Archive for July, 2014

What’s wrong with the Railway Budget

Saturday, July 19th, 2014

Mint, July 9, 2014

Railway minister Sadananda Gowda has presented his Budget. And media reaction has been generally positive. He acknowledged the parlous state of the finances of the Indian Railways—out of every rupee it earns, only a meagre 6 paise is available for investment. He avoided announcing scores of new trains and new zonal headquarters.

Instead he opted to complete as fast as possible all the important projects already in the pipeline, many of which were proposed by the previous UPA governments. He bravely admitted many of the problems besetting the railways (some of which I mentioned in my 7 July column on this site) and his budget speech spoke of a long-term vision.

However, the two ideas that appear to form the lynchpins of his vision—high-speed passenger trains (including bullet trains), and private investment (including foreign direct investment)—come with a lot of baggage.

In the first case, the National Democratic Alliance (NDA) government is looking at the issue the wrong way, and in the second, as things stand, it’s not going to happen.

First, the bullet train dream. Bullet trains, travelling faster than 250 kmph, are, well, a seductive concept, but the fact is that only two lines in the world—one in Paris and the other in Japan—actually break even. Bullet trains that China has invested in run up staggering losses. The upfront investment is too high, and there is a limit to what passengers will pay for their tickets, so recovering costs may take decades, if they are recovered at all.

The railway minister himself admitted in his speech that the investment would be “Rs.60,000 crore for introducing one bullet train alone”. Rs.60,000 crore! And this when, “(The Railways’) surplus, after paying obligatory dividend and lease charges, was…Rs.602 crore in the current financial year.” But, of course, as Gowda put it, “it is the wish and dream of every Indian that India runs a bullet train as early as possible.”

Ok, now for the bullet trains’ slower cousins—the high-speed trains (160-200 kmph). Gowda wants to introduce them in nine sectors. Fair enough. But he misses the most economical and smartest way to do it.

Let’s go back to the basics. The Indian Railways makes its profits from transporting freight, and these profits are used to subsidise the passenger business. Yet, freight trains get stepmotherly treatment from the Railways. They are not timetable trains and spend possibly 50% of their travel time hanging around for the lines to clear. No wonder 70% of freight traffic has shifted to roads, even though road transport is more expensive and less environment-friendly.

Hence the concept of Dedicated Freight Corridors (DFCs), railway lines only for freight trains, connecting important commercial centres of India. This is the most crucial project that the Indian Railways are working on right now, yet Gowda mentioned it only once in his speech.

Two of the six corridors planned—the Western DFC (Delhi-Mumbai) and the Eastern DFC (Ludhiana-Kolkata)—are targeted to be commissioned by March 2017. The ports in the Western region covering Maharashtra and Gujarat will be efficiently linked to the northern hinterland, and coal would move rapidly to the power plants in the north, and steel to the industries.

The DFCs will have a massive impact on the Railways’ profitability, and the entire Indian economy. The average speed of freight trains will go up from 25 kmph to 70 kmph which will reduce the transit time from the present levels. At the same time, DFCs will allow higher axle loads per carriage and much longer trains. And the beauty of it is that the project will pay for itself because of the obvious advantages it would offer.

So what does all this have to do with high-speed trains? As pointed out by the National Transport Development Policy Committee (NTDPC), whose report I mentioned in my 7 July piece, with the construction and commissioning of DFCs, freight trains would get substantially diverted to the new freight corridors. This would present an opportunity to increase the maximum permissible speed of passenger trains on the existing corridors to 160-200 kmph (at present the maximum permissible speed for passenger trains is 150 kmph for a few trains and the average commercial speed is in the range of 70 kmph).

This would, in turn, enable operation of overnight inter-city services in the distance range of 1,000-1,500 km, as also help connect cities within distance of 500-700 km with high-speed day services. Increasing speeds to 160-200 kmph would need inputs by way of removal of speed restrictions, yard remodelling, fencing, improved signalling, easing of sharp curves and so on. The most opportune time would be to commence the exercise and implement the scheme when any section of the DFC gets commissioned, relieving the pressure of operating freight trains on an existing congested section.

For instance, as the NTDPC has calculated, with trains travelling at these speeds, one would be able to travel from Delhi to Mumbai in 11.5 hours instead of the current 16 (Rajdhani Express), Chennai to Delhi in 18 hours instead of the current 28 (Rajdhani), and from Mumbai to Ahmedabad in four hours (as opposed to the three hours envisaged for the first proposed bullet train).

Until the DFCs are complete (and they are, as I said, the most vital railway project for the economy), passenger trains travelling at this speed will slow down freight traffic and other passenger trains even more, and congest the network even further. This is the smartest way to build the high-speed rail network. Focus on the DFCs and piggyback the high-speed passenger trains on them.

