TRANSPORT NOTES ROADS, HIGHWAYS & RURAL TRANSPORT THEMATIC GROUP THE WORLD BANK, WASHINGTON, DC Transport Note No. TRN-32 May 2006 Highway and Railway Development in India and China, 1992-2002 Clel Harral, Jit Sondhi and Guang Zhe Chen THE EVOLUTION OF THE TWO ECONOMIES Table 1. Key Economic Data for India and China, 1992-2002 In the last two decades, the GDP growth rate in India has been around 5.5% with the economy growing about 2.6 India China times reaching a level of about US$510 billion in 2002. In 1991- 2001- 1992 2002 China the GDP has been growing at about 9.5 % over the 92 02 same period with the economy growing more than five fold Population 846 1,000 1,171 1300 between 1982 and 2002 reaching a level of about US$ (million) 1,232 billion in 2002. The GDP of China, which was about 1.2 times that of India in 1982, had by 2002 grown to 2.6 Poverty rate 36 29 40 7 times that of India. In terms of impact of the economic (%) growth on poverty reduction, by 2002 China had lifted 400 GDP (current $ 244.2 510.2 454.6 1,233 million people out of poverty and its poverty rate had billion) declined to 4.6%. In India over the same period the poverty GDP growth rate 5.5 4.4 14.4 8.0 rate declined from 36% to 29%. (%) Share of GDP 26.7 26.6 43.9 51.7 The structure of the two economies also evolved differently, (%) ­ Industry with the share of the agriculture sector declining more sharply in China ­ to less than 15% of GDP in 2002 ­ while Share of GDP 42.3 50.7 34.3 33.7 in India it was nearly 23%. In India the contribution of (%) - Services services to GDP grew to above 50%; in China services Volume of trade 46 157 165 623 contributed 33.7 %. In India, industry share of GDP is about (current $ billion) 27% and in China it is 52%. Moreover, by 2002/2003, the Foreign direct 1.8 4 11 53 amount of foreign direct investment and volume of trade in investment China have reached a level that is many times of those in (current $ billion) India. On balance, the Chinese economy has thus become Source: World Bank "India at a Glance" and "China at a Glance". more freight transport-intensive than that of India. http://www.cpirc.org.cn/yjwx/yjwx_detail .asp?id=3204 for China THE DEVELOPMENT OF THE HIGHWAYS AND data. RAILWAY IN FRASTRUCTURE In 1992, the two railways then carried almost At the beginning of the 1990s, India's highway and exactly the same volume of passenger km (pkm, 314 railway infrastructure was ahead of those in China in vs 315 billion), while China Railways (CR) managed terms of total route km, route km/square km, and route to carry 1,157 billion ton km (tkm) of freight ­ or km/head of population, but the utilization of the 4½ times that of Indian Railways (IR) of 257 billion infrastructure, particularly for railways, was quite different. tkm ­ through far more efficient exploitation of track, locomotives, and wagons, and by assigning lower priority to India's road network was more extensive than that passenger services. IR operations were dominated by of China in 1992, but the quality of the road passenger services (including suburban operations, a networks in both countries was severely deficient burden not imposed on CR), but, reflecting the fact that relative to the standards of modern highways in India's citizens enjoyed a far higher propensity to travel, the virtually all dimensions ­ pavements, road geometry, and 314 billion pkm carried by IR constituted only 20% of traffic management. Informal evidence1 suggests that the India's estimated total passenger pkm, while the 315 billion quality of the two road networks was roughly on a par, pkm via CR constituted 45% of China's estimated total except that China had perhaps generally better road passenger market. The share of both railways in their maintenance. The uncontrolled mixing of pedestrians, respective freight markets had already substantially eroded animals, and other slow moving traffic was similar in both over the preceding two decades as trucking, coastal countries, contributing to slow travel speeds, uncertain shipping, and, in China, also inland water transport took an journey times, and high accident rates. ever larger share. IR's share stood at 45% in 1992, slightly superior to that of CR at just under 40%.2 2 Traffic statistics for the railways sector may be reasonably accurate, but statistics for other modes, particularly roads, are subject to wide margins of error, so that reported modal share 1 Clell Harral, formerly Highway Design and Maintenance Advisor should be taken as indicative at best; published estimates vary to the World Bank, traveled several thousands of km of highways widely: e.g. Pittman (2004) reports CR's current share at an in both India (1964-2003) and China (1980-1990). implausible 70-80 % of surface freight transport. Page 2 Transport Note TRN-32 May 2006 Over the ensuing decade (1992-2002), China's average output per employee more than twice (2.1 times) highway and railway development overtook that of that of IR. It is also the perception that CR has developed India's. rail line capacity that would cater to growth of demand Having started the development of a National Trunk over the next 10 years or so while India has not done so. Finally, CR has invested heavily to ease the shortage and Highway System (NTHS)3 in 1992, China took improve availability of wagons to its clients. advantage of the macro-economic slowdown following the Asian financial crisis that began in 1997 to more