“India continues to cross subsidise passenger services with freight revenues; it condemns India to a high carbon, high logistics, cost, and high road congestion future,” says World Bank specialist
Martha Lawrence, senior railway specialist, leader of railways community of practice, World Bank, said Indian Railways faces three major challenges. First, it is losing market share to roads, second is capacity constraints and third is finances. To end railway woes, Lawrence proposed to turn it into an enterprise with commercial independence, like in the case of Russia and China. She advocated building of new revenue sources for funding passenger services.
Here is the text of her speech at the Railways Reform and Governance Conclave 2017 held in New Delhi.
Indian Railways is facing three challenges. Number one is that the rail service is losing the market share to roads. After decades of growth both freight and passenger services are down, despite India having the fastest economy in the world.
The second challenge is capacity. The traffic has grown much faster than the infrastructure capacity and is constrained in key corridors. This affects railways ability to offer competitive services.
The third challenge is finances. Historically, railways revenue has covered cost and contributed to a third of capital investment. But balancing the budget is getting increasingly difficult. Moreover passenger masses are huge and put a big burden on the freight whose high tariff makes railways lose competitiveness.
So Indian Railways is at crossroads. If issues are not addressed, it is becoming trapped in vicious cycle of deteriorating finances under investment capacity bottleneck and declining rail share.
I would like to highlight some of governance reforms, international experiences, which suggest putting Indian Railways instead on a virtuous cycle of growth investment and financial sustainability.
Let us look at freight services. Coal, which comprises of 40 percent of freight volume and nearly half of its revenue, is down. It’s not a temporarily blip. It’s the structural changes in the economy such as coal mines in Odisha replacing the imported coal. So this traffic is not likely to come back and the gap needs to be filled with new traffic.
The good news is India has lots of other traffic that could be carried by the rail. Our freight logistics model shows that rail carries only a fraction of traffic which in other countries would move by rail. And the railways in my country –the US – would similarly depend on coal a few years ago. But they were able to develop other lines of business which you can see in two railways in the US; they are now bigger revenue producers than coal.
This was happened because railways were free to change how they worked. They went from bureaucratic government focused service providers – the kind of guys who would expect customers to adopt their logistics system to customer friendly transport provider who adopt rail services to customer needs.
This required a big change in culture. As well as competitive prices, tailored services, targeted investments – all wrapped up in long term contracts to service guarantees. India could attract this kind of non-coal traffic, too. It’s there to be moved.
But it requires commercial management which is much easier to deliver in a company structure than through ministry. It requires that the cross subsidy from freight to passenger services be reduced. So freight can charge competitive prices. If India continues to cross subsidise, it condemns India to a high carbon high logistics cost, high road congestion future.
I don’t have enough data to talk about growth in rail passenger market, although I firmly believe it’s there. But I do have some data about why passenger services require so much subsidy.
I have heard people say that it is because Indian Railways is overstaffed, and I want to tell you that is not supported by the facts. If we look at IR staff productivity it stacks up pretty well against other passenger railways. It’s about 70 percent of the productivity of China railways and more than twice productivity of France and Germany!
The issue is in ticket revenues. The Indian Railways revenues are way lower than other countries. Indian Railways revenue per passenger kilometre is less than one-fifth of China where the average salary is about the same.
So what is international experience suggest to be done to address this issue. Well, given how low the rates are it does appear that there is some room to raise rates – something to consider and study. Rates could be indexed to cost and inflation.
It’s possible to enlist local support for local services. The Russian railways, for example, has put its suburban services into joint ventures with municipalities. So they share and support in the service.
China railways develops high speed infrastructure with provincial government – again getting the local government to support the investment.
In many countries, you can support loss making social services through government funded public service contract. Many, many countries do this. It’s possible to leverage passenger assets and footfall through advertising and developing station real estate. That can’t substitute for the other sources of the revenue. But it can be an excellent supplement.
On infrastructure, the key corridors in the golden quadrilateral are saturated with trains. The dedicated fright corridor being built with WB and JICA (Japan International Cooperation Agency) support are part of the answer to this. But much more needs to be done. The ministry of railways has developed a concept of ‘India development fund’ to raise financing from the private sector for commercially viable infrastructure. But it’s the railway fund exercise demonstrated that financing depends on funding. The cash flows from freight, passenger and government have to be sufficient for financing that allows investment in new services. So addressing the low revenues from passenger service and growing the profitable freight service are key to be able to finance the expansion in infrastructure that’s needed.
The three changes that international experience reflects to address the challenges dogging Indian railways are as follows: 1) turn the Indian railways into a state owned enterprise with financially separate passenger and freight units—acting under the mandate with sufficient independence to operate commercially. Every major railway in the world is functioning as a company. Russia, China and many others have made this change to be enable railways to be more commercial and market oriented.
And when I raise this issue, which I know is a controversy in India, I would also like to emphasize the importance of the mandate and the independence to operate commercially. Without this corporatization it is just like moving the boxes around.
Second would be to encourage market pricing and contracting for freight services. Without services tailored to specific customers the railways can’t compete with trucks and expand profitable services that need financial help.
Third would be to build the revenue sources for passenger services, so that the passenger services have the funding to support the needed investment and service improvements.
I know that this simple-sounding ideas are not easy to implement but the market is there and with all the smart people, the Indian Railways, I assure you, can figure out how to do this and put itself back on virtuous cycle of growth investment and financial sustainability.
(The Railways conclave was organised by Governance Now.)