Wednesday, November 16, 2016

CHANGING ROLE OF INDIAN RAILWAYS – A STUDY

CHANGING ROLE OF INDIAN RAILWAYS – A STUDY

The back ground
Monopoly days are over due to other surface transport like road, and air
Dwindling budgetary support for Goi
Cross  subsidization
Wage bill
Pension liabilities
Growing cost of service – labour VI and VII CPC
                                       Stores cost
Cost of projects time and cost over run


In one of the reports[1] of the United Nations on ‘the Restructuring Railway’  Economic And Social Commission For Asia and The Pacific, New York 2003 the problems faced by Railways in many countries listed out for remedial action. It is stated that the problems are interrelated which typically have comprised of:
􀂾Chronic financial deficits;
􀂾Archaic pricing systems where charges are not related to cost;
􀂾Lack of an equitable fare structure and excessive freight;
􀂾 freight Costs have been excessively high
􀂾Low operating efficiency;[2]
􀂾Poor management and technical efficiency;
􀂾Low labour productivity;
􀂾Severely congested services;
􀂾Low service quality;
􀂾Services have failed to respond to need;
􀂾Deficiencies in the physical infrastructure;
􀂾Poor asset maintenance;
􀂾Inadequate funds to invest in transport infrastructure and/or services;
􀂾Widespread state ownership and operation of transport infrastructure and services;
􀂾Limited private sector participation in the transport sector
In the same report, the reasons for the above problems are discussed at length.
The Problems of Railways[3]
Railway Problems
no
Typical Causes
Chronic Financial Deficits.
1
Constraints on charges imposed through Government regulation; Persistent excess capacity; Provision of guaranteed service levels at fixed prices or with ‘excess’ competition; Provision of services at below marginal cost; Failure to understand or identify costs; Ineffectiveness in collecting revenues; Low productivity; Unduly high operating costs;  Over manning.
Growing Operating Subsidies.
2
Chronic financial deficits; Lack of ‘corporatization’;
Inadequate distinction between roles of government and of the railway operator; Inadequate subsidy policies.

Archaic Pricing Structures
3
Prices are not related to marginal costs; Costs not properly identified or measured; Inadequate financial and management accounting systems;
Inadequate or non-existent pricing objectives or statements of pricing policy.
Lack of an Equitable Fare Structure
4
Lack of an Equitable Fare Structure and Excessive Fares. Lack of user or community representation in service and price decision making; Public or private monopoly.
Excessive costs;
5
Excessive costs; Low managerial and technical efficiency; Low Productivity. Lack of competition or existence of a ‘natural’ monopoly; Over-manning; Lack of investment.
Low service quality;
6
Congested services; Services have failed to respond to need.
Lack of competition; no peak-load pricing; Inadequate cost recovery in pricing policies; Inability to reinvest operating surpluses or raise funds for investment. 

The underlined problems (by the research scholar) are also applicable to Indian Railways and the Southern Railway being part of the Indian Railways. The study aims at making the rail transport marketable. Thus it is making way for private parties to enter in to rail transport business as elsewhere. In these countries of South Asia, rail transport is under Govt control or partly controlled by the Govt.



Figure – 2 The Vicious Cycle Of Under Funding In Railways[4]


Oval: GROWING
FINANCIAL
DEFICIT
Oval: REDUCED
MAINTENANCE
Oval: FALLING
SERVICE
STANDARDS
 





























In another report by the United Nations, (ESCAP) Economic and Social Commission for Asia and the Pacific: “Marketing the Railway Products in the Asia and the Pacific Region- Guidelines for development of a marketing culture, systems and practices in the railway systems of the region” the vicious cycle of the problems of the railways in the region of study is exhibited.   The dilemma faced by most of the railway organizations of the region, and of the world for that matter, is best understood by reference to what might be termed “the vicious circle of railway under funding”. Figure 2 (above) illustrates how this vicious circle works.
A widening negative gap between operating costs and revenues such as that experienced by a majority of the region’s railway systems can lead (and often has led) to a situation in which governments reduce the level of funding available to their rail systems for the maintenance of their track infrastructure and vehicle fleets at a level compatible with the provision of a safe, efficient, reliable and competitive transport service.
This in turn leads to deterioration in the condition of track, bridges, signaling systems, and of locomotive and rolling stock fleets, resulting in high rates of equipment failure and the imposition of increasingly stringent speed restrictions on track and bridges, in order to arrest the decline in physical standards. The market response to falling standards of service is a withdrawal of business and reduced traffic volume, leading successively to: declining revenue;[5] further widening of the financial deficit; and further reductions in the railway budget. In this way, the vicious circle is completed.
The problem of the non-availability of funds[6] to support an acceptable level of maintenance (which might be perceived to be the root cause of the vicious circle) is often compounded by capital starvation, particularly of funds for railway capacity expansion projects, the majority of which may be economically justified by comparison with alternative investment in less environmentally friendly transport modes.

