October 05, 2016

Railways minister faces uphill battle to achieve meaningful reform

Written by  Raghuv Thakur
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India’s railways minister Suresh Prabhu, who was appointed in November 2014, is the latest in a line of recent railway ministers tasked with attempting to reform Indian Railways. Raghav Thakur assesses IR’s current condition and how far the railway minister has got.

AS a reformer, India’s minster for railways Mr Suresh Prabhu has been cautious.

The minister last month re-designated and re-defined the roles of two members of the Indian Railways (IR) railway board - IR’s top policy making body - giving the impression that he had finally decided to take the bull by the horns. But the policy reform programme was abruptly halted; ostensibly on account of departmental rivalries concerning plans to re-designate a third member of the Railway Board as member for infrastructure.

IndianRailwaysDblDeckerVarious heads of different committees of experts have expressed their desire for a revamp and restructure of the British-era architecture of India’s rail bureaucracy as a measure to reduce red tape and improve efficiency.

It is generally agreed that re-designating the board member mechanical as member traction with responsibilities for both diesel and electric locomotives, and the member electric as member rolling stock with powers to procure and manufacture all types of coaches and wagons, will help to reduce so-called “departmentalism” and enable faster decision making.

These changes are in line with the earlier initiatives outlined in the ruling NDA coalition government’s incremental reform plan, such as the creation of two new directorates - the directorate of mobility to suggest ways to speed up trains, and a directorate to develop ideas for generating non-fare revenue.

The railways minister’s reformist intentions have been clear from the start. Why, then, the growing scepticism about Prabhu’s ability to deliver?

IR currently runs 19,000 trains including 12,000 passenger trains carrying 23 million passengers on its 65,000km network every day. It is though facing big challenges. The network is saturated, with 492 of the total of its 1219 sections, or 40%, running at over 100% of line capacity. There is also a shortage of funds to meet track maintenance targets and to eliminate the network’s 11,563 unmanned level crossings.

Passenger deaths from rail accidents have remained a regular occurrence, while IR has been unable to spare the funds for safety-related works. The Anil Kakodkar-headed safety committee report released in February 2012 outlined estimated spending of Rs 1.03 trillion ($US 15.4bn) over a five-year period to address these issues but it has since been gathering dust. As several railways ministers had previously, Prabhu sent a letter last July to the Finance Ministry requesting an additional grant of Rs 1.1 trillion for rail safety works, including the installation of the ECTS Level 1. He is still awaiting a response.

IR also has no money for its array of pending projects, which require a whopping Rs 4.92 trillion to complete. The railway’s share of India’s GDP has also been sliding. The National Transport Development Policy Committee (NTDPC) estimates that IR will need to invest Rs 900bn in the 12th five-year plan from 2012-17, Rs 1.9 trillion in the 13th plan and Rs 4.6 trillion in the 15th plan to regain its lost share in the transport sector.

In his inaugural budget speech of 2015, Prabhu outlined a five-year investment plan of Rs 8.56 trillion. He has since secured a five-year Rs 1.5 trillion loan arrangement with the state-owned Life Insurance Corporation (LIC) and is also in talks with the World Bank and Institutional Investors over rail infrastructure funding. That part is fine. What is causing concern is the continuing slide in rail finances, with IR recording a 9% shortfall compared with last year’s earnings in the first two months of the current fiscal year.

Revenues fell to Rs 261bn during April-May, a decline of 8.22% compared with overall earnings of Rs 284bn for the same period in 2015. Earnings from rail freight declined from Rs 194bn to Rs 169bn, and while suburban traffic grew, earnings from long-distance and general class passenger traffic fell by 2.13% and 1.32% respectively. The operating ratio of more than half of the 17 railway zones is said to be hovering in the region of 110-120%. “The focus on investments is fine, but IR is not earning enough to service the loan,” conceded an official.

IR’s financial commitments this year are substantial. The railway will need to provide an estimated Rs 400bn to implement the recommendations of the seventh pay commission and will need to balance its accounts due to an estimated loss of Rs 290bn from its passenger division. IR will also need to find about Rs 90bn to pay a dividend against the Gross Budgetary Support (GBS) component of the rail budget.

However, following an announcement on September 21, the 2016 edition is the last time railway spending will be presented separately from the general budget, a practice which has lasted 92 years since British colonial times. While it is unlikely that the Indian government will absorb IR’s entire financial burden, the merger means that IR is not expected to pay the dividend again, which was expected to increase to nearly Rs 100bn this financial year.