In sum, after suffering from transport constraints than double its spending on highways, from US$13 impinging on its economic growth for more than a decade billion in 1997 to US$30 billion per annum or more since the start of the economic reforms and liberalization in during the ensuing years. Highway building is estimated 1978, China decided in the early 1990s to address the to have increased China's GDP by a full 2 % per annum problem head on. A choice was made to build over the subsequent years. India's road expenditures capacity not merely to alleviate the most serious averaged only US$1 billion to US$3 billion per annum immediate bottlenecks on its existing, largely during this decade. outmoded transport infrastructure, but to go beyond and build a high-capacity system of modern China's Rail network extension and capacity highways and railways that would provide for expansion also exceeded that in India, as the double- future needs as well. This would smooth the path tracked network was extended by 69% (+9,400 km), for sustained future growth for the rapidly growing electrified track km doubled (+8,975 km), and the coastal provinces, and extend improved economic overall network route km extended by 24% (+13,797 opportunity to the vast population residing in its km). The latter included 12,367 km built by new local distant, impoverished hinterlands. It appears that rail corporations, many with private participation, owned rapid capacity expansion on highways and railways has and operated separately from the National Railway, contributed significantly to the high economic growth rate unlike India, where IR retained a monopoly for rail in China. Indeed, it is doubtful whether China could have services. The investment in the government owned sustained its rapid growth without addressing the serious railways during the decade 1992-2002 in China and constraints in its transportation system. India was US$ 85 and 17.3 billion, respectively. The increment in annual freight traffic (from 1,157 to 1,551 How did China accomplish this extraordinary = 394 billion tkm) taken on by CR over 1992-2002 breakthrough? Does its experience suggest exceeded the entire freight traffic carried by Indian development options and offer lessons learned that Railways in 2002 (336 billion tkm), reflecting, among could be considered by policy makers in India other things, the far greater freight intensiveness of today, as it faces many similar problems to those China's economy. faced by China in 1992? This paper addresses these questions first for the highways sector and subsequently It was in the highways sector, however, where the for the railways sector. contrast, in both objectives and achievements, was greatest. While India's road network officially grew by 600,000 km (from 2.7 to 3.3 million km, or 22%), virtually HIGHWAYS all of the increase was in very low-standard roads to reach Key Strategies Pursued by China. In achieving the more of the rural areas which had before been outside the rapid expansion of its arterial highway network, China had reach of all weather access. High standard arterial to overcome two basic constraints: (i) highway finance, highways to connect the four main cities of India were and (ii) physical implementation capacity, including largely neglected; the effort to widen the 6,500 km Golden planning, design, tendering, and supervision of Quadrilateral to 4 lanes without controlled access, began in construction. 1998 and is not expected to be completed before 2005. In contrast, China's road network officially grew by only HIGHWAY FINANCE 443,000 km (from 1.32 to 1.77 million km, or 28%), but the emphasis was on the arterial networks. By 2002 some The huge increase in funding for highways was 25,130 km of access-controlled expressways with accomplished through a wide spectrum of minimum 4-lanes and another 27,468 km of 4-lane dual measures, several of which have the characteristics carriageway highways without controlled access feature of temporary expedients that will have to be had been completed, including 27,000 km of the NTHS. substantially restructured or replaced over the long run. The great majority of financing for roads in China has Over this period, India's rail network grew by only 682 been secured from public sources, either directly from the route km (1%), double track by 1,519 km (10%), and government budget or through government borrowings or electrified line by 5,192 km (48%). Interestingly, IR's gain guarantees. About one-quarter of new construction in annual traffic carried per US dollar of investment (14.9 expenditures came from China's road user charges system tkm+pkm) over the decade was more than twice (2.2 ­ the Road Maintenance Fee (US$10 billion in 2002), the times) that of China Railways (6.8 tkm+pkm), but the gain Vehicle Purchase Fee (US$ 4.5 billion), and the Highway in labor productivity was only 61% (from 402 to 648 Transport Management Fee(US$2.5 billion). Although tkm+pkm) vs the 90% gain on CR (from 728 to 1385 authorized by the new road law in 1998, the Government tkm+pkm). Apparently CR spent extra capital partly to of China has so far been unable to agree on a fuel tax for purchase improved labor productivity, to achieve an road construction; consequently vast additional sums had to be sought elsewhere. 