Regulation, Ownership, and Costs: A Historical Perspective from Indian Railways

Abstract

This paper studies the relationship between operational costs and state ownership in Indian railways between 1874 and 1912. We find the move to state ownership significantly decreased working expenses. The cost declines are not driven by anticipation effects, changes in reporting standards, or long run trends. Rather, the evidence suggests the colonial Government of India reduced operational costs by cutting labor costs. Our surprising results can be explained by the undemocratic colonial nature of the Government of India, a fiscal system heavily reliant on railways for revenues, and a regulatory environment under private ownership that weakened incentives to lower costs. (JEL L32, L51, L92, N45, N75, O18, R41)

Off the Rails: Is State Ownership Bad for Productivity

“…2 We have contributed to this literature in our previous work. In Bogart and Chaudhary (2012) we find that variable costs declined following the switch to state ownership without an increase in the number of accidents. In Bogart and Chaudhary (2013) we estimate the aggregate performance of Indian railways and find high TFP growth rates relative to other sectors of the Indian economy and railways in other parts of the world.…”

“…In three cases, the Government chose to operate railways after takeovers. 6 In the five other cases, the Government entered into agreements with directors of the former railway companies. The newly formed companies generally held less than 20 percent of the capital.…”

“…We believe railway fixed effects capture the differences in size and any other time invariant factors that lead to these companies being taken over on their 50 th anniversary. 6 We do not study operations in detail because different reasons appear to have driven the operation decision such as military concerns in one case versus private mis-management in another case. This potential endogeneity combined with fewer operational switches in the data make it difficult to accurately identify the effects of operation.…”

Transport Policies and Development

“…When the infrastructure is in place, operation also requires funding (which can be scarce) or may be hindered by inefficient management (Bogart & Chaudhary, 2012), non-competitive market structures of service providers (Lall, Munthali, & Wang, 2009) or excessive regulations (Button & Keeler, 1993;Combes & Lafourcade, 2005), which further drives up user costs. These non-physical costs may represent a significant share of total transport cost, in particular in African countries (Teravaninthorn & Raballand, 2008).…”

The Growth Contribution of Colonial Indian Railways in Comparative Perspective

“…In our case, the ratio is the weighted average of freight revenues and ton miles of the 17 major railway systems operating in India. 7 The average freight rate was 0.014 rupees per ton km in 1912. 8 Next, we estimate pre-railway freight rates in the regions served by each of the 17 major railway systems.…”