The way for Indian Railways to capture back some of the market lost to roads is through privatisation. Although the intent is there, privatisation of rail logistics is a while away because the fundamentals, including documentation formats, do not exist. It’s time the Railways re-focused on core capabilities, write Bhaskar Subbramanian and Mohammad Athar.
The Indian Railways is one of the major catalysts to infuse socio-economic growth in the economy. The apex transport and logistics organisation of the country has the largest rail network in Asia and is the world’s second largest under single management.
Indian Railways are currently going through a major transformation phase, with a planned outlay of $12.7 billion, the highest ever in Indian history. Large infrastructure development projects are proposed (in the form of high speed corridors, dedicated freight corridors, new factories for coaches and locomotives under the Public-Private Partnership (PPP) model, proposed separate authority for Metro etc). These projects are poised to provide the necessary support to the burgeoning logistics requirement of the booming economy and providing India’s national ports the necessary connectivity to ensure competitive logistics costs.
However, the activities and projects to be opened for private participation have to be carefully selected and structured for their amenability to market-based incentives and smooth execution. While opening up for private participation can bring in opportunities galore, PPPs should not be seen only as an option of easy resource mobilisation, but should be employed as a tool of bringing in technical, entrepreneurial and professional spirit of private organisations.
Besides, such optimism needs to be dealt with a lot of caution. Many issues remain currently and need addressing: the absence of a Model Concession Agreement (MCA) for private participation, lack of finance, poor financial performance in some segments and large time delays in executing planned projects etc. These are critical limiting factors in the transformation of Indian Railways into one of the finest transport organisations in the world.
Logistics in India: A case for developing railway infrastructure
A positive correlation has been established between GDP growth and transport growth. Thus while, India grew at an average rate of around 7.9 per cent, growth of railway traffic was around 10 per cent. With 9 per cent plus growth envisaged over the next few years, India should plan to strengthen traffic and transport infrastructure. One of the key elements will be developing railway infrastructure, which provides a cost effective way of transporting goods across the country, especially in providing connectivity to the gateways for international trade—the ports.
On the contrary, the transport infrastructure is currently facing many challenges which have been limiting its performance. India is still at a nascent stage when it comes to logistics and distribution. The logistics industry is highly fragmented; nearly 94 per cent of the logistics and distribution requirement is dominated by a large number of small fleet (5- 10 trucks) owners, accounting for 80 per cent of the revenues. The logistics costs, which include transportation, warehousing, packaging, holding and inventory, account for nearly 13 per cent of India’s GDP. When compared to those of developed countries such as Japan and USA, this figure is very high.
In the road sector under the National Highway Development Programme (NHDP), major road projects were completed after it brought in many private players in the sector and projects were executed in a timely and professional manner. However, in the case of Indian Railways, stemming from the absence of proper guidelines or MCAs development of railway infrastructure has been one of the slowest and PPP is yet to take off.
In the economic context, inadequate hinterland connectivity has important impacts on external trade and therefore on the development of the economy. It causes companies and players, to choose sub-optimal and hence uncompetitive transportation modes. In the case of ports, this leads to time and cost escalations, and in extreme cases to congestion in the ports. This poor logistics performance and lack of proper logistics infrastructure has affected associated industries as well. High logistics costs in the manufacturing sector have seen a reduction in the FDI investments in this sector.
Goods—both imports and exports—are transported within India largely through rail and road transport, with pipelines carrying some crude oil and petroleum products. Alternative modes for reaching the origin / destination such as inland waterways and coastal shipping have remained largely undeveloped and the situation is unlikely to change in the medium term. The present mode share of port cargo vis-à-vis optimal mode share is provided below.
Rail transport is primarily used for low value commodities for which transport costs are an important component of the delivered price. However, with the exception of coal, which is almost entirely transported by rail, most other commodities are beginning to shift to roads owing to the shortage of rail capacity in many sectors.
• Iron ore exports have experienced a large shift to roads, on account of the rapid increase in exports and the capacity crunch being faced by the railways.• High value cargo such as containers, are also moving away from rail transport.• Fertilizers, limestone and food grains are the other dry bulk commodities being moved by rail.
