Unduly drastic revision

Railways can eventually hurt themselves

The railways have at one go raised container haulage charges by between 100 and nearly 300 per cent for such major bulk items as iron and steel, cement and petroleum products. This is what the railways levy on third party — private and public — owners of freight trains for using the railways infrastructure. As this comes in the wake of a much smaller 3-6 per cent rise in these charges in January, it raises several questions. What are the extraordinary developments beyond the control of the railways which prompted such drastic action in the middle of the financial year? If it is a desperate move to shore up a seriously deteriorating financial position, then it puts a question mark over the sanctity of the budgetary exercise. Why should railway revenues falter when the economy is growing at 8 per cent plus, having put behind itself the slowdown of 2009?

The next issue is what this will do to the economics of container train operators. As the railway charges make up three quarters of the operators’ costs, their business fundamentals will change drastically. They are unlikely to be able to avoid passing on a good part of the charges to their customers. This will affect their demand scenario and also future revenue potential. According to analysts, the latest railway move will deal a blow to a business that is not making any money for the newer private operators (that is other than the railways’ own incumbent Concor) even at the old rates. In the process, the railways may have dealt themselves a blow that will harm them in the long run. The new players were trying to create a market in private rail haulage which, if it got going, would in the future reduce the railways’ need for investment in rolling stock.

It may well be that the railways feel that the market can take a somewhat higher level of charges. The January rise by the railways led to a higher-than-commensurate rise in the private operators’ rates. But the question is how much? A 3-6 per cent rise cannot be compared to 100 to nearly 300 per cent. There is indeed a need for independent determination of costs of both the railways and the operators. In allowing third party use of its infrastructure, the railways are really playing the role of a common carrier, the same way as electricity boards allow their networks to be used for private trade in power against the payment of charges determined by electricity regulators. An independent regulator should determine costs and fix user charges which will both recover costs and create incentives for efficiency gains by all parties. Unless this is done, the railways stand in danger of shooting themselves in the foot. If private freight train operators’ charges go up drastically, then it will lead to even more of inland freight being carried by road. The Indian Railways do poorly in this regard, according to a McKinsey study, accounting for 36 per cent of total haulage, compared to 47 per cent in the case of China and 48 per cent in the case of the US.