Diesel dual pricing may hit Railways’ turnaround strategy

Just when the Indian Railways appeared to have given itself a shot in the arm by raising passenger fares across the board after a gap of almost a decade, it suffered a setback through the sharp hike in diesel prices for bulk consumers. The latter is likely to take away a significant part of the additional revenue that will be earned through higher fares. Though the diesel price hike was, of course, necessary, the problem is that it has not been applied to all consumers; dual pricing means that truck operators will be able to access subsidised diesel at the pump. The Railways will thereby end up buying diesel at a 20 per cent higher rate. Although rail transport is a far more cost-efficient and environmentally friendly method of haulage, the Railways has been losing market share to road transport steadily over time. Now, this additional cost disadvantage will make it difficult to hold on to whatever it has, not to speak of clawing back lost ground.

This setback to finances shortly before the Railway Budget will make it all the more difficult for the Railways to script a turnaround strategy. This is because the other major avenue for raising resources, hiking freight rates, is virtually closed. Freight rates have gone up to a point where any further rise will be resisted by customers and accentuate the loss in market share. Hope of financial recovery, thus, theoretically hinges on two measures. One is through cutting costs. This is difficult because there is no flexibility in outgo under heads such as salaries and pensions, dividend and fuel costs. Though there is always scope to cut wasteful expenditure, for a public sector organisation to do so under current governance realities is unlikely.

Significant additional revenue can be earned by carrying more freight tonnage. This may be partly facilitated by the expected recovery in the economy, which will raise freight offerings. But there is a catch here. Recently, the Railways has followed a flawed pattern for placing orders for new wagons — so that if there is actually more freight to carry, then the Railways may find itself in the invidious position of running into a wagon shortage. Under the circumstance, the only hope for earning more revenue in the coming financial year is by getting more out of existing capacity. The Indian Railways has over the years achieved substantial improvement in the utilisation of rolling stock and other infrastructure. The scope for this is critically dependent on balancing investment in areas such as signalling and goods yards; and commercially attractive new lines, even if short, which improve port connectivity. But it is precisely expenditure heads that affect capacity and safety, like depreciation reserve fund (track renewal), capital fund and development fund, which have experienced cuts in the current financial year. While the Indian Railways must improve existing capacity use and invest more to enhance its ability to carry more freight-earning goods, the government should also move fast on diesel price reforms and eliminate subsidies on retail prices, in order to allow the Railways a level playing field.


Follow up railway fare hikes with measures to boost private investment

The surprise hike in passenger fares announced by railway minister Pawan Kumar Bansal, much before the rail budget, is a smart move aimed at improving railway finances. The timing should help counter political pressure for a rollback, which would have inevitably impacted the budget session. For almost a decade successive railway ministers, in their bid to play to the gallery, kept basic rail fares untouched. Meanwhile, railway finances continued to dwindle under surging fuel costs and wage bills, with losses on passenger services escalating to around Rs 25,000 crore. Efforts to compensate this huge loss by raising freight rates hit the cargo business. Transport costs rose, hurting the competitiveness of Indian industry.

Losses on passenger services have curtailed Indian Railways’ own fund mobilisation efforts. This not only led to downsized plan spending from the targeted Rs 61,000 crore to Rs 51,000 crore in the current year, it also curtailed replacement of worn-out equipment, opera-tion and maintenance activities and efforts to upgrade safety and passenger amenities. Opposition parties now crying hoarse about the fare hikes would do well to remember that further delay would have severely compromised passenger safety. They should keep in mind that railway trade unions themselves had demanded a fare hike last year.

Efforts at railway modernisation have been a major casualty of populist policies till now. While neighbouring countries like China have rolled out superfast trains travelling at a speed of more than 300 km per hour, Indian trains still run at a maximum speed of 130 km per hour. Its funds crunch has also forced the state-owned enterprise to continue operations with archaic signalling and safety equipment, worn-out coaches and poor passenger facilities. Another consequence has been stalled hiring of a large number of safety personnel, besides curbs on spending on ongoing projects of around Rs 1.5 lakh crore.

Sustaining the current drive to improve the functioning of the country’s transport lifeline would require Bansal to follow up fare hikes with supplementary measures. An important step would be to work to attract private sector investment in the railways by fast-tracking PPP projects. This must go along with steps to urgently boost services by increasing capacity as well as improving safety and cleanliness of the rail network. A tariff regulator to rationalise fare and freight rates is also urgently warranted to insulate decision-making from unnecessary politicisation.


What Railways needs most. Independent, powerful tariff body the best medicine

he decision by the railway ministry to set up a Rail Tariff Authority to take care of periodic changes in passenger fares and freight rates needs to be welcomed in unequivocal terms. As C P Joshi, minister for road transport, is holding additional charge of the railway ministry and so may not have the perspective to initiate fresh policy moves in key areas, the thought process behind the move may have originated from the prime minister himself. The Cabinet’s ability to take a positive decision in the matter has been enhanced by the end of the overbearing presence of Mamata Banerjee, West Bengal chief minister, who considered the Railways to be part of her fiefdom and was opposed to any passenger fare hike. To put it plainly, an inability to raise fares and freight rates to take care of rising costs will mean the kiss of death for the national carrier. Such a calamitous situation has to be avoided at all costs.

But it will not be enough to simply set up a tariff authority. To take fare and freight rate changes out of the political space and put them in the domain of business imperatives, the right type of tariff authority will be needed. It must be independent and it should work transparently, and its awards must prevail. Even worse than the current situation would be a tariff authority that will only advise. It will be one more bureaucratic layer, which will not aid but impede effective decision making. It is not as if fare rises are currently not taking place because of the absence of adequate number crunching. The facts are not just known, but are glaringly revealed in successive annual financial statements by the calamitous decline in the finances of the Railways.

