendering infrastructure services were natural monopolies and a single provider would be able to offer them economically. It was believed that vertically and horizontally integrated units would be better placed to provide these core services. Besides serving the colonial British interest and military needs of British imperialism it was also believed that monopoly power in such core areas should rest with the public sector to protect the consumer from exploitation by the profit motive of a private provider.

Although Indian Railways (IR) is considered to be the most efficient government department asserting the presence of the integrating factor of the Indian state, and its reputation is as a department which can deliver services properly with making profit year after year and contributing to the government exchequer. But when we compare this, with some developed countries like France, Germany, the U S A or even China we find that some thing is missing in the IR. One may feel that the absence of competition over the year has led to operational inefficiencies, poor quality of services and inefficient allocation of resources. IR’s inability to provide good quality services stymied economic growth and adversely affected India’s competitiveness in the rapid globalization-taking place. Quite often the prevailing bottleneck between the four metropolitans and diagonals and some other busy routes and poor quality of infrastructure framework has affected India’s economic growth including de-motivating prospective investors to invest in India. Some of the specific constraints being felt in IR were: -

· An increasing inability to fund much needed expansions, particularly between the four metropolitans and diagonals and some other busy routes.

· Inadequacy of budgetary allocation for infrastructure development of IR.

· Need for additional resources to finance the new projects of IR.

· Non-assured, non-guaranteed or poor quality of services largely due to managerial and worker apathy towards the consumers. This lead to inability of IR to provide transport services in an efficient and commercially sound manner.

· The inability of IR to benefit from technological changes, like high-speed trains of France or Germany or heavy haul goods trains.

· The increasing need for high quality infrastructure services to remain globally competitive. No doubt, there is need for efficient and cost effective transport services in an efficient and commercially sound manner.

An assessment of the performance of some of the developed countries like USA, Japan, UK, France, Germany etc railways’ system and other infrastructure sector like telecom, electricity, air transportation etc in many countries lead to the belief that market forces and competition could improve the provision and delivery of services without affecting the economies of scale. Besides, several technological advancements have taken place that has altered the traditional perceptions about economies of scale. These changes have enabled an unbundling of the sector, hitherto not considered to be feasible and permitted a separation of natural monopolies from those that are not necessarily so. Such an unbundling has permitted competition in segments that are not natural monopolies. (Agarwal and Paul, 2001: pp3-15).

Fear of Privatization and Stunted Growth

Given the restricted growth of Railways in post independence India, there is significant need for private investment. However privatization and foreign investment in the railways are viewed with lot of skepticism, as the common fear is that privatization will lead to unemployment and foreign investment will lead to draining out of national wealth to foreign country. At the same time a small subsidy or petty budgetary support is not helping IR to grow in a robust manner. There is great paucity of fund for the development purpose and to meet the challenge of the growing economy, which is illustrated by the fact that the share of road traffic has been growing continuously since independence. In 1951 IR was carrying 89% of freight traffic and 80% of the passenger traffic. However, with the economic development and increase in GDP along with increased activities of the private sector this monopoly has started dwindling down. Today IR faces tough competition from the road sector and most of the traffic has shifted to the road. In 1951-52 the road was carrying 11% of freight traffic and 20% of passenger traffic. By 1996-97 this share of road has improved phenomenally and it was carrying 60% of freight and 80% of the passenger traffic.

Year after year IR is losing its share to the road sector as shown below: -

Table No. 1

Year	Combined Cargo (Million Tonnes)	Railways (Million Tonnes)	Roadways (Million Tonnes)	Rail-share (%)	Road-share (%)
2001-02	2046.10	492.50	1553.60	24.07	75.93
2002-03	2194.18	518.48	1675.70	23.63	76.37
2003-04	2405.29	557.39	1847.90	23.17	76.83
2004-05	2665.09	601.89	2063.20	22.58	77.42
2005-06	2971.71	667.39	2304.32	22.46	77.54
2006-07	3464.25	728.41	2735.84	21.01	78.99

Source: The Economics Times 27th February 2008

Despite having best ever performance of freight loading of 790 MT in 2007-08 the share of Railways in total freight business has come down from 21.01% to 20% (approx). This is despite having best operating ratio of 76.3 %. Thus, there is certainly a need of looking beyond the existing framework or out of box thinking. If private participation and or deregulation measures can improve growth rates, then the employment curtailment argument does not hold good ground (Hazra 2000).

Adopting a realistic approach we have to accept the fact that in a democratic set up socialist goals are good, but should not be at the cost of development. Till date, inhibition for privatization has become a root cause of stunted growth of IR. Although complete privatization may not be correct policy initiative, we have to accept the fact that at this stage of economy when the government does not have sufficient fund to give full fledged development of the Railways, to extract the full benefits of the economic development or higher GDP growth or to facilitate higher GDP growth as infrastructure has been widely as a major bottleneck for the economic growth in India, we need to look something beyond. In this scenario, the role of government could not remain as that of a controller, but that of a facilitator. Thus the government should initiate deregulation and positive regulation so as to ensure proper or free and fair competition, which can translate into better services.

