IR on a difficult track due to fall in revenues from Coal and Air Travel: CRISIL’s Director-Transport & Logistics Sector

There are two major obstacles: fall in revenues from coal because of the renewables shift, and the appeal of air travel – says Jagannarayan Padmanabhan.
Jagannarayan Padmanabhan
Director–Transport & Logistics
CRISIL

Indian Railways, which is making concerted efforts to correct its legacy of under-investments — and therefore, the opportunities lost — is facing the law of unintended consequences.

It is up against multiple headwinds, such as:

1. Faster awarding and implementation of national highway projects

2. Decreasing dependency on coal compounded by increasing thrust on renewable energy, and,

3. Airlines weaning away AC class passengers, and the regional connectivity scheme UDAAN.

Here’s the potential trouble in perspective:

Indian Railways sustains itself on two businesses — freight and AC class passengers. While freight contributes to two-thirds of revenue (coal transport alone contributes to half of that), nearly a third of passenger revenue comes from AC class passengers (who constitute just 1.3 per cent of the total number of passengers travelling in a year). In the past four decades, as more highways got built, the share of roads in freight transport has rocketed from 30 per cent to 70 per cent.

Problem is, the pace of highway construction is only accelerating. In the past three years, there has been a 25 per cent increase in the length of highways constructed, and Nitin Gadkari, the Union Minister for Road, Transport and Highways, wants to expand the network of highways in India by 50 per cent to 200,000 km.

That will have ramifications for the Railways. Financially, it’s a pincer move because freight income is used to subsidise passenger tickets, so any shortfall in freight revenue will be detrimental to the operating ratio of railways, which is already wallowing at a decadal low of 96.9 per cent.

Coal losing steam

Another flank of worry is that renewable energy is exploding. Solar power generation is becoming cheaper than thermal, and wind tariffs are heading southwards, too.

That will curb growth in coal freight. And if all that weren’t enough, a new law says coal cannot be transported without beneficiation for distances of more than 500 km.

Demand for cement and steel, which, along with coal account for about 70 per cent of annual railway freight, has been subdued for a while now.

Then comes the attack from the air. India became the third-largest aviation market in the world after China and the US, by overtaking Japan. Domestic passenger traffic has grown 17.7 per cent in the first four months of 2017 on a fairly large base.

If the trend continues — and there’s no reason why it shouldn’t — India will also see a signal shift this fiscal where flyers will outnumber AC-class rail passengers, with more than a push coming from UDAAN. Contrastingly, the volume of rail passengers has been flatlining at 120-125 million for a while now.

Clearly, the railways faces multiple headwinds, and the irony is that many of these emanate from its owner’s actions and disproportionate influence.

To wit, the government is a part of all phases of customer engagement by the railways — be it providing core infrastructure and its operation and maintenance, providing vehicles and their operation and maintenance, and lastly, bearing the financial risk that have ultimately given only poor returns. In road and air transport, private entities have a lot more skin in the game so the financing and risk-sharing is well spread out.

The way out

Given this context, what should Indian Railways do? There is only one way, and that is offer total customer solutions, both in freight and for passengers.

For example, in freight, it can:

1. Offer door-to-door service by tying up with logistics providers. That would require investment in technology to ensure service predictability and cargo control to the last mile.

2. Decrease the freight rate and increase investments in priority projects.

3. Execute route decongestion and laying of new tracks on mission mode.

4. Encourage private sector participation in operation and maintenance, and even running of trains and terminals

5. Get stakeholders involved in the core functioning of the rail network to benefit from optimum utilisation of finance and better management of workforce — a significant contributor to expenses.

6. Operationalise the two Freight corridors and move fast track the implementation of the others.

Offer differentiators

For passengers, it can:

1. Create more pay-per-use ecosystems. While passengers buying second class tickets are the most by number, about 28 per cent of passenger revenue comes from those that buy sleeper class tickets. The railways can them by offering more facilities, in-train entertainment, station refurbishment and a material leap in punctuality.

2. Better customer experience in all the interfaces starting from ticketing, Station touch points, on board travel engagement (cleanliness, food and beverage, in coach facilities, etc.).

Passengers need convenience, cost-effectiveness, and timeliness. There is enough empirical evidence to suggest people are willing to pay if they get value.

Today’s consumer has many choices, so the Railways will have to offer differentiators by reinventing itself rather quickly.

For the frenemy is at the gate.

The writer is practice leader and director-transport & logistics at CRISIL Infrastructure Advisory

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