report no. india transpor sector - world bank€¦ · a transport system that is currently...

Report No. 13192-trM

IndiaTranspor SectorLong Term Issues

March 16, 1995

Infrastructure Operatimws DivisionCountry Department l- IndiaSouth Asia Regiona! Office

Document-of ;he Word Bank

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Abbreviations

CEM Country Economic MemorandumPER Public Expenditure ReviewGDP Gross Domestic ProductICP International Comparison ProgramPPP Purchasing Power ParityGNP Gross National ProductGOI Government of IndiaHDC High Density CorridorADB Asian Development BankRFFC Railway Fare and Freight CommitteeMOST Ministry of Surface TransportCBR California Bearing RatioIRI International Roughness IndexIR Indian RailwaysPWD Public Works DepartmentLCL Less Than CarloadCONCOR The Container Corporation of IndiaJNPT Jawaharlal Nehru Port Trust (Nava Sheva)SAR Staff Appraisal Report of the World BankOED Operations Evaluation Department of the World BankME Member Electrical of the Indian Railway BoardMM Member Mechanical of the Indian Railway BoardISO International Standards OrganizationMAV Multiple Axle VehicleBOT Build, Operate and TransferAACRG Average Annual Compound Rate of GrowthR&D Research and DevelopmentBUTP II Second Bombay Urban Transport Project (Proposed)CO Carbon MonoxideNO Nitrogen OxideS02 SulfatesMEIP Metropolitan Environmental Improvement ProgramSOE State Owned EnterpriseNAFTA North American Free Trade AssociationFNM Ferrocarriles Nacionales de Mexico (Mexican Railways)NHA National Highway AuthorityLRDSS Long Range Decision Support SystemGOM Government of MaharashtraR&R Relocation and RehabilitationEEPS Initial Executive Project Summary

THE INDIAN TRANSPORT SECTOR - LONG TERM ISSUES

Table of Contents

Page

EXECUTIVE SUMARY .............................................. iINTRODUCTION .............................................. iLONG TERM ISSUES ........................................... iTHE REFORM AGENDA ....................................... v

I. INTRODUCTION ............................................... 1

II. MACRO ECONOMIC LINKAGES AND DERIVED DEMAND ............ 2Transport Intensity ................................... 3Growth Rate Differentials and GNP Linkages ........... ................. 5

m. THE INTERMODAL CONTEXT ................................... 6Road and Rail .......................... 6Ports and Trade Facilitation ...... ................. 7

TV. THE PAST APPROACH TO DELIVERING SERVICES .............. 8Physical Planning vs. Flow of Services ..... .......................... . 8The Importance of Cross Subsidies .............. .................... 13Perverse Incentives for Management .. ............ ................ 21Rent-Distribution and Rent-Seeking Activity ............ ................. 25

V. LONG-TERM ISSUES IN A CHANGING ECONOMIC SCENARIO ...... ......... 26Linkages with Economic Reform Initiatives ........... .................. 26The Deregulation and Expansion of Foreign Trade ......... ............... 27Privatization and Deregulation of Domestic Industry ........ ............... 30Reducing Government Subsidies ............... ..................... 34

VI. LONG-TERM ISSUES IN A CHANGING DEMOGRAPHIC ...... .. ........... 38Increasing Population ....... ............ ........................ 38Increasing Urbanization ...... ........... ........................ 38Technological Change and Obsolescence ............ ................... 40Energy, the Environment, and Other Externalities ......... ................ 45

VII. THE INTERNATIONAL EXPERIENCE WITH TRANSPORT SECTOR REFORM .... 52The US Experience ............................................ 53The Experience of Chile ...... ........... ........................ 54The Mexican Experience .......................................... 56

VIII. A PLAUSIBLE REFORM SCENARIO FOR INDIA ......... ............... 59Progress to Date ....... ............. .......................... 60The Unique Elements of the Indian System ........... .................. 63Likely Areas for Further Transport Sector Reform .......... .. ............. 64The Difficult Areas for Reform .. 65Conclusion ....................... .......................... 70

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ANNEXES

ANNEX 1: SECTOR OUTPUT AND MODAL SPLIT ESTIMATES ................. 71ANNEX 2: INTERNATIONAL COMPARISONS OF RAILWAY PERFORMANCE ... .... 73ANNEX 3: CONGESTION ON THE ROAD AND RAIL NETWORK ................ 81

BOXES IN TEXT

Box 1: Appropriate GDP Measures for International Comparisons .................... 2Box 2: The Deregulation of Trucking ...................................... 9Box 3: The Physical Condition of Indian Roads .............................. 10Box 4: The Conflict between Rail Freight and Passenger Services ................... 12Box 5: Ports as a Deterrent to Trade Expansion .............................. 14Box 6: Rail Management's View of their Relation to Parliament .................... 15Box 7: The Bulk Freight Rate Tax and its Uses ............................... 15Box 8: Rail Management's View of the Redundant Labor Problem .................. 18Box 9: The Impact of Frequent Rail Management Changes ....................... 22Box 10: The Costs of Delayed Road Projects ................................. 23Box 11: Police Checkposts as a Deterrent to Interstate Comnerce ................... 26Box 12: Manufacturing Plant of Indian Railways .............................. 32Box 13: The Coming Railway Financial Crisis ............................... 35Box 14: The Limited Potential for Private Monies in Road Investment ................. 36Box 15: The Controversy Over Earmarking for Road Funds ...................... 37Box 16: The Pros and Cons of Technology Transfer ............................ 41Box 17: The Stagnation in Rail Technology ................................. 42Box 18: Indian Trucking Technology ..................................... 44Box 19: The Railway Electrification Initiative ................................ 47Box 20: The Potential Impact of Involuntary Resettlement ........................ 51Box 21: Twenty Years of Self-Criticism by Rail Management ...................... 68

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ACKNOWLEDGEMENTS

The principal author of the report was Robert Bums. Mme. Grace Samuels-Bracy has presided

over its production and distribution. Major contributions were made by Harald Hansen, Antonio Cittati,

Louis Thompson and Hans Peters. Helpful review comments were provided by Robert Panfil, Robert

Anderson, Jacques Yenny, and Hernan Levy - all from the World Bank. Other comments and

contributions were received from Jitendra Sondhi, Mridula Krishna and Alok Bansal - local consultants

for the World Bank. An earlier draft was reviewed with the Indian authorities in November 1994. The

Ministries of Surface Transport and Urban Development provided extensive written conmments and

suggestions. The Chairman and Members of the Railway Board made extensive verbal comments and

suggestions. Many of these have been integrated into the present version.


EXECUTIVE SUMMARY

INTRODUCTION

1. The economic reform initiative in India is expected to raise the long term annual growth rate ofthe Indian economy from the 3.5-4.0 percent of the past to 4.5-6.0 percent. This implies a doubling offreight transport output every 10 to 13 years and a doubling of passenger transport output every 7 to 10years. Foreign trade flows would then double in about 8 years. These are large pressures to exert ona transport system that is currently saturated on the main road and rail links and the possibility arises thatthe capacity constraint of the transport system may (together with that of the power sector) serve as aconstraint on overall economic growth.

2. In the Indian transport sector there are three important historical developments to bear in mindbefore examining the present and looking to the future. The first is that India, a rail dominant economyin the 1950s, has become a decidedly road dominant economy in the 1990s. Road transport now accountsfor over 60 percent of intercity freight traffic (ton-kin) and over 80 percent of intercity passenger traffic(pass-km). The second development is that during the same period Indian Railways (IR) shifted frombeing a freight dominant operation to a passenger dominant operation. The third development is that themain links of the parallel and competing road and rail networks have become saturated under the currenttechnological and operational regimes.

LONG TERM ISSUES

3. The long term issues examined in this report come under two general headings. The firstcategory are those that require or induce transport sector change in response to the Government'sproclaimed national reform initiatives. These are: (i) the deregulation and expansion of foreign trade,(ii) the privatization and deregulation of domestic industry , and (iii) the reduction of governmentsubsidies. The second category of issues are those that require or induce transport sector change inresponse to exogenously imposed demographic and technological changes. These are: (i) a growingpopulation, (ii) increasing urbanization, (iii) technological change and obsolescence, and (iv) energy, theenvironment and other externalities. Taken together these are a formidable list of forces which thetransport sector must somehow accommodate now and in the long term.

Foreign Trade Expansion

4. Indian exports and imports are projected to expand at a sustained rate of between 9 and 10 percentper annum. This will place certain obvious pressures on ports, inland transport links and internationalair cargo capacity. Less obvious are the technological, administrative and legal implications of integratingmajor portions of the Indian economy with world markets. The major physical bottleneck in the longterm is the inadequate road and rail capacity for hauling containers to and from ports and inlandterminals. The major administrative bottlenecks are the application of the rules of the Indian Customs

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Service and the interpretation of cargo liability and ownership and related dispute resolution by the Indianlegal system. Any country that wishes to participate actively and successfully in the international tradingsystem must adjust its infrastructure, administration and laws so that they not only allow trade to takeplace but promote it through efficient, transport, communications, documentation and conflict resolution.India has only begun this task.

Privatization and Deregulation

5. The current Indian economic reform movement seeks to remove government from much of thenationalized industrial sector and to give private companies more freedom to run their own affairs. Thismovement towards commercialization has an indirect long term impact insofar as it effects the users ofthe transport system. It has a direct long term impact insofar as the public sector entities providingtransport or transport infrastructure are themselves commercialized and/or privatized.

6. The railway mode is the most affected by these initiatives - both directly and indirectly. As avertically integrated, nationwide, public conglomerate facing increasing financial difficulties; the railwaysthemselves would be a logical target for reform through the "unbundling" of their disparate service andequipment providers into coherent, focused corporate entities - public and/or private. The railroad wouldalso be greatly affected by the different behavior and demands of their privatized and deregulated formerpublic sector freight customers. Rail reform is well advanced in other reforming economies and theexperience indicates that this is a difficult area of adjustment for politicians, rail labor and management.

Reduction of Government Subsidies

7. Part of the solution to the problem of national public finance imbalances has been to proposeraising charges for most subsidized government services on the grounds that the government cannot affordthem and that many of the benefits are captured by the upper and middle classes rather than the poor.The economic argument is that increased charges promote more efficient use of these scarce services andresources.