The Theoretical Analysis of IR

The basic functioning of IR can be evaluated on the prism of general equilibrium theory. This theory specifies the conditions under which the decisions of utility maximizing consumers and profit maximizing firms will lead to the inevitable, spontaneous establishment of equilibrium in all markets simultaneously. This is established only when competitive forces led to the equality of marginal benefit and marginal cost in the market for every single commodity and service. There is a direct link between general equilibrium theory and welfare economies.

Thus, general equilibrium is both productively, as well as allocatively efficient. From a consumer’s point of view, the proper functioning of market is beneficial. However if the conditions of competitions are not attained, it is possible for conditions of general equilibrium to hold. There are four conditions under which the market fails. They are – (a) monopoly and market power (b) externalities (c) public goods, and (d) severe informational asymmetries. These all condition exist in case of infrastructure facilities, Particularly railways in India. In this perspective the development of railways in India has not been on the line of the competitive demand and supply theory. Rather it has been developed as monopoly of state, or as ‘natural monopoly’ as it was felt that the growth could be more balanced and equitable if the railways function under single organization due to economies of scale.

Growth during British Era and Post Independent Era

Once the IR was accepted as ‘natural monopoly’ and got total government support that it made a very robust growth. From 39603 KM in 1900, it had gone up to 61232 KM in 1925 (This included railways lines of present day Pakistan and Bangladesh). At the present time the situation has changed drastically. In terms of route KM it has increased marginally from 54376 KM in 1947 to 63310 KM in 2007-08. Investment on IR no longer occupies a position of budgetary preponderance as in the pre-independence period. While the government expenditure on railways as a percentage of total public investment stood at 53.7% and 58.3% respectively in the period 1860-1918 and 1919-1946, according to 8^th plan it stood at 6.1%. During 9^th and 10^th plan it went down further to 5.7% and 5.5 % respectively. During 11^th plan (2007-2012) it is likely to be somewhere around 5%. (The transport sector allocation during 11^th plan is Rs 572443 crore).

This kind of restrictive availability of fund for development has resulted in stunted growth of IR as illustrated in the following table: -

Table No. 2

Year	Popu-lation (Crore)	GDP (000 crore) (At 1999-2000 Price)	Railways			Roadways
			Route Length	No. of Coaches	No. of Wagon	Length of Roads (000KM)	No. of Goods Vehicle (Thous and)	No. of Buses (000)
1950-51	36.1	552	53596	19628	205596	400	82	34
1960-61	43.9	330	56247	28439	307907	525	168	57
1970-71	54.8	474	59709	35145	383990	915	343	94
1980-81	68.3	641	61240	38333	400946	1485	554	162
1990-91	84.6	1083	62367	38511	346102	1998	1356	331
2000-01	102.7	1864	63028	42675	222193	2447	2948	634
2003-04	107.2	2222	63221	46119	228170	2713	3748	768
2005-06	110.6	2612(pro.)	63310	--	--	--	4782	934
2006-07	112.2	2864(quick estimate)	--	--	--	--	--	--

Source: Economic Survey 2007-08. Table No. 0.1, 1.26, 1.28

It is clear from the above table that between 1950-51 and 2005-06 there has been three time increase in the population, five time increase in the GDP, seven time increase in the length of road, fifty eight time increase in the number of trucks, and twenty eight time increase in the number of buses. But in IR the growth has been abysmally low. IR’s route length has increased only 1.18 time, number of coaches increased only 2.35 time and number of wagons increased only 1.11 time. Now, when population is growing and economic activities are growing, particularly in last 10 years it is not possible to retain the same customer base. Although the IR has improved its productivity as shown in the following table its market share has declined as shown earlier

Table No. 4

Year a	Originating Traffic (Million Tonnes)	Goods Carried (Billion tonne-KM)	Goods Earning (Rs. Crore)	Originating Passenger (Million)	Passenger Kilometers (Billion)	Passenger Earning (Rs. Crore)
1950-51	93	44	139	1284	67	98
1960-61	156	88	281	1594	78	132
1970-71	197	127	601	2431	118	296
1980-81	220	159	1551	3613	209	828
1990-91	341	243	8247	3858	296	3145
2000-01	504	316	23045	4833	457	10515
2003-04	581	384	27403	5112	541	13298
2004-05	626	411	30489	5378	576	14115
2005-06	682	442	35535	5725	616	15126
2006-07	745	483	41092	6219	695	17224

Source: Economic Survey 2007-08. Table No. 1.26,

It is obvious from the above table that IR has been able to increase its loading capacity of goods traffic and carrying capacity of passenger traffic many fold despite having minimal growth in its’ assets. This has been made possible by the better utilization of the assets by introducing measures like ‘providing discount in anti flow direction of wagons’, round the clock working hour, ‘upgradation of passengers in upper class to accommodate waitlisted passengers’ etc. These measures have helped not only in better turn round of wagons and coaches but also helped in achieving best ever operating ratio as can be seen in the following table: -

Table No.5

Years	Operating Ratio
2001-02	96.0
2002-03	92.3
2003-04	92.1
2004-05	91.0
2005-06	83.2
2006-07	78.7
2007-08	76.3

