Indian Railways Repeal Proposals - Background

Extracts from the "Statute Law Revision - Indian Railways Repeal Proposals", August 2007, published by the Law Commission of the United Kingdom.

The Law Commission published a consultation paper in August 2007, proposing repeal of 38 Acts in the UK statutes relating to the operation of railway companies in British India. The material here is extracted from the Consultation Paper. Web site of the Law Commission

Related pages: History of railways in India - FAQ

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The Development of the Indian Railway System

1. This repeal note deals with the surviving legislation relating to the various railway companies which operated in India (prior to the country gaining independence as a republic in 1947) and to the wider East Indies. The scheme in the notes addresses the legislation by reference to the individual companies, set out alphabetically by company name. It embraces some 38 Acts.

2. First, however, it is useful to set out a general history of railway development in India, from the early days of pioneering private companies through to piecemeal state acquisition (and eventual grouping and regionalisation).

The beginning^[1]

3. Indian railways have been described as: 'British in origin, British in model, financed by British share-holders, built by British engineers, managed by British railwaymen, the right arm of the British army, the life line of the British Indian Empire'.^[2]

4. The idea of using railways to traverse the vast expanse of the Indian subcontinent and connect its populations was first mooted in 1843. Rail travel was still in its infancy in England, but it was already clear that a reliable and extensive rail network would bring benefits to the territory.

5. The British East India Company, having recognised the value of the railways in England, commissioned the development of a rail network in India.^[3] The company could not afford to finance the whole venture itself, and British capitalists were less than keen on sole investment. The Court of Directors of the British East India Company decided upon a system of guarantees whereby ownership, control, and risk were spread across both the private sector and the quasi-public (represented by the East India Company).

6. The first train ran from Mumbai (formerly Bombay) to Thane, on the Great Indian Peninsula Railway, in May 18544 - the culmination of ten years of planning and construction.

The guarantee system

7. The guarantee system ensured that neither the private nor the public sector took on the entire financial risk of establishing the rail network in India. English companies were invited to carry the construction costs and to own the undertaking. In return, the East India Company would guarantee the railway shareholders a 5% return on their capital investment, afford the railway companies free use of land and offer a 99-year operating contract. The East India Company would reserve the right to exercise an option to purchase the undertaking, for proper consideration, at specifically appointed break points.

8. Two companies, involved from the outset, were instrumental in formulating the guarantee arrangement. The East Indian Railway Company was proposed by Rowland Stephenson in the mid-1840s.5 After much negotiation with the East India Company about the guarantees available, the railway company was established as a joint stock company in May 1845. Its first rail service, between Howrah and Hooghly, started in August 1854.

9. The Great Indian Peninsula Railway Company was incorporated in Britain in 1849 and began construction work shortly thereafter. Its first rail service ran from May 1854 between Mumbai and Thane. The success of the East Indian Railway and the Great Indian Peninsula Railway encouraged British investment in the Indian railway project. By 1868, 70 million had been invested in the development of Indian railways, and 4000 miles of line had been opened to traffic.^[6]

Teething problems

10. As the East India Company had anticipated, early development of the Indian railway network encountered a number of logistical difficulties, particularly that of distance. The need to import most of the construction materials from Britain gave rise to delays. Engineers had to create their own fabrication works alongside the railway construction because the local products - such as bricks - were of inferior quality. Long distance supervision, and the disparate nature of the participants, made for bureaucracy and communication complexity. There were 'politicians and members of boards of directors of private companies in Britain, administrators in India and Britain, supervising engineers, contractors and their agents, and engineers on the line of works' all playing a part in the supervision of works, plus a 'myriad of individual worksites where Indians physically built the railways of the Raj'.^[7] Lack of British control over the whole of the subcontinent compounded the problem. Protracted negotiations with the French when lines were due to cross their territory lengthened the construction programme.

