comparative evaluation of highway and railway development in china and india 1992-2002 clell harral...

Comparative Evaluation of Highway and Railway Development in China and India

1992-2002

Clell Harral and Jit SondhiMarch 28, 2005

HARRAL WINNER THOMPSON SHARP LAWRENCE, INC.

Contrasting Approaches to Transport Constraints on Rapid Economic Growth: Lessons Learned and Transferability Issues

HARRAL·WINNER·THOMPSON·SHARP·LAWRENCE, INC. 2

Our presentation today

• What was accomplished ?-- Early 1990s vs 2002• Economic Development• Highway Development

• Railway Development

• How was it accomplished?• Investment Priorities• Financing Mechanisms• Key Strategies Pursued by China• Institutional Development

• Potential Lessons for India


Table 1. Key Economic Data for India and China, 1992-2002

IndiaChina

1991-92

2001-02

1992 2002

Population (million) 846 1000 1171 1300

Poverty rate (%) 36 29 40 7

GDP (current $ billion) 244.2 510.2 454.6 1232.7

GDP growth rate (%) 5.5 4.4 14.4 8.0

Share of GDP (%) – IndustryShare of GDP (%) – Services

26.742.3

26.650.7

43.934.3

51.733.7

Volume of trade (current $ billion)

46 157 165 623

Foreign direct investment (current $ billion)

1.8 4 11 53

Source: World Bank “India at a Glance” and “China at a Glance”.


HIGHWAYS/1

At the beginning of the 1990s, India’s highway and railway infrastructure was ahead of that of China.

Highways In total route km In route km/square km

In route km/population

Highways & vehicles in both countries, however, were well below world standards, and railways dominated in all but short-haul transport.

Geometric standards Pavement standards Mixed traffic – much congestion & accident rates world’s

worst point No modern large trucks, few modern buses


HIGHWAYS /2 Over ensuing years, China leapfrogged India in

highways construction. China’s annual allocations for highway construction jumped from

about US$ 1 billion in 1991 to $38 billion (3.1% of GDP) in 2002 India’s highway allocation grew negligibly by comparison, rising

from about US$ 1 billion in 1991/92 to $3 billion in 2002.

India built more road km (600,000 vs China’s 443,000 km), but no high-standard arterials.

The choice of investment priorities was very different. China chose to focus first on arterial networks linking its 100

largest cities – the 35,000-km National Trunk Highway System + additional 25,000 km of 4-lane highways without access control

60% of China’s investment funding went to new arterial networks, 25% to upgrading existing networks, and 15% to rural roads


HIGHWAYS /3 China chose (mostly) high design standards for its new

highways The National Trunk Highway System (NTHS) is a 35,000-km

network, all 4-lanes with controlled access… 27,000 km (77%) of which completed by 2002

An additional 25,130 km of 4-lane highways without access control were also completed

Building an arterial highway system of over 52,000 km in only 10 years is an extraordinary accomplishment -- the USA took more than 30 years to complete its Interstate System of 69,000 km.

Unfortunately pavements were commonly designed to accommodate legal axle load limits, contrary to actual practice of overloading.

India has not yet completed Golden Quadrilateral which will connect 4 largest cities by 4 lanes, but without controlled access and traffic flow is still mixed.


HIGHWAYS /4How did China do it?

1. Sources of construction finance A wide spectrum of financing methods was

employed, with extensive innovation of both private and public modalities.

Private finance contributed some US$ 11 billion, more than in any other emerging economy

Private finance was virtually total equity, as lack of maturity of China’s capital markets & associated regulatory & legal infrastructure causes high risk perceptions precluding most private loans, bonds, & BOT structures.

> 80 PPP joint ventures between private developers in Hong Kong & provincial or local governments in China contributed > US$ 9 billion

Post-construction sale of equity in established toll roads raised $ 2 billion


HIGHWAYS /5

How did China do it? 1. Sources of construction finance (continued)

The total private finance was under 10% of China’s total road construction costs…

=> more than 90% of construction funding came from public sources.

Since 1998, virtually half of road development has been financed by domestic bank loans guaranteed by local government and by central government bond proceeds which were on-lent to local governments. This is unlikely to be sustainable.


HIGHWAYS /6

How did China do it?

2. Cost recovery: tolls, taxes, & other user charges China’s existing system of road use taxes is poorly related

to road use & funds only about 25% of road costs. China has not yet imposed a significant fuel levy to support

road costs. Tolls are expected to provide major source of cost recovery

& debt service in future. The tolls & proliferation of toll stations have caused

substantial under-utilization of new high standard highways & continued congestion of existing lower-standard but untolled routes.