3 This is a program to develop 35,000 km of expressway A notable feature over recent years (particularly network of 12 corridors in the country, planed to be completed since the explosion of expenditures from 1997) is by 2020. By 2002, however, about 27,000 km (or 77%) of that virtually half of road development has been the NTHS have been completed. The government has since financed by domestic bank loans guaranteed by decided to push up the completion date to 2007. local government and by central government bond Page 3 Transport Note TRN-32 May 2006 proceeds which were on-lent to local governments.4 demands, is yet an unresolved set of issues in This mode of finance is unlikely to be sustainable at these China. The prospective elements of a long-term solution magnitudes over time. include both a fuel tax and a restructuring of ownership and method of collecting tolls, which are expected to Tolling of improved roads was already introduced and grow with rapidly rising incomes, personal car ownership, widely practiced in China prior to initiation of the NTHS and consequent traffic. Bellier and Zhou (2003), provide program, and it was decided from the beginning that the an overview of the potentials of private finance and a NTHS (like most other major new roads) would be blueprint for exploiting those potentials for highway operated as toll facilities. That decision, of course, did not finance in China. These potentials should not be provide the immediate finances for construction of the exaggerated, however. The magnitude of funding network or its initial years of operation before growth of required, the strong public goods characteristics of roads, traffic generated significant revenues. Financing of the and the particular character of the roads remaining to be construction of the NTHS and other major components of built in China (primarily lower-volume non-arterial the highway development program has involved both networks) are likely to dictate that the dominant portion public and private finance, the latter largely equity, as of resources for road development continues to come long-term debt from private sources has not generally from public funding. been available without government guarantees. The application of tolls has also caused important HIGHWAYS IMPLEMENTATION: PLANNING, DESIGN, operational problems and economic distortions, the TENDERINDG, AN SUPERVISION OF CONSTRUCTION most significant of which has been substantial traffic China was not yet equipped with modern industries for diversion, reducing both the financial and economic rates highway planning, design, or construction in 1992, and of return, as older non-tolled facilities have continued to the massive expansion of highway construction carry heavier traffic in many cases than the newer, high engendered countless challenges. While the problem- quality facilities. Fragmentation of ownership and solving capacities of its civil works industries, fueled by operation of the toll network has also caused other vast sums of money, and assisted in some key aspects by operational inefficiencies ­ e.g., more than 300 toll the international community, rose to meet the challenge stations were reported in place in Guangdong Province of one of the largest highway building programs ever alone in 2001, with the excessive segmentation undertaken anywhere, the process of transition of this increasing the costs of construction and operation, sector to a competitive market-based economy is still a causing road users much unnecessary delay, and work in progress. Today, the industry ­ in its various magnifying risks for investors and lenders. facets of design, tendering, contracting, supervision and ` The innovations in road finance, some more quality control ­ still lingers to a degree in a dual successful than others, have included extensive economy' structure: alongside a modern industry with efforts to engage private finance to complement world-class capabilities, there remain many vestigial public funding. During 1990-2000, there were more enterprises that have not adapted, sustained for now by than 80 cooperative joint-venture (public-private state subsidies in one form or another that distort market partnership) road projects between Hong Kong competition. developers and provincial or municipal authorities which International Competitive Bidding was introduced mobilized some RMB 75 billion (>US$9 billion) from under World Bank financed projects from 1985 and private sources. In addition, since 1996, asset competitive tendering of one form or another (whether securitization (sale of equity in existing toll highway local or international) has since grown to supplant direct companies) raised another RMB 16 billion (US$2 billion) labor (`force account') for most road construction through listing of eight expressway development projects. companies on the domestic stock exchanges and five in Hong Kong.5 The absolute magnitude of private Construction bureaus were separated from the finance is thus significant--and quite large relative governmental roads authority (Ministry of to that achieved in other emerging economies ­ but Communications, MOC, at the central level, and the the total has been well under 10% of the total Provincial Communications Departments, PCDs, at funding committed to road investments in China over theprovincial level), and over time many have been this period. The disinterest of institutional lenders (such reorganized (at least ostensibly) as financially autonomous as insurance companies and pension funds) in providing