governance, political economy, institutional development and economic regulation

Archive for July, 2016

Rebranding Indian Rail

IR1

Indian Railways: Lifeline of the Nation” — runs the bold title of a 2015 government white paper. But the reality is that post-1991 the Indian Railways (IR), whilst retaining its high ritual status, ceded ground to competition from road transport.

Too many consultant chefs

It has only itself to blame. The railways steadfastly stonewalled all attempts to reform its operations. Over the past 15 years, railway operations have been studied by no less than six high-level committees, under Rakesh Mohan (2001), Sam Pitroda (2012), Montek Singh Ahluwalia (2014), Rakesh Mohan (National Transport Development Committee, 2014), D.K. Mittal (2014) and Bibek Debroy (2015). There was no committee chair from the railways.

There are seven executive members of the Railway Board, its highest body, that functions directly under the railway minister. There are 9,124 senior Group A railway officers who are specialists in finance, commercial services, maintenance, operations, construction and production of rolling stock. It’s odd, therefore, that the government has never trusted these professionals to come up with a vision of what “the lifeline of the nation” should look like. In fact, this illustrates that reform was never an internally driven priority.

No internal support for reform in IR

Admittedly, with a large workforce of 1.3 million, unionisation in the railways is strong. George Fernandes, former railway minister (1989-1990) and Janata Party luminary, sowed his wild oats as a firebrand, railway union leader. But this is exactly why the Narasimha Rao brand of “reform by stealth” cannot work for the Indian Railways. The bottomline is that in such huge industrial enterprises there is no alternative to a broad consensus around reform and approaching it head-on.

Road wins versus rail

Truck

The railways languished in the post-reform era as it was unable to build private partnerships and leverage its assets. The government too seemed to have given up on it and turned its attention to building highways instead. So as rail passenger transportation doubled, road passenger transportation has trebled since 1990-91. The railways’ share of freight decreased from 53 per cent in 1986-87 to less than 30 per cent today.

The Indian Railways lost ground as it got mired in its own corrosive image of a government entity focused on social objectives — providing cheap, even free, travel. Thus, it lost sight of its mission to become the “economic lifeline” of the nation. Communist China moves less passengers kilometre per kilometre of its rail network than India. But it moves four times more freight kilometer per kilometre of its network than India. The India Railways’ priorities are time-warped around passenger traffic.

The seamless movement of freight over long distances can cut the cost of production and make industry competitive. Long-distance freight is best moved by rail. But the Indian Railways lost the freight business due to a monopolistic tariff policy for bulk freight, such as for coal, iron ore, cement and foodgrains. It is similar for the power sector. Bulk consumers like industry are still charged at penal rates to cross-subsidise rural and retail consumers.

Fuzzy mission

Railway minister Suresh Prabhu, like several of his predecessors, is articulate, public-spirited and full of ambitious programmes spelt out in his Railway Budget speech this year. On offer is more public investment to remove the choke points which congest and slow down traffic; a more extensive search for alternative revenues from station redevelopment and the monetisation of assets; better passenger facilities and continued implementation of the dedicated freight corridors.

SPrabhu

But clarity on the Indian Railways’ core mission is missing. This has to be, first and foremost, the movement of freight and increasing the railways’ market share in the city and suburban passenger traffic.

Three reform measures are preconditions for success.

City and suburban travel

metro

First, it is SMART to switch city and suburban passenger traffic to rail from road. The savings on travel time and the avoided cost of air pollution justify such investments. But this is an option only if we can make these systems attractive for private investment and management. Assured viability gap funding on the back of regular adjustment of tariff is a must. The experience of “independent” regulators in electricity shows that in large metros, with high income levels, cost-reflective tariffs can work, if customers can transparently see for themselves the value proposition the service offers.

Use scarce capital to move freight

IRFreight

Second, allocation of public capital across competing projects has to be “value for money”. The railways’ passenger and freight businesses should be insulated silos for accounting purposes so that costs and revenues can be allocated to each service. Our rail freight tariff is on average 40 per cent more than China’s. But our passenger tariff is on average 75 per cent cheaper. Investing to make freight move four times faster at 100 km per hour instead of 25 km per hour makes sense as there is room to reduce tariffs and expand business. Investing to move passengers at 130 kmph, instead of 70 kmph, makes no sense because although passengers are willing to pay for it the Indian Railways is not willing to charge for it.

Go for partnerships

Third, the Indian Railways must think of itself as part of a supply chain rather than a stand-alone competitor. It must seek partnerships with air, road and marine transporters, and with traffic aggregators that can yield better returns. This is possible through transparent contracts, even as the railways remains a government entity.

In 1990-91, India had few choices except to reform by stealth. We have moved on since then. The reform constituency has grown. The real concern now is how to insulate losers from the pain of change and development. Loss of employment or of land must be fairly and adequately compensated. Using scarce fiscal resources for this purpose aligns with equity and is more efficient to bump up aggregate demand than across-the-board public sector pay increases.