Of course, this means we will have to wait a bit, but in the long term, this will be the best for the railways and the economy. And, yes, please forget about the bullet train!

Now for private investment in the railways. Public-private partnerships (PPP) have not taken off at all in this sector. The simple reason is that Indian Railways is owner, regulator, judge, jury, arbiter, all rolled into one. Unless an independent Railway Regulatory Authority is set up, which, among other responsibilities (including tariff determination on an economically rational basis), will also ensure fairness in dealings between Indian Railways and PPP participants in projects, the better class of private sector companies would not be interested.

Gowda is willing to allow foreign direct investment (FDI) upto 100% in railways, other than operations. But which foreign firm will invest in an entity which has no credible accounting standards?

The accounting system of the Indian Railways is organised to cater to government budget and control functions and does not follow accounting norms as prescribed in the Companies Act. The financial results of the Indian Railways, as presented to Parliament and for public information, include a Statement of Revenue Receipts and Expenditure (Profit and Loss account) and a Balance Sheet, but the contents of these documents depart substantially from the disclosure standards that are expected of going concern entities.

In other words, the Indian Railways’ accounts are not available in a format that is readily interpretable by lenders and investors. The present system of accounting does not give a true and fair financial picture. For example, the balance sheet does not show depreciation provisions and as a result it is impossible to ascertain the net block. Similarly, there is a no clear separation between revenue and capital, or between ‘top of the line’ and ‘below the line’, and the data is presented in a way in which one cannot ascertain labour productivity or employee cost.

This is actually funny! Neither the government nor the Railway Board has any clue how the organisation would fare if its accounts were presented as per the Indian GAAP (Generally Accepted Accounting Principles) followed by companies incorporated under the Companies Act.

Would you invest in such an entity? According to the NTDPC report, “The need for Accounting Reform has been recognised and accepted in the Railway Board. An Accounting Reform project was initiated and sanctioned in 2004-05. However, the work has made a tardy progress and the final results are far off yet.”

Unless the Railways undertake sweeping accounting reform, no one is going to risk putting money into it. FDI will remain a pipe dream.

The NDA’s first Railway Budget has much to recommend it. Most of all, it has defied all tradition and refused to go the gravy train route. But now the government must get down to serious hard-nosed restructuring.

That is the only hope for the Indian Railways, not bullet-train dreams.

Scrap the railway Budget and the ministry

Saturday, July 19th, 2014

Mint, July 7, 2014

Tomorrow, we shall have the first railway Budget presented by the Narendra Modi government. I have always been rather confused by this ritual. Why a separate railway Budget? Why are the railways segregated from everything else in the economy and given this little show of its own?

Yes, all right, the British began it. After all, it was the largest British project in India, and it transformed both the Indian economy and the fortunes of the British Raj and its mercantile class. “(Before the arrival of the railways) the common means of freight transport was the bullock cart, which could travel no more than 30km a day on India’s dirt roads,” I am quoting here from an essay I wrote in India Junction (Rupa, 2014), a book celebrating 160 years of the train in India. “These roads became near impassable during the monsoon, and for the rest of the year, traders faced the threat of en route piracy… Trains were capable of travelling up to 600km per day and they offered this superior speed on predictable timetables, all months of the year, and without any serious threat of piracy or damage. Railroad freight rates were also considerably cheaper: 4.5, 2.4, and 1.5-3 times cheaper than road, river and coastal transport, respectively. This was a boon.”

Of course, the British were proud of what they had wrought. They gave it a separate budget. The railways also played a much bigger role than just economic efficiency. Passenger travel by train connected people, made a significant dent in the caste and communal systems, exposed Indians to their country’s myriad cultures and branches of knowledge (How else could the average Tamilian ever have tasted the rosogolla, and the Bengali the dosa?). It was the greatest force of modernisation and unity that India had ever seen.

Mohandas Karamchand Gandhi could hardly have come to know the quandary, the diversity and the pride of his nation and its people se well, quickly and insightfully, without having taken the pan-India tour—under the advice of Gopal Krishna Gokhale—with his wife Kasturba. It was one of his first acts upon returning from South Africa. In fact, one can say with some confidence that the ‘Mahatma’ was born on Indian trains.

But things change. For decades, the railways has been used as a milch cow by successive ministers as simply a means to generate employment for their supporters, waste money on unproductive projects in their states and constituencies, launch unnecessary “prestigious” trains for political purposes, and invest very little in modernization and for long-term profitability. All this, while raising freight rates to subsidise passenger fares to an extent that defies all economic sense. Freight doesn’t vote, passengers do.

Just consider the huge outcry when the current government raised passenger fares recently. The annual railway Budget is usually the most cynically political exercise under the garb of economics and development.

The fact is: the cow is dry now. It has no milk left.