corporations. long-term debt to support road development in China in Competition has been actively promoted. While there the absence of a government guarantee is a major was a vast expansion of demand for road construction, constraint. "In the absence of a well structured legal and supply was also greatly expanded by encouraging regulatory framework, most mainland companies do not participation of construction enterprises from railways and have access to sources of long-term domestic funds from other sectors in road construction. Hundreds of institutional investors.6 construction enterprises with modern equipment are now Arranging sustainable, economically efficient said to be qualified to construct expressways. sources of finance for a highway system that is still FIDIC contract structures and conditions were expanding rapidly, while at the same time coupling introduced and broadly adopted from the early with mounting maintenance and rehabilitation 1990s, but its application is still evolving, with some important modifications. While there has been growing 4 J. Yenny, "China Higwhay Strategy Review", draft report independence of the contractors from the highway to World Bank (July 27, 2001). administration, there is as yet no independent supervision 5 industry. The independence of the Resident Supervising J. Yenny (2001). 6 Engineer (who is selected by competition) is constrained M. Bellier and Y.M. Zhou, Private Participation in (at least in the case of expressways) by a higher Chief Infrastructure in China (World Bank, 2003), p. 49. Page 4 Transport Note TRN-32 May 2006 Supervision Engineer, who, together with his staff, is support a substantial PPP program of highways appointed by and answers directly to the Employer. The development.8 independence of contractors is also evolving, due to their traditional linkage to the government a state owned Cost recovery: tolls, taxes, and other road user enterprises (SOE) under the centrally planned system, and charges. While China has not yet implemented a is being addressed as part of the SOE reform and significant fuel levy and has placed reliance instead on introduction of bankruptcy law. direct tolling as the primary source of cost recovery to meet debt service and dividends on private equity, it is as While quality of construction for arterial highways procured yet unclear whether this strategy will ultimately prove under ICB contracts is tightly supervised, there have been successful, and, if so, in what time frame. What is already significant quality problems to be overcome even clear is that the tolls and the proliferation of toll collection under ICB contracts. One of the causes for the persistent stations have caused substantial economic and financial quality problem has been the very low bid prices offered by distortions from under-utilization of new high standard quazi SOE contractors. To address this problem, following highways and continued congestion of existing lower- collapse of some bridges in 1999, new laws were passed standard but untolled routes. In this context, India should placing lifetime responsibility on designers and contractors avoid repeating China's mistakes in this respect and choose for faulty design or construction. a more efficient way of effecting cost recovery. Until such The problem of under-design of pavements ­ to meet the time as revolutionary new technologies may be official legal limit rather than the actual much heavier invented that permit tolling of all highways (or any loadings ­ has so far defied resolution, with the result that chosen sub-set thereof, separately for each type of China will soon be facing large outlays for pavement vehicle), India's current choice to place primary strengthening that could have largely been deferred by reliance on fuel levies (the central road fund), several years at low marginal cost. By contrast India has complemented by direct tolling only where the tackled this problem by designing pavements for actual demand for the tolled facility is highly inelastic, is axle loads as determined from load surveys. the appropriate one. A study of India's policy options for comprehensive road user charges encompassing economic Today China has 240 design institutes that can design any as well as financial dimensions has recently been highway short of expressway standards and 79 design undertaken by the World Bank.9 No similar study of institutes that are qualified to design expressways. The China's user charges policy options was uncovered during total technical staff is said to number more than 60,000 the preparation of this paper. engineers. Choice of investment priorities and design ARE THERE POTENTIAL LESSONS LEARNED FOR standards. China chose to give first priority to INDIA'S HIGHWAY SECTOR DEVELOPMENT? development of its arterial networks, and allocated 60% of a vastly expanded road sector budget for more than a Required expansion of resources for highways decade to achieving that outcome. Moreover, for the development. After under-investing in highways for arterial networks it chose high design standards, decades, China increased its allocations for highways by a including access control features, from the earliest stage factor of nearly 40 times over 1991-2002, from about of construction, resulting in high initial costs. India's US$1 billion to 38 billion, or 3.1% of GDP in 2002. decision makers have until now made very different Similarly, large increases in