Source: The Economic Times, 27^th Feb.2008

It is not that, the IR has identified all bottleneck points, which have been affecting its performance. These bottleneck points may be existing ether in its rule or in its operating practices, which leads to idling of its stock on the one hand, and unmet demands on the other hands. Proper managerial approach with goal of optimization of loading and earning to resolve such bottleneck is required, which the IR is gradually doing. But then there is a limit and such measures now can help only in having some marginal increase in its productivity. Undoubtedly, IR now badly needs surplus capacity generation to attract to retain its customer base and to attract or win back those customers who have moved out of its fold. As we have seen in the Table No.2 that there has been massive increase in the number of trucks, buses and road length and roadways is always ready to provide customized and personalized services to the customers on demand and with a kind of guarantee. Due to this, as we have seen in the Table No. 1 that the share of road traffic has grown phenomenally. For IR it has not been possible to cater its all present and potential customers, despite having very heavy demand, as per their needs as there is always shortage of wagon and passenger coaches in most of the months, particularly in peak seasons, which are, nowadays, more than six months a year. As an alternative these customers move to roadways for meeting their demand despite paying higher charges and lot more inconveniences. The kind of budgetary support, which IR gets from the Government of India and the kind of surplus IR has been able to generate, are far from meeting the developmental requirement. The following table gives the detail of budgetary support received from the Government of India.

Table No. 6

Plan	Year	Total Plan Outlay	Internal Generation of IR	% Share of Railways Budget	Govt. of India support (Rs. Crore)	% of Govt. of India Budget
First Plan	1951-56	422	280	66.4	142	10.3
Second Plan	1956-61	1043	467	44.8	576	10.3
Third Plan	1961-66	1685	545	32.2	1140	10.3
Annual Plan	1966-69	762	320	42	458	10.3
Fourth Plan	1969-74	1428	397	27.8	1031	10.3
Fifth Plan	1974-79	1525	384	25.2	1141	5.3
Annual Plan	1979-80	1251	316	25.0	766	6
Sixth Plan	1980-85	6585	2783	42.3	6587	6.1
Seventh Plan	1985-90	16549	7089	42.8	16549	7.6
Annual Plan	1990-91	-	-	-	4892	8.4
Annual Plan	1991-92	-	-	-	5393	8.3
Eight Plan	1992-97	32306	18832	58.3	7313	6.3
Ninth Plan	1997-2002	46405	16352	35.2	15472	5.3
Tenth Plan	2002-07	-	-	-	64709	5.5
Eleventh Plan	2007-11	-	-	-	572443 Trans. sector

Source: Economic Survey 2007-08. Table No. 2.4 to 2.10 and Status Paper 2002 and Raghuram (2002)

Thus, we find that after independence, IR has not got sufficient fund for the proper development. Since the government decides the different rents, it has not been possible to generate more funds by raising freight or fare. Whatever, the budgetary support it has got from the Government of India, remained to be a paltry sum to meet some minor requirements. Although IR has tried some alternative strategies like market borrowings through the Indian Railways Finance Corporation and schemes like ‘Built Own Lease Transfer’ (BOLT), and ‘Own Your Wagon’ (OYW) these schemes have never caught fancy of the investors. Only in recent time ‘Public Private Partnership’ (PPP) has got some attention of the investing public with some successful examples of government –public partnership as it was seen in the case of Pipava Railways or Kutch Railways. Now when the mood of the investing public is positive, it is high time that the IR takes a positive decision to invite private investments in railways expansion and consolidation process. Railways have to realize and accept that attracting private sector investments into IR’s expansion to meet a part of the enormous fund requirement is very critical and important.

Need of Regulator in Indian Railways

At the same time IR has to concede that if private investment is to be attracted to infrastructure services like railways, it is important to mitigate the investors’ perception of risk, both financial and political by establishing a system of clear and credible risk to govern the operations of the sector and to ensure transparency in private participation deals. Although the IR has till date opposed the formation of a regulator we have to now accept that on matters of pricing, that are critical to the private investor decisions it is necessary to establish regulatory arrangements that are not only autonomous but are also in a position to exercise that autonomy and are free from any political interference. No doubt, there is need to have a private investment policy as well as one related to risk mitigation at the state level, both of which should be aligned with the best practices of those countries that have attracted such investment for infrastructure successfully (Kar Pratip in Sarkar and Kaushik ed. 2001:pp17-26).

Situation in Developed Countries

The experiences of the developed countries that have successfully built new infrastructure through private investment show that privately financed projects are not only alternatives to traditional forms of financing but also important tools for meeting national infrastructure needs. It was also noticed that, the conditions under which projects for a particular sector are executed have been devised, keeping in mind the overall policy of the host government for that sector. It may be noted that, national policies to promote private investment in infrastructure are often accompanied by measures to introduce competition between public service providers to prevent the monopolistic conditions. Competition reduces the cost and increases the productivity of infrastructure investment, also enhancing the responsiveness to the needs of customers.

Now, if IR wants to avail this benefit there is a rider. It is difficult to achieve all these benefits in the absence of a regulatory framework, or with the archaic legislation accompanied with over slow judicial system. One good thing about regulation in India has been that it takes on another challenge beyond managing private investment. That is, for some time to come the state-level regulatory system in India will be concerned largely with regulating state-owned utilities. This is because despite growth in participation of private sector, state-owned incumbents continue to own majority market shares in infrastructure industries and there would be lot of resistance from the existing staff for protecting their turf as they view any such attempt as end of their dominance (Narasimha Rao and Subhashish Gupta, 2005).