8. A dominant subsidy in the transport sector is the salaries to redundant management and labor inthe airlines, ports, railways, state bus monopolies, customs service and the state PWDs. Another well-defined subsidy is to intercity road and rail passengers through money losing second class ordinary railservice and state monopoly bus services. Another is to rural transport in general in the form of moneylosing branch rail lines and meter gauge rail operations and an extensive system of low volume tertiaryroads. A final subsidy stream is directed at the users of urban rail services. The reduction and/orremoval of these subsidy streams will be resisted fiercely by those groups that have come to accept themas a-right. It is an issue with long term economic efficiency and equity implications.

Demographic Pressures

9. For the transport sector the large and increasing population of India means a large and increasingdemand for passenger transport. Indians currently consume about 2330 kilometers of intercity passengertransport per capita per year. For the USA in 1988, with a purchasing power adjusted per capita GDPabout nineteen times the Indian level, the figure was 12,774. km per capita, about six times that of theaverage Indian. In the early 1980s in Korea personal mobility was about 1400 km per capita, while inBrazil it was about 3700 km. It would appear that Indians consume much more intercity passengertransport than other nationalities at comparable income levels.

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10. This high level of per capita consumption of intercity passenger transport has had very seriousimplications for the Indian transport sector since buses are competing with trucks for the limited spaceon the roads and rail passenger services are using at least half the track capacity on the saturated raillinks.

11. For the long term, the issues here are: (i) how important is passenger service relative to freighttransport service, (ii) are passenger subsidies warranted, and (iii) can the transport system and theeconomy accommodate a doubling of intercity passenger demand every seven to ten years?

Increasing Urbanization

12. Natural growth rates and rural to urban migration are expected to raise the urban population ofIndia from 28 percent of the total in 1990 to 42 percent in 2010. The share of economic activity in urbanareas would also increase from about 56 percent of GDP in 1990 to about 63 percent in 2010. All ofthis growth in urban population and economic activity is to take place in the three "mega cities" ofBombay (12.6 million), Calcutta (10.9 million), and Delhi ( 8.3 million); the six aspiring mega cities ofMadras, Hyderabad, Bangalore, Ahmadabad, Pune and Kanpur (5.4 to 2.1 million); the fourteen othermetropolitan cities of more than one million population; the 277 class I cities between 100 thousand andone million and the 3396 cities between 5 thousand and 100 thousand. This shift in the spatialdistribution and concentration of population and economic activity will have profound effects on thenature and level of transport demand.

13. The most obvious long term transport impact of urbanization is that the demand for urbanpassenger and goods movements will grow very rapidly. This will be translated into pressure on thephysical infrastructure of city streets and suburban rail. Less obvious is the fact that increasingly thecongested urbanized areas on the national transport network are becoming barriers to the free flow of longhaul intercity traffic, requiring the construction of costly road and rail urban bypasses.

Technological Change and Obsolescence

14. This analysis shows that, in order to accommodate the extraordinary changes projected in themedium and long term, India needs engineers to design its main roads to be built to efficientspecifications by modem capital intensive road contractors. Modern Multiple Axle Vehicles (MAVs) areneeded to operate over the new MAV friendly roads with lighter axle loads and more fuel efficientengines. Indian railways cannot afford to continue operating low power, fuel inefficient diesellocomotives of a 1960 design vintage out of a system of redundant workshops and depots based on steamtechnology. Nor can IR continue to use high tare weight freight rolling stock with only 20 ton allowableaxle loads. The foreign trade sector cannot afford to use ports that are still being served by first andsecond generation container ships and feeder vessels because of the low level of containerization of Indiancargoes and the low service levels in ports.

15. While many of the technology "solutions" to India's transport problems are obvious - theireffective (as opposed to superficial) adoption has profound long term implications for labor andmanagement and operational policies in the sector and, for this reason, will not be welcomed by importantelements of society.

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16. The transport sector in 1990 was the second largest consumer of commercial energy (22 percentof total) after industrial users (53 percent). Transport, however, was the largest consumer of petroleumbased energy (43 percent). And, petroleum imports in 1990 were about 22 percent of the value ofimports and expected to rise to 30 percent of imports by the year 2000. For balance of paymentsreasons, therefore, great emphasis has been put on energy saving in the petroleum users category. Thishas been pursued through the traditional import substitution route rather then the end use efficiency route.

17. All of the energy use (coal, diesel, and electricity) of India Rail accounts for only 4.3 percent ofconimercial energy production. This means about 18 percent of commercial energy consumption takesplace in road transport (urban and intercity). The greatest potential for energy saving in the transportsector now and in the future is on the road side and this has not yet been pursued effectively becausegovernment exhortation, which has the most political support, is not effective and pricing incentives,which are the most effective, have no political support.

The Environment

18. Transport is a major contributor to environmental pollution in that it requires the burning of fossilfuels to produce its 22 percent share of commercial energy. When the results of this combustion areconcentrated in urban areas where the polluted air is breathed, then the public health impact can besubstantial. There has been a great deal of analysis and discussion but very little action in dealing withthis problem.

19. The basic reasons for lack of effective action are rooted in the lack of effectiveness of governmentvehicle emission mandates and the lack of public support and administrative capacity for non emissioncontrol policies. Among these latter are: (i) internalizing the externalities of private motorized vehicleuse by charging much more for polluting fuels, charging for parking in congested areas and charging foraccess to congested areas at peak periods; and (ii) enhancing the quality and coverage of public transportby charging more for a greater variety of services, making use of exclusive bus lanes, removingencroachments from streets, and by providing pedestrian and bicyclist amenities in the form ofunencroached footpaths, bicycle lanes and underpasses.

Public Safety

20. Roads in India are dangerous by developed country standards with an annual fatal accident rateof about 2.65 deaths per 1000 registered vehicles. This compares to a range of .15 (Japan) to .38(France) in developed countries a factor between 18 and 8. The generic reasons are poor roads, mixedtraffic, unsafe vehicles, poor driving habits, lack of safety belts and helmets, poor emergency servicesand lack of police enforcement. The results are about 60,000 fatalities per year, an annual accident costestimated at 0.5 percent of GDP and an unquantifiable amount of human suffering. The hope is that afour lane divided toll express way system would begin to have an impact by physically separating orexcluding slow moving vehicles, reducing congestion, suppressing ribbon development with limited accessand providing an incentive for effective policing. At the moment this is no more than a faint hope andhigh road fatalities are likely to be a permanent feature of the road transport subsector.

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21. The railways, by contrast, have passenger fatalities due to train accidents of only 100 per yeardespite the fact that they account for approximately 16 percent of passenger kilometers nationwide. Thereare however an unspecified number of nonpassenger fatalities which are not recorded. These take placein the approximately 50 level crossing accidents per year and in a large but unspecified number of illegalpedestrian crossing of rail tracks (especially in urban areas). In addition to being more benignenvironmentally, rail transport is clearly the safest mode of passenger transport (for the passenger) in thecountry.

Involuntary Resettlement

22. It is extremely difficult to provide any new infrastructure in India without displacing individualbusinesses or residences. The resulting involuntary resettlement is an external cost associated with theprovision of transport services to the extent that the individuals displaced suffer a net loss in income orassets. Beyond the quantifiable costs of involuntary resettlement there may be a host of other associatedcosts. By far the most difficult area for involuntary resettlement in the transport sector is that of urbantransport - especially road transport. Any attempt at improving the flow of road vehicles in, through oraround urban areas quickly encounters the constraint of land acquisition from individuals who have legalrights as well as those who are squatters.

Conclusion

23. Energy, environmental, public safety and involuntary relocation considerations all mitigate againstrapid and effective expansion of the currently dominant road transport mode - especially in urban areas.Railroads are by far the least energy intensive and polluting mode as well as the safest and leastdemanding of land for expansion of capacity. All four of these long term constraints will favor the railmode if intercity passenger traffic pays its way, the urban tax base allows the financing of suburban andurban rail improvements, and rail management and labor will accept the labor saving and managementintensiveness implications of technological improvements. As the reform agenda below indicates, it willbe difficult to meet these conditions even in the long term.

THE REFORM AGENDA

Progress to Date

24. A great deal of transport sector reform has already been accomplished in India with private:trucking, bus, rail container, shipping and airline operations. India has already set up a legal andadministrative environment in which private domestic entrepreneurs are willing to finance, maintain andoperate extremely mobile pieces of capital equipment - trucks, buses, flatcars, ships and airplanes - ina competitive environment. What has not yet transpired is the development of effective regulatoryauthorities to promote safe, non damaging and non polluting operation of this equipment and to promoteprice competition as well as service competition.

25. It is on the fixed infrastructure side where the least progress has been made and the private sectorhas been virtually absent. Thus, the roads, ports, airports and rail lines used by private trucks, buses,ships, air planes and flat cars are all provided and maintained by the public sector and are rapidlybecoming physical bottle necks that will not allow the efficient use of the generally adequate, privatelyfinanced and operated, equipment.

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The Least Difficult Reforms

26. The most likely areas for further rapid reform in Indian are sea ports, airports, trucking and busoperations, in that order. To reform the nation's seaports the emphasis should be on shifting thegovernment's task from one of providing infrastructure and services to one of regulation of private sectoroperations. The international experience shows that the "landlord" port concept is the way to go. Thenew regulatory role of the government would be to let franchises or concessions to prequalified firms forproviding mobile equipment and operating specific facilities eg. container terminals under a specific termsof reference. This could be done quite rapidly for the container facility in New Bombay (JNPT).Current container handling rates at JNPT are less than one half those of similar facilities elsewhere andwould certainly double almost overnight with a concession award to a qualified firm. This was theexperience with similar reforms in Mexico.

27. The redundant labor problem of the ports is manageable - the total number redundant probablydoes not exceed 50,000 nationwide and this is feasible for a labor buyout. This was done successfullyin Chile.

28. The successful deregulation of international air cargo and domestic air passenger services will leadto very large pressures on the Indian Airports Authority to expand and upgrade airport facilities. Thisis feasible in the short and medium run because there is upper class elite support for safer airports andair space and because airport users are affluent and easily identified and charged for using the facilities.This sets the stage for the commercialization and partial privatization of the major airports and thedevelopment of a landlord/coordinator role for the various airport authorities - not unlike that envisionedfor the sea port authorities.

29. Intercity bus operations in India are being gradually reformed with a steadily increased allocationof routes to private operators. However this is seen in many quarters as an expedient brought on by theinability of states to finance public bus corporation losses rather than a desirable reform. Privatizationreforms usually require a shift in regulatory policy designed to promote public safety as well as low faresjust as in the case of airline reforms. This shift in focus has not yet taken place in all the states and itneeds to if the desirable shift to private sector finance, maintenance and operation is to continue withoutsocially undesirable consequences.

