Two railways privatisation models for India to learn from—UK & Japan

The experience of privatisation of railways across the world has been mixed. There have been some failures where the incentives did not play out and outcomes didn't match expectations.

Representational image | Commons

Union railways minister Ashwini Vaishnav has categorically stated that the sector will not be privatised. Many Indians would have heaved a sigh of relief. Our anxiety may not be misplaced — railway privatisation has been fraught with difficulties in many parts of the world. However, it might be useful to analyse the different models for privatisation and consider the possibility that it may encompass many choices that eventually improve efficiency, safety and quality of service.

A railway train between point A and point B consists of different functions. At the very least, there are the railway lines, platforms, train coaches (or the rolling stock) itself, the signals that guide the coach and ensure no accidents, maintenance of the tracks, signals, coaches, ticket counters and reservation system, and the services within the trains such as food and other hospitality. Railway privatisation could mean handing over ownership of one or all components of the system to a private party. The handing of the full process in a region to a private entity is known as horizontal separation. It could equally mean handing over only the running of some parts of the system without giving up ownership. This is known as the vertical separation model.

Two examples

Let’s take the example of the United Kingdom. Its 1994 experiment of handing over infrastructure to the private sector did not work very well. In 2002, therefore, it established a public body, the Network Rail, which owns and manages a large chunk of the railway infrastructure such as tracks, bridges, tunnels, signaling systems and some of the stations. The trains, however, continue to be privately owned and run by train operating companies. These companies are largely based on a franchisee model where private firms bid to run rail services. The revenue risk in this model is borne by the private companies. This engendered incentives to cut costs by potentially lowering the quality of services or compromising on safety standards. Due to the inefficiencies of the franchisee model, the arrangement is also changing. In 2021, the Williams-Shapps Plan recommended the consolidation of various activities of Network Rail and other ancillary organisations into a new public body called the Great British Railways. The Plan has also proposed the end of the franchisee model. But it has not proposed the full return to government management either. The proposal is to set up a concession-based model, where private companies will be paid to run services and meet specific performance targets.

Another example is that of Japan. Unlike the UK, which undertook a vertical separation of the railways, Japan chose horizontal separation. It split the public sector entity, the Japan National Railways (JNR) into six passenger rail companies, operating in different regions of the country, and one freight company operating throughout. Each private company is responsible for the ownership, operation and maintenance of the infrastructure on its lines. The Japanese system also allows for “third-sector” railways where the government funds large projects but leaves the management to the private sector.

Lessons for India

Privatisation of railways need not mean complete ownership of the railway infrastructure or services. There are various models that could be considered, depending on what we want out of the rail system and what the current bottlenecks are. For example, we could continue to retain the ownership of the infrastructure as public utilities but allow the private sector to provide services, including the operation of train services. Alternatively, we could consider allowing for private companies to own rolling stock, which then lease it to private sector operators who run the trains.

The success of any model also depends on the surrounding legal and regulatory infrastructure required to make this work. For example, licensing and leasing require contracts that are fair and applied consistently. In both the UK and Japan, the regulator plays a pivotal role on issues such as licensing of private parties, safety standards, tariff setting, and consumer protection. In the UK, the Office of Road and Rail (ORR) oversees Network Rail, a public sector body, as well as other functions. In Japan, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) performs most regulatory functions. A liability regime and compensation framework in the event of accidents is another critical component to set the correct incentives for the private sector. In the UK and Japan, railway companies owe a duty of care to their passengers and in the event of an injury, the framework actually delivers compensation.

The experience of privatisation of railways across the world has been mixed. There have been some failures where the incentives did not play out and the outcomes did not match expectations. However, the efficiency, quality of service, and fiscal sustainability have been better than what would have ensued under fully nationalised railway systems. Most countries that went down this route are not walking back to a fully nationalised system. There are various models in which the three functions of ownership, operation, and maintenance are shared between the public and private sectors, each with their trade-offs. Even incremental reform to allow for private participation will bring in more investment and efficiency into the current operations of the railways.

Renuka Sane is managing director at TrustBridge, which works on improving the rule of law for better economic outcomes for India. She tweets @resanering. Views are personal.

(Edited by Humra Laeeq)