Decline in Market Share:
The market share of the railways is declining vis-à-vis roadways.  The investment of Govt of India  in the transport sector has declined steadily after the Third Five Year Plan.[7]  While quoting a report by the World Bank, Tandon states that India’s rail dominant economy of the 1950s have become a road dominant economy in 1990s.[8] Similar sentiments are echoed by R M Raina. For numerous reasons railways are losing to road traffic over the years.  Against 90 % of total land freight carried by railways in 1950 -51 (we) are now carrying only about 25.76 %[9], the balance shifted to roadways.[10]  As per the Railway Minister’s records that railways market share of both freight and passenger traffic has declined from 89 % and 80 % respectively in 1950-51 to 40 % and 17.68 % as of then.[11] The latest picture shows that  Indian Railway’s share is less than 45 % and 20 % respectively as per the modal shares at the following Table No:5
Table No: 5
Modal Shares of Various Modes Of Transport In Percentage Basis[12]
                                                                                                                                              
SL. No.
MODE
SHARE OF NTKM
SHARE OF PKM
1
RAIL
46.3
20.7
2
ROAD
49.1
78.6
3
AIR
0.17
0.66
4
COASTAL SHIPPING
2.20
0.04
5
INLAND WATER
0.03
-
6
PIPELINES & OTHERS
2.20


TOTAL
100.00
100.00

NTKM: Net Tonne Kilo Metres; PKM: Passenger Kilo Metres



Table No 6
Sources of Funds (in Crores of Rupees)[13] Indian Railways
Source of
Fund
2009-10
2010-11
2011-12
%age share
2012-13
%age share
2013-14
%age share
2014-15
%age share
Budgetary Support    

16911
18385
20013
44%
24132
48%
27033
51%
30100
46%
Railway
Safety Fund  


805
1100
1323
3%
1578
3%
1983
4%
2200
3%
Internal Resources    

12196
11528
8935
20%
9531
19%
9681
17%
15350
23%
Extra-Budgetary Resources

9760
9780
14790
33%
15142
30%
15085
28%
17795
27%

39672
40793
45061

50383

53782

65445


Figure 3 Share of Net and Gross GOI support to IR as share of Plan Outlay[14]


At this time, it is useful to recall that the Expert Group on Indian Railways, chaired by Dr. Rakesh Mohan in 2001 had noted the sharp decline in the share of budgetary support and internal resources has led to increased market borrowings and financial stress in IR. Leasing arrangements through IRFC had enabled additions to rolling stock; the effect of shortage of internal resources was therefore acutely felt on other replacements financed through the DRF, i.e., track renewals, bridges and other fixed assets resulting in adverse effects on train operations. IR faced great difficulties in the 1990s in raising the resources required even for its low investment levels and being forced to raise the levels of its public borrowing through IRFC, raised its overall level of resource costs. To ensure that this does not happen again, the investment priorities have to be refocused on remunerative projects.

Tariff Policy and Cross Subsidization:
Economic and financial considerations make it imperative that the tariff structure be cost-based or cost-oriented to minimize the level of cross-subsidization.  However, in the Indian Railways the policy of tariff is not based on the cost.[15]  Railways are not entirely free to fix the fare and freight rates to fully cover the increase in prices of various inputs.[16]   The pricing of services of Indian Railways is decided by the Parliament.  In keeping with the socio-economic policies of the past, the tariffs have distortion of inherent cross subsidies to meet such objectives which are not entirely commercial.  The policy has resulted in the loss of high revenue yielding traffic to road transport and to other modes such as pipelines.[17]  Cross subsidization between profitable and non-profitable transport activities is threatening the viability of an enterprise.  This has been one of the prime reasons for segregating passenger and freight transport into separate companies in many countries. 
Such continued cross-subsidization of passenger operations, by freight earnings has reached a critical stage as the freight traffic has reached the saturation point.  The continued milking of freight traffic has made Indian Railways freight rates is the highest among the world as per a World Bank Report.  Further increase in freight rates to meet the increase in inputs would be counter-productive.  Indian Railways are now in the verge of  a financial crisis.[18]