Some of the issues regarding rail logistics are presented below:
Since proper provisions of connecting the hinterland are absent in India, users are forced to use sub- optimal modes and lead to higher logistics costs. In recognition of these considerations, Government of India constituted in March 2005 a Committee of Secretaries to establish policies and priorities for improving port connectivity. The following summarises the key recommendations of the Committee:
• Each major port should have at least four-lane road connectivity and double line rail connectivity.• For those connectivity projects having a lower than prescribed rate of return, budgetary assistance—or Viability Gap Funding (VGF) in the case of PPP projects—should be considered.• National Highways Authority of India (NHAI) should undertake port connectivity (less than 50 km) projects on a BOT basis, and hinterland connectivity highway projects on a BOT basis where possible.• Toll rates for highway port connectivity projects shall be established jointly by NHAI and the Department of Shipping.• Ongoing projects (10 road and eight rail) are to be monitored on a quarterly basis and approvals of pending projects (four road and five rail) need to be expedited.
Demand and supply
Freight in Indian Railways is dominated by nine major commodity groups as shown below:
The total freight cargo is expected to more than double by the year 2020, primarily driven by container cargo, coal and cement. What is abundantly clear from the above table is that for port traffic to be moved to and from its inland destinations efficiently, the key strategic issue will be rail connectivity. This is true of all major or non-major ports, with the possible exception of Cochin and Tuticorin, and even there the absolute rail traffic volumes projected are not inconsequential.
To meet the above demand, an estimated 225 percent increase in rail haulage of port cargo will be required over the medium term (2015). Based on the presently proposed rail capacity enhancements, an analysis was conducted of the last mile port connectivity of the railways for the 2015 High Case and the number of trains required for the transportation of projected rail cargo.
The analysis given below very clearly points to the large rail capacity shortfalls likely in the critical Mumbai port. Cochin, Tuticorin and Mangalore are also likely to experience significant constraints. This is assuming the present plans are implemented without major delays. It must be kept in mind that the analysis merely explores the bottleneck at the port and not further into the network, where large capacity constraints may exist and for which projects such as the Dedicated Freight Corridor are needed to address capacity expansion needs.
Development plans of Indian Railways: Overcoming gaps
The current scenario in railway logistics warrants immediate steps for building infrastructure, augmenting existing capacity and undertaking necessary policy reforms.
Roughly Rs 14 lakh crore is needed for augmentation of capacity, upgradation and modernisation of Railways in the next 10 years. It has been tentatively assessed by Indian Railways that 64 per cent of this investment could be mobilised by Indian Railways through surpluses from high growth in freight and passenger traffic, supported by prudent borrowing and use of PPP initiatives. Even then, it is obvious that the cost of completing this massive expansion and modernisation of the railway system cannot be borne by Indian Railways alone. Thus the government proposed to set up an Accelerated Rail Development Fund (ARDF) to finance the remaining 36 per cent to the tune of Rs 5 lakh crore to be spent over the next 10 years. It needs to be borne in mind that India’s key competitor, China, plans to invest Rs 14 lakh crore in railways in next three years. The table below provides for the tentative outlay planned by Indian Railways in building infrastructure.
The Vision 2020 also envisages the implementation of at least 4 high-speed rail projects to provide bullet train services at 250-350 kmph. It also envisages the production of passenger coaches to be increased from 2,500 per year to 5,000 over the next 3 years and finally to 10,000 per annum.
The Ministry of Railways (MoR) expects a budgetary support of Rs 5 lakh crore towards the total decadal investment of Rs 14 lakh crore. Of the remaining Rs 9 lakh crore, it remains to be seen how much will be through internal resources, ‘prudent’ borrowings and PPPs. But the issue with PPPs in India has been in evolving workable Request for Qualification (RFQ), Request for Proposal (RFP) and contractual agreements, and in taking along a variety of stakeholders, driven by changing stances of the MoR. Examples of this change are modernisation of railway stations the locomotive factories at Madhepura and Marhowra in Bihar.
The success of Indian Railways in transforming itself in to a leading supply chain provider of the country depends on the confidence and maturity with which proposed plans and schemes are implemented. The Indian Railways needs to take steps on many fronts:
• Explore, analyse and implement optimal solutions on organisational transformation.• Concentrate on its core activity of creation of railway infrastructure and operations.• Finalise PPP frameworks for developing state-of-the-art rolling stock factories, locomotives, high speed corridors, multi-modal Logistics Parks, port and hinterland connectivity projects etc.• Forge partnerships with private sector to accelerate implementation of railway infrastructure and corresponding logistics requirements.
The authors are with PricewaterhouseCoopers India. Subbramanian is Associate Director, and Athar is Senior Consultant—Government Reforms and Infrastructure Development.