30. Since the shift to private sector bus operations at the state level is taking place slowly, theredundant labor problem can be handled by allowing natural attrition at the state road transportcorporations to shrink the public sector operations. Since this will be an industry of steady to rapidgrowth there should be no long term redundant labor problem.

31. It is also desirable to complete the reform of intercity truck operations. The 1986 deregulationof trucking was the key initiative but two other related initiatives are required. The first is to reduce thenumber of police check posts and/or increase their efficiency. These operations tie up trucks for manyhours of costly waiting and are rated the number one problem facing truckers in a recent survey. Theother initiative is to find a substitute revenue measure that will allow the abolition of octroi collections.A potentially feasible approach is to allocate a portion of a new state road fund fed by increased taxeson diesel fuel and leaded gasoline to municipalities in lieu of octroi. The road fund concept has otherdesirable aspects as well.

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The Difficult Reforms

32. The basic objectives of highwav building reforms should be to introduce high quality, private,road investigation, design and supervision services and a full-service, private, capital-intensive roadconstruction industry capable of constructing high quality roads rapidly for high density high axle loadtraffic. The current state PWDs with their long tradition of in-house engineering and near force account,small scale, labor intensive construction were adequate (and still are) for low volume roads and basicrural access but do not have the absorptive capacity for the main roads task.

33. The quickest and most efficient way to introduce the engineering initiatives at the state level isto privatize the in house engineering services of the PWDs by making use of private consulting firms forinvestigation, design and construction supervision and by initially making use of foreign consulting firms.These firms will hire the best of the local engineering talent and bring back some of the most experiencedIndian talent that is currently working abroad for lack of effective demand for their services in country.The current oligopoly of domestic highway engineering firms will have to compete with better salariesfor good engineers and new domestic firms may be expected to develop in the new competitiveenvironment. These are the same pressures that foreign competition is putting on domestic manufacturingfimis under the national economic reforms. Engineering services should not be exempt.

34. The quickest and most efficient way to introduce the construction industry initiatives is to puttogether large contract packages, mandate rigorous prequalification of construction firms, useinternationally accepted contract documents, allow foreign competition for large scale road works, andexpedite the import of efficient and dependable road building equipment. As in the case of engineeringservices the competition will do much to develop a client-responsive domestic construction equipment androad building industry. Also, many potential Indian participants in construction equipment and roadbuilding are currently operating abroad for lack of effective domestic demand and would have incentivesto return under a reform environment together with a large and predictable construction program.

35. Finally, the huge backlog of economically justified road projects and related maintenancerequirements needs to be addressed with a long term solution to the problem of finance. While someprivate sector money will be forthcoming under a BOT format, this will not do the whole job - nor willpublic sector toll roads. Assuming that financing from general revenues will continue to be completelyinadequate, the only viable alternative is to set up state (and a national) road funds fed by new earmarkedtaxes on diesel fuel and leaded gasoline. This stream of user revenues could not be used for anythingother than maintenance and upgrading of the road system and as an alternative to the octroi formunicipalities. State (and a National) highway boards with mixed private public members could be setup to ensure that the management of these funds reflected user interests as well as the interests of thepublic roads bureaucracy.

36. Rail reforms will be the most difficult because of the huge amount of redundant labor (at aminimum 400,000 positions) and a passenger lobby that has grown accustomed to subsidies in the formor free or very low cost services. Freight services can no longer absorb the burden of redundant laborand below cost passenger services. The very least that can be done in the short run is to run thepassenger services as a commercial venture. This would mean no more free travel for anyone and privateticket checking and collection companies with an incentive to stop so called "ticketless" travel. Surveysof train passengers show that they are not a disadvantaged sector of the population and are receivingpublic funds that could be used with greater social benefits elsewhere.

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37. Much of the redundant rail labor is currently absorbed by the very large number of stations, yardsand workshops that are no longer required or viable because of technological change and competitionfrom road transport. Some is absorbed by meter gauge services that will never again be viable becauseof the road alternative. Conventional downsizing and disinvestment is required but is difficult becauseof the impact on labor. However, the land and buildings associated with the redundant facilities andservices are frequently strategically located and valuable for private sector industrial/commercialoperations. If properly handled, these facilities could be turned into viable private conmmercial operationsto the benefit of the redundant labor - either through buyouts from land sale revenues or through theprovision of alternative employment in the new enterprises. International experience has shown that itis fruitless to pursue rail reforms without dealing explicitly with the labor problem in an equitable andfinancially responsible manner.

38. If the experience of reformed railroads is transferrable, then Indian Rail also needs to concentrateexclusively on being an intercity freight and passenger transport operation. The IR conglomerate suffersfrom the conflicting objectives of the urban passenger and equipment manufacturing operations vis a visthe main passenger and freight business. New lines of freight business should also be explored by IRwith the most obvious being profitable domestic double stack container operations that would reducepressure on the rail budget as well as the saturated main road links.

39. At the very least the IR manufacturing operations should be corporatized so that international jointventures including technology transfer and export sales can take place legally, so that bidding can takeplace for multilateral financed investments, so that true manufacturing costs are known and so that quality rcan improve through the use of meaningful post delivery warranties. Whatever the past benefits ofvertical integration they no longer obtain for railroads in the late twentieth century.

40. None of the above rail reforms are likely to happen without a great deal of sustained managementattention. This cannot take place with the current policy of frequent senior rail management changes withtenures of six to eighteen months not unusual. A minimum of three to five years in a senior position isrequired in order to push through any change. The specification of much longer job tenures for managersis, therefore, an essential ingredient of meaningful rail reform.

41. Related to management tenure reform is the whole question of the role of Parliament in railwaymanagement. While public entities should certainly be responsible to Parliament in terms of their overallmandate, they should not be subject to daily scrutiny of the details of operation and investment decisions.At the very least, the railways should become a semi autonomous public corporation with a detailed termsof reference approved by Parliament. This would help depoliticize the provision of railway services(especially passenger services) and allow professional rail managers to plan and provide nationaltransportation services in a competitive environment. In an economy dominated by roads and roadtransport the annual ritual of the rail budget presentation in advance of the National Budget is no longerappropriate.

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Conclusio

42. A substantial amount of progress has been made with the first phase of transport sector reformin India in which the government has allowed the private sector to finance, operate and maintain in acompetitive environment the nation's fleet of buses, trucks, airplanes, and ships. The second phase ofreform involves the improved regulation of private sector operations and improved provision andmaintenance of physical infrastructure - ports, airports, railways and, most importantly, roads. Thereare some promising beginnings of this phase on the roads side with the BOT initiative, the NationalHighway Authority initiative and moves by some progressive state governments to reform their ways ofobtaining good roads rapidly. However, progress on rail reform is lagging. This is disquieting becausethe rail mode is uniquely positioned to relieve the high density corridor capacity constraints in the shortand medium term and help meet future transport needs in an environmentally and socially sustainablefashion.

43. The great advantage that India has at this stage is the plethora of successful models of transportsector reform that now exist worldwide. There is no longer a need to proceed into the unknown for mostof the required initiatives. This factor, plus the steady pressure of the long term forces identified in thispaper, could conceivably make the process in India more orderly and less painful than has been the caseelsewhere.


I. INTRODUCTION

1. The intention with this exercise is to look beyond the current organization and functioning of theIndian transport sector to the logical impact of demographic trends, economic growth, technologicaldevelopments and economic reform efforts on the various transport modes. It is proposed to treat inconsiderable depth the demand for and supply of both freight and passenger movements for intercity roadand rail services, and freight movements for port services. A separate treatment of intermodal transportand trade facilitation integrates the freight movements through and between road, rail and ports.Urban/suburban transport, air transport, coastal shipping, international shipping, and pipelines will betreated in less depth and incidentally to the treatment of the major modes.

2. There exists a very large amount of completed subsector and sector work undertaken by the modalministries, the Planning Commission, The Asian Development Bank and the World Bank in India. Takentogether, this body of work explains why things work as they currently do in the sector. Except for theopening section on macro economic linkages and derived demand there is little new information presentedin this document. While there has been no lack of information in the recent past, there has been a lackof integrated analysis that pulls together in a coherent fashion the discrete pieces of descriptive andanalytical work that exist. That will be one of the principal tasks of this exercise.

3. The presentation opens with the identification of the transport sector in the context of the Indianeconomy, linking the growth in transport output with the growth of the economy. This is followed byan integrated dynamic description of the transport system in the sense that road, rail and ports aredescribed as functioning together over time. The usual static descriptions of the various subsectors is keptto the bare minimum needed to sustain the analysis.' The subsequent section involves a policy-orientedanalysis of past and current approaches to the actual delivery of transport services as opposed to thestandard treatment of maintenance and expansion of the physical infrastructure.

4. Once the contemporary scene is set it is possible to begin introducing the long term issues of thetitle. Economic, demographic, environmental and technological trends that are already becoming apparentwill be introduced with an attempt to define the implications of dealing with each of these issues in auseful way. Most of the appropriate responses require a change in the current way of doing business andthis imnplies reforms of some sort. The basic menu of reforms is then set forth based on the internationalexperience of other liberalizing economies and transport sectors with due account taken of the uniqueelements of the Indian system. This then leads to the development of a likely (as opposed to a desirable)medium and long-term reform scenario for the Indian transport sector. Since scenario prediction is an

1. A more conventional descriptive treatment may be found in: Indian Transport System Sector Report, The AsianDevelopment Bank, Manila, February 1993.

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exercise in dynamic political economy, the one set forth herein will certainly be wrong but it does serveto highlight realistically the nature of the steps that will need to be taken if the reform process is to goforward in this sector.

II. MACRO ECONOMIC LINKAGES AND DERIVED DEMAND

5. If measured in purchasing power parity terms, the Indian economy is the sixth largest in the 1994WDR list of Bank member countries - following the U.S.A., Japan, China, Germany and the RussianFederation (Box 1). The economy is varied in that GDP in 1992 was 32 percent agriculture, 27 percentindustry and 40 percent services with over two thirds of GDP emanating from the private sector. Withonly 10 percent of GDP exported it is safe to assume that most current transport activity is associatedwith domestic production and consumption.

Box 1-a: ADRroRriate GDP Measures for International Compansons

The use of official exchange rates to convert national currency figures to U.S. dollars does not'i ireflect the relative domestic purchasing power of currencies. The United Nations InternationalComparison Program (ICP) has developed measures of real GDP, on an internationally comparablyscale, -using purchasing power parities (PPP) iinstead of exchange rates as conversion factors. The1992 ICP estimates of Indian GDP quadruple the size of the Indian economy relative to that of theU.S. That of China is also about four times that based on official exchange rates. Hence, theimportance of using ICP estimates in calculating and comparing energy intensity or transportintensity.