And given that the railway minister’s post was seen as a purely political one, governments have focused their transportation investments on roads. As a result, the railways’ share of total inter-regional freight traffic came down from 89% in 1951 to 30% in 2011-12. Even passengers have deserted the railways in very large numbers. The share of road in total passenger traffic (billion passenger km or bpkm) carried by road and rail together has increased from 32% in 1951 to about 90% in 2011-12.

Why should we be worried? Because, as compared with road, rail consumes 75-90% less energy for freight traffic and 5-21% less for passenger traffic. Unit cost of rail transport is lower than road transport by Rs.2 per net tonne-km and Rs.1.6 per passenger-km. For passenger transport, road accident costs are 45 times higher than rail; for freight, it’s eight times higher.

A study covering all modes of transport by consulting firm RITES Ltd has estimated that the consistent and unchecked fall in the share of railways through the years cost the Indian economy about $385 billion (16% of total transport cost) in the year 2007-08.

So what is the solution? Like in many other areas, it is there in an expert committee report that is lying in the Prime Minister’s Office (and several other ministries). The national transport policy development policy committee (NTDPC) was set up by former prime minister Manmohan Singh to take a look at India’s transport sector—from strategy to investment needs—with a 20-year time horizon. The report was submitted to Singh in February.

NTDPC, headed by Rakesh Mohan, currently India’s executive director at the IMF, and one of the key figures of India’s economic liberalisation, has suggested doing away with the railways ministry. In fact, it has suggested doing away with all the specific transport-related ministries (roads and highways, shipping, civil aviation) and clubbing them all under a unified transport ministry.

The idea may sound radical, but the logic is absolutely simple. Transport exists to carry people and goods from point A to point B. The customer—the passenger or the businessman—does not particularly care about mode of transport. He cares about reaching—or his goods reaching—the destination in the safest, most comfortable, quickest and value-for-money way.

India’s policy makers have never understood that transport should not be looked as roads vs railways vs coastal shipping, but as a multi-modal integrated system. And how could they, with the present set-up comprising so many mode-specific ministries, each lobbying for more funds from the finance ministry and the Planning Commission for its particular area of interest? Why should the roads minister care about railways? Why should anyone think holistically?

So we have containers lying in our ports for ridiculously long hours, because the roads to the port yards are in very bad shape, or there is no last-mile connectivity by train. Or highway construction gets stuck halfway because they have to cut through land owned by the Railways or the Airports Authority of India.

In fact, our transport system is a mess, and its uncoordinated inefficiency certainly shaves a couple of percents form our gross domestic product growth each year.

This, when nearly every other country in the world, and every one of India’s perceived peers, has moved in the direction of a unified transport ministry. Railway systems have also been included as part of this unified transport ministry or equivalent. China’s integration of rail into the larger transport ministry is under way. Most of these integrated ministries retain the basic division of labour across departments focusing on different modes of transport, with additional “integrative” sections looking at energy efficiency, innovation, and other cross-cutting functions.

As NTDPC’s India Transport Report recommends, the country needs to have a single unified ministry with a clear mandate to deliver a multi-modal transport system that contributes to the country’s larger development goals including economic growth, expansion of employment, geographic expansion of opportunities, environmental sustainability, and energy security.

The current collection of ministries creates a list of mandates to deliver particular types of transport infrastructure, with little incentive or ability to consider how these pieces interact as a circulatory system for moving goods and people. Transport planning is too big a job for a bunch of ministers protecting their own turfs, or to the Planning Commission (which, anyway, may become history very soon).

There should be one transport minister who should be held responsible overall for the transport system’s contribution to development goals articulated by the government. The existing ministries should become departments focused on delivering effective transport infrastructure and services for each mode. Each could be led by a minister of state with usual bureaucratic support. Each department should focus on building a credible case for investment and policy in its mode of transport to meet the broader framework set at the ministry level. This distribution of authority and technical expertise is crucial to maintain an ongoing, constructive discussion of various means for meeting transport development goals.

Of course, this sort of consolidation would have been difficult—if not impossible—in an era of fractious coalition politics; there would be a serious shindig over the distribution of goodies. But Prime Minister Modi has spoken about consolidating ministries, and he also has the mandate and the stature right now to push through necessary reforms. Assigning a single minister to power and coal is an intelligent and laudable move. But if he really wants to shake things up, have a nimbler, more coordinated government, he should abolish this relic of the raj—the railway ministry—in its current form, and also the other transport-related ministries and create a single transport ministry that takes responsibility for moving people and goods in the most economically viable and environmentally friendly way. And he does not have to hold too many long meetings—something which he is alleged to abhor—to do it.

It’s all there in India Transport Report (with an executive summary too) that’s lying in his office. Let it not gather dust like so many other reports commissioned by so many governments. And let this be the last railway Budget.