The decision has revived speculation that the government of prime minister Mr Narendra Modi intends to corporatise and restructure Indian Railways (IR) along commercial lines. The government has been simultaneously working on other policy reforms including the introduction of a corporate accounting system and the establishment of a rail tariff regulator, which will be known as the Rail Development Authority.

Hyperactive

Yet as India’s rail reform plan just about gets up and running, grave uncertainties persist. Investor fears also seem to have been aggravated by Prabhu’s hyperactive and social media-driven approach. The minister recently announced the launch of a railway hospital unit, and talked about plans to introduce maglev trains in India. He also regularly tweets about the “remarkable achievements” in transforming the railways-passenger interface, as well as announcing the launch of preliminary studies for a dozen high-speed rail corridors in India.

However, in contrast with the soaring rhetoric, the reality is that many important details of once heralded projects, like the schemes themselves, are now falling between the cracks.

For example, the Japan International Cooperation Agency’s (Jica) estimate that it would cost Rs 1.81 trillion to ramp up speeds on the Delhi - Mumbai main line and reduce travel times between the two cities from the existing 17 to 12 hours meant that this plan was promptly buried. IR has also carried out trials using Talgo trains on existing broad-gauge lines at speeds of 180km/h or above, which would offer a substantial improvement over existing services - the Gatimaan, India’s fastest passenger service offers at a top speed of 160km/h on the Delhi - Agra route. However, plans to replicate the experiment on eight other lines have remained in cold storage.

In addition, after several rounds of bids and about three investor summits, the plan to acquire modern trains to replace conventional ABB locomotives was dropped after none of the six identified bidders decided to bid. Earlier, the proposal to build the Mumbai elevated corridor through a public-private partnership (PPP) was shelved on account of disagreements between IR and the state of Maharashtra. “The railway minister must focus on critical issues of infrastructure in order to generate confidence among investors. At the moment, he appears to be spreading himself thin,” says former Railway Board member Mr Subodh Jain.

Indeed, while Prabhu’s attempts to pass big changes are commendable, it is clear that India’s rail reform story remains in its early stages, with many significant hurdles yet to be cleared.

Among these is one of the minister’s primary directives - to empower general managers and divisional railway managers so that they can take administrative and financial decisions without sanction from the railway board. The plan to merge IR’s nine existing cadres into a single unified service has also yet to materialise due to disagreements between the technical and non-technical cadres.

In addition, the long-awaited plan to establish an independent tariff and safety regulator - now called the Rail Development Regulator - has been placed on the backburner. Similarly processes to set up a corporate accounting system to replace the conventional accrual-based accounting system are also still awaiting meaningful action.

However, most importantly the rail budget merger plan needs to reach a logical conclusion by freeing the organisation of governmental controls and turning it into a corporate entity.

To his credit, the minister - a chartered accountant by profession who is considered a political lightweight - has achieved some meaningful changes so far. For one, to overcome financial constraints for infrastructure projects, he has firmed up memorandums of understanding with state governments and public sector undertakings for joint ownership and funding. He has also launched a number of big-ticket projects, with a view to securing significant private and international investments. Among them is the Rs 40bn station re-development plan.

He can also rightly claim credit for following through with initiatives to secure technological upgrades; convincing GE and Alstom to build locomotive manufacturing units at Madhepura and Marhoura in the eastern Indian state of Bihar is a notable achievement. However, his big plans to re-invent Indian Railways remain a work in progress, and there are likely to be a few more bumps in the road yet.

 

Work schedules continue to lag on Dedicated Freight Corridors

ON the face of it, everything has been right about India’s plans to build Dedicated Freight Corridors in the east between Delhi and Kolkata, and in the west from Delhi to Mumbai. This year, there has been a five-fold increase in physical progress on the two projects, with contracts worth Rs 240bn ($US 3.58bn) awarded compared with contracts worth Rs 130bn in 2015.

So far, a total of Rs 470bn of contracts have been issued, while contracts worth Rs 100bn will be awarded by the end of 2016, leaving a balance of Rs 40bn for the next fiscal year. Against the total requirement of 11400 hectares for the 1839km Eastern DFC and 1534km Western DFC, 89% has been acquired and the first 51km stretch of the Eastern DFC from Durgawati to Sasaram has been commissioned. Systems work has also commenced on the Khurja - Sonnagar section, while on the Western DFC, design work has been initiated on the Rewari - Palanpur section.

However, the picture is not altogether bright. For either a lack of adequate manpower or working capital - or on account of procedural and administrative issues - work schedules have been lagging behind.