See: World Develogment Report 1994, The World Bank, Washington, D.C., Technical Notes pp..244-247. Compare Table 1 p. 162 with Table 30 p. 220-222 to see the differences between the twoGDP estimates. Also see: Purchasing Power of Currencies - Comparin, National Income Using:I.,C iDa, International Economics Departnent, The World Bank, Washington, D.C., 1993.

6. The spatial distribution of production and consumption have much to do with the derived demandfor freight and passenger transport. According to the 1991 census 26 percent of the Indian populationlived in urban areas which generate about 47 percent of GDP.2 This is expected to rise to 35 percentof the population and 60 percent of GDP by the year 2000. UN population forecasts project India's rurban population to grow by 402 million by the year 2025 while the rural population is projected to

2. An urban area is defined to be a place with a minimum population of 5,000 with a population density of at least 400persons per sq km and with a minimum of 75 percent of the male working population in non agricultural pursuits.

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decline by 26 million.3 Well-defined urban centers of production and consumption linked by a road, railand air transport system are evolving rapidly from what was, until recently, an overwhelmingly ruralsociety.

Transport IntensitY

7. In Figure 1, the total domestic freight ton-km in of several economies are divided by their ICPestimates of GDP to provide internationally comparable measures of freight transport intensity for 1989.4Subcontinental India with an area of 2.9 million sq km has an appropriate transport intensity of 0.51 ton-km per $ of GDP, less than that of continental USA (0.64), Canada (0.74) and China (0.78) butexpectably larger than the much smaller countries of Germany (0.28), France (0.22), and Spain (0.37).There is, therefore, no evidence to suggest that gross macro distortions of the frei&ht transport subsectorof India have resulted from Indian central planning, an argument that cannot be made for the economiesof Poland, Bulgaria, Hungary and the former Yugoslavia. There are numerous reason for this positivedevelopment in India of which the most important has been the relatively large share of GDP in privatehands, the steady expansion of the road system, and the privatization and deregulation of trucking.

3. Extracted from Annex I of: India Public Expenditure Review Infrastructure - Urban Sector, Yellow Cover Draft, TheWorld Bank, June 11, 1993.

4. Taken from: Esra Bennathan, Julie Fraser and Louis Thompson, What Determines Demand for Freight Transpor?,Infrastructure and Urban Development Department, The World Bank, Washington D.C., October 1992. Great caremust be exercised in making comparisons because the intercity freight ton-km measured are those that take place onthe soil of the nation state. The international portion of freight ton-km of imports and exports are excluded from thestatistics. Thus, physically small but rich island states such as Singapore and Hong Kong will have few domesticfreight ton-km associated with large GDPs. Most of the transport associated with their economies will be overinternational waters or in other countries. They will therefore have very low transport intensity measures. Largecontinental economies will be more freight transport intensive because of the relatively small amount of internationalton-km associated with their economies.

Fizure 1.

Iernational Comparisons of Freight Transport Intensity(Ton-Km per $ 1989 GDP Purchasing Power Adjusted)

(Area 000 Km2)

FSU (22.272) 3.69

POLAND (305) _ s.

CSFR (125) _ 0.32

CHINA (9,597) _ 0.78

CANADA (2.305) _3 074

BULGARIA (11t) _ ! OJ 02

USA (9,167) _ 0.54

HUNGARY (92) - o. a

INDIA (2,973) _ 0.51

YUGOSLAVIA (255) _ 0.481

SPAIN (499) in 0.37

HOLLAND (34) o 0.34

SWEDEN (412) -E 0.32

BELGIUM (30) - i 0.32

W.GERMANY (244) - i 0.28 1

UK (242) E 0.26

ITALY (294) - 0.23

FRANCE (546) - 0.22

AUSTRIA (83) 0.21

0 1 2 3 4 5

Ton-Km per S of GOP

8. For passenger transport the linkage between personal mobility and economic growth is not so welldefined and passenger transport intensity statistics are usually not computed or compared internationally.The per capita consumption of passenger transport is, however, of some interest. If the 1992 estimateof 2058 billions of passenger-kilometers is divided by the 1992 population, the Indians currently consumeabout 2330 kilometers of passenger transport per capita per year. For the USA in 1988, with an ICP percapita GDP about nineteen times the Indian level, the figure was 12,774 km per capita, about six timesthat of the average Indian. In the early 1980s in Korea personal mobility was about 1400 km per capita,while in Brazil it was about 3700 km. In China in 1982 where personal mobility was restricted as amatter of state policy, the average person travelled only 252 km per year intercity.5 If anything, it wouldappear that Indians consume much more intercity passenger transport than other nationalities atcomparable income levels. This is an important statistic to bear in mind for subsequent analyses sincedifficult demand management decisions are likely to be required in the near future in India and therelative importance of intercity passenger transport, especially rail, will need to be assessed.6

Growth Rate Differentials and GNP Linka2es

9. Over the period 1967 to 1987 the total demand for intercity freight transport in India grew at anaverage annual rate of about 5.3 percent (See Annex 1 for details and sources of estimates). GNP overthe same period grew at an average of 4.2 percent yielding a growth rate ratio of about 1.3. In the lastten years the ratio of growth rates has risen to about 1.5. A recent international comparison based oncross sectional rather than time series analyses suggests that the ratios of freight traffic growth to GNPgrowth for developing countries is generally above 1.25 while that for developed countries is close tounity.' The time series figure of 1.3 for India between 1967 and 1987 is consistent with these findings.The higher figure of 1.5 for India for the last ten years is not inconsistent with the findings but thetendency towards unity as development and urbanization proceeds would suggest that the figure of 1.5is inappropriate for long range projections.

10. For passenger transport, demand over the period 1967-87 was increasing at 8.1 percent annually,a much higher rate than freight, yielding a growth rate ratio of about 1.9. We do not have recentinternational comparisons of this statistic but it is surely high in the Indian case and consistent with thehigh per capita consumption figure of 2330 pass-km in 1992. The substantial differentials in growth ratesfor freight and passenger traffic in India is an important factor to bear in mnind for the future as it againraises the important question of the relative importance of intercity personal mobility and its impact onthe public budget.

5. Transport in China: A Comoarison of Basic Indicators with Those of Other Countries, World Bank Staff WorkingPaper No. 723, 1985, p 24.

6. Creightney, at the end of his recent survey, makes the point that: "(transport) infrastructure services that are stronglyoriented to household final consumption may be generally less important to structural adjustment." See: Transportand Economic Performance - A Survey of Develoving Countries, by Cavelle D. Creightney, World Bank TechnicalPaper No. 232, 1993. p. 34.

7. Esra Bennathan, Julie Fraser and Louis Thompson, What Determines Demand for Freifht Transport?, Infrastructureand Urban Development Department, The World Bank, Washington D.C., October 1992.

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HI. THE INTERMODAL CONTEXT

Road and Rail

11. It is the differentials in traffic growth rates for the road and rail modes that have transformed thetransport sector in India. For freight, rail output expanded at 3.3 percent annually over the twenty yearperiod 1967-87 while road output was expanding at 8.8 percent annually. For passengers rail output wasexpanding at 4.7 percent annually while road output was expanding at 9.8 percent annually. While bothmodes were experiencing substantial growth in output the more rapid growth in the road sector led todramatic shifts in the shares of total output (See Annex 1). The year 1985 was the first time that theroad freight share of output exceeded that of the railways (52 percent vs. 48 percent). Passenger shareswhich were about equal in 1961 had become 79 percent road by 1985. Application of the historicalmodal growth rate ratios makes it possible to estimate the 1992 modal splits in which road accounts for62 percent of national freight output and 84 percent of passenger output. Thus India, a rail dominanteconomy in the 1950s has become a decidedly road dominant economy in the 1990s. This is entirelyconsistent with the experience of most free market economies but it has not become the core of policydiscussions in the transport sector as it ought because it has been contrary to the official Indian policyof a dominant rail service.8

12. Support for overlooking the reality of the current modal split has been the general feeling thatroad transport is energy intensive, polluting and unsafe. And, since all the road freight operations andmost of the passenger operations are in the private sector, that profit maximization overrides socialconcerns. Furthermore, a technology based on the combustion of imported fossil fuels is in the long runfundamentally unsound. All of this was good reason to give roads and road transport a low priority inthe overall scheme of things and to give rail investments such as gauge conversion and electrification ahigh priority. This is reflected in the Eighth Plan document. The problem here is that most future gaugeconversion and single line electrification investments, even with the most generous assumptionsconcerning benefits have economic returns less than 10 percent, whilst the road investments show returnsas high as 40 percent. Private shippers stubbornly prefer the polluting, energy intensive, unsafe roadtechnology because it gives them the one thing the railways are unable and/or unwilling to i.e.dependable, customer-responsive service. Furthermore, no amount of gauge conversion will ever be ableto duplicate the geographic coverage of the road network.

13. The major urban areas of India are now connected by a parallel system of road and rail links -all carrying extremely high density passenger and freight traffic. This system of high density corridors(HDC) with a total length of about 30,000 km is the integrated core of the Indian transport systemcarrying about three quarters of the intercity freight and passenger traffic in the country. The mostheavily travelled elements of the HDC system are those linking the cities of Delhi, Bombay, Calcutta andMadras. About 7,000 km of electrified double track rail and a roughly equal length of two lane road

8. The persistence of the annual presentation of a separate rail budget in Parliament DriOr to the presentation of the restof the national budget is one obvious manifestation of this historical bias. The first substantial step towards explicitrecognition of the current dominance of road transport in India has been the recent completion of the Railway Fareand Freight Committee's report on potential integrated rail-road transport services. See: Integrated Rail RoadTransport System for Movement of Lone Distance Freight, Railway Fare and Freight Committee, Ministry ofRailways, GOI, Final Report, June 1993.

form the main corridors linking these cities. Virtually all of the four-city core road and rail links areexperiencing extreme congestion (See Annex 3). Yet, rarely are the two systems considered in anintegrated manner and rarely are public policy or investment decisions made with both systems in mind.9

14. The ADB-financed Expressway Study illustrates well the interrelated nature of the two systems.'°Forty-six percent of the freight vehicles on the HDC road system were travelling in excess of 500kilometers. Twenty-six percent were travelling in excess of 1000 kilometers. The argument in theExpressway Study is that this long-haul high value truck traffic is the natural market for the expresswaysystem. The argument can as easily be made that it is the natural market for a high-quality domestic railcontainer operation offering scheduled, or at least predictable, services. This latter argument has nowbeen made with the RFFC study. Both arguments are somewhat sterile in that extreme congestionprevails in the HDCs of both modes (Annex 3) and neither can hope to provide more capacity or betterquality services in the near future without major investments and/or major changes in operational policies.

