Back-tracking

The decision by the Indian railways to exercise its option and merge the Konkan Railway Corporation (KRC) into itself when the shareholders' agreement expires next year, highlights the difficulties faced in generating anything resembling a reasonable commercial environment for infrastructure projects.

On the face of it, the move may seem a practical one. The Konkan Railway has certainly provided enormous relief to the large number of people who live in Mumbai and its surroundings but maintain close personal links with their home towns and villages all the way down the west coast.

It has also made tourist access to Goa and emerging locations on the coast much easier. However, it took much longer than planned to build and, for that and other reasons, cost a lot more.

Even with the imposition of a cess on regular fares, which themselves are linked to the railway passenger tariff, the corporation is unable to generate the surpluses to service the very large debt that it incurred to build the system.

Since these obligations were backed by the Indian railways, it is effectively bearing the net cost of running the system. Why not, then, eliminate the pointless distinction between the larger organisation and its financially dependent offspring?

There are good reasons as to why not. First, while time-cost overruns and the unanticipated debt burden are undeniable, the Konkan Railway has a huge captive user base for whom alternative modes of transport, while they might be relatively cheap, are also highly inconvenient.

The willingness to pay for time saved by passengers is simply not reflected in what the Konkan Railway can charge. To view the Konkan Railway in the traditional railway light of subsidising lower-class travel is to miss out on the legitimate business opportunity that the system provides.

This could have been properly exploited if the management had greater autonomy on the services offered and their pricing. By going ahead with the merger, the railways are effectively signalling a rejection of even the minimal requirements of commercial viability.

This bodes ill for the railways' ability to raise external funds. Significant organisational restructuring and transparency in accounting are critical for the railways to attract outside investors without an iron-clad government guarantee.

But, if the railways treat corporatisation as a largely cosmetic exercise, with no fundamental change in the way in which the corporate entity is managed, there will be no credibility to the process.

The best way forward in the Konkan case would be to let the corporation be, and to give it a chance to function as a commercial enterprise, instead of as an extension of the ministry.