The tariff policy of administrated prices enables freight earnings to cross-subsidize passenger services and movement of essential goods (charged at concessional rates to meet Government’s social objectives).  The extent of cross subsidies was estimated at Rs 2000 Crores annually.[19] As a deliberate policy of the Government, railways have over the years exercised a policy of tariff restraint with the result that a number of services are being run below cost.[20]

Indian Railways are following a policy of concessional fares for its passengers, the extent of concession varying with the different streams of such traffic.  The average rate of revenue (fare) for passenger Kilo Meters is shown in Table No: 7  for various categories of traffic. Table No 7 Unit Cost vis-a-vis Yield per Unit[21]
Year
Coaching services
Freight services

Cost
Per PKM
Earnings per
PKM
Ratio
Cost
Per NTKM
Earnings per
NTKM
Ratio
1999-2000
35.83
22.21
62.0%
55.91
72.28
129.3%
2008-09
48.86
26.13
53.5 %
63.74
96.90
152.0 %
2009-10
52.87
25.96
49.1 %
65.84
97.41
147.9 %
2010-11
52.60
26.32
50.0 %
67.63
100.44
148.5 %
2011-12
54.38
26.99
49.6 %
69.64
104.17
149.6 %
2012-13
57.76
28.52
49.04 %
75.28
123.27
163.7 %

Decline in Budgetary Support:
The major source of investment in the past has been the budgetary support, has dwindled from 75 % to a meager 15 %.  Railways have therefore, to raise resources from the market on commercial terms and conditions.[22]
‘Budgetary support started declining and came down from 75 % in V Five Year Plan to 58% in VI Five Year Plan and to 42 % in VII Five Year Plan.  It has drastically come down to 21.5 % in VIII Five Year Plan.    Declining governmental support has caught the railways between the need to carry higher traffic and increasing cost of operations.[23]
The following table would indicate that the GOI has reduced the outlay support to railways.
Table No 8
Declining Budgetary Support[24]
Sector/units
Up to V Plan
1958-70
VI
1980-85
VII
1985-90
VIII
1992-97
IX
1997-02
X
2002-07
XI
2007-12
TOTAL
PLAN OUTLAY
59979
109292
218729
485457
813998
1525639
4118531
TRANSPORT
SECTOR
10117
139662
29548
65173
117563
259777
448987
RAILWAYS
4723
6585
16549
32306
45725
84003
223289
TRANSPORT
SECTOR AS %
OF TOTAL PLAN
16.9
12.8
13.5
13.4
14.4
17.0
10.9
RAILWAYS
AS %
OF PLAN  OUT LAY
7.9
6.0
7.6
6.7
5.6
5.5
5.6












Outside Borrowing:
 Market borrowing for financing the railway plans are comparatively expensive - high cost of market borrowing - high cost of operation - the rate of interest on Taxable bonds is 9 % against the dividend rate of 7 %.[25]  Similar view was already expressed by George Fernandez.[26]  If the railways have to maintain their financial viability, the market borrowings have to be kept under very close scrutiny.[27]  The Lease Charges have risen from a modest Rs. 25 Crores in 1987 - 88 to whooping Rs. 11000 Crores in 2013-14.[28]

No
Details
Percentage
1
Total Earnings
83.80
2
Total Social Cost
16.20
No
Details
Percentage
1
Working Expenditure
82.00
2
Social Cost
18.00