Ports and Trade Facilitation

15. Bombay, Calcutta and Madras are also the sites of the major port complexes of the country. Theylink the international ocean shipping routes with the domestic HDC road and rail system and are majorgenerators of freight traffic for the core road and rail system." The intermodal container revolutionhas made smooth and efficient door to door movements of high value international cargo a reality to themajor trading nations of the world. India has provided modern container facilities at Bombay and Madrasbut has not yet provided all the laws, administration, and operating policies in the ports and inland thatwill allow the full benefits of the container revolution to accrue to the Indian economy." Even if thesefacilitation measures are eventually provided there remains the problem of the saturated HDC road andrail links serving the sea ports and the air ports.

16. The lack of an efficient door-to-door sea container operation has led to the shift of what isnormally sea container traffic to more costly international air cargo operations. But, this service too hasexperienced severe congestion both in terms of aircraft cargo capacity and airport capacity.'3

9. The recently published Railway Fare and Freight Committee's (RFFC) Report is a notable exception to this generalrule.

10. See Development of a Lone Term Plan for Expressways in India, Final Report, GOI, MOST, October 1991, Table4.6, p. 4-20.

11. In addition they make it theoretically possible for the much-neglected coastal shipping mode to provide potential relieffor some of the saturated land based links. The imposition of customs clearances and inspections on domestic coastalshipping to suppress smuggling has, unfortunately, also effectively suppressed this possibility.

12. For a good exposition of the transport and facilitation problems faced by Indian exporters see: A study onTransportation for the Export Sector, by A. F. Ferguson & Co., Bombay, for The World Bank, May 1989. Also see:India's Growing Conflict between Trade and Transport, by Hans J. Peters, Working Paper INU-69, The World Bank,1990.

13. See "Constraints on Export by Air" in: A study on Transportation for the Export Sector, by A. F. Ferguson & Co.,Bombay, for The World Bank, May 1989, pp. 39-44. The aircraft cargo capacity constraint was relieved in 1990 withan 'open skys" policy that allowed foreign air cargo carriers to expand their services unilaterally.

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17. The Indian transport system, therefore, demonstrates substantial intermodal linkages and systemseffects. This is normally a powerful argument for national transport systems planning similar to thatundertaken for an interconnected electric power system. Yet, there is in India no ministry of transportnor is there any longer an adequate national transport planning group in the Planning Commission."Nor, has the Ministry of Commerce as yet taken a national view of transport infrastructure and policiesand their impact on economic activity.

18. Despite these developments, India has managed until recently to avoid the most costly transportrelated policies that have hindered economic growth in the centrally planned economies of EasternEurope. Evidence for this is found at the macro economic level in the generally appropriate transportintensity measure of the economy. The fact that expanding foreign trade was never previously a majorobjective of economic planners in India has meant that the failure to benefit fully from the containerrevolution was not until recently a drag on economic growth. There was instead a higher level constraintprovided by an import substitution regime. Even the extreme congestion on major road and rail links,ports and airports could be dealt with to some extent because of the extraordinarily well articulatedtransport network that provided alternative routes and modes around congested segments and corridors.Increasingly these built in network flexibilities have reached saturation points and more fundamentalchanges are now required. To say more requires a much closer look at how transport services have beenprovided in the past.

IV. THE PAST APPROACH TO DELIVERING SERVICES

19. It is useful to examine the actual delivery of transport services in India by considering four majorcharacteristics of the Indian transport market. The first is the emphasis put on physical planning ratherthan the flow of a variety of services to users. The second is the widespread use of cross subsidies withinthe sector. The third is the unique incentive system facing the managers of public sector transportinfrastructure and services while the last is the prevalence of rent distribution and rent seeking activity.

Physical Planning vs. Flow of Services

20. Most centrally planned economies tend to emphasize physical planning and the provision ofengineered infrastructure rather than the flow of appropriate services made possible by the presence ofthe infrastructure. In India this has been the case for railways, ports and roads but, significantly, not forroad freight transport where the-private trucking industry has been allowed to offer an array of servicesto those willing to pay for them (Box 2). It is this remarkable development and the rapid shift to roadtransport that largely explains the appropriate level of transport intensity in the Indian economy.

21. With all trucking and much of the bus operations in private hands, it is understandable why, inthe case of roads, the public sector emphasis has been to provide physical facilities rather than services.This has led to a remarkable expansion of the Indian road network in the last forty years. In 1950-51the core highway system was about 19,800 km of paved road, about half the length of the broad-gauge

14. There is a Ministry of Railways, a Ministry of Civil Aviation and a Ministry of Surface Transport (MOST) togetherwith a Central Planning Commission.

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Box 2: The Deregulation of Truckin

Under the Motor Vehicles Act of 1939 attempts were made to protect the railways from truckingcompetition by restricting trucks to operations in a single state thereby limiting them to short hauloperations. Otherwise, free entry and exit and a free pricing policy were allowed. States wereallowed to issue national multi-state trucking permits subject to ceilings set by the CentralGovernment and these expanded steadily as freight transport demand grew and the railroadswithdrew from haulage of private goods in favor of haulage of passengers and freight for publicenterprises. In 1986, the Central Government removed the ceiling on national pennits and in oneyear the number of pennits increased from 25,000 to 57,000. Today there is no shortage oftrucking capacity in India and services of various quality can be purchased by any user willing topay.

rail network. By 1990 the system of paved National and State highways had expanded over seven timesto 153,000 km. - five times the length of the current broad-gauge rail system. The 1990 national roadinventory is given below:

Table 1

All-India Road Inventory 1990

Length Km. Percent of Total

National 33,000 2State 123,000 6Major District 286,000 14Project Roads'5 200,000 10Urban 157,000 8Rural 1,199,000 60

Total 1,998,000 100.0

22. This rapid expansion did not come without problems. By generally accepted engineeringstandards, the Indian arterial road system is both extremely congested and physically deficient - reflectinglabor intensive construction methods, the lack of mechanized compaction for base and sub base and theconscious decision to spread road investment resources by constructing narrow thin pavements (Box 3).Significantly, less than five percent of the National Highway network is four lanes despite extremecongestion and no provision has been made for right-of-way to expand the major two lane roads to fourlanes. Strip development and encroachments have subsequently made expansion to four lanes sociallydisruptive, time consuming and costly. This is a feature of the Indian road system that must be kept inmind when contemplating future investment strategies.

15. Project roads are those built and maintained by the forestry, irrigation, electric power and other departnents ofgovermment.

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Box 3: The Physical Condition of Indian :Roads

DA Benkelman deflection measurement of one mm or less :is generally taken to indicate the presenceof sound structural condition of the pavement formation. In a 1988 sample survey of the networkthis was the case in only four percent of the two-lane roads and not :at all in the inte: miate andone-lane roads. If the acceptable deflection is extended to two mm, then 54 percent of ffie tolaneroads wouldhave acceptable values, 21:percent of intermediate roads and 33vpercent of Ilaneroads. The high pavement deflection measures are consistent withi the thin :pav :e andth lw.CER (load bearing) measures of the sub base.

In the 1:988 study it was also found -that for two-lane roads, about 60 percent of the road. en;gtsurveyed had International Roughnes Indices (f) less than 4000:mm per km which is considered-.good. About 20 percent had an flU between 4000:and:6000 mm per km whichis fir t o por. -o. T:remaining 20 percent had an.IRI in:excess of 600which:issbad. The correspondig figrures fOr

:. internediate width roads.:were 19,: 69:.and :12 ::percent: and fbr one-lane roads 259,67Cand XWp .....7respectively.:E If one takes: the bondary between good and not goo&dat:4000:(as theconuliantsd; )then 40 percent of two-lane roads :have not:good riding quality and 75 to 80 pe0rcet io theintermediate and one-lane roads. : :.:.

Source: Final Report on Vehicle Fleet iModernization. Volume II, Highway Systems Study,Miisty of SurfaceTransport (toads Wig), NeDelhi,: December 1988.

23. A combination of weak structural conditions, very high traffic volumes, overloading of trucks andhand finishing of pavements has led to a situation where the roads are very rough. Congested roads withrough pavements then lead to high cost low quality services for users. As a result, many of the proposedmain corridor highway projects in India display economic rates of return in excess of 40 percent, and allof these project benefits are directly linked to increases in the efficiency and quality of service of bus andtruck operations. Yet, the record shows that road investment, as a share of public sector plan investmenthas dropped steadily from a high of 5.5 percent in the Fourth Plan to 4.3 percent in the Fifth Plan to 3.5percent in the Sixth and Seventh Plans. For the Eighth Plan is projected to be 3.0 percent of total Planinvestment. This is taking place despite the dramatic increase in road transport output in the country.

24. The point is frequently made that the declining share of roads in the Plan allocation is responsiblefor the poor quality of public roads in India. However, the experience of the major donor agencies inIndia suggests that even if the financial resources were to be made available the engineering design andsubsequent construction could not be implemented in any reasonable time period. There is an absorptivecapacity and implementation constraint that is more serious than the financial constraint.

25. The origin of the highway engineering and construction constraint in India lies in the longtradition of public in-house provision of engineering investigation, design, and supervision services andthe generally low status and technical competence of the private road construction industry which wasoriginally relegated to providing large amounts of labor to support what were in effect public forceaccount operations. Attempts at reforming this system by privatizing the provision of engineeringservices through consulting firms and by engaging in rigorous pre qualification and competitive bidding

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exercises for a full supply of contractor services including equipment, materials and management havebeen only partially successful in India. The public institutions have been reluctant to give up thesefunctions to private engineering firms and contractors as it means a loss of public jobs, status, andauthority. 16

26. For railways, the lack of emphasis on the delivery of high quality freight services to the usersprings from two developments. The first is that most railway freight traffic (85 to 90 percent) comesfrom public sector enterprises and that a steadily declining share emanates from the private sector whichturned to trucking long ago. Indian Railways (IR) is offering a monopoly service in a highly segmentedtransport market.