11. The Sepoy Rebellion in 1857 caused enormous disruption. For the East Indian and other railways, the uprisings served to increase construction costs considerably.^[8] But, by the same token, the unrest and security consequences served to balance out the costs by demonstrating the benefit of a comprehensive railway system which could expedite deployment of the military across the British Raj. By 1859, a further 3000 miles of lines in India were being planned or were under construction.^[9]

State railways and the revised guarantee system

12. In April 1868, the Calcutta and South-eastern Railway was surrendered to the Indian government under the terms of its guarantee. This was the beginning of state enterprise in railway development. From 1869, the state (now a Secretary of State representing the British Crown) undertook directly the construction of all proposed lines, and implemented a policy of acquiring railways as soon as the opportunity arose.

13. The policy change - from providing guarantees to carrying out construction direct - was a reaction to the cost burden imposed by the original guarantee system. It significantly reduced the net cost to the state. Although capital expenditure remained even over the decade, by 1878 income generated from the railways was approximately 57% higher than in 1868.10

14. In 1879, the government exercised its option to buy the East Indian Railway, but left the railway company to run and manage the line. In the case of the Bombay, Baroda and Central India, the Great Indian Peninsula and the Madras railways, the government waived its right to purchase the lines, but insisted on modification of the contracts. Outstanding debts were cancelled, with the proviso that all surplus profits for the duration of the lease periods were to be shared equally between company and government.

15. Only a year later it became clear that these arrangements were misjudged, and that the state would carry a disproportionate financial burden, because:

(a) the companies no longer accrued all the profits, giving rise to the need for higher state subsidies; and

(b) new state lines could not compete on equal terms with the old guaranteed lines (which were established, lucrative, and had secured optimum fuel, labour and maintenance contracts).

16. The government set about creating a new model which would encourage private enterprise, but which would differ markedly from the outmoded guarantee system. In essence, the new assisted companies were to be guaranteed a 4% return on their capital, limited to a five-year period. The government retained an option to purchase the lines after 30 years. The burden was offset by incentives to new companies and new investors: the offer of free land, free use of roads and cash injections.

17. The first company established under the new scheme was the Bengal Central Railway, which opened with the support of the banks of Rothschilds and Barings. Whilst the new terms were not nearly as favourable to the companies as the original guarantee system, the involvement of two major financial institutions from the outset stimulated others to invest.

18. The extent to which the state should be actively involved in the construction and maintenance of individual lines turned on whether the lines were categorised as 'productive' or 'protective'. Lines classed as 'productive' were those with commercial potential. They were capable of being built by private enterprise using moneys borrowed from investors. 'Protective' lines were those which lacked commercial potential - and the ability to support loans - but which were important to the country s overall infrastructure. Partly because early public investment might obviate later expenditure, the state took on responsibility for these lines.

Management

19. By the close of the 19th century, management of the various Indian railway undertakings had become very complex. In some instances, company managers were responsible to their boards in London, to the British Government in Whitehall and to the Government of India. Following a formal review of the Indian railway system,^[11] it was recommended that the myriad of management arrangements be simplified to provide a single point of control under a unified Railway Board (comprising a Commissioner of Railways, a Secretary to the Government of India, a Chief Inspector of Railways and a team of Government Inspectors, all with practical knowledge). The Railway Board came into being in 1905, and has survived despite several reorganisations.

20. By the early part of the 20th century, the Indian railway undertakings were no longer conventional private enterprises. Having relinquished their proprietary rights to the government (although still using their own names), the companies were now state-controlled managing agents, running the network on behalf of the Government. By 1920, the Government owned 73% of the total railway mileage in India. All the major lines in private hands had been purchased by 1910. In the 1920s and 1930s, the Government accelerated its programme of purchasing railway companies and, by 1944, all the trunk lines were owned and managed by the Government. The new assisted lines had belonged to the Government from their inception, as had the lines the state had constructed itself. What emerged was nationalisation of the railway system by a protracted process of piecemeal acquisition and direct build.

21. Railway construction and development continued apace until the Wall Street Crash, and the world-wide depression of the 1930s,^[12] when it was hit severely. Revenue was significantly reduced, and the reserve funds were used. When India emerged from its economic depression in 1937, a backlog of maintenance and construction works had to be addressed. The Second World War interrupted the process. Attention refocused on mobilisation of the military to assist in the war effort, and in this the Indian rail network played a key part (at the same time benefiting from increased traffic and greater investment).

