Nine Ideas that will make Freight profitable

K Yatish Rajawat

indian_railway2Preparation for Railway budget are in full swing and the officials are now closeted inside the Rail Mantralay. The most crucial thing for the Railway Minister is to bring back profitability and sustainability into the budget. Every year Railways has been borrowing money from the government to bridge its deficit, this can only stop if Railways improves its services on the freight front.

The real potential of the largest rail network in the world remain unrealized as freight is treated as a step sister by successive Ministers. Too much focus is there on the passenger fares while the real story lies in how Indian Railways can boost the economy of the country.

Freight services generate profits, which are diverted to subsidize passenger fares, leading to an overall loss in operations. Freight accounts for more than 70 per cent of revenues but does not get the attention it deserves. Development of freight services has been ignored over the years, and Railways has been losing market share to road transportation. Even though, road transportation is an in-efficient way of transporting bulk cargo and polluting. Higher dependence on road transportation also links logistics to the oil bill and raises the cost of doing business. Trucks add to pollution and general congestion in cities and highways. The trucking manufacturers lobby is a strong one, insisting on higher investment in highways. Investment in Highways needs to be balanced with investment in building the Railways freight infrastructure.

There are several reforms that need to be done to make freight services more efficient.

1. Railways charges freight on the basis of the shortest route to the destination not on miles or kilometers traveled. But congestion on major routes means that the shortest route is rarely taken, a fact pointed out by several CAG reports. Freight services and booking needs to be rationalized and every booking needs to be profitable. The profits on freight is divided a zonal and divisional level through apportioning of route traveled in the zone. This prevents a clear picture of profit on each booking nor does it give any incentive for zones to send the traffic through the shortest route. Freight traffic is the first one to be diverted in case of congestion.

2. One of the largest item, for freight is Iron ore and there are concessional scams galore, it has been a major area for losses for the Railways. South Eastern Railways has admitted to freight evasion of Rs 1875.63 crore in 15 cases, the real evasion maybe larger. This can be controlled by payment of full freight first and concession to be repaid or be adjusted against future freight payment. This can ensure cash flow and check evasions.

3. There is poor capacity of both rolling stocks and locomotives for freight. Unlike passenger services where shortfalls are vocally demanded by parliamentarians, the need for increasing capacity is rarely raised as an issue. Procurement of locomotives is slow due to dependence on domestic manufacturing. Railways need to look at lease and maintenance models to augment capacity similar to private airlines that survive on leasing aircrafts.

4. Even for rolling stock or wagons supplies have been poor both from public and private enterprises. Here also new lease model that reduces the initial capital expenditure and spreads the payment over a period of time, this is important Railways has a cash crunch. Supplies from China need to be considered with Chinese banks funding the lease, a model perfected by several companies in oil exploration, and even telecom.

5. Freight traffic was 975 million metric tonnes (MMT) in 2012 and is expected to grow to 1405 MMT by 2017, a CAGR of 7.6 % during 12-17 according to Aranca Research. But expansion is not keeping pace with this demand as Railways does not have any surplus. Huge project like the Dedicated Freight Corridor (DFC) are stuck with land acquisitions and financing issues. Smaller projects some 800 odd ones are not getting the attention because of the obsession with DFC. DFC is a $16.7 bn project that was expected to be completed by 2017. But as per its balance sheet for 2012-13 the cumulative project execution of just Rs 2334.43 crore (approx.$400million) has been done. Spending time and efforts on DFC comes from a mindset of all or nothing. This has to change, incremental capacity is as important and smaller projects between ports and clusters need to be developed on a priority basis. One of the biggest bottleneck to power sector is delivery of coal and rail linkages from mines to power plant an area that has been neglected by Railways.

6. Railways has tried and tested PPP models the success rate has been poor. Privatization cannot fill the gap in freight capacity. For instance the Automobile Freight Transport scheme was announced a few years back and got a lukewarm response with only Maruti-Suzuki showing interest. But no progress has taken place on it since then due too may constraints, the policy needs to be revised.

7. Capacity expansion projects have to be taken up on war footing and should. PMO should directly monitor the progress and completion of these projects so that the Railway minister can ensure their completion. A status report in the budget on these projects will be a welcome beginning.

8. Commodity wise loading models needs to be adopted at major city based freight terminals so perishables can also consider railways as an alternative, The Prime Minister talked about it during his speeches and this is a low hanging measure that can be adopted immediately.

9. Freight Operation Information System (FOIS) is a huge help for bulk cargo transporters but limited to providing information. Can it be made as easy to navigate and book a rake on FOIS as it is to book a ticket for travel, that should be the goal.

(K Yatish Rajawat is a senior journalist. He is the founding Editor in Chief of Business Bhaskar (Hindi) and former Managing Editor of Dainik Bhaskar group. In a span of close to two decades he has worked with Economic Times, Businessworld and The Hindu Business Line newspapers.)