27. The second development is that Indian Railways is a passenger dominant railway (slightly morethan 50 percent of output) and this generates special problems for IR operations. As long as passengerand freight trains travel at the same speeds and make no stops between origin and destination there is nospecial physical interaction between freight and passenger trains. The special interaction begins whenthey travel at different speeds. Overtaking of freight by passenger trains on double lines then requiresfreight trains to pull over on sidings to be passed. The greater the speed differential the greater thenumber of overtaking operations and the more time freight trains spend waiting on sidings. Whenpassenger trains begin tc make intermediate stops, more special interactions take place in decelerating,accelerating and reentering the main line (Box 4). If passenger trains are scheduled and are given priority(as they are in India) and on-time arrivals for passenger train are one of the few measures of rail servicequality (as they are in India), then freight operations (for which there are no comparable qualitymeasures) suffer.

28. Freight customer orientation and marketing is not, therefore, an important element of the IRcorporate ideology. The emphasis in recent years has been on train operations and track capacity to"cater to" the captive, public sector, bulk, freight traffic projections of the Planning Commission. Theproblem for IR freight planners is how to achieve this in spite of an increasingly important passengeroperation.

29. Big increases in freight rolling stock productivity were achieved in the 1970s and 1980s byshifting from steam to diesel locomotive technology and by shifting from two axle twenty ton freightwagons to four axle sixty ton wagons. With the loss of less-than-carload (LCL) freight from the privatesector it was then possible to shift from mixed goods trains to unit trains of bulk commodities and thistoo raised the productivity of both track and rolling stock. IR general freight performance indicators havebeen good by US and European standards (See Annex 2). In the areas of network, wagon and locomotiveproductivity it is generally much better than European performances and comparable to or better than USClass I operations.

16. Unlike the railroad, the size of the PWD work force is not common knowledge. The State of Maharashtra alone hasa total of about 54,000 employees of which about 2,100 are Gazetted Engineering Officers. With 72,000 km ofNational, State and Major District roads in Maharashtra vs. 376,000 nationally this would imply a total national PWDwork force in the order of 280,000 employees of which about 11,000 would be Gazetted Officers.

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Box 4: The Conflict between Rail Freieht and Passenger Services

The conflict between freight and passenger services is one of the enduring concerns of rail plannerswho must now ration scarce track capacity. The theoretical simulation analysis carried out by IRplaners in 1987 for the Moghulsarai-Allahabad section shows that, with the present scheduled speeddifferential of 100 km/hr for passenger trains and 75 km/hr for freight trains, 39 pairs of freighttrains per day could be accommodated with the 17 pairs of passenger trains, indicating that theunimprovedline was near saturation. By increasing freight train speeds to 90 km/hr and reducingthe speed differential from 25 to 10 km/hr the number of freight trains could theoretically beincreased from 39 to 60 - another way to avoid the problem of saturation and an approach favored-by the railroads of Western Europe. The analysis of reity shows that the 75 km/hr booked speedo'f freight trains drops to 40 knmhr in the existing train control charts and that the actual measured* average. speed of freight trains over the section was only 22 1om/hr. The so-called "speed

:. '.differential and density drag" explain the drop from 75 km/hr to 40 km/r. it is, however, he-threestopping passenger trains that explain thet drop in average freight train speeds to 22 knmhr,leading the analysts to the conclusion that the benefits of speeding up freight trains could notmaterialize unless stopping passenger trains were eliminated. It was not possible to do this.

; 0 ;Source: Pian,n n Group on Technology Progression on Railways: Group Report, Government ofIt diaPlanning Commission, June 1987, pp. 59-62, L

30. However, if average freight rates are corrected using international purchasing power factors(Annex 2), IR freight rates are comparable to the short haul freight railroads of Europe rather than thelong haul freight railroads of China, Canada and the US indicating that freight shippers in India have notbenefitted from their inherently more efficient long haul (700 km average) bulk operation as they might.The fact that the average speed of freight trains has stagnated at 22 km per hour since 1970 indicates thatthe quality of freight service has probably not improved in terms of travel time or its standarddeviation. 17

31. Attempts by the railroads to provide high quality container transport services through theirsubsidiary CONCOR also indicate poor quality service. Transit time for containers on the Delhi-Bombayand Delhi-Madras routes in 1993 were about 21 days while that for Delhi-Calcutta has been about 40days. 8 Achieving high productivity measures by offering very poor service at high prices imposes otherlarge costs on the economy that do not appear in the railway accounts.

17. Planning Group on Technologv Proeression on Railways: Group Rewort, Government of India Planning Commission,June 1987, p. 59.

18. Inteerated Rail Road Transport System for Movement of Lone Distance Freight, Railway Fare and Freight Committee,Ministry of Railways, GOI, Final Report, June 1993, p. IV-15. The recently negotiated Container Transport LogisticsProject seeks to reduce these transit times dramatically by achieving targets of 3.0 to 3.5 days for the Delhi-Bombayrun and 5.0 days for the Delhi-Madras run. Penalty and reward premiums are specified for achievement andnonachievement. See: SAR India - Container Transport Loeistics Proiect, Report No. 12780-IN, The World Bank,May 9, 1994, p. 25.

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32. For rail passengers the pressure to provide good services is overwhelmed by the much greaterpressure to provide anv service. Given one of the world's lowest rail passenger tariffs and the high percapita consumption of passenger travel in India, the demand is always greater than the supply and theemphasis is on rationing a scarce supply of low quality service. The constant pressure by Parliament toadd passenger services on existing congested track sections then exacerbates the quality problem for bothfreight and passenger services.

33. For ports, current attitudes and institutions were formed during a period in which imports weregenerally considered to be undesirable in an economy seeking autarky while exports were generallyassociated with rich domestic and foreign businesses which could afford to pay high prices for bad service(Box 5). The critical shift in emphasis from the provision of physical infrastructure to the provision ofgood services to port users has only begun in the last two years.'9

34. The modern container facilities at New Bombay (JNPT) and Madras currently deliver a flow ofpoor and costly services to users. They handle less than ten containers per hour compared to 20-30 perhour in other ports in the region. Low capital and labor productivities lead to a chain of cargo and shipdelays that are costly. Container delays cost about US$ 70 million per year while excessive ship waitingtime costs run about US$ 100 million. Less obvious, but more serious, is the poor international shippingtechnology that serves Indian ports because of the delays. The cost of Indian foreign trade moving infeeder services utilizing first and second generation technology rather than third and fourth generationtechnology is estimated at US$ 250 million per year.

The Importance of Cross Subsidies

35. The pervasive willingness to use large cross subsidies within public infrastructure services as aninformal system of taxation and expenditure outside the budget is a characteristic common to the Indianfiscal system.

19. See: 'Problems Encountered by Exporters Shipping by Sea' in A Study on Transportation for the Export Sector, byA. F. Ferguson & Co., Bombay, for The World Bank, May 1989, pp. 21-34.

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Box 5: Ports as a Deterrent to Trade Expansion-

A recent study of the actual sh costs of moving containers. through Indian ports reveals that the.cash outlay to move an fimport container through a major Indian port comes to about US$500-520per box compared to US$330-3504in foreign ports in the region. For export:containers the Indiancash outlay is US$420 compared to about US$ 340 at comparable foreign ports. An Indian exporterbears a cost disadvantage of US$ 80 per container cowmpared to their comnpetitors. The two majorreasons for the excessive cash outlays. are the payment of ".speed" money and custom agent chargesor customs administrative procedures. Speed" money payments are estimated to be US$50 toU$100 per container in Indian ports as opposed to US$0 to US$30 in other ports. Customs agentcharges amount to US$120 to US$200 per: container :in Indian ports compared to US$50 to US$100on other ports. Both payments arise from the need to process.23 separate documents to cleal:imports and 18 separatedocuments.to clear exports through Indiatiports - requiring an estimatedn t22t hours of preparation time.-

The above cashi payments are quantifiable symptoms of the larger problem of non cash outlays andcosts imposed by ship delays in port resulting in poor international shipping services and lost tradeop0port-nities: - costs that do not enter the calculus of current port administrators.i

Sources: 1India Port Sector Strategy Report, The World Bank, January 28, 1993, pp. 9-10. And,lIndia's Growing Conflict between Trade and Transport", by Hans J. Peters, Working Paper INU

69, The World Bank, 1990.

36. For rail, the system of cross-subsidies is both complex and deeply rooted. They spring from thedesire of Parliament to have regional equity, cheap food, low cost personal mobility, and large-scalesecure public employment. To understand the origin and importance of cross-subsidies in IR it isnecessary, therefore, to understand the relationship of IR to the Indian Parliament (Box 6).

37. Parliament tends to see and use IR as a tool for influencing the spatial distribution of economicactivity and to achieve the broad and narrow equity objectives of the various members of Parliament -all subject, in the end, to the financial viability of the IR enterprise as a whole.0 The term cross-subsidy has no negative connotation as such.

38. The fundamental basis for IR financial viability in the past has been the large volume of public,long-haul, bulk commodities that are captive to the railroad. The average tariff negotiated with thevarious public sector entities that generate the traffic is the critical financial decision that makes cross-

20. An extreme example of the notion of regional equity was the freight equalization scheme instituted in 1956 in which,for some bulk commodities, the same tariff was charged regardless of the distance transported. This was to promotemore uniform industrial development - assuming that rail transport costs were a major factor in industrial locationdecisions. The appropriate transport intensity of the Indian economy indicates that this policy did not lead to thetransport inefficiencies of the countries of the former Soviet Union.

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Box 6: Rail Management's View of their Relation to Partiament

'Indian Railways is entirely owned by the Central Government and is operated as a departmentalundertaking managed by a Railway Board which also functions as the Ministry of Railways. TheRailways do not have much freedom to decide on major investments or on the tariffs that itprescribes. This is done with the approval of the Parliament which exercises control on theRailways directly and through its various Consultative and other Committees."

Quoted from the Address by Mr. R.D. Kitson, Chairman, Railway Board, India at the AsianRailways Round Table, Vienna, Austria, October 1991.

subsidies possible.2" As such the tariff setting exercise in which freight revenue surpluses are generatedto support money-losing operations internal to IR is a form of taxation of the public sector which iseventually reflected in the price of coal (and then energy), steel, mineral oil, and cement or the magnitudeof losses in these industries. Broadly speaking, Parliament has seen fit to use this informal taxmechanism to subsidize passenger transport in general, metropolitan passenger transport in particular,rural access to poor and/or isolated communities, and a large redundant labor force. (Box 7).

Box 7: The Bulk Rail FrM2ht Tax and fts Uss

A level of IR freight rates roughly double that of other long haul bulk freight railroads of the world(Annex 2) gives a rough idea of the magnitude of this tax. In 1991-92 the bulk freight revenuesof IR were about US$ 3.7 billion. If IR freight tariffs had been comparable to those of other longhaul railroads then the bulk freight revenues would have been only US$ 2.0 billion or so. The taxon bulk freight shippers by rail was therefore about US$ 1.7 billion - close to one percent of GDP.The major recipients of this tax revenue were suburban rail passengers, second class intercitypassengers, and about 500,000 redundant rail workers.