Partition and grouping

22. India attained independence from Britain in August 1947 under the Indian Independence Act, which sliced the subcontinent into two Dominions - India and Pakistan. India assumed republican status in January 1950; Pakistan remained a British Dominion until March 1956.

23. In 1947, the single Indian railway system was divided overnight into two entirely separate systems. The North Western Railway and the Bengal Assam Railway were the most profoundly affected in that they straddled the new international boundary between India and Pakistan. The railway lines within the state of India, including 1855 miles of the North Western Railway and 1942 miles of the Bengal Assam Railway, formed the Indian Railway network. The railway lines within the state of Pakistan, including the remaining 5026 of the North Western Railway and 1613 miles of the Bengal Assam Railway, formed the Pakistan Railway network.^[13]

24. There was a division of assets at the point of partition. Essentially, the assets that resided within the borders of the new state became the property of that state, according to the Inter-Dominion Financial Agreement.^[14] Both India and Pakistan were left to complete the partial administrative framework each had been left with.

India

25. Prior to independence and partition it had been recommended that the railways should be managed by group. The British government had been resistant to grouping because it would necessitate terminating contracts with British companies. Post-independence and partition, the Indian government formed the view that it was economically inefficient, and administratively inconvenient, to operate a single rail network with a large number of small semi-independent entities. A truly national undertaking was required. Thus, in 1948, Indian Railways was reborn as a single administrative body. Starting in 1951 the network was grouped into six zones. Each zone was managed as a group in itself, but a level of central management was retained, via Indian Railways, to ensure that the railways functioned as a single coherent network. The six original zones have since been split and reordered on a number of occasions. Today, the network covers 63,140 route kilometres, divided amongst 16 administrative zones.^[15]

Pakistan^[16]

26. The railways in Pakistan did not fare as well as those in India after independence. 'Unwarned by precedent, uninfluenced by example, the management of Pakistan railways reverted to the position of 1882'.^[17] The Railway Board was abolished, railway finances (which had recently been separated) were subsumed in the central financing provision, an independent financial advisor was appointed to approve railway financial decisions, and a railway division was created within the Ministry of Communications.

27. Centralised governmental control gave rise to higher-level communication difficulties, delays in decision-making (particularly in matters of finance) and management by non-experts. There were also practical problems on the ground: staff shortages as a result of staff choosing where they wanted to serve; coal shortages because coal had previously been imported solely from what was now India; inadequacy of workshop repair facilities; and serious disruption to the continuity of the railways because a number of lines straddled the new India/Pakistan border. In short, as one commentator put it, 'the transport situation in which Pakistan was placed after independence posed a challenge which would have overwhelmed any country!'.^[18]

28. The same problems, which had been identified in the formal reviews of the early 1900s, arose in Pakistan after partition. In 1961-2, the Government of Pakistan restored a Railway Board, and separated the railway finances from the general budget.

29. Currently, the railway network is managed by the Ministry of Railways via the state-owned railway company Pakistan Railways. In 2005-6, the route network spanned 7,791 kilometres, and carried 80 million passengers annually. The railway company operates 228 passenger, express and mail trains every day.^[19]

Bangladesh, Myanmar and Sri Lanka

30. Railways in Bangladesh are currently managed by the state-owned organisation Bangladesh Railways.

31. Railways in Myanmar are currently managed by the state, via Myanmar Railways.

32. Railways in Sri Lanka are currently managed by Sri Lanka Railways, a stateowned entity.

The position today

33. All the railway lines referred to in this note are now managed by the states in which they are located, through the state-owned entities of Indian Railways, Pakistan Railways, Bangladesh Railways, Myanmar Railways and Sri Lanka Railways.

The material in the Indian Railways Repeals Proposal - Consultation Paper is under UK Crown Copyright and is reproduced here in accordance with applicable terms of use.