Tentative reforms and some eye-catching projects could herald a private sector-driven shake-up of India’s creaking railways, but deeper change is needed to tackle the supply bottlenecks that still crimp growth.

Once seen as a shining legacy of the British Raj and still one of the world’s biggest employers, India’s rail network crams 18 million people a day on to its ageing trains running from the foothills of the Himalayas to the southern beaches of Kerala.

Decades of low investment and policy stagnation mean India has fallen far behind emerging market peer China in building a network fit for Asia’s third-largest economy.

Contrasts abound. While Indian trains are notorious for 24-hour delays, China has made a global splash with a train whose top speed of 486 km/h will halve the travel time for the 1,318 km (819 mile) journey from Beijing to Shanghai to less than five hours by June.

“The Indian Railways is at an infancy as far as the reform and privatisation process goes,” said Ranveer Sharma, principal at Eredene Capital , a London-listed private equity investor in Indian ports and logistics.

There are some signs of change. The Indian government has initiated multi-billion dollar projects including a $90bn freight corridor to connect Delhi and Mumbai, with world-class industrial and commercial hubs to be built alongside.

Backed by funds from the Japan Bank for International Cooperation and the Sumitomo Mitsui Banking Corporation, officials say the track will cross six states and benefit 180 million people, three times the population of Britain.

A second giant freight line to the east will likely be backed by the World Bank. The private sector is moreover flexing its muscle with inner city metro rail projects that have been snapped up by big-hitting domestic firms such as Reliance Infrastructure Ltd and Larsen & Toubro.

“There are encouraging signs,” said S. Nandakumar, a Chennai-based infrastructure specialist at Fitch Ratings.

“If you look at it on a timescale of where we were say six or seven years ago, there’s definitely a lot more activity in the rail sector in terms of expanding infrastructure, in terms of involving the private sector.

“On the flipside, in comparison with what we’ve achieved on initiatives in some of the other sectors, it’s a little short.”

A world away from the country’s gleaming new airports, trains teem with rural migrants and hawkers left behind by India’s near double-digit growth story. More than 80 percent of the network was built before independence from Britain in 1947.

New Delhi has given a big push to infrastructure spending with a planned splurge of $1.5trn over 10 years. Railways could end up a laggard as the network receives five percent of funds from private money, the lowest figure of any major infra sector, though it takes $20bn in traffic receipts a year.

New destination?
The railway ministry has talked up the need for tapping the private sector for funds and in mid-2010 launched two policies to open up freight traffic to private firms.

The Private Freight Terminals (PFT) scheme lets private operators build and operate terminals on private land for a duration of 30 years and charge third parties for handling freight, boosting, for example, the business potential of ports and logistics firms.

Another initiative by the ministry was to let private firms run freight trains for certain commodities.

“Privatisation of the container trains and the recent PFT policy are perhaps the first seeds sown by the government towards substantial privatisation over the medium- to long-term,” said Eredene Capital’s Sharma.

“Foreign private equity investors, including Eredene, remain keenly interested in such developments.”

India’s infrastructure is a study in contradictions, with showcase projects such as Delhi’s revamped airport and a swish sea-link in the financial capital Mumbai set against road and power projects held up for years by red tape and funding gaps.

Projects such as the Delhi-Mumbai freight line are a statement of intent that India’s railway sector is playing catch-up with the likes of China, although the projects have proceeded slowly.

India needs such projects urgently to ease its expensive, inefficient and polluting reliance on road transport to move around freight, which has in turn fuelled soaring food prices.

British private-equity firm 3i Group Plc, which has a major presence in India, may expand its investment to include railways in a $1.5bn infra fund to be rolled out in 2011.

“There is investment required in railways, so for example some of the new ports that are being developed need additional rail links,” said Michael Queen, the chief executive of 3i.

“And of course, from an environmental perspective, moving cargoes like coal or iron ore is much more environmentally friendly doing it on railways rather than trucking it or building power plants in environmentally sensitive areas.”

A lot more could be done. India’s powerful Planning Commission, whose de facto head carries ministerial rank and is close to the prime minister, panned the railway ministry’s “lack of clear long term vision” in a 2010 report and urged private sector-driven reforms.

The panel recommended greater private participation in building world-class train stations and logistics parks, faster building of dedicated freight lines as in Delhi-Mumbai and “rebalancing” heavily subsidised passenger tariffs.

“Government monopoly”
Successive governments have ring-fenced the railways ministry as a gift to an ally. Prime Minister Manmohan Singh has handed the reins to Mamata Banerjee, the head of the Trinamool Congress party whose first priority is to win control of her home state of West Bengal in state elections due by May.

Her predecessor, Lalu Prasad Yadav, is a former chief minister of the state of Bihar and a one-time ally of Singh.

The temptation for a railway minister has always been to set up railway factories in their own states and keep passenger fares artificially low as a crowd pleaser, pushing a higher volume of freight traffic on to roads.

India’s bureaucracy is notorious for red-tape and delay that dates back to an older India before economic liberalisation in 1991. While there are signs this is changing in some sectors, the railways can still appear a law unto themselves, with their own budget, schools, hospitals and residential colonies to house some of their 1.4 million employees.

“These guys are sitting there and running the whole show as a government monopoly, which is a very weak incentive for commercial and economic decisions,” said a government official involved in the sector who did not want to be identified.

“They don’t want to let go of any control. They don’t want to introduce any competition. They don’t want to introduce any efficient private sector entities. It’s an island which has protected itself against modern influences.”

In the years from 1990 to 2007, which approximate to the start of India’s economic surge, the country built 960km of tracks compared with China’s 20,000km.

Losses from poor infrastructure shave off roughly one to two percent from India’s GDP growth.

The government official said it would take much greater political will or a serious crisis in the ministry’s finances to push real reforms. So far, he says, that has not happened.

“Private investments have been on the horizon for quite some time,” he said. “The problem is that the sun never rises.”