Why Indian Railways failed to attract private players to run trains

Context: On July 1, 2020, the Indian Railways launched the formal process of inviting private parties to run trains on the Indian railway system. Bids were finally opened last month.

• Hopes of a large participation were belied as there were no bids for nine clusters and only two bids for three clusters.

Reasons for their failure

• Lack of equal relationship: IR wants the capital and technology without giving up control, while the concessioner wants a far more equal relationship to be moderated by a regulator.
• Constraints on efficient decision-making: IR has imposed constraints that prevent efficient decisions and adopted an organisational design that does not take into account the characteristics and associated risks that will determine outcomes and investment decisions.
• Lumpiness of investment: The biggest dampener is the lumpiness of investment before a single passenger can be carried.
• High risk involved: Train sets have to be purchased without really knowing how much traffic the service will be able to attract in the face of rising competition from airlines. IR does not guarantee the investor that, in case the concession fails, it will acquire the train sets.
• Absence of regulator: The other big dampener is the absence of a regulator for resolving disputes.

Suggestions
Remove the lumpiness of investment by establishing rolling stock company
The central issue is how to align the three interests.

1. India’s need to be capable of designing and manufacturing state-of-the-art rolling stock.
2. IR’s need for private capital participation.
3. Private capital’s necessity of earning a profit.

Establish a company to lease rolling stock: The above 3 interests can be aligned provided the lumpiness of investment in train sets can be eliminated by establishing a company that leases rolling stock not only to concessioners but also to IR.

• The rolling stock company, apart from leasing train sets, can also be the window for bringing in new technology.
• This will also enable reducing the concession period from 35 years to a more reasonable 10-15 years, bringing in competition.
• For starters, IRFC, which is already into leasing rolling stock, can be that company.

Bring in new technology by opening IR’s rolling stock market to international manufacturers

• There is need to move the rolling stock industry up the industrial value chain and bring about a structural change of the Indian economy.
• Long term arrangement with suppliers: This can only be brought about by a vision that encourages long-term arrangements with rolling stock suppliers.
• Open the market for global players: An arrangement that gives access to IR’s rolling stock market is the only way to compel global players to share technology and form joint ventures with Indian companies.

Investment in research

• Technology transfer requires understanding the critical elements of the technology and absorbing them into the design-production process.
• This calls for the investment of large sums of money and the involvement of universities, research institutes and national laboratories.

Make changes to attract private investors: For attracting private players, the risks for the concessioners needs to be reduced.
Road Ahead

• As far as drawing private players is concerned, all that is required is to reduce the risks for the concessioners, reduce the period of the concession to around 15 years, establish a regulator and moderate charges like the amount for the maintenance of tracks and stations. 
• With these changes, the plan may still take off. However, the initiative will remain limited to just running trains if there is no long-term vision.