This year is expected to be worse than last year and so, the Railways, which have shown an impressive turnaround, are likely to see a slower growth in freight revenues. The slower growth, however, is not going to result only from a slowing economy. As the prices of oil head towards newer lows, the advantage that the Railways have over road and air will narrow, so the competition will get more intense. The Railways need to buck the trend and wean away freight from the roads sector, not just by offering lower fares, but also by offering better logistics, essentially end-to-end transportation of goods.
Earnings in the passenger segment are around 50 paise per seat per kilometre in the upper class (101 paise per km per person is rationalised for equivalent capacity) and around 27 paise in the mail/express sleeper class — it is around 15 paise for ordinary second class, but this figure is not comparable as we do not know the load factor. The Railways are moving on the right track, and have introduced new trains such as the Jan Shatabdi and the Garib Rath which, apart from being more comfortable, have helped increase earnings closer to around 50 paise. But the scope for further increases here is probably limited since it may not be possible to raise fares at the lower end — this is part of a political strategy to lessen the burden on the economically weaker sections of society who are dependent upon the railways for relatively inexpensive transport.
So, freight is the area where the Railways need to concentrate upon from the point of view of revenue. Around 55 per cent of the freight traffic is accounted for by coal, iron ore and steel. Since the revenue per-tonne-km is almost the same for most commodities, except iron ore and steel, this means the Railways need to look for new categories of freight (those being freighted by road) if they want additional revenues. This is where the role of Public-Private Partnership (PPP) comes in.
The Railways must first target the low-hanging fruit by involving the private sector in marketing for freight services, and to complete the last-mile in the supply chain. A hub-and-spoke model is what is required here. The Railways should carry the goods on the hubs, that is, from one station to the other; while the private sector transships the goods from the hub to the spoke, that is from the railway station to the customers’ godown/outlet. If the Railways use this model and offer attractive rates to transporters, it will incentivise them to divert goods from pure-road to road-cum-rail.
Second, the Railways must increase their effort to enhance container train traffic. There are currently 13 private players, apart from the Railways’ subsidiary Container Corporation of India, who are running their own freight trains and who pay a track fee to the Railways. The Railways can explore the possibility of increasing track capacity for running more freight trains and taking more load per train through better design of wagons, softer and less investment-intensive methods like better signalling, de-bottlenecking, and, where feasible, by rearranging the priority for uneconomic passenger trains. So, while the economic slowdown and falling diesel prices will reduce demand for railway freight services, we think freight demand can be raised if the Railways are to get back some of the share in traffic which they ceded to road transporters over the years.
Third, as a long-term strategy, the Railways should accelerate the Dedicated Freight Corridor (DFC) programme. This, of course, is capital intensive. But during a period of economic slowdown, the standard Keynesian prescription is to build public assets as a way of stimulating income, employment and final demand. It was during the Great Depression, that the highway network in the US was put in place using government funds.
The total investment in the DFC, in both the western and eastern corridors, adds up to around Rs 49,000 crore including escalation, out of which about 76 per cent is the debt component. The western corridor is being financed by Japan International Cooperation Agency (JICA) at an interest rate of 0.2 per cent, and the eastern corridor by the World Bank and the Asian Development Bank (ADB) at an interest rate of 5.5 per cent. The cost-per-km for the western/JICA-funded segment is around Rs 19.5 crore while that of the eastern/WB-ADB-funded segment is about Rs 16.55 crore. While there may be justifiable reasons for the difference, such as land acquisition, type of terrain, use of costlier locomotives, and so on, the Railways may want to look at this again to see whether the lower interest rate of the JICA is more than offset by the higher costs.
Prima facie, the western corridor may be more profitable as it carries higher value-added goods and hence merits priority in construction. However, full benefits of the DFC can be availed of only when both corridors are fully integrated. This is also the time when the Railways can get market-based financing on more attractive terms — not just because of the economic slowdown but also because of its impressive performance over the past few years. The Railways can get additional financing from the market to build supporting and complementary infrastructure in order to maximise benefits from the DFC.
Difficult times always demand innovation. After all, the 1991 Balance of Payments crisis is what led to Manmohanomics and the subsequent dismantling of the licence-permit-quota raj and replacing it with liberalisation-privatisation-globalisation (LPG). Given the high user-charges at major airports, and their inconvenient location in cities like Bangalore and Hyderabad, for instance, the time may also be right for the Railways to consider introducing high-speed trains that can link major metros through overnight journeys, and charge commercial rates on these trains. This will result in switching from fossil fuel consumption to more convenient energy which would necessarily reduce energy consumption and CO2 emissions and, in turn, will improve the viability of these projects through the sale of carbon credits
The authors are, respectively, Chair Professor, Railway Finance, and RBI Chair Professor at IIM Bangalore