Some countries have chosen to separate the ownership and operation of infrastructure (tracks, signaling systems and train stations) from rail transport services (passenger and freight). Under these schemes, the law does not allow the track operator to operate transport services, which are operated by other companies, often in competition with each other. This helps in making every activity as self-dependent and vibrant to the need of the market or customers and removes all kinds of inefficiencies. The IR is yet to follow this model.

Some other countries have let integrated companies operate infrastructure as well as services, but have enforced third party access rights to the infrastructure, sometime called as trackage rights. In these cases, transport companies, whether a different rail line or transport service company, have the right to access the track on certain terms, and the company controlling the track is obliged to grant such access. Barrier to investment and operation in this sector are also being gradually removed (Kar. 2001). It may be noted that IR has started to adopt this strategy in 2007-08 when it permitted for the private container train operators, under some condition to access and avail the facility of IR on some charges. However, it has been noticed that these operators are facing lots of difficulties and in absence of any independent grievance settlement mechanism; these operators are bowing to the pressure tactics of IR. On the other hand, IR officials feel that these operators are acting on the turf of IR and are competing with IR only, which they feel is counter productive.

Formation of Sectoral Regulator

In view of the multiple and conflicting role of the government and above problems with available alternatives of solution the IR may adopt a strategy of forming a regulator. Ideally, formation of the regulator should be on sector basis. There should be a common regulator for transport sector, which should regulate all branches viz. railways, roadways, airways, waterways including shipping and ports, pipeline etc. The prime function of the regulator would be to see that there is proper and integrated development of transport infrastructure facility in India so that major infrastructure constraint and bottleneck is removed properly and fast. It can be given broad, enforceable mandate to oversee the project development process for multiple infrastructure sectors. This body can serve as a check on the compliance of projects with environmental and land-related regulations, contract design and implementation, quality standards, etc. This will also encourage a standardized method for tendering, contract terms, and distance decision-making from the vested interests in each ministry. It would also develop a common template for service contracts, which would apply to all transport related services. This can also evolve some kind of project justification method, through a social cost-benefit as infrastructure projects are normally not justifiable on financial rate of return, and until unless socio-economic benefits are taken into account we cannot justify any such projects. Here the representatives from all concerned sectors and other stakeholders who would collectively regulate and thereby reduce the potential for manipulation by any individual ministry (Narasimha Rao and Subhashish Gupta, 2005). Here the development should not be restricted only to the government sector. Rather private participation should also be welcomed along with ensuring proper follow of safety rules and consumer interest. Further there should be proper coordination in different branches, so that one branch is not at conflict with other branch and no part of the country is totally neglected. However, this should not result in restricting competition between different branches and it should be left to the market forces to decide the most economical and efficient means of transportation. The functional scope of such a regulator should be limited and well defined to include broad guidelines and standard processes, but need not include judicial powers.

Separate Regulator in Each Branch

Below this central regulator, there could be separate regulator in each branch viz. railways, roadways, airways, waterways including shipping and ports, and pipeline. The function of the central transport regulator would be to coordinate and develop an integrative policy for the development of transportation infrastructure, whereas the regulator of each sector would monitor the implementation of the above policy in consultation with the concerned sectors players.

Regulator in Indian Railways

Thus there should be one regulator with in the railways. Seeing the historical importance of the IR and its grand role being played in the nation building the regulator should be formed within the fold of the ‘Railway Board’, which would act independently and would advise to the ‘Railway Board’ on various issues. This separate regulatory body would remain at arms length from all service providers and stake holders including the government. Since government continues to be stakeholder it was natural that an independent and outside regulator, remaining equidistant from all service providers and stakeholders, including the government, to discharge this responsibility. This regulatory authority would be neither an administrative body nor a judicial one. Its function cannot be called administrative, as it is required to take consultative and transparent decisions, while, in practice, administrative decisions in India are generally opaque. Similarly it cannot be called a judicial body as the regulator is required to balance the interests of stakeholders during the regulatory processes and does not simply apply rules to facts as judicial bodies do (Sarkar and Srivastava in Sarkar and Kaushik ed. 2001: PP27- 44). Regulatory independence may mean that regulators should have: -

• An arm length relationship with regulated firms, consumers and other interests.
• An arm length relationship with political authorities
• Organizational autonomy (Smith 1997)

Following major benefits are likely to accrue from a rational and even handed regulator

· Creation of right environment for the much-needed expansions of railways to take place with the induction of private capital.

· Better standards of railways services due to competition and greater managerial efficiency.

· Ensuring a fair rate of return on the railways investments and reasonable rates for the railways consumers.

· Technological upgradation and innovations like enabling high speed trains, heavy hauled goods trains etc.

· Greater consumer orientation – creating dynamic competitive markets, which deliver economic benefits to the consumers.

· Building consumers’ trust and confidence.

· Better transparency and fairness

· Establishing better avenues for communication between the regulated utility and stakeholders.

· An overall set up in the rate of economic growth.