funding for highways in India choices, choosing first to emphasize feeder networks would be necessary to modernize its highway networks on linking local markets with the low cost all-weather access, a comparable scale. and only in 1998/1999 started the National Highway Source of finance. While China raised some $11 billion Development Project - a program to four-laning about from private investors in highways, this amounted to less 13,000 km of its core national highway network, without than 10% of the total investments. However, a recent limited access features. We have seen no systematic study by the World Bank7 suggests that the better quantitative analysis to justify the strategy in either established capital markets and associated legal country, but Indian officials have commented that the infrastructure in India offer superior prospects for latter choice was dictated in part by the difficulties in private participation in highway finance. Moreover, India of securing the right-of-way to permit higher the arterial networks which are yet to be built in India may standards, including access controls, and in part by provide attractive opportunities for Private-Public budgetary constraints. Unfortunately, recent road travel Partnerships, if appropriately structured and managed. The in India has revealed that the issue of mixed traffic World Bank and the Asian Development Bank (ADB) have remains a major problem (generating both congestion been asked to support the national highway authority of and accidents) on those widened roads where access has India in establishing a major PPP program to tap private not been restricted, and subsequent upgrading will be capital markets to augment public funding for highways, more costly than it would have been if done originally. At and the prospects appear good. However, for this to be realized, substantial increases in state funding of highways will be required to provide the public share for a massive expansion of the total program, even if the public contributes the lesser share. Public participation up to 40% of construction costs should 8 In December 2003, there were press reports that the Government had decided to limit the public participation to 25% of construction costs. We understand that the proposal has since been withdrawn. 7 World Bank, "Private Finance of Highways in India: An 9 World Bank, "Highway Finance in India: Policy Note, Assessment" South Asia Energy and Infrastructure Unit (SASEI) "South Asia Energy and Infrastructure Unit (SASEI) (January 2004a). (January 2004b). Page 5 Transport Note TRN-32 May 2006 the opposite extreme, in China there are reportedly many The operating ratio for CR is much healthier at 0.74 in segments of costly access-controlled facilities that have 2002 (based on operating revenue plus construction limited traffic and may remain underutilized for years, surcharge). even if the toll diversion is eliminated. The optimal It is to be noted that IR's operating ratio of 0.96 is solution likely lies somewhere between the two substantially understated, as the provision of depreciation is extremes chosen by India and China, and will often well below actual requirements. If IR were to make vary from segment to segment of the network. adequate provision for annual asset renewal, a What is striking is that this problem is one that can fortiori if it were to make adequate provision for the be quantitatively analyzed with time staging large backlog of overdue equipment and track options for alternative design standards, using the renewals, as well as pension accruals, in normal planning tools already available in both countries. commercial accounting term, it is very likely that IR The lesson in this case is that the choice of design would be a heavily-loss-making entity ­ in fact one standards should be properly analyzed and well along the path toward bankruptcy, if it were determined on a project-by-project basis. not state owned. On the expenditure side, IR's staff costs account for RAILWAYS 53% of working expenses, while on CR these costs Comparative financial and operational performance. are only 25%. It is also noted that all a small portion The total transportation output (measured in equated " of the passenger services that dominate IR's units" = passenger km+ton km) of China Railways (CR) operations are loss-making. The most extreme case is ` was about two and half times that of Indian Railways (IR) the ordinary stopping trains' where the cost recovery is in 1992 as well as in 2002. Over this decade, the estimated to be less than 30% while these consume performance of CR has come to surpass in most scarce line capacity. dimensions that of IR by a wide margin, including: Investment and financing. In the period 1992-2002 Network length and standards the investment on IR and CR was US$17.3 and US$85 billion respectively. China has a system of levying a Realized throughput capacity Construction Surcharge on freight tariff. The proceeds Labor and equipment productivity (locomotives, from this are utilized for investments in construction of wagons, coaches) new lines with the approval of the Planning Commission Maintenance of assets and the State Council. Further, CR's operating ratio is Financial profitability healthier than that of IR leading to surplus that has been used for investment. In the five years to 2002, 57% of Self financing capability through rail construction investments on CR were