For example, many months after securing work on the Western DFC, Soma Construction has been unable to begin work due to an arbitration case involving the company. Similarly, GMR Associates was awarded a contract for the Western Corridor in March, but it has not since started work due to the company’s inability to find the right calibre of people to implement the project.

Within Dedicated Freight Corridor Company of India (DFCCIL), there are reports of low morale. Several employees, including two general managers, have quit the corporation in recent months. In addition, no applications were reportedly received for the post of chief project manager at Mughalsarai, despite the placement of two advertisements for the post in the last few months.

“Companies that have been awarded the contract have work experience in the roads sector; but none whatsoever in the rail sector. DFCC officials - mainly drawn from Indian Railways (IR) - also lack the experience in dealing with such an ambitious project. These are the reasons that project timelines are unlikely to be met,” sources say.

For quite inexplicable reasons, just one track laying machine has entered service on the Western corridor, slowing down execution work. At some locations in both the Eastern and Western stretches, work has been held up due to the unwillingness of farmers to give up small stretches of land that have otherwise “on paper” been acquired.

The cost of both the corridors is estimated at Rs 814bn, with Jica funding the Rs 387bn cost of the Western Corridor. Yet of the total World Bank loan commitment of $US 3.4bn for the Eastern DFC, only $US 125m has been disbursed so far.

DFCCIL managing director Mr Adesh Sharma’s assertions that the target to complete work on the Eastern DFC in 2017 will be met, therefore currently appear distant.

 

High-speed projects caught in administrative struggles

 

AT the midway point of the NDA government’s tenure, progress on India’s high-speed rail projects is a picture of inconsistency.

The Mumbai - Ahmedabad corridor - India’s first sanctioned high-speed line - has threatened to get entangled in a disagreement between the Maharashtra and the central government over the location of the terminal station in Mumbai. The National High Speed Rail Corporation (NHSRC), which will provide the administrative, financial and institutional framework to oversee the project, is currently without even an ad-hoc chairman, with Indian Railways (IR) yet to advertise for a full-time chairman and directors of NHRSC.

Japan International Cooperation Agency (Jica), which is funding the project, recommended that the station is located at the Bandra-Kurla complex. However, the Maharashtra government wants to build a commercial centre at the spot and has offered an alternative location at the Bandra reclamation ground. If this suggested alignment change is to happen, it will come at a cost.

In addition, there are increasing calls for the use of an elevated line alignment for the project, which if approved, will cause costs to shoot up by approximately Rs 110bn
($US 1.65bn).

In a detailed project report submitted earlier this year, Jica estimated a project cost of Rs 960bn. However, the agency is now revising its estimates and will come up with the latest project cost by December. As part of the Memorandum of Understanding signed between India and Japan, at least 30% of rolling stock and systems for the Mumbai - Ahmedabad line need to be sourced from Japanese companies.

Even as the project remains to take off, suspicions are growing that it may not meet its target operation deadline of 2024. More should be known after a meeting of the NHSRC board of directors (comprising both Japanese and IR officials) which was set to be held on September 30 to discuss the outstanding issues.

In the meantime, a flurry of studies on possible high-speed routes has been commissioned in recent months. The status of ongoing surveys aimed at implementing prime minister Mr Narendra Modi’s pet “Diamond Quadrilateral” project envisaging a network of high speed lines connecting the country are as follows:

1. Delhi - Chandigarh - Amritsar: Preliminary survey report conducted by the Systra/Rites consortium submitted to railways minister Mr Suresh Prabhu in August 2016. Four separate alignments were suggested, with varying costs.
2. Delhi - Mumbai Stage 1: Survey report of the TSDI/Lamhar consortium also submitted last month. Stage 2 report was scheduled to be submitted in September.
3. Delhi to Kolkata via Varanasi and Lucknow: A survey conducted by the Spanish Ineco/Tipsa consortium with the ICT as the Indian partner has been submitted. Stage 2 survey is underway.
4. Mumbai - Chennai: Stage 1 report conducted by Systra/Rites submitted. Stage 2 report was scheduled to be submitted in September.
5. Mumbai - Nagpur: Spanish consortium of Adif and Ineco conducting survey as part of a government-to-government agreement. A Spanish technical team was in Delhi in July to submit the Stage I report.
6. Delhi - Nagpur: two Chinese companies are surveying the line as part of a government-to-government understanding.
7. Calcutta - Chennai: India is in talks with the German government over a preliminary study for the line as part of a government-to-government understanding.

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