Framework of Regulation

The above-proposed regulator must have functions relating to tariff control, ensuring quality of services and monitoring compliance, and authority to settle disputes. Broadly, policy making may be the exclusive area of the government/Railways whereas policy implementation may be left to the regulator. The core function of the regulator may include tariff regulation, checking quality of services and monitoring compliance, adjudication of disputes between operators, between licensor and operators, and between consumers and operators; consumer protection; and enforcement of licensing conditions. Since policy decision process in IR is centralized and all broad issues are decided on the Railway Board level, it is prudent to have the regulators office located in New Delhi itself. If any person or institution want to lodge a complain, this could be done personally, or through post or Internet. However, it should not become only another grievance cell, rather it would be looking only to the issue pertaining to the regulatory aspect. All other grievances should be directed to the IR.

The Task Ahead: The Role of IR

Once we have agreed for the formulation of regulator then we need to define the role of the IR and the regulator, so that there is no confusion for the respective roles. Since basically we would be forming the regulator for proper development of railways in India, the first responsibility starts from the IR side. IR need to spelt out in clear-cut term, what are the constraints and bottlenecks, which are hampering the proper functioning and growth of the railways. It will further assess whether those constraints and bottlenecks can be removed without any major fund requirement. If any policy change is required, it will be evaluated that whether those changes can be brought about, without creating any major upheaval. And if it is yes, then it will have to ensure that those changes are brought about within a reasonable period of the time. Say within 6 months, from the formal raising of the issue.

Then there are those issues where there are minor and major financial implications.

IR needs to identify these all issues, do thorough cost benefit analysis, and put the entire documents in public domain by putting them on internet and invite public participation in the debate. IR will further identify those projects where it is going to finance the entire projects on the internal resources on a time bond manner, say not more than five years and the stream of revenue is allotted in a fixed manner and should be non - lapsable in nature, so the even after the change of individual the project is implemented in a time bound manner.

Then there are those projects where fund will not be provided by the internal resources. Here, the IR would provide a part of fund, where another part would be invited by the private participation. Here also the entire project will be presented before the public, a through discussion will take place, and beyond the IR’s contribution which ever party comes with best solution and funding arrangement, would be entered with a memorandum of understanding (MOU) with IR. Here again the Railways’ contribution would be definite and non-lapsable and so would be private party’s commitment. These kinds of project would be of two kinds: - first, those projects in which the implementation would be done by the IR itself and the public partner will get a fixed steam of revenue or a part of profit sharing out of the new project. Second would be those projects where the private participant would do the implementation and the IR’s contribution would be given for the project implementation. Once the project is completed, then the normal operation of the assets would start and the private participant will get the share of the revenue out of the running of the assets.

In last, there would be those projects where the IR will not invest any money, but would identify where any private agency can create an asset and can run as a part of IR operation and the profit generated out of the operation of those asset would be shared with the private participant. The private participant would be permitted to participate only when they have entered with a MOU with the IR in a pre-stated purpose with a proper financial stream and proper infrastructure to carry these activities. For the participation the IR would determine the specifications of the assets and it would be strictly followed so that there is seamless integration of the entire projects.

Some of the projects, which could be identified, would be as under: -

· Doubling of a railway line between some stations where there is serious capacity constraints.

· Improving the existing facility to improve the throughput say providing tokenless block instruments and colorlight signal so that more number of trains could run.

· Improving an existing an asset so that its utilization can improve, say provide mechanized loading unloading facility in a goods shed so that more number of freight train is handled in an existing goods shed.

· Providing more number of wagons.

· Providing more number of coaches

· Providing more number of electric locomotive

· Providing more number of diesels locomotive.

· Developing goods shed.

· Developing an ICD (Container terminal depot).

· Developing a passenger lounge in a busy station.

· Developing a new railway line.

· Running a coaching maintenance depot.

· Running a wagon maintenance depot.

· Maintenance of diesels locomotives.

· Maintenance of electric locomotives.

These activities can be done only when the cost assessment of these activities are done in more accurate and realistic manner. Further, we need to identify and define all these activities including cost in a clear cut unambiguous manner so that every body would understand same meaning. Hence, initially, there would be massive requirement of defining the specification and quantification. Thus some kind of contracting has been proposed by connecting public and private organizations for public service delivery. Here contracting would involve both institutional and even constitutional questions related to the state with a more focused questions on how to achieve best value for the public. The above contracting would involve a number of actors besides the main parties to the contract itself: the purchaser and the providers. These include the public that has to consume the services, the regulators who have to oversee the purchaser and the providers, the politicians and bureaucrats who lay out the contracting policy. The above suggestion would not be ‘for’ or against government rather for market. Today we will have to accept that purchaser of railways services are going to be smart buyers, so until unless quality services at the lowest price is not going to be offered they are not going to stick with us. The above-proposed public private partnership would facilitate a reflective stage where there is room for informed choices and balanced judgments (Greves, 2008). The role of regulator would be too see that every thing is being done as per agreement and no party is put into disadvantageous position due to any reason.

Relationship with the Railways

Relationship between railways and regulator may become a strong point of debate. It is being felt that the regulator should work as a part of railway system He should be directly reporting to the Chairman, Railway Board, The Government of India. Normally, the advice given by the regulator should be binding to the railways and should not be flouted easily. Only in case, if the Chairman along with the majority of the Railway Board Members feels that the advice or decision given by the regulator is in contravention with the national interest, then they can give overruling decisions. However, the detailed reasoned statement should always support such decisions with clear-cut para wise remarks against the regulator’s decision. Such decision should be immediately displayed in public domain including on the Internet. Giving such kind of power would lead to establishment of relatively unbiased system, which would lead to better faith on the system. This will lead to better return for the IR, as public participation in PPP projects would be more forth coming. Such decision of the Railway Board should be subject to review by the Supreme Court of India. Undoubtedly, it is being felt that a regulator should enjoy a certain degree of freedom to effectively discharge his duty under the proposed statute. The survival of the regulator should not be made dependent on the pleasure of the railways executive, and his autonomy has to be guaranteed by law. Of course, this independence cannot be absolute – it must be subjected to the law of the land and the policy of the government.