funded by internal accruals surcharge (including construction surcharge) as compared with 35% Restructuring, including separation of non core on IR. The rest of the funding on CR was from borrowing business and introduction of incentives for managers. (32%) and other sources including government (11%). IR obtained remaining investment funding from market A summary of reported financial results for IR and CR is borrowing (31%) and government (34%). CR pays taxes given in table 2. The operating ratio for IR is shown to on profits. have deteriorated from 0.90 in 1991/92 to 0.96 in 2002. Table 2: Financial Results for IR and CR, 1991/2-2001/2 INDIA CHINA 1991-92 2001-02 Ratio 1991-92/ 1992 2002 Ratio 2001-02 1992-2002 Employees total (million) 1.65 1.51 0.91 3.41 1.76 0.51 Operational employees (est. million) 1.42 1.3 0.91 2.04 1.39 0.68 Output per operational employee 1000 402 648 1.61 728 1,385 1.90 equated units Transportation revenue (billion) INR 137 INR 378 2.76 RMB 69.9 RMB 142.0 2.96 Operating expenses & pensions (billion) INR 104 INR 343 RMB 24.6 RMB 112.0 Depreciation INR 20 INR 20 RMB 13.5 RMB 22.3 Total working Expenses including depreciation and pensions INR 124 INR 363 2.92 RMB 35.8 RMB 134.3 3.75 Working ratio % 0.76 0.94 0.35 0.62 Operating ratio % 0.90 0.96 0.51 0.74 Page 6 Transport Note TRN-32 May 2006 HOW DID CHINA RAILWAYS ACHIEVE HIGHER Table 3. Cost and Fare Structure for IR and CR, OUTPUT AND PRODUCTIVITY? 2002 Physical features. In China, railways has been growing IR CR rapidly, and consequently much of its system is new, Passenger pkm of total output % 59 24 incorporates higher design standards, has high service Passenger revenue of total % 30 41 reliability and requires less maintenance and less 0.75 0.65 downtime. Moreover, maintenance of older assets is also Average cost per equated unit US performed in a timely manner to high standards, so that cent equipment downtime is low and full productivity is Average freight tariff per tkm US 1.6 0.96* generally sustained. IR, on the other hand, has relatively cent older assets that, even when new, did not Average pass. fare per pkm US cent 0.55 1.25 incorporate performance standards that have since become industry standards. Furthermore, many of *Including construction surcharge of 0.4 c its assets (including way and structures, CR has managed passenger business quite locomotives, wagons, and coaches) are not always differently ­ cross subsidy from freight traffic to in a satisfactory state of repair. Speed restrictions, passenger traffic, while still prevailing in IR, has failures of rolling stock and infrastructure affect not only been all but eliminated in CR. Till the late 1980s, the productivity of the particular asset, but, given system government controlled tariffs did not cover cost of interdependencies, also propagate shock waves and passenger services. In order to minimize losses CR kept reduce the throughput capacity of broader network the volume of passenger business low. The seats on trains segments. were rationed and prospective rail passenger had to wait Institutional factors - Commercial objectives and weeks for a seat allocation. With the transition to market competition. Although China's national railways, like economy it was apparent that this situation would not be Indian Railways, are still part of the Ministry of Railways sustainable. To help address this problem, the Chinese (MOR), CR has placed increasing emphasis on Government decided to allow CR to substantial fare commercial focus and financial performance. Increase in increases to cover costs plus an element of profit. passenger fares to achieve financial viability for Passenger services have been separated on an accounting passenger service was an important step. From 1999, basis. Once this was achieved, CR then started increasing Chinese MOR introduced an assets operation liability capacity for passenger trains. In the decade under review system (AOLS) under which MOR entered into CR's passenger throughput (pkm) increased by 58% and management contracts with the 14 Regional the revenue by 130%. The table below shows the cost and Railway Administrations (RRAs), which are fare structure for 2002. It is significant that unit cost per engaged in a closely monitored competition, with equated traffic unit on CR is 15% lower than that on IR and clear benchmark performance indicators, freight tariff on CR is 30% lower than that on IR, while the management in centives (both positive and average passenger fare on CR is almost twice the average negative) to encourage profitability rather than cost per equated traffic unit. Significantly, CR's ratio of physical targets. The best performing managers revenue per passenger km to ton km, which had been less receive significant financial and other incentives, while than 1 in 1992, stood at 1.3 in 2002. For Indian Railways, poor performers are quickly identified and removed. this ratio stood at only 0.34. CR has undergone major restructuring since 1999, LESSONS LEARNED FROM CHINA RAILWAYS a vertical dis-integration that has separated non- CR's improved performance can be attributed largely core activities and cut CR staffing rosters by half, to six interrelated groups of factors: down to 1.7 million employees. In accordance with modern railway management structures in almost all Better focused, less conflicted objectives of the countries today, many of CR's former social services government