The true wage bill of IR is about 65 percent of operating expense. In 1991 this came to aboutUS$1235 per rail employee. There are about 500,000 jobs in IR for which there are salaries butno productive work and this costs IR about US$ 0.6 billion per year - roughly a third of the bulkfreight tax. The other two thirds goes to suburban and intercity rail passengers.

39. The cross-subsidy between rail freight and passenger operations has evolved over a long period.Passenger transport now makes up, conservatively, 55 percent of IR output (one ton-km = one pass-kIn)but account for only 26 percent of revenues. Freight traffic, on the other hand, accounts for 45 percent

21. Even within this category of freight there are internal cross-subsidies. In an attempt to keep food cheap, food grainsaccount for 14 percent of net ton-kilometers but only 8 percent of freight revenues. Coal, iron and steel, and mineraloils are the backbone of the freight revenue surplus accounting for S0 percent of net ton-kilometers and 60 percent offreight revenues.

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of output and generates 74 percent of revenues. In an average fully-allocated cost world it is apparentthat passenger traffic is not making an adequate revenue contribution.' In the words of the 1988Planning Commission Steering Committee: "Of the two broad categories of services provided by theRailways viz. coaching and goods, the former is a parasite of the latter."3 The international evidenceto support this statement is found in Annex 2 where it can be seen that Indian freight rates (purchasingpower adjusted) are about double those of the world's other long haul freight railroads while thepassenger fares are the lowest in the world.

40. Also, a comparison of the official tariff for second class intercity passengers (which accounts for96 percent of intercity passenger-kilometers) with the actual revenues collected indicates that collectionsare only about 80 percent of the official tariff. A very large number of ticketed passengers ride free orat large discounts. This includes IR staff and dependents, military personnel, students, sportsmen, artists,nurses, the handicapped and the elderly.

41. While it is clear that Parliament favors the use of public funds for private rail passenger transportin general, the extent of the subsidies given for metropolitan rail transportation implies that this serviceis even more important than intercity passenger service.24 About 58 percent of passenger journeys and20 percent of passenger-kilometers are suburban or metropolitan services (excluding the Calcutta Metro).Suburban passenger traffic therefore constitutes about 11 percent of total rail output but generates only3 percent of gross traffic receipts. Intercity passenger traffic is 44 percent of output and generates 23percent of gross traffic receipts.

42. No where is the structure of conflicting objectives facing the management of IR more apparentthan here. The necessity to subsidize the services that conflict most with efficient profitable trainoperations creates considerable confusion for analysts and managers. When traffic volumes wererelatively low and there was surplus capacity in the system the conflict was not so serious. Given today'ssevere track capacity constraints, major investments are required to continue to accommodate thisarrangement.

43. A less well-known internal cross-subsidy takes place on a geographic basis - between the broadgauge high-density Rortion of the rail network and the meter gauge. low-density system. The broadgauge system, which is 56 percent of route kilometers generates 91 percent of freight output, 83 percentof passenger output and about 89 percent of gross traffic revenues. Thus, the meter gauge system, whichis 44 percent of route kilometers accounts for only 9 percent of freight output, 17 percent of passengeroutput and 11 percent of rail revenues. The actual costs and losses of the meter gauge system are not

22. Given the presence of severe congestion on main lines and the absence of an appropriate system of commercialaccounts we do not have a measure of the Long Run Marginal Costs of providing passenger or freight service so wecannot speculate as to how far current freight and passenger rates might deviate from these desirable measures.

23. Here it is interesting to note that the Chinese have approached the problem of the relative importance of intercity railtransport on a saturated rail system by a combination of physical rationing and pricing. Passengers on China Railaccount for only 25 percent of total output and 21 percent of total rail revenues. No major railway in the world exceptIR has allowed itself to become a majority passenger operation without shifting the revenue burden to the passengers(See Annex 2 for international comparisons).

24. The case can be made that the urban journey to work is more important than intercity passenger travel and, becauseof environmental externalities, is deserving of subsidy. This appears to be the revealed preference of Parliament. Therevealed preference for intercity rail passenger travel over intercity freight travel is less easy to justify.

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known and this particular cross-subsidy does not receive much explicit treatment on a system basis -rather isolated losing lines are studied in an attempt to close them down or share the losses 50-50 withthe State Governments.2

44. The other major cross-subsidy (or income transfer in this case) is from the public sector shippersto a large redundant labor force.' IR has, by far, the lowest labor productivity of any major railwayincluding that of China (See Annex 2). Secure bureaucratic employment in an institution that providesfor most basic needs is highly prized in India and the pressures for expansion of the IR labor force areenornous (Box 8). While salaries made up 23 percent of China Rail revenues and 34 percent of USConrail in 1982, they were 39 percent of IR revenues.' Ten years later the figures for China Rail andUS Conrail dropped to 13 percent and 28 percent respectively while those of Indian Rail rose to 42percent, threatening the financial stability of the institution (See Box 13: The Coming Railway FinancialCrisis).2' The redundant labor force of at least half a million workers is absorbed by the largelyuneconomic and redundant meter gauge system and by a large number of workshops, yards, freight andpassenger stations in the broad gauge system that are no longer required to serve the now specialized TRbulk, post-steam, unit-train, freight operation.9

25. The Railway Refonns Committee in 1983 recommended the closure of 40 such lines where adequate road transportalternatives existed. In lieu of closure a 50-50 sharing of losses with the states was recommended. Seven lines wereactually dismantled where train services had already been discontinued for years. The other 33 lines continue to beopen and the dialogue with State Governments continues.

26. The IR management is well aware of the magnitude of the problem and has addressed it in a recent study: ManpowerPlannine for Indian Railways - Diaenostic Study, Two Volumes, Government of India, Ministry of Railways, May1990.

27. This is for cash wages alone. When the fringe benefits of IR employment are added the true figure is much higher(See Box 7).

28. The situation is actually much worse than this if pension payments, in kind services of schooling, housing and medicalcare and payments for casual labor are included in the wage bill (as they should be). See Box 13 in the text for details.

29. Attempts at rationalization of the extensive and redundant system of rolling stock repair facilities under the World Banklending program ran into the problem of the impact on labor and little progress was made. See: Proiect PerformanceAudit Revort India Railway Modernization and Maintenance Proiect (Credit 844-IN), Report No. 7020, OperationsEvaluation Department, the World Bank, November 30, 1987.

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Box 8: 1tail ts View of the Redundant Labor Problem

'One has to be the Minister of railways to realize the expectations the people have from.theRailways and what the railways mean to the people. In the last ten weeks, at least one hundredL itthousand unenployed youth have either written to me or called on me seeking employment in theRailways. And, they don't include the children of Railwaymen who have been clamoring for:preferential treatment in recruitient to jobs that hardly exist on the Railways. What frightens meEisthe thought that, given,the resources available with the Railways, nmst of these expectations willnot be fuifilled."

Excerptedcfrom the foreword to: Status - aDer on Indian Railways - Some Imues and Opts, 0nGovernment. of India, New Delhi, March 1, 1990.

45. For roads and road transport the principle of the cross subsidy are also well-established. InAugust 1989, the MOST Working Group on Roads for the Eighth Five-Year Plan proposed an EighthPlan allocation for roads of Rs. 326 billion.2' The final Eighth Plan allocation is Rs. 132 billion about40 percent of the recommended level. The two allocations are compared below:

Table 2

Comparison of Recommended and Final Eighth Plan Allocations(billions of Rs.)

Type of Road Working Percent Plan PercentGroup Total Allocation Total

National Highways 66 20 26 20

State Highways and 160 49 75 57Major District Road

Rural Roads MNP 100 31 31 23

Total 326 100 132 100

46. A comparison of Table 2 with Table 1 indicates that the badly congested National Highwaysystem that accounts for about 40 percent of the national traffic will receive about 20 percent of theEighth Plan investment allocation. Less congested State Highways and Major District Roads whichaccount for about 60 percent of the traffic will receive 57 percent of the resources. Lightly traffickedrural roads under the Minimum Needs Program (MNP), which account for less than 1 percent of trafficwill receive 23 percent of the Eighth Plan allocation. In addition to this, the rural roads system will

30. Revort of the WorkinR Group on Roads for the Eighth Five Year Plan (1990-95), GOI, Ministry of Surface Transport,August 1989.

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receive funds from various Rural Employment Programs (REP) that will more than double the amountallocated in the Eighth Plan under the MNP. Clearly, rural access by all weather road has a very highpriority for road planners that is unrelated to intensity of use. It is probably fair to assume that the HDCroad users are cross subsidizing the users of the low density regional and rural roads. The high rates ofreturn on the HDC projects and the correspondingly low rates of return on the low density roadinvestments also support this conclusion.3"

47. The big cross subsidy in road transport, however, is between road users as a group and thebeneficiaries of expenditures from the general budget. As detailed in Table 3, principal revenues fromroad users in 1987-88 totalled Rs. 82 billion.32 About Rs. 21 billion of this was attributable to urbanroad use, so non-urban road users paid about Rs. 61 billion in taxes, approximately three times the levelof expenditures on non urban roads in that year. The case can then be made that road users as a groupare subsidizing other public services and users in the economy. This argument depends on: (i) whattaxes are so unique to road transport that they can be construed as user charges, and (ii) the value puton the negative externalities (principally accidents and pollution) of road transport. The former is anopen issue and the latter cannot be quantified. It is probably fair to conclude though that road users arenot being subsidized by the state.

31. The village access story has yet to be told comprehensively. For rich agricultural states such as Punjab and Haryanathe Paved village access roads that link virtually all villages have been largely paid for by taxes on agriculturalproduction at the village market centers. Subsequent maintenance is also organized and forthcoming. Given thedifficulty of capturing the benefits of rural access in a project feasibility study and the beneficiary financing, it isdifficult to fault this type of program. For a poor agricultural state such as Bihar the funds for rural roads are external,the initial construction poor, the subsequent maintenance nonexistent, and the investments largely wasted. For theBihar rural roads story see: OED Report No. 9910, Sept. 23, 1991.

32. India: Policy Issues in Road Transport, The World Bank, Washington, D.C., Report No. 8057-IN, October 6, 1989,Table 7.1, pp. 40.

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Table 3

Principal Revenues from Road Users 1987/8833(billions of Rs.)