Arranging sustainable, economically efficient sources of finance for a highway system that is still expanding rapidly is as yet an unresolved set of issues in China.


HIGHWAYS /7

How did China do it?

3. Physical implementation: planning, tendering, & supervision Like India, China was not equipped with modern industries for

highways planning, design, or construction in 1992, and the massive expansion of construction engendered countless problems.

The problem-solving capacities of its civil works industries -- fueled by vast sums of money & assisted in some key aspects by the international community -- rose to meet the challenge, but the transition of this sector to a competitive market-based economy is still a work in progress.

International Competitive Bidding introduced from 1985 & competitive tendering of one form or another (whether local or international) has since grown to supplant direct labor (‘force account’) for most road construction projects.

Construction enterprises were removed from the roads authority [PWD] & many have been reorganized as financially autonomous corporations.


HIGHWAYS /8 Lessons for India

China gave first priority to development of its arterial networks, with high design standards, allocating 60% of a vastly expanded budget for more than a decade to achieve that. The result is a highly modern arterial network integrating markets across the country & the rest of the world.

Many segments were built ahead of demand, & tolling of these facilities in parallel with untolled facilities has reduced utilization further – yielding a poor return on invested capital.

India has made almost exactly opposite decisions, focusing on secondary & tertiary networks with minimal design standards to stretch limited budgets as widely as possible. This has left India with severe congestion bottlenecks between its major cities & severe accidents problem.

The best strategy lies between these two extremes, varies from segment to segment, and can be identified by proper analysis.


HIGHWAYS /9 Lessons for India

(continued) A vast expansion of investments in highways will be required for Indian industries to become more competitive in world markets & sustain more rapid economic growth – of the order of 3% of GDP while catching-up.

Public finance is more severely constrained, but private finance can play a larger role in India than in China

domestic capital markets & legal infrastructure better established

the arterial networks yet to be built in India provide attractive opportunities for Private-Public Partnerships

ownership & management of toll roads can be better organized with multiple projects grouped under regional authorities with risk pooling

… but private finance unlikely to carry the major burden. Reform of the construction industry in India is vital

greater, genuine competition among domestic contractors is needed

state construction units could be spun off and made autonomous, accountable entities

international contractors can play a more effective role private finance will spur improved construction management.


HIGHWAYS /10 Lessons for India (continued)

India should seek to minimize China’s problem of a myriad of short tolled segments with attendant high costs of collection & delays to travelers by grouping toll finance initiatives through state- or region-wide highway corporations that can pool assets to reduce operational costs, improve risk management, & facilitate network extension through securitization of revenue streams from existing assets.

Until such time as revolutionary new technologies may be invented that permit tolling of all highways, India’s current policy mix -- to place main reliance on fuel levies combined with direct tolling on new facilities primarily where the traffic is heavy with inelastic demand -- is appropriate.


The Railways of China and India

1992-2002


RAILWAYS OVERVIEW

ROUTE KM: Similar size – China network 6% smaller

in 1992 but 14% larger than that of India in 2002.

TOTAL OUTPUT (equated units= pass km + ton km):

CR two-and-a-half times that of IR in 1992 & in 2002.

TRAFFIC GROWTH: The growth rates of passenger (57/58%) and freight (31/34%) in decade 1992-2002 of the same order in both countries.


RAILWAYS in CHINA (1)

Four types of railway in China National Railway (CR) is the main system (84%) owned and

managed by the Ministry of Railways. Joint Venture Railways (9%) Local Railways (7%), and Private Railways (negligible).

CR was until recently a vertically integrated railway it has now divested most of its social support, manufacturing,

and construction activities.

CR has become more commercially oriented former subsidiaries now compete with other suppliers for CR

needs incentives established to encourage commercial attitudes &

results about 100 unprofitable branch lines separated from CR and

operating losses reduced assistance provided to redundant employees to qualify for new

roles.


RAILWAYS in CHINA (2)

MOR retains all profits, pays taxes on profits, and finances most of its own construction and purchases of rolling stock.

Construction surcharges on all freight transportation used only for investment in railway construction with the

approval of NDRC and the government

The fixed and rolling assets (except freight wagons) allocated to Regional Railway Administrations (RRAs)

which are required to pay MOR a rate of return on the value of assets allocated to the respective RRA.

Wagon allocation and operations are managed on a system wide basis from Beijing using a computerized transport management information system (TMIS).

RRA pays hire charges to MOR for wagons in use on its territory.