owner, which is seeking an increasingly (education and health services) have been divested, as market-based commercial determination of price and have 38 construction units, 4 railway design units, and outputs, relatively free of unprofitable public service extensive manufacturing facilities (for locomotives, obligations (PSO) and employment generation coaches, wagons, signaling and communications demands, and is willing to grant railway management equipment, and track components). In addition, in a first related autonomy to achieve the agreed objectives, step to deal with non-economic branch lines, about 100 together with the associated accountabilities. such line segments have been separated from main lines Senior management appeared to have strong on an accounting basis. Three special purpose companies commitment to reform to achieve efficiency and have also been created to handle containers, special profitability, backed by strong individual and collective cargo (oversized and perishable cargos), and Post and incentives. Parcels. Undertaking large scale restructuring, including The advent of the local and joint venture railways under separation of non-core activities and outsourcing. separate management from MOR could ultimately prove a stepping stone in the direction of opening the railway Introduction of quasi-competition in rail operations operations to competition, and a new law has been (benchmarking of RRAs) passed to permit foreign investment in China's railway Superior financial management, including at least five sector, in accordance with the World Trade Organization key facets: (i) Willingness of the government to accept articles. Page 7 Transport Note TRN-32 May 2006 market-based pricing principles and output decisions to fulfill the railways' potential, are outside the for passenger as well as freight transport; (ii) direct control of Railway management and requires implementation of modern accounting/information strategic policy direction from GOI. These include the systems on costs and profit/loss of specific lines of phasing out of cross-subsidies between freight and business, services, and facilities; (iii) better passengers, and between the core commercial railway and maintenance of assets; (iv) application of available the network of non-commercial lines and services. investment funds to most productive uses; (v) Rightsizing of the labor force and de-politicization of availability of larger investment budgets; and investments will also require a clear expression of political will by GOI. The GOI has to decide that it desires IR to Introduction of privatization through local railway joint function as a commercial entity. ventures and corporatization with sale of shares in In particular, the Government, as Owner, needs to: existing railway units (including listing in the New York as well as Hong Kong stock exchanges). resolve the conflict between the objectives it has imposed on IR ­ on the one hand, the ostensible What Did China Railways Not Do? obligation to operate as a commercial organization, and on the other, the very real social obligations, CR did not develop sufficient capacity for freight including the loss making ordinary rail passenger transport in time to meet the demand from increased services (although very often these services could be imports and domestic consumption. CR is now provided far more efficiently and to higher standard by struggling to keep up with demand for freight road transport), maintenance of uneconomic levels of transport. employment and a long list of politically/socially CR has not created an enabling environment for motivated investments that continue to divert scarce attracting private capital. In fact, recently it cancelled investment resources from profitable investments the existing system of private ownership of freight critically needed to reduce congestion and improve wagons. It has thus missed an opportunity of sourcing service standards on the arterial mainlines; private capital for rolling stock that would have helped refrain from interference in the day-to-day alleviate the current wagon shortage. management of railway operations, but, in return for Unlike IR (in the case of Concor), CR was slow in the granting of management autonomy, impose an providing enabling environment for movement of effective system for contracting performance targets containers by rail. As a result most container traffic in with IR Management, monitoring them in a China moved by road. CR has recently established a benchmarking competition, and holding Management company that would focus on rail transport of accountable, including significant positive incentives for containers. managers and labor forces. IR Management and Labor could: Although CR has taken several steps to separate its non core business and has been formulating plans for (a) In terms of its operations: restructuring for some years, it has not yet been able to establish a road map for separation of ministry Recognize that the performance of IR in terms of functions (policy and regulation) from the operational productivity of labor, equipment, and railway responsible for the enterprise. infrastructure is a fraction of the productivity of CR and other well run railways; ARE THERE POTENTIAL OPTIONS FOR INDIA'S Invest in areas that would help increase RAILWAYS DEVELOPMENT? utilization of existing assets, reduce unit costs IR is facing the same problem that railways