Adapted from the authors article in The Asian Age, July 27, 2016  http://www.asianage.com/columnists/3-reforms-put-railways-fast-track-019

Don’t demonise air travel

 

solar plane

Solar Impulse 2 touches down in Spain completing a historic trans Atlantic flight. photo credit: dispatch.com

Air India recently made headlines by offering last-minute unsold seats at the price of AC rail tickets. It makes a lot of business sense for the national carrier: every marginal rupee it earns adds to its bottom line. More important, the fact that its bottom line is attracting leadership-level eyeballs is welcome for a state-owned company that budgeted for government support of Rs 19,900 crores over the 2012-16 period.

This new initiative could bomb if it makes regular air travelers, who are time flexible,wait till the last minute to book tickets. This would squeeze revenues further. But if it induces rail travelers to fly instead, it will be a win-win. This is a calculated risk that must be tested. What is more significant is that it signals the Maharaja’s changed can-do business-oriented approach.

air india2

Disruptive pricing or funded wars for market-share

Disruptive price innovation in passenger travel as a whole is a welcome move to squeeze out hidden value. This should be distinguished from the price war unleashed by private low-cost airlines a decade ago, and again in 2014, to gain market share within aviation. As the e-commerce market has found, funding losses to push out the competition quickly reaches the endpoint. Air India, a full-service airline, unlike some private carriers which levy hidden costs for baggage, seat allocation and food, should be encouraged to go further and explore all commercial options for expanding the air travel pie. Pulling away rail travelers, willing to pay AC fares, to fly instead is a good one.

Less than one per cent or 60 million inter-city travelers choose to fly. For most, the higher cost is the barrier. But for significant numbers easy connectivity is also an issue. Civil aviation is the neglected child of the ersatz socialism we have long practised. So deep is the association of private enterprise and markets with the rich that even this government, with its massive mandate, has to battle populist urges to stay on course with its reform agenda.

The socialist bias against air travel

Till just two years back, the thought of air travel competing with trains was a fantasy. Seen through the binary vision of poor versus non-poor, air travel is a luxury used mostly by the non-poor. Imposing penal taxes on air travel is therefore only a natural corollary of this bias.

The good news is that such mindsets are changing. The Union government has worked quietly but effectively since 2014 to convince state governments not to levy penal taxes on air turbine fuel, which cripple expansion of this sector. The fuel cost is 50 per cent of an airline’s total costs. State governments earlier saw air travel as a cash cow and levied VAT at penal rates of up to 29 per cent.

Government intervenes to correct the tax disincentives

But now several states, most affected by poor connectivity, wisely responded to the Union government’s efforts to de-demonise air travel. Orissa, Madhya Pradesh, Chhattisgarh, Jharkhand and West Bengal slashed VAT to nominal levels in late 2014. Even CPI(M)-ruled Tripura was persuaded to reduce VAT to 18 per cent. Around 50 per cent of air traffic today and the bulk of profits are from flights linking the seven large metros. The need for better regional connectivity is obvious in a country of India’s size, that is also saddled with our dodgy surface transport infrastructure. Travelling from Kanyakumari, on the Indian Ocean, to Jammu, just below the Himalayas, or from Dwarka, on the Arabian Sea,K to Dibrugarh in Assam takes at least three days by train and even longer by road.

The Centre has launched a parallel scheme to improve air connectivity by creating a special fund to finance the gap in financial viability for linking Tier-2 and Tier-3 cities by air. There are around 50 of these. The pity is that this initiative is seen as fulfilling a social objective. This is an effective way to kill the long-term sustainability of air operations on these routes.

Regional air travel a wooly “social” objective  or just good economics?

Regional connectivity shouldn’t be branded as a populist goody. Air connectivity drives and contributes to growth and decent jobs. Globally, every job created directly in civil aviation leads to an additional six jobs indirectly. Only a link with growth will induce serious air operators to see the proposed subsidy as an initial sweetener rather than a perpetual crutch. Faster and better passenger trains are an option too. But it will take at least two decades to build upgraded rail tracks and the appropriate rolling stock. Our fastest passenger trains run at an average speed of only 80 km/hour. High-speed trains of the type envisaged between Mumbai and Ahmedabad and later between New Delhi and Varanasi can be viable only on high-density routes. These also cost a packet. The intrepid Elon Musk of the SpaceX rocket venture; Tesla Solar Wall and automated electric car, envisages a disruptive technology – travel by Hyperloop — an elevated tube mounted on pylons with passenger pods pushed through at hyper-speeds using electro-magnetic waves.

hyper loophyper loop2

The ball park estimate is a capital cost at $6 billion, just a fraction of the $68 billion, planned to be spent on the high-speed rail link between Los Angeles and San Francisco. Musk concedes that beyond 1,500 km, air travel would still be cheaper.But this innovation in transportation is yet to be piloted and tested. Commercialization is unlikely before 2030 though Musk is pushing for 2020.

Air travel also more safe and easy to secure than surface transport

In lightly-policed countries like ours, the security and safety of ultra high-speed inter-city passenger trains is a matter of some concern. Air travel is more difficult to cripple and offers higher security levels as it is off the ground. It is suitable for connecting urban growth hubs at distances beyond 500 km under our “enclaved pattern” of development

The Maharaja has kicked-off its strategy to meet the competition in a fiscally sustainable and affordable manner. More power to the elbow of the civil aviation leadership to grow the pie of the air travel business.

air india

Adapted from the authors article in the Asian Age, July 18, 2016 http://www.asianage.com/columnists/incentivise-air-travel-new-links-will-boost-growth-825

 

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