Doubt on Independence of Regulator in IR

There has always been some doubt that given the continued dominance of government in railways, whether regulators are really workable in India. Even though the enabling legislation empowers regulators with substantial scope and decision-making authority, several loopholes exist to undermine their authority. First, they are tied to government in their very structure. Second, they face capture in various forms. In addition to the well-recognized political interference for populist motives (e.g., lower passenger fare and no hike in it despite sharp increase in input cost), and ministries’ desire to protect and control the incumbent utilities adds a new dimension of capture possibilities. The government -owned utilities provide several benefits to bureaucrats, including pay-offs from large contracts and investments, as well as other favors. Regulators are often reluctant to penalize state-owned enterprises for non-compliance. Even when they do, their effectiveness is limited, since financial penalties mean little to state-owned utilities (Narasimha Rao and Subhashish Gupta, 2005). No doubt these pitfall exist, but once we know this then we can develop a framework where these risks are minimized in the beginning, and it is expected that once the private sector participation becomes prominent, they would also become assertive in safeguarding their interest. In fact, the regulator at that time has to act in such way that only one or two private players do not dominate it.

Safeguarding the Regulator

To ward off above doubt and to inculcate the confidence, the independence of the regulator may be tied up with appropriate measures of public accountability. According to Narasimha Rao and Subhashish Gupta the way forward is to encourage regulators to act in accordance with their mandate, and to remove the constraints that prevent them from implementing their mandate. This influences both regulators’ autonomy and enforceability of their actions. To the extent that collusive behavior is unavoidable, in the least measures must be taken to make such collusion difficult. Improving member selection, altering the scope for policy direction of regulators, and exposing private information about regulatory process and decisions by giving more transparency are some options for doing this. Narasimha Rao and Subhashish Gupta further suggest for three broad doctrines to meet these challenges- fiduciary trusteeship, consumer sovereignty and empowered citizenship. Fiduciary trusteeship treats oversight as a specialized function to be carried out by expert bodies – such as tribunals, legislative committees, and encourage strict procedure to limit regulatory discretion. In the consumer sovereignty, consumers exercise their sovereignty by exercising choice, which is facilitated by competition and rivalry, both among service providers and regulators. The third doctrine emphasizes the consumers’ role in scrutiny of regulatory process and service provision by reducing distance between the regulator (and service provider) and consumers, rather than just exercising choice.

Open and Transparent Regulatory Process

No doubt some tools like clear rules, an open and transparent regulatory process, and reasoned decisions may become powerful measures to ensure this. To maintain balance, the regulatory process may incorporate some crucial steps to ensure accountability. To ensure this stakeholder may be given the opportunity to present their views, the regulators decisions must be written and published, placed on public domain including on Internet along with the clear cut stated reasons for arriving on such decisions. The public comment should be invited and these should be considered before making the final rule. There may be proper provisions to appeal against the regulators decisions including in the court. These measures would ensure that all potential stakeholders are aware of the regulatory process and have an opportunity to present their views freely and frankly (Agarwal and Paul in Srivastava in Sarkar and Kaushik ed. 2001: PP3-15). This kind of transparency in decision-making would provide the integrity and credibility of the regulatory process. Making regulators accountable is another safeguarding as this will force more reasoned decision making, and dissuade regulators from yielding to informal lobbying.

Filing Annual Reports And Due Process Of Rulemaking

Filing annual reports is one mechanism of accountability. Such reports will give an overview about the activities what the regulator has done and the areas where no action has been initiated. Appeal process is another mechanism, which can be made against error, procedural, legal, and substantive grounds. Usually, affected parties to hold regulators accountable for inaction, if they can be shown to violate their mandate should utilize the appeals process. The due process of rulemaking with procedural checks and balances has to be rigorously pursued. To improve process accountability, procedural rules must incorporate obligatory requirements for transparency and explanation of rulemaking. These include maintenance and publishing of a rulemaking record, holding workshops, training programs and public hearings for important rules. These rules should be judicable, and their adherence subject to legislative scrutiny (along with annual reports and orders). Some amount of participation of public, particularly the stakeholders in rule making should be permitted. Information sharing and educating public about the market processes through user-friendly websites could be a helping tool for this purpose. To maintain a balance the regulator needs to ensure market players do not overcompensate and gain market power. Until such time that tariff setting is made free from the unpredictability of government intervention, as it is being done in railways, market risk mitigation through assured returns or price would need to continue. However, at the same time privatization design needs to build in better safeguards for cost discipline, and performance improvement so that each player or operator is self-dependent. For this, regulatory approval of capital expenditure and operating costs is essential. Second, the efficacy of such oversight will improve only with a reduction in information asymmetry, which goes back to the institutional efficacy issues and the fundamental need for a greater information flow in the regulatory process. In order to develop appropriate (quality) performance targets, regulators should consider the development and use of benchmarks. The key matrix’s for performance include loss reduction, customer satisfaction, quality of service and utility company’s financial performance, and only those companies would be able to survive which fit on these parameters. Reasonable standards, effective monitoring and enforceable penalties are the critical requirements to force utilities to improve quality of service. It may be noted that in competitive markets, public exposure of quality of service metrics for all competitors can significantly reduce information asymmetry, and increase pressures on competitors for quality. More detailed rules on quality of service need to be codified and enforced. Formal rules on adherence to standards would be judicable, thereby further strengthen accountability for quality of service. In this way a single body makes the implementation rules, administers them, and adjudicates disputes. It is expected to act in the public interest, actively engage virtually all sector stakeholders in decision-making, and effectively interpret and carry out a mandate that is based on a broad set of principles, while all along remaining unfettered by the influence of lobbyists. These all decisions would be pertaining for a politically sensitive sector like railways makes it more delicate. (Narasimha Rao and Subhashish Gupta, 2005).

