Prabhu’s plan to increase spend by 285% will transform Indian Railway, says Morgan Stanley
Under-investment in Indian Railways over past 60 years has hurt passengers as well as the country’s manufacturing competitiveness. Rail Minister Suresh Prabhu’s promise to increase the spend by almost 285% over next five years will turnaround the transportation behemoth, says Morgan Stanley
India is paying the price for underinvestment in the railways for well over a decade. In a special report, global investment major Morgan Stanley is however very upbeat that Railway Minister Suresh Prabhu’s plan to increase spending by 285% over the next five years will be transformational.
Morgan Stanley report says, "...the historical lack of delivery in the railways creates scepticism, but this time could be different. This opinion is driven by the minister’s reformist credentials as Power minister, our opinion that he has identified the largest problem (overcapacity and speed) and his innovative approach to funding. We estimate that India will spend $95 billion on the Indian Railways over the next five years, which along with the railways multiplier will result in 12% of the growth in GDP between F2015-19e being driven just by the investment."
The World Bank estimates that India's logistics costs are two to three times the best practice benchmark costs, hurting India's manufacturing competitiveness. The key reason for this is the underinvestment in Indian Railways – with budget allocation compared with roads significantly lower than global standards. Rail is a significantly cheaper mode of transport than roads, yet the share of roads in Indian freight movement is less than 1.5 times that of the railways, owing to the congestion on the rail network and poor policies. However, according to Morgan Stanley, this would change as Railway Minister Prabhu has promised to increase spend by almost 285% over next five years.
The inadequacy of the network, which has continually worsened over the last 60 plus years owing to a combination of underinvestment, poor utilization of available funding, and the burden of cross-subsidization (passenger verses freight) which has been put on the railways. The railways' comparatively lower share in transportation, 36% in freight and 14% in passenger movement, might have made it tempting for policy makers to ignore the issues. However it is leading to an inefficient system of transport, where the mode of transport that is the cheapest, most reliable, and has the least emissions is losing market share constantly, hurting India's productivity and global competitiveness, especially on the manufacturing front, the report says.
The railways' share of passenger traffic (measured in billion passenger km) has fallen to 14% in 2012 from 74% in 1951, and their share in freight traffic (measured in billion ton km) has fallen to 36% from 86% over the same period. This is even though rail remains not just the cheapest (see image below) way to move freight cargo, but also creates 60-80% lower emissions than roads for freight and passenger transport respectively, which has picked up the lion's share in transport of both freight and passengers over the last 60 years.
Mr Prabhu has promised to spend $132 billion on the railways over F2015-19e, a 285% step-up over the $34 billion spent over F2009-14.
The railways are a massive system riddled with various complaints – so the solution needs to be complex. Apart from envisioning a huge step up in investments over the next five years, Mr Prabhu has formulated a multi-pronged approach, including improving customer experience, making rail a safer means of travel, expanding capacity and making the railways financially self-sustainable to resolve issues created over the past few decades.
According to Morgan Stanley, achieving a sustained and measurable improvement in customer experience is important. "...though there is lack of political will to raise passenger fares, the reluctance is not shared by passengers. An NCAER survey including both suburban and non-suburban and reserved and unreserved passengers indicated that they are willing to pay more, if they get better services – easier reservations, cleanliness, on-time arrival of trains, food and safety."
"We believe that the customer resistance to fare increases would be much lower if there were an improvement in speed and services. We expect that the railways' attempt to improve the customer experience will prefigure successful raising of passenger fares. A fare increase would reduce the drastic losses on passenger traffic, now running at 68% of passenger earnings. It might also have a significant positive impact on railways’ finances. It might also enable the railways to stop whittling away their financial cost advantage over roads as a mode of transport, by creating the potential to reduce the over-recoveries on freight to make up for the under-recovery in the passenger segment," the report said.
By comparison, to Indian roads, rail is a much safer mode of transport, both for passengers and freight – but compared to other countries, India's safety record is only middling. Morgan Stanley says it believe that this is a function of the over 30,000 level crossings, especially about 11,500 unmanned ones. The railways continue to pursue a better safety record through reducing the potential challenge – while manned level crossings have increased 27% over the last 40 years, unmanned ones have come down 57%, taking the share of unmanned level crossings, in the total, down to 38% in FY2014 from 64% in FY1974, it added.
Talking about the key issue of expanding capacity of the railways substantially, the report says, the reason that the railways have been losing share to roads despite all the advantages they have as a mode of transport is overcrowding.
The Committee for Mobilisation of Resources led by Bibek Debroy, which submitted its final report in June 2015, highlighted that 60% of Indian Railways' lines were running above a capacity utilization of 80% (which the Railways defines as the optimum utilization). The situation on the high-density network was worse. Even though it makes up only 18% of the total IR network, it carries 56% of the traffic, with 88% of the lines above the optimum utilisation.
Historically, instead of going into doubling, investments have gone into new lines, despite lower returns and rolling stock.
"However," Morgan Stanley says, "the plan for the next five years is rather different, with network decongestion finally to get as much investment as network expansion compared with the past 10 years, where investments in doubling were half the investments in new lines."
While there is slow beginning for the dedicated freight corridors (DFCs), it is also a key for the growth of Indian Railways, the report says. Projections by the Ministry of Railways indicate that it will carry 305 million tons of cargo by FY2022.
"Around 85% of the land required for the Eastern and Western DFC has been acquired already, though our discussions with the Rail Ministry indicate that 100% of the land is now in possession of the railways, clearing the DFC’s biggest potential stumbling block. Though only 65% of the DFC (in track length) has been awarded as of now, the awards process has picked up in C2015 (between January to August 2015, the DFC awarded contracts worth Rs170 billion compared with Rs130 billion in the 10 years prior to that). Our discussions with the Rail Ministry indicate that the award process will be completed by 30 June 2016, setting the stage for both corridors to be fully operational by December 2020 (4.5 years required for construction), though part of the Eastern DFC (a 55km section between Durgawati-Sasaram) will become operational in FY16," Morgan Stanley said.
According to the report, making Indian Railways financially self-sustainable is the most challenging objective for the Railways as well as for Mr Prabhu, the Minister. "This is because, it means generating surpluses from operations that are large enough not only to service the debt needed to fund the current capacity expansion (Exhibit 70) but also to invest in renewal of assets. Getting to such a stage will require significant improvement in both the revenue stream of the railways and strong cost control measures," it added.
The Indian rail network is spread over a wide area, with about 66,000 route km (around 90,000 running track km) and about 7,100 stations. After the US, Russian, and Chinese railways, India’s is the fourth-largest railway system in the world. In 2014, the Indian railways carried 1.1 billion tons of total freight and 9.3 billion passengers. In terms of the distance freight was carried over too, with 762 billion ton per km registered in 2014, India's railways were the fourth largest in the world. Also, the railways run around 13,000 passenger trains, which carry more than 25 million passengers per day. With 1.2 trillion km of passenger km for 2014, Indian railways actually score better than on the freight side, ranking first in the world. The growth on both carrying counts has been impressive too, with the railways registering 160% growth over the last 15 years in freight carried and 200% growth in passengers.