Social Costs: 
These costs impinge upon the viability of Indian Railways system. Social Costs are those costs involved in carrying certain commodities and passenger category below cost and the consequent loss incurred by the Railways. Net social service obligation borne by IR in 2013-14 is assessed at Rs.24,886.32 Crores excluding staff welfare cost (Rs.4286.99 Crores) and law and order cost (Rs.2947.12 Crores) constitutes 17.8 % of the total revenue earnings and 19.00 % of the total expenditure.[29]
Essential Commodities Carried rates below cost:
Essential Commodities Carried at concessional rates below cost include food grains, sugarcane, salt, fruits ,vegetables, timber wrought, live stock, wood  wrought, edible oils, coir products, oil products, fodder, bamboo, cotton raw and unprocessed, acids, bones, lime etc., The total loss on this account is Rs 53.31 Crores during 2013-14.
Losses on Passengers and other coaching services :
Losses on  Passengers and other coaching services operated at subsidized rates due to short distance passenger traffic by Second Class ordinary  fares, non-suburban passengers availing Season Ticket concessions, commuters on monthly and quarterly season tickets on suburban sections of  Calcutta, Chennai and Mumbai., concessions granted to award winners, sick ,blind, deaf and dumb, orthopedically   handicapped  persons, other categories of police, military personnel, students,  war widows, senior citizens, and others . The loss on passenger traffic during 2013-14 accounted for Rs. 32067.12 Crores (Source: Indian Railways, Year Book, 2013-14 Pg 114)
Uneconomic Branch Lines:
A number of branch lines carry traffic below capacity and are not commercially viable.  With the development of roads, change in the pattern of industrial activity and progress in the urbanization, many branch liens have lost their original utility.   However, in the face of the strong public resistance to any proposal for closure of these branch lines and reluctance on the part of the State governments to support any suggestion for their closure, it has increasingly difficult to close these lines.  The loss on this account is Rs 1681 Crores during 2013-14(Source: Indian Railways, Year Book, 2013-14 Pg 117). Such subsidies affect the railway’s capacity to invest further unless railways have the freedom to do their own pricing of services.[30]

Financing the social costs is a great burden not only to Indian Railways but to railways all over the world.  However, in many countries the losses are compensated by hefty grants from the governments.  Unlike in India, all over the world the State compensates the Railways for incurring social costs. British Railways have been getting Public Service Obligation
Grants; Swiss Federal government has also been contributing as Federal Compensation for regional passenger and piggy-back freight support for investment and infrastructure maintenance.  German and French governments have also been contributing towards the cost of social services in these countries.  

The Government of India set up a High Level National Transport DevelopmentPolicy Committee (NTDPC)on 11 February2010.
The main objective of setting up this Committee was to develop long term national transport policy (with a twenty year horizon) which facilitates overall growth and efficiency in the economy, while minimizing energy use and effects on climate change.[31]
http://planningcommission.nic.in/sectors/NTDPC/TOR_CabSec_NTDPC.pdf

IR’s share in PKMs[32]
Dominance of Road in Freight[33]
Growth in total originating passengers
During the last decade (2001-11) the trend of suburban category being the driver of growth reversed and non-suburban passenger category has been the key driver of growth in total originating passengers with a CAGR of 6.2 per cent, compared to 3.6 per cent for the suburban passengers.[34]





Freight Growth in IR
Note: IR has focused on carrying bulk cargo in train-loads dominated by a narrow basket of nine commodities such as coal (46 per cent), iron ore, cement, fertilisers, steel, raw materials for steel plants except iron ore, foodgrains, petroleum products and container traffic, together these account for over 90 per cent of the freight traffic.




Action taken:
Market borrowing through IRFC  Raising bonds  market – Receive Rolling Stock on lease basis
Charges 16 % p a
Railway Safety Fund – a share from the Central Road Fund – every lr of petrol sold railways
get 12.5 paise and diesel 6.25 paise –meant for construction of ROB/RUB, manning unmanned level crossing
Special Railway Safety Fund –  non lapsable fund Rs 15000 Crores for renewal and Replacement of tracks, bridges, Rolling Stock Over aged coaches and wagons, signaling gears
Ministry of Defence for rail lines in strategic areas  – Udhampur – Katra – Baramulla – Quazigund  100 % support
North East Development Forum – for all projects in the seven North Eastern States

Corporatization -  IRCTC, RailTel Corpn, Container Corn, DFCC, Mumbai Rail Vikas Nigam, Rail Vikas Nigam Ltd, RITES, IRCON, MRTS,
Land development - RLDA,
PPP – 100 stations to be of world standards Adarsh stations, Habib Ganj in Bhopal fully under PPP, Railway Station Development Corpn,

Public Private Pariticipation:
Mundra Port Ltd – Mundra – Pipavav 50:50

State participation
Maharashtra:            Mumbai Rail Vikas Corporation 2/3
Karnataka   :             Karnataka Rail Infrastructure
                                 Development Enterprises  2/3
Andhra Pradesh:      50 : 50 sharing
West Bengal    :       Metro Rail – Dolliganj – Dahria
                                1/3 share
Jarkhand         :       2/3 sharing
Tamil Nadu :            MRTS – Taramani – Velacheri 2/3
                                GC – MSB – TBM               50:50
                                GC  -  SA  - COT                 50:50


