The railways has been able to sustain its freight-loading trend of an incremental 60-plus million tonnes (mt) every year for the past three years. In fact, with nearly 33 days to go for the end of this fiscal year, it may even reach 800mt, the internal target of the railway minister. Predictably, the surge in earnings and the reduction of working expenses continue, resulting in a cash surplus of more than Rs25,000 crore before dividend and marking an improvement in the operating ratio. Such high levels of operating profit will provide the railways with investible resources of Rs17,000 crore in the first year of the 11th Plan (2007-2012).
The budget also brings some comfort to industries that transport goods through rail by not proposing any visible increase across the board for freight traffic. For the first time, it has offered discounts on freight tariffs on “reverse” routes to encourage growth of reverse logistics supply chains (that move in the opposite direction to conventional ones). The 5% tariff reduction for petroleum products, though welcome, comes a little too late, since most of petroleum products have already migrated to pipelines.
R. Sivadasan is a former railway finance commissioner (Photo: Harikrishna Katragadda/Mint)
However, barring a few landmark announcements such as the decision to set up one more integral coach factory and multimodal integrated logistics parks, a careful reading of the budget reveals that Lalu Prasad has adopted an overcautious approach.
For instance, while the budget mentions a new wagon leasing policy and wagon investment scheme for translating the intentions of the Board to deliverables, it says nothing about creating an independent regulator for technology and design clearance and licensing with an arms length relationship with the ministry. In the absence of a clear disclosure of the ministry’s approach to such mandatory arrangements, the proposed new wagon leasing policy may well end up as a vague announcement and the new wagon investment scheme nothing more than old wine in a new bottle.
The budget repeats its desire to adopt new design high capacity wagons. In reality, nothing much has happened on this front because of an endless debate on files about the designs. Though the ministry promises to start the construction work of a dedicated heavy-haul?freight corridor without high capacity wagons, the truth is that no heavy-haul train operation can materialize in the near future on DFC (dedicated freight corridor) routes.
Yet, another issue of concern has to do with the annual plan for 2008-09. The ministry had submitted its 11th Plan document with a five-year spend of Rs2.3 trillion. In 2007-08 the plan had an outlay of Rs31,000 crore. In 2008-09, the budget proposes Rs37,500 crore, which would leave almost Rs1.62 trillion to be spent in the remaining three years. Assuming that for the next three years, Indian Railways will be able to spend as much as Rs40,000 crore per year under its own plan heads, the remaining Rs42,000 crore will have to be spent by DFCs including logistic parks, four new rolling stock (or wagon) production units under joint venture mode and the world-class passenger terminals, etc., presumably through public-private partnerships (PPP). A daunting task by any standards.
Another area of concern is plan financing. With budgetary support being limited to less than Rs17,000 crore in the first two years of 11th Plan, for the next three years no undue reliance can be reposed on such support beyond Rs27,000 crore. This leaves a gap of Rs1,89,000 crore. The Railways may be able to raise Rs80,000 crore on its internal resources, even after absorbing the wage hikes from the Pay Commission. The remaining Rs1.09 trillion will have to be borrowed by way of ministry’s market borrowals through IRFC/RVNL/Own Your Wagon Schemes and PPP initiatives. Certain degree of adhocism and fuzzy assumptions that have crept into the proposed financing plan need to be addressed urgently.
Coming to the brighter side, the ministry needs to be congratulated for sustaining the momentum of commercial reforms. One of the path-breaking initiatives proposed is the setting up of logistic parks through PPPs. Though this follows the intention of setting up as many as 13 integrated logistic arks within the Delhi-Mumbai Industrial Corridor by the commerce ministry, it is only logical that the ministry of railways take the lead in creating world-class multimodal supply chain systems.
But it is necessary to provide a word of caution that such integrated multimodal logistic parks would do well if they are limited to three-four on each of the proposed dedicated freight corridors. The somewhat very successful “airport modernization public private partnership model ” may contain some useful lessons for the ministry if they are keen on implementing logistic parks.
One mistake the railways is prone to repeat is to form too many public sector undertakings. It would be difficult to fully realize the tremendous business potential of logistics in a government business mode. The flexibility and online market sensistive innovation and reinventing required in supply chain relationships requires micro level interventions and considerable private initiative. At a time when third and fourth party logistics are gaining momentum in China and the rest of the world with immense success, state of art logistics parks are the need of the hour.
Some suggestions with regard to logistics parks can be put in place here:
• Cold chains can be operated by DFC’s partners.
• The built up space with different types of compact hi-tech warehouses and assembly shops can be owned by real estate investors for assured streams of revenue. Railways may invest some equity in these parks to tap this sunrise industry, leveraging the dedicated freight corridors and land banks.
•In the PPP venture of airport the partners were obligated to invest in runways and terminals, they were allowed a share in the aeronautical revenues in addition commercial real estate revenues. A similar model can be applied in railways.
In this case we could offer concessions for development of logistics parks along with the provision for construction of pre-determined stretches of the DFC on either side of the integrated logistics parks. A fractional share of track use charges can be given to the PPP partners on the track built by them, in lieu the cargo related commercial real estate revenues from logistics parks.
•The direct inseparable linkage between DFC and logistics parks will compel logi parks to move more and more cargo through railways. There may be other variants to this model. However, all these models are definitely far superior to the run of the mill BOT arrangements which are nothing but private finance initiative. However, there is no indication of such policy developments in the budget speech.
Overall it is a good budget. There are a few bright spots such as the wagon leasing policy and reverse logistics concept. Now let us wait for the next budget.
R. Sivadasan is a former railway finance commissioner.