PMO puts the brakes on rail tariff regulator plan

The PMO has asked the Railways Ministry to follow the legislative route to set up an independent regulator for freight and passenger tariffs rather than push it through an executive order.

                       

Background:

In a bid to bypass the parliament, the Ministry of Railways had proposed Rail Development Authority by issuing a notification through an executive order and subsequently strengthen its powers through the legislative process.

Implications of this decision:

The legislative route may be a major setback for the Railways on this front, as it was banking on creating the independent regulator this year in order to perk up its worse-than-expected financial performance in the first half of this fiscal year.

About the authority:

The proposed Rail Development Authority would be an independent body, housed outside the Ministry of Railways.

Funding:

• The authority will be funded through the annual railway budget sanctioned by the Parliament. The approved Budget would be placed at the disposal of the regulatory authority.
• It would also be permitted to arrange funds through adjudication fees, penalties levied and any other source as specified in the proposed Act.

Functions to be performed by the authority:

• The proposed Rail Development Authority will be mandated to set passenger and freight tariff, ensure fair play and level-playing field for private investments in Railways, maintain efficiency and performance standards, disseminate information such as statistics and forecasts related to the sector.
• The authority will set tariff based on cost recovery principle and “what the traffic can bear.”
• All the direct and indirect costs such as pension liabilities, debt servicing, replacements and renewals along with productivity parameters, market-driven demand and supply forces and future investments will be considered by the regulator before setting tariffs.
• The authority will be authorised to penalise cartelisation, abuse of dominance and other unfair market mechanisms.

Who sets the Rail Tariff at present?

At present, the tariff is set by the Union government. Earlier, the revised tariff was usually announced by the Union Rail Minister in Parliament but this practice was discontinued after protests by the Members of Parliament over any proposal to hike tariff.

Significance:

• The proposal for setting up a regulator comes at a time when the estimated losses in passenger segment has ballooned from Rs 6159 crore in 2004-05 to provisional estimate of over Rs 30,000 crore in 2015-16, primarily due to sharp increases in input costs and no proportionate increase in fares over the same period.
• Keeping fares within affordable limits has led to cross-subsidisation of passenger services leading to erosion of railway’s market share in freight. The total share of railways in the total transportation of freight traffic has declined from 89% in 1950-51 to 36% in 2007-08.
• The full potential of the railway sector has not been tapped as “investors have generally been shy of investing in an industry where far too much is still being done or controlled by government and the risk or return trade-off is not always favourable.”