DII LIC of India Rs 150000 crore

Suggestions
Hiving off non core activities – schools, colleges, hospitals, etc – welfare
                                                    Maintenance of assets – coaches, wagons, pway, machinery
Rail wheel separation as in European countries
The infrastructure will be owned by a govt or corporate and  the trains will be run by multi operators like the road. Reduction in HR: aims at reduction of 10 %  p a to reduce to 7 to 8 lakh employees from 11 lakh. Hiving off pension liability to NPS for employees joining after 2002.



[1] United Nations on ‘the Restructuring Railway’  Economic and Social Commission for Asia and the Pacific, New York 2003   
[2] Balakesari K Former Member Staff Railway Board- “Strategy For Revival And Resurgence Of The Public Sector In India” 2012
[3] UN Report:op cit
[4] U N Report-(ESCAP)  Economic and Social Commission for Asia and the Pacific:” Marketing the Railway Products in the Asia and the Pacific Region- Guidelines for development of a marketing culture, systems and practices in the railway systems of the region” Pg11 Chap 3.1  
[5] U N Report- ibid
[6] Ranganayaki K: “Ways and Means of Increasing Revenue of Indian Railways”, IR, Jan 2012  pg30,
[7] Ashok Bhatnagar, “Emerging Role Of The State In Transport Sector - The Case of Indian Railway”, IR, April 1995 PP. 22, 23 & 25
[8] Prakash C. Tandon , Report Of The Committee To Study The Organisational Structure And The    Management Ethos In The Indian Railways,  New Delhi, March 1994
[9] Prosenjit Dey Chaudhury  “Shares Of Modes Of Transport-Modal Split Between Rail & Road Modes Of Transport In India” Pg 20
[10] R.M. Raina,  op cit
[11] Presentation of Railway Budget, 1998-99, IR, May 98, p.5
[12] Arun Bhagra, -Lt. Col “Role of Indian Railways in The Future Transportation Scenario. RTJ, July - Sept. 1996 PP.  29 & 30.
[13] Interim Report of the Committee for Mobilization of Resources for Major Railway Projects and Restructuring of Railway Ministry and Railway Board, March 2015, Ministry of Railways, Rail Bhavan, New Delhi Pg 144
[14] ibid Pg 132
[15] George Fernandes, op.cit para 47
[16] Birkh Ram, Improving Railway Finances, I R, Aug.96, p. 39.
[17] Ashok Bhatnagar, op cit.
[18] R.M.Raina , op.cit
[19] Ashok Bhatnagar,  op.cit
[20] George Fernandes, op cit., para.  30
[21] Indian Railways, Life Line Of The Nation, February 2015Government of India Ministry of Railways  New Delhi
[22] , N. P. Srivastava, Brief Report on the Seminar on “Investment Opportunities in Rail Transportation and Services ‘, RTJ, Jan- March 1996, p.  5
[23] V. Sivakumaran,” Privatisation and Modernisation in Indian Railways - Financial consideration”, I R, April 96 p.  17
[24] Indian Railways Year Book 2008-09, P 13
[25] Sivakumaran V, op.cit.
[26] George Fernandes, op.cit para 39.
[27] White Paper on Railway Projects, Ministry of Railways, Govt. of India, 1998 p.7
[28] Status Paper on Indian Railways, Some Issues and Options, Ministry of Railways, Govt. of India, 1998.p. 9 & Indian Railways Annual Reports & Accounts 2012-13 pg 14
[29] Indian Railways Year Book 2013-14 Pg 113-116
[30] Lakshmi Narasiah, Dr. M.,” Cheap Transport for India’s Millions, IR, Feb.-March 97, p 41.
[31] http://planningcommission.nic.in/sectors/NTDPC/TOR_CabSec_NTDPC.pdf

[32] http://planningcommission.nic.in/sectors/NTDPC/TOR_CabSec_NTDPC.pdf

[33] http://planningcommission.nic.in/sectors/NTDPC/TOR_CabSec_NTDPC.pdf

[34] http://planningcommission.nic.in/sectors/NTDPC/TOR_CabSec_NTDPC.pdf

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