India currently endures the worst of both worlds. It has an army of regulators in different spheres — excellent post-retirement slots for senior civil servants at considerable cost to the exchequer. But ministerial supremacy reigns, and the main struggle for regulators is to make themselves heard and be taken seriously. The only regulator that can be considered truly autonomous, and has had to earn this status through bruising fights, is the Reserve Bank of India. India, thus, has good-quality banking regulation and monetary policy management. The Railways needs to be professionally run with a premium on efficiency and safety. It is a very large commercial service provider, which can and should use all the tools offered by modern management and information technology. As it plays a critical role in the national economy, affecting the lives of many who may not be directly involved in its workings, it gives rise to many externalities. This makes it a bit like a utility whose tariffs have to be fixed keeping the overall national interest in mind. But that can hardly be served if it goes bankrupt and becomes unsafe for travel.


Freight hike to pull railways out of red

His fare hike proposals may have turned controversial for political reasons, but what has gone largely unnoticed is Dinesh Trivedi’s quiet move to increase freight rates by 20 percent on March 6, days before he presented the rail budget as railway minister.

According to sources in the railway ministry, the hike in freight rates will fetch an additional Rs.16,000-17,000 crore and provide a much-needed financial cushion to the railways. The railways’ freight earnings are Rs.80,000 crore annually. “Even without a passenger fare hike, the railways will be in a comfortable position thanks to the freight rate hike,” said the railway ministry official, speaking to IANS only on condition of anonymity as he was not supposed to speak to the media.


Officials say the freight hike went unnoticed as it was announced March 6, when the nation’s attention was focussed on vote count for assembly polls in five states. Indian Railways was staring at an earnings shortfall of Rs.7,000 crore just two weeks ago. It earns around Rs.28,000 crore from passenger fares annually.

The additional earnings from a 20 percent freight rate hike coupled with enhanced loading target and minor to moderate fare hike announced in the March 14 rail budget for 2012-13 would help generate around Rs.25,000 crore for the railways in the next financial year, said the sources.

Even if the fare hike is partially rolled back to placate a miffed Mamata Banerjee, chief of Trivedi’s Trinamool Congress, the railways would still end up mopping up an additional Rs.4,000-5,000 crore in passenger earnings, said sources. Owing to pressure from Banerjee over the rail budget, Trivedi quit the post Sunday.

The railways would still have to take hard decisions to meet the challenge of generating large amounts – to the tune of Rs.9 lakh crore over the next five years – to address the safety and modernisation imperatives pointed out by two expert panels headed by former Atomic Energy Commission chief Anil Kakodkar and prime minister’s adviser Sam Pitroda.

“The safety and modernisation challenges will remain till the railways address them,” former Railway Board chairman R.K. Singh told, adding “the move to hike freight rate before the budget would certainly help the national transporter.”

According to the Kakodkar panel, elimination of over 32,000 level crossings across the 64,000-km track alone would require Rs.50,000 crore, which is one-fourth of the rail budget 2012-13 size of over Rs.2 lakh crore.

Published in: on March 24, 2012 at 2:00 pm  Leave a Comment  
Tags: , ,

Plan panel for politics-free rail tariffs

The Planning Commission is pitching for an independent body to regulate railway tariffs, as it feels that this is integral to encouraging the much-needed private investments into the sector. Commission member BK Chaturvedi told FE: “Passenger tariffs have not been revised regularly for a while and there have been only marginal adjustments in freight rates. There is a marked gap between India’s ratio of passenger fares to freight and that of other countries. We need to remove this anomaly and ensure that tariffs and user charges are fixed through a mechanism that is independent of government functioning.”

When asked whether this would be a politically feasible, he said: “Politics is part of governance. But fixation of tariff and user charges should be an independent decision.” According to the Indian Railways’ own estimate, the sector needs an investment of Rs 14 lakh crore in the next 10 years, the bulk of which has to come from the private sector.

“Railways needs large investments for expansion. For this, tariff fixation should be kept away from other decisions,” Chaturvedi said, adding, independent decision-making would facilitate better investment opportunities in the railways by linking fares to cost.

Indian Railways, with its monopoly over rail traffic in the country, is free to fix tariff for its services. But tariff decisions are largely influenced by politics, as evident from passenger fares remaining unchanged for the last seven years.

At one point, the Railways thought of linking fares to variable costs like fuel costs, but the same did not fructify. A senior railway official said: “We cannot afford to raise passenger fares as it would hamper many political ambitions.”

Former financial commissioner of Railways Vijayalakshmi Viswanathan said: “For some stretches, we have passenger fares below that of a bus. We need a better transport policy, which prohibits use of road transport beyond a particular distance.” She said such a policy will improve traffic and enable the utility to link its fares to actual costs.

“We have not had a comprehensive revision of transport policy since 1984, despite the huge surge in vehicle population choking cities,” she said.

Railways carries 35% of freight and 12% of passenger traffic in the country, with the road network accounting for the rest.

Railways is now getting more aggressive in raising freight rates to make up for the losses on passenger transport. “We would be looking at increasing freight rates frequently while appearing not to be doing that,” Railway Board chairman Vivek Sahai had said last week. In May, the rate of iron ore transport was raised by Rs 300 per tonne, which was second such hike in two consecutive months.


Published in: on June 12, 2010 at 1:58 pm  Leave a Comment  
Tags: , ,