A ‘shadow’ regulator for Railways?

In this year’s Railway Budget, there was a proposal to set up a Rail Tariff Authority. A number of international models for a Railway regulator are available, but these are basically designed to specify norms for approval and monitoring of independent train operators and concessionaires. In India, the situation is somewhat different, with the Indian Railways being the principal transport operator. It would be necessary to lay down the role of the regulator in our context.

The regulator should be responsible for setting fares and tariffs, which are fair to the service provider as well as to the customer. The regulator should safeguard public interest and ensure that the monopoly of the operator and its market power is not abused to the detriment of the customers’ interest. Concurrently, the regulator must also protect the service provider against overbearing sectarian and political interests.

Strategic objectives

The strategic objectives of the Government relating to public distribution system, protection of the national borders and development of backward regions should be factored in. Fund requirements for strategic interest projects and for special movements should be separately computed for possible direct support from the central exchequer.

Regulator should lay down the minimum quantum of the service delivery and the quality standards. It should be a confidence-building institution that would encourage public-private participation, which today, at least in the Indian Railways, suffers from a trust deficit.

To ensure independence, the Regulator should be a creature of an appropriate statute enacted by the Parliament. Chapters VI and VII of the Indian Railways Act, 1989, which deal with fixing rates and dispute resolution, would need to be amended.

To ensure transparency, the Regulator should engage in wide-ranging consultations with all stakeholders to arrive at the criteria to be adopted for rate fixing. The process to be followed and the criteria for rate fixing should be clearly articulated and shared with all concerned. The Regulator has to come up with a 24×7 system. Quick response to issues and grievances are essential. An image of impartiality should be built up, both in substance and appearance.

Process of regulation

The process of regulation and fixing of rates should take into account the fact that at present the Railways are a monopoly operator and have no real competitors. Road haulers address different segments of passenger and freight traffic. Comparative data, though useful, are of limited application in fixing benchmarks of railway tariffs.

There are, however, two possible approaches to rate fixing.

Returns on capital: This appears to be a logical method, but our system of accounting would need a total revamp. Capital-based accounting system would be time-consuming and expensive exercise. Further, the capital base of the Indian Railways, accumulated through loans in perpetuity spread over a century and half, is too large. It includes non-operating components, such as hospitals, schools and employee settlements, among others, in a substantial measure. This aggregate capital, when corrected for the present day, costs would generate rates that would be too high and, as such, unrealistic. Even if the capital attributable to the delivery of services is segregated, there would always be a temptation to bloat the capital assets base. This approach is, as such, not recommended.

Benchmark pricing: Initially, a benchmark for rates could be fixed through consultations between the Railways and the Regulator, based on the analysis of sector-wise costs of the audited data submitted by the Railways. Historical trends in fares and tariff would provide valuable inputs to the Regulator. The political interventions that caused distortions in trends should be identified and isolated. Finally, an element of reasonable profit/surplus could be built in.

While basing the rates on costs, it is important to remember that all expenses are not costs. For instance, expenses incurred in celebrations, inaugurations, advertisement of events, providing medical services, running educational institutions, maintenance of settlements, promotion of sports and cultural activities, are expenses but not necessarily costs to be apportioned to the freight, passenger and parcel services. No doubt, a reasonable amount for corporate social responsibilities could be built in.

Simplest way would be to link fares with the Consumer Price Index (CPI) or the Wholesale Price Index (WPI). But, in my view, it would be more appropriate to index it with a statistic that reflects the variation in cost of inputs that directly affect railway tariffs. A Rail Tariff Index (RTI) that comprises cost variations in steel, cement, electrical energy, diesel fuel, lubricants, stores purchases and staff costs could be devised for annual/biannual revisions.

With modernisation, induction of advanced technology and managerial innovations, the productivity of service delivery is expected to improve. This would have a beneficial effect on tariffs that should be reduced taking into account this efficiency factor.

Finally, the Railway infrastructure would need continuous inputs for expansion of system capacity and improving quality of service and safety. The fare box collection would need to be increased to make provision for this urgent requirement.

The rate fixing process would, as such, cover the following path: Fix benchmark rates; escalate rates on the basis of RTI; reduce rates on the basis of efficiency factor; and increase them to provide for infrastructure development.

While rates escalation on the basis of RTI could be applied annually, the efficiency factor and infrastructure development requirements could be assessed once in three years and applied accordingly.

Setting up of an independent Regulatory Authority, would need, among others, an amendment to the Chapter VI and VII of the Indian Railways Act. Given the long list of enactments pending in Parliament, this may take at least two to three years. With elections slated for 2014, the possibility of an early enactment seems remote.

In the interim, therefore, it would be prudent to put in place a “shadow” Regulator entrusted with the aforesaid roles, attributes and methodology for rate fixing. The Regulator could be an individual or a team of specialist commissioners with Railway domain knowledge and a deep understanding of the art and science of rates.

To begin with, this could be a recommendatory body and the Government will have the authority to accept, reject or modify the recommendations.

The Government would be free to address social needs and political dispensations as long as these are fair to both the Railways and the rail users.

The Regulator will place the entire process of rate fixing, along with the back-up data, in the public domain for all to see and formulate a clear picture of the rates scenario and comprehend its implications on the Railway finances and service delivery. Despite being just a recommendatory authority, such a transparent mechanism would enable the political executive to take tough decisions.

The subsidies in various sectors, particularly between freight and passenger, as well as between upper class passenger and the unreserved class services will also be identified by the Regulator to enable the Government to take a call on these issues and enable preparation of a road map for gradual phase out of subsidies.

The Regulator will also identify and recommend areas where the Government is expected to compensate the Railways for the socially desirable expenses.

(The author is the former General Manger of Central Railway.)

(This article was published in the Business Line print edition dated May 27, 2013)

http://www.thehindubusinessline.com/todays-paper/tp-logistics/a-shadow-regulator-for-railways/article4753950.ece

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