Structure of the Regulator

To ensure the effectiveness of independent regulatory body – and therefore, the interest of the private participation- it is necessary that these bodies have the requisite expertise; independence and accountability and that there is an adequate level of coordination in the regulation of the sectors that have strong market inter linkages. Two critical issues that are of critical importance for credible regulatory framework are

· Staffing of the regulatory bodies, and

· Need for related multi-industry\ sector coordination

The main concerns in staffing issues relate to the background and expertise of the regulators, delays in feeling of the vacancies and getting the requisite supporting staff. An examination of the composition of the regulators presently in electricity, telecom sector, would show that most of them are either retired officers from government and government owned entities or retired judges. For example, in the case of electricity sector - which has highest number of regulators - nearly 60% are retired civil servants and judges and many of them are not only new to the sector, but also unwilling to take a pro-active approach to development. Considering the complexity of regulation in the sector and the need to function at ‘an arm’s length’ from the government, these situation causes a bit of concern. Wider talent and younger professionals with a good background on economic regulation / sector exposure are not getting appointed as regulators. This state of affair may be due to the composition of search committee, the selection process, terms and conditions of appointment, and the qualification and experience prescribed in the reform legislation (Leena Srivastava: 2005). The IR has to ensure that these common pitfalls are not forced on it and the matter is pursued in letter and spirit.

Objective Selection Process

To avoid this kind of situation recurring in the railways it should be clear that regulators should be selected through a broad based search committee, which should include some independent experts and representative from the private sector as well. There should be some degree of uniformity in the number and status of the members constituting the search committee. The post of the regulator should be widely publicized and advertised, clearly specifying their responsibility. There should be some form of mandatory induction training program for the entire regulators on various aspects of the railways, economic regulation etc. There should not be undue delays in filling up of the posts of regulators, which undermine the credibility regulatory institutions. The chairman of the regulatory commission should keep the following points while chairing a meeting

· The imperatives of economic regulation of railways requires conscious and proactive balancing interest in favor of overall sustained growth and development

· Decision making in regulatory commissions need to be undertaken in an open and participative manner.

Quality and Adequacy of the Supporting Staff

The quality and adequacy of the supporting staff also merit special emphasis. It is necessary that a well-trained core team of multi-disciplinary expert is available with a certain level of continuity. Based on the prevailing ground realities, innovative human resource development strategies, including intensive training programs, better perks and privileges etc need to be worked out to attract the better talent. (Leena Srivastava: 2005. PP: 1-3). To attract the better talent the pay scale of the staffs and officers should be at least one scale higher along with other perks and benefits.

Financial Independence

Financial independence is one of the sources of independence of any organization. Railways should ensure that the regulatory agencies should not be funded through a consolidated budget. Rather, they should recover costs through a consumer fee which could be collected from both passengers and goods transporters. They should finance internal capacity building and training through such a cess.

Relationship with the Regulated Entities

A regulator is supposed to ensure a level playing field for all players and a fair return on the investment made by them. He has to ensure their confidence to secure further investments and thus attain the goal of adequate competition to actually do away with the need for the regulator. Since the IR is a giant organization, and even if the private participation is started, for long, private operators would be too tiny to compete with the IR and IR may be in a position to deal unreasonably with the other players in the competitive market. Hence here the regulator has to ensure that the IR does not exploit this position and power. At the same time, it is extremely important that the regulator is not perceived to be bias in favor of, or against any particular entity. His ability to win the confidence of all the entities in the field would go long way in the success of the reform process.

The Consumers

In the present world, consumers are supposed to be king as we have gradually moved from the sellers’ market to the buyers’ market as these days a customer has plenty of opportunity to select one, which maximize his\her welfare maximum. This applies to the field of transportation as well. Therefore consumers have to be ensured of, by regulator, a fair price for the service and a commensurate quality of service. They cannot demand unreasonably low prices and should not be exploited into paying very high prices. This is where the abilities of the regulator to balance the interest of the consumers and those of the regulated utilities will be put to test. (Agarwal and Paul in Srivastava in Sarkar and Kaushik ed. 2001: PP3-15). From a consumer point of view, markets and regulators are complementary instruments as the role of the later is to compensate in some way for the failing of the former.