Managers in RRAs receive bonuses that are linked to performance.


TRAFFIC AND ASSET UTILISATION

In 1992 and 2002 the two railways carried almost exactly the same volume of passenger km

(314 vs 315 billion pkm in 1992 and 493 vs 497 in 2002)

But CR carried 4½ times the freight of IR (1,157 vs 257 billion tkm in 1992 and 1551 vs 336 in

2002).

In fact, the increase in freight on CR over 10 years was more than the entire freight carried by IR in 2002 (394 btkm vs 336 btkm)

CR achieved this through more efficient

exploitation of track, locomotives, and wagons.


TRAFFIC AND ASSET UTILISATION

China has a larger proportion of double as well as electrified track.

CR has adopted automatic signaling more aggressively than in India.

Reliability of CR assets is higher, as they are relatively new, and quality of maintenance is better.

As a result CR operates roughly twice the number of trains on electrified double tracks as IR.


FINANCIAL PERFORMANCE

IR (INR) CR (RMB) 1991-92 2001-02 1992 2002 Transportation revenue billion

137 378 47.9 142.0

Revenue including construction surcharge bn.

69.9 181.3

Operating Expenses and pensions billion

104 343 24.6 112.0

Depreciation billion 20 20 13.5 22.3 Total working Expenses including depreciation and pensions billion

124 363 35.8 134.3

Working ratio % 0.76 0.94 0.35 0.62 Operating ratio % 0.895 0.96 0.51 0.74

Internal accruals fund 57% and 35% investments on CR and IR,

respectively.


COST and FARE STRUCTURE 2002

IR CR Total Revenue $ billion 8.2 17.1 Passenger pkm of total output % 59 24 Passenger revenue of total % 30 41 Average cost per equated unit US c 0.75 0.65 Average freight tariff per tkm US c 1.6 0.96* Average pass. fare per pkm US c 0.55 1.25 *including construction surcharge of 0.4 c Cost per unit on CR is lower by 15% than IR, Freight tariff on CR is lower by 40%.


EXPENDITURE

• Staff costs IR 53%, CR 25% of ordinary working

expenses• IR’s staff cost level is not sustainable

• Depreciation• IR 2% of historical value of assets • CR 4.4% of net value of assets

• IR is eroding its asset base


ASSET and LABOURPRODUCTIVITY

INDIA CHINA Remarks 1991-

92 2001-02

% 1992 2002 % China/ India ratio 2002

Traffic density* (Indian BG system)

9.1

14.2

13.1

17.6

+44 +24

27.4 34.4 +25 2.6

1.95

Output per emp- loyee#

402 648 +61 728 1385 +90 2.1

*Million equated traffic units per route km # Million equated units


FREIGHT BUSINESS

INDIA (BG) CHINA (CR) 1991-92 2001-02 1992 2002 Wagon turnaround (days)

11.1 7.2 4.15 5.10

Daily output per wagon operated (tkm)

2878 4446 9924 9100

Average trip (km)

740 677 734 760

Average Speed (kmph)

22.7 24.4 29.9 32.4


STRATEGIES IMPLEMENTED IN CHINA

Focus on core business, separated non-core activities, established independent entities that compete for CR business

Passenger services profitable, separated on accounting basis within CR

Minimize labour costs, assist excess labour to set up small businesses

Rail Construction Fund to develop railways Technology upgrades to improve capacity, service

quality and efficiency Asset Operation Liability System with RAs (to

promote benchmark competition and financial performance and provide management incentives).


AREAS WHERE IR COULD EMULATE CR (1)

Government should

Resolve the conflict between IR’s role as a commercial organisation and one to serve social obligations

Support IR in making only financially viable investments Fund all social/politically driven investments and

resulting operational losses Hold IR management accountable for service and

financial performance –benchmark against CR Offer significant incentives to railway managers and

labour if agreed targets are exceeded. Have an independent operations auditor carry out an

annual review of IR’s operational performance over time, across units within IR and across railways in other countries, including an assessment of the impact on Indian economy.


AREAS WHERE IR COULD EMULATE CR (2A)

IR should Recognize that highways and airlines will increase

competitive pressure on IR immensely Recognize the substantial scope for improving

productivity of assets and labour and reducing unit costs on IR

Recognize that railway restructuring is inescapable if IR is to serve the needs of the growing Indian economy

Separate non core activities, reorganize management on business lines focusing on customers

Implement an incentive system for managers based on “benchmark competition” between zonal railways.

comparative evaluation of highway and railway development in china and india 1992-2002 clell harral...

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