in many other and increase profit margins, e.g., technology countries have had to face: a loss of monopoly position, improvement in signaling, more powerful and with it the need to adapt to a competitive locomotives, modern train control systems, IT, environment. IR has been losing market share to road etc.; transport in both passenger and freight services. Unless it Invest in improving maintenance of infrastructure improves its commercial orientation, IR's position in freight and rolling stock so that these are used to full will further erode as India upgrades its highways network, potential and loss of capacity due to failures and and its premium passenger services may lose to an speed restriction is reduced; increasingly competitive aviation industry. The only unique Invest in improving quality of service, both for aspect of IR is its scale of operations and the sheer size of freight and passenger services in order to compete its labor force. These make IR's adaptation more difficult, for high margin traffic; and but not less urgent. In comparison, CR has been Invest for capacity enhancement on corridors confronted with the similar changing environment, but has where additional traffic is expected. begun its process of transformation to meet the (b) In terms of its management structure challenges, with measurable initial results. To realize IR's full potential contribution to India's recognize that the prolonged period of protection transport system and economic growth, substantial of IR from inter-modal competition (road and investment will be required to fund track modernization, airlines) will be coming to an end in the near capacity expansion and safety enhancement. However, as future; the CR experience shows, such investment needs to be restructure IR, separating non-core functions (not undertaken in conjunction with pragmatic actions by the only social services but also manufacturing government and IR to address the railways' institutional services to create a competitive railway supply performance issues. GOI needs to signal its strategy industry) and discarding IR's traditional functional for IR. Several of the changes necessary to allow IR organization in favor of a modern lines-of-business to compete effectively in the transport market, and structure, centered around the major clients, with Page 8 Transport Note TRN-32 May 2006 the management of each unit focused on meeting strategy and associated investment plan to enable client service quality requirements, costs, pricing, IR to better meet profitable market demands and and net revenues to sustain IR in future years; shed unprofitable services and facilities; and review passenger services (especially ordinary implement a new system of capital budgeting and trains) and fare structure to reduce cross subsidies investment prioritization based on the Net Present and reduce freight rates to grow freight business;· Values using the opportunity cost of capital in the introduce a modern cost accounting and marginal application that must be forgone. information system that would be able to measure performance and profitability of IR as a commercial The changing operating environments confronted by CR in entity; the late 1990s and by IR now are not very different. The implement a `benchmark competition' system experience of CR's reform since 1999 suggests that across the 16 regional administrations of IR based substantial progress is possible, provided that there are on comparative performance of key indicators, serious commitment by the leadership in both government particularly, profitability; and railway management, and that an accommodation prepare a long-term (10-15 year) business acceptable to the millions of affected laborer is found. ANNEX : COMPARATIVE RAILWAY ASSETS AND PHYSICAL PERFORMANCE (1992 AND 2002) Comparative network assets and performance of China Railways (CR) and Indian Railways (IR) at 1992 and 2002 are given below. INDIA CHINA 1991- 2001-02 Ratio 1992 2002 Ratio 92 91-92/ 1992/2002 01-02 Population million 846 1,000 1.18 1,171 1,300 1.11 Railway route km 62,458 63,140 1.01 58,100 71,897* 1.24 Broad Gauge 35,109 45,099 1.28 NR53565 NR 59530 1.11 Double track km 14,605 16124 1.10 13658(25. 23,058(38. 1.69 Electrified km 10,809 (25.5%) 1.48 5%) 7%) 2.06 16001 8434(15.7 17,409(29. (25%) %) 2%) Railway track km 109,338 109,227 1.0 106,184 127,949 1.20 Automatic Block track km 2,594 3,571 1.38 11,287 20,682 1.83 Passengers carried million 4,049 5,093 1.26 997 1,056 1.06 (non Suburban) (1637) (2094) (1.28) Average per capita trips per 4.78 5.09 0.85 0.82 year total (1.93) Passenger km billion 314 493 1.57 315 497 1.58 Passenger originating 20 15 11.6 6.6 market share % Av. Trip length Total 77.7 96.9 1.25 316 471 1.49 non-suburban km 153.4 191.6 1.25 Freight originating tons 360 522 1.31 1,576 2,043 1.30 million Freight tkm billion 257 336 1.31 1,157 1,551 1.34 Average haul distance km 714 643 0.90 734 759 1.034 Freight originating ton 45 30 15.1 14.6 market share % Equated traffic units 571 829 1.45 1,472 2,048 1.39 Source: Chinese Railways CR Facts 2002 Edition, Indian Railways Year Book 2001-02 and 1992-93 *In China, Total (71,897 km) consists of National Railway (NR), managed by Ministry of Railways (MOR): 59,530 km; Local Railways managed by local governments: 4,716 km, and Joint Venture Railways, jointly funded by governments and enterprises: 7,651 km. Most data relates to National Railway