Theoretical Justification of Need of Regulator in Railways

In India, where market has failed to provide necessary impetus for the growth of the railways, there is complete justification to develop a regulator. The needs are two fold: -

· To correct the situation where market has failed.

· To address, the developmental aspects of the sector.

As we have seen that to meet the developmental needs of railways we have to take the benefit of private investments. Once different private operators are permitted to play different functions, then the primary role or purpose of regulation is to ensure that markets do not fail i.e. competition is not breaking down and is working properly. The goal of regulation is to devise proper arrangements best suited for this purpose. Policies are also required for enhancing development. Correspondingly, regulations are at time geared toward this end, especially when there is an urgent need to develop the railways.

At the initial stages of the development the railways services tend to act as public utilities. Consequently they are not profitable business and require subsidization. At the initial stages it is not feasible to promote the greater good of the development. Nevertheless, we have to accept that the subsidy or status quo cannot carry on perpetually and in the long run the railways need to be self-sufficient.

As we have seen, regulation can be either on the issue of price or on entry or over quality of service, alone, or any two of them or all three simultaneously. Each of the four reasons for market failure, which we have discussed earlier, needs to be analyzed and we need to identify the type of regulation, which would suit us in a best possible manner.

Since in the railways, the fixed cost associated with the setting up of operations is very high, this discourages most new entrants. Further the government controls the prices of different services and there is no guarantee for the timings and quality of services. This makes the entire working as non-standard and risky. Even if the railways rate may be low for many customers it has no meaning if there is no assured service. In view of availability of road transportation and its associated conveniences of door-to-door services many consumers are more interested in the reliability, continuity and safety of the services than only in the price they have to pay. So the regulator would be monitoring quality of services.

Regulation can consequently be administrative and economic. Administrative regulation means a watchdog body, which is set up to safeguard against monopoly abuses. It ensures that private operators are not put into undue disadvantages by the dominant player and all kinds of changes and rents are specified well in advance. Such regulator will have to promote demand and supply principle in freight sector from very beginning and gradually will have to extend in passenger segment as well.

Externality is another source of market failure. It appears when the benefit or cost of an exchange inside a market spill over onto other parties than those explicitly engaged in the exchange. Given an opportunity, the private sector would try to work only in those sectors where no long-term investment is required and where there is very high demand. To attract the fresh capital, where the lack of facility becomes the major bottleneck for the expansion of traffic, the IR may identify such routes and facilities to be developed, should duly notify in national and international press and on web and invite private capital investment and once the proper facilities have been developed than due profit sharing should be done. Since the initial fixed cost is very high, i.e. entry and exit is very costly, one cannot possibly have the margin of time by which the market determines the optimal number of private operators, and this role has to be taken over by the government. They need to put an entry restriction. Entry should be regulated in accordance with traffic projections; market development, capacity requirement and the existing facility available as over capacity can lead to the sickness of the private operators.

The externality problem also arises in the developmental stages. In order to provide linkages and faster development of an area IR have to cater to economically unviable regions and routes. In such undeveloped or underdeveloped regions it becomes un-remunerative to run both passenger and freight services. Here the role of regulator could be to ensure that there should be some mechanism through which the region that benefits from the railways services provides the compensation to the operators. In other words, there must be some mechanism of incentive that must be designed into the system.

Severe informational asymmetries, the fourth reason for market failure, might have potential effects for the railways. The issues pertaining to safety and environmental standards are very critical, particularly in ecologically fragile zones like coastal regions, mountainous regions etc. Hence the role of the regulator in ensuring safety and environmental standard as well as proper flow of information would be very crucial. (Hazra 2000: PP 1-7)

Since the IR is a major stakeholder in the development of an efficient infrastructure in the country and has the financial and technical capabilities to demand effective regulatory institutions, it needs to play an important role in determining the policy and formation of regulation and regulator. It would also serve the long term interest to invest in capacity building of regulatory commissions and their staff, so as to ensure well reasoned and forward looking regulations that would find a perfect balance between all stakeholders.

We may conclude that, if we adopt the above suggestion, then the IR will get the necessary blood to revitalize and rejuvenate itself and potentially morbid organization would again adopt a path of youth ness. Without this the IR is already rapidly missing its market share. Once these strategies are adopted then the trend will be arrested immediately and gradually it will again improve its pie in the share. The private participation and expertise would also bring more efficiency, accountability and necessary capital, which have been missing or were less all through. Allocative efficiency would be gained from these reforms and there would be substantial reduction in dead weight loss. More efficient allocation of investment will result in less political interference in investment decisions. This will also lead to reducing in cross subsidization among different products and customer groups. (Philippa Dee and Duc Nguyen-Hong: Domestic Regulatory Reform and Liberalization of Trade in Infrastructure Services in Sidorenko ed. 2003). It is expected that suggested reform will result in greater market access. The implementation of these changes or reform will not come at the expanses of social welfare or equity considerations, or other national objectives. These reforms will allow a more efficient allocation of resources and facilitate structural changes. Different prices of railway services would become more reflective of costs, and improved productivity and lower prices will reduce the input and production costs of user industries or the service provider. Lower prices and grater product choices will ultimately benefit to the customer as well.

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Useful Sites: -

http://indiarail.info/component/option,com_frontpage/

http://www.indianrailways.gov.in