Source Central StateGovernment Governments Total

Petrol 18.7 4.4 23.1Diesel 7.6 7.4 15.0Lubricants 0.4 0.3 0.7Tires 5.7 2.7 8.4Spare Parts 2.1 1.5 3.6Vehicle (Purchase) 11.8 4.0 15.8Motor Vehicle Tax 7.0 7.0Passenger and Goods Tax, Fees 8.6 8.6

Totals 46.3 35.9 82.2

48. One of the major justifications for providing bus transport by State road transport corporationswas that low density rural access service could be cross subsidized by high density HDC services. Theargument was that private bus owners would operate only on the profitable high density routes and wouldnot offer services on the low density routes. This arrangement has evolved into a situation where thepublic sector is now operating a money losing combination of the highest and lowest density routes whilethe private sector is being allowed to operate on the medium density and any low density routes on whichthey can make a profit without fare increases.' In order to cut losses of the state bus monopolies andmiaintain services private sector participation has steadily expanded. The evidence for this at the nationallevel is in the decline of public sector buses from 45.5 percent of the national fleet in 1980-81 to 32.7percent of the fleet in 1989-90.35 Thus, the state monopolies are retreating in a relative sense but notso rapidly as to lead to an absolute decline in public sector operations. The 763,000 employees of the68 State Road Transport undertakings operating 102,000 buses nationwide have merely approached a littleor no growth environment allowing most of the growth to take place in the private sector.

49. For bus transport the average number of employees per public bus is 7.5 while that for privatebuses is about 3.0. Personnel costs for the State operations is about 37 percent of total costs while thatfor private operations varies between 6 and 13 percent of total costs. If four staff per bus were to be

33. The only comprehensive study of road user revenues for India was the very valuable Road User Change Stud , MOST,April 1989. Fragments of information are available subsequently but nothing comprehensive. Hence the admittedlyoutdated 1987/88 figures used.

34. Public buses also offer concessional passes to certain categories of the public - similar to the concessions offered byrail passenger service. Private operators are not expected to do this, which also helps to explain their ability to showprofits at current fare levels.

35. India: Public ExDenditure Review and Sector Strateev - Infrastructure Sector -Road TransDort Sub-Sector, The WorldBank, Draft October 9, 1992.

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adopted as an efficient standard for public bus operations then about 350,000 public bus employees, about47 percent of the labor force, would be redundant. As in the case of the railways, there is an (lesssuccessful) attempt to cross subsidize a large redundant public bus labor force with monopoly earningsfrom profitable services.36

50. For ports the cross subsidy is mainly from importers and exporters to a large redundant laborforce. At Bombay, a gang of 22 laborers is allocated to handle a container for stuffing or unstuffingwhere there is a need for four persons at most. With the modern equipment available, two persons canstuff or unstuff a container in half an hour - yielding a labor requirement of one man-hour per container.The present performance of three containers for a 22 person gang during a shift of eight hours requires59 man-hours per container.3' As a result, wages and salaries for the major ports are between 52 and71 percent of operating revenues."

Perverse Incentives for Management39

51. One of the great benefits of competitive pressures is that managers are rewarded for takinginitiatives and developing new and better services than their competition. New initiatives always involverisks and a certain percentage of well-conceived innovations will fail for reasons that could not beanticipated. Private firns and successful public entities will accept a certain number of failures as theprice for eventual success and survival. It becomes a form of research and development. For mostpublic entities in India risk taking and acceptable failures are not a part of the corporate culture.Individual initiatives receive little reward and can give rise to resentment as well as the risk of failure.The way to avoid resentment and any possible failure is to not take any initiatives until the magnitude ofa crisis leads to a joint decision to move. With senior management of Indian Railways, the state PWDsand the MOST being transferred or retired at intervals of six to twenty-four months it is not difficult ofavoid individual innovation nor is it easy to determine who is accountable for changes in performancethat take place over several years.(Box 9).

36. Not all of the state-owned bus companies are inefficient. That of Tamil Nadu has always allowed competition fromthe private sector and has costs comparable to private operators. The most inefficient (and the largest at 16,000 buses),that of Maharashtra, does not allow any competition from the private sector.

37. A study on Transportation for the Export Sector, by A. F. Ferguson & Co., Bombay, for The World Bank, May 1989,p. 22.

38. India Port Sector Strateev Report, Report No. 11609-IN, The World Bank; March 1, 1993, p. 30.

39. The best recent treatment of the perverse incentive system facing Indian civil servants in charge of infrastructureservices is: Organizational Determinants of a 'High Ouality Civil Service": Bureaucratic and Technological Incentivesin Canal Irrigation in India and Korea. A Background Paper for the 1994 World Development Report, By: RobertWade, Institute of Development Studies, Sussex University, 1 I May 1994.

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Box 9: The Impact of Freguent Rail Management Changes

Bank staff encountered the implications of IR personnel policies for managers under theModernization Series where short term decisions with long term implications were required. Theresults were not good. The Project Completion Report for the MOD II project cites the " . . .frequentturnover of staff in critical positions." as a major reason for the poor performance in the technologytransfer element. Bank staff state that each position critical for successful project implementationwas occupied by six different individuals, during the period of project implementation. In the samePCR the Borrower responds to this criticism by stating that: "The Railways fully recognize theneed for continuity, but changes made were unavoidable in the context of personnel policies of theRailways."

In its' own most recent self examination by committee, the Board's report states: 'If any single i

suggestion in this Report could be accepted and announced forthwith, that would be most welcomeand conducive to the organization's well being, it is to fix tenures of top management with suitableminimum periods..."

Sources: PCR India MOD II, OED Report No. 9455-IN, The World Bank, March 22, 1991......Renort of the Committee to Study Organizational Structure and Management Ethos of IndianRailways, Govemment of India, Ministry of Railways, March 1994.

52. The difficulty of assigning responsibility for outcomes makes it difficult to judge most publicmanagers by actual output or performance. The emphasis instead has been on so called input audits inwhich the major objective is to detect fraud or misuse of funds - the assumption being that if all the inputsto an effort are procured according to the rules then the desired outputs will transpire.

53. For a PWD road engineer, any decision that might imply an engineering mistake or be interpretedas favoring a road contractor is likely to be questioned by adversarial state auditors and senior managersto the great potential detriment of the decision maker. Yet, mistakes in surveys, design and contractdocuments are not unusual and decisions that rectify mistakes and possibly benefit contractors are requiredfrequently on any complex civil works contract if progress is to be made. And, bankrupt contractors arethe worst of all outcomes for civil works expansion. The threat of auditors concerned about unanticipatedfinancial outlays together with technically bankrupt contractors then leads to endless delays asmanagement decisions are passed from level to level to spread the risk. Relations with the contractorfrequently become adversarial, leading to time-consuming litigation. Eight to ten years for completionof a major road contract in India is not unusual when three to four years should be the norm. Theeconomic costs of delaying a 40 percent return investment project by four to six years is enormous andnot taken into account by the state auditor (Box 10). This is a very real example of the impact of theprevailing management incentive system on the provision of some of the most important infrastructurein India.

54. Unlike the PWD road engineer who is never held accountable for truck and bus operations, therailway management must take into account some basic performance measures in carrying out their duties.Rail managers are currently rewarded if passenger trains run on time, derailments are minimized, physical

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Box 10: The Costs of Delayed Road Projects

Bank staff estinated the costs of construction delays in terms of foregone benefits in the recentlycompleted Project Completion Report (PCR) for the First National Highway Project. Theconstmction of the various components (that were not canceled from the loan) has been or isexpected to be delayed by three to five years and the traffic is now expected to grow even fasterthan originally expected. The revised rate of return on the whole project dropped from theoriginally estimated 36 percent to a now expected 29 percent, a lower but still healthy return on theinvestment. However, an examination of the loss in benefits because of the delays in the face ofincreased traffic shows that the present worth of the foregone benefits is about Rs. 14.3 billion orUS$ 463 million which is more than the total cost of the original project (US$ 425 million). TheState Auditors are unaware of these costs because they do not appear on a budget sheet and no oneis responsible for them.

Source: PCR India National Highway Project (Loan 2534-IN), The World Bank, June 30, 1994.

freight targets are achieved within the budget constraint and labor is reasonably tranquil. Little emphasisis put on profitability or the quality of freight service. The complexity and danger of high density mixedpassenger and freight operations in an environment of rapid management turnover has also led to a rigidcodification of train operation rules so that the system can be run safely by experienced staff just belowmanagement level. Typically this staff remains in place for many years at the same job since they cannotbe promoted to the level of gazetted officer. In a very real sense the system can be run (but not changed)with very little management input. The input audit constraint that the PWD engineer labors under is alsopresent and the combination of central planning performance measures, rapid management turnover, rigidoperational rules and state auditors monitoring procurement and use of inputs explains much of the"conservatism" of the rail industry. Change of any kind is difficult, very time consuming andunrewarding to the agent of change.

55. Beyond this formidable complex of incentive barriers to change in the railways lies the fact thateven during their short periods in a position the IR management effort is very dispersed and unfocused.Other than the obvious cause of rapid management turnover, the dispersal of management energy andattention is due to a combination of "departmentalization", vertical integration into the social sectors andconflicting management objectives. As a result of the "departmentalization" within the railways, in whichvarious independent technical streams are represented on the Board by their own Board member, thereis competition between the technical streams for budget and status and this is invariably not conduciveto the health of the organization as a whole.'

40. One of the most egregious examples of departnentalism is the competition between the Member Electrical (ME) andthe Member Mechanical (MM) on the Rail Board. The ME fights (successfully) for the low economic returnelectrification program and is in charge of electric locomotives while the MM is in charge of diesel locomotives andassociated facilities. Electrification infrastructure is in place but not being used effectively since there is a shortageof electric locomotives and diesels are everywhere running under wire. A much larger problem is a general shortageof all locomotive power. A Board member concerned with locomotive power in general would be able to focus onthe larger problem and subsume the conflict of electric vs. diesel.

l

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56. The vertical integration of the railway into the social sectors - particularly housing, health,education and recreation has led to a situation in which the fringe benefits of IR employment are closeto half of total remuneration. The management of IR spends an inordinate amount of time and effortmanaging the distribution of these scarce benefits amongst IR staff. Given the short-term nature of theirtenure in each posting and the constant day-to-day pressures from Parliament, the tendency formanagement is to get engaged in the short-term issues they are most familiar with at each posting i.e.administrative issues associated with posting, housing and terms of employment of those beneath themin the hierarchy. The risks associated with long term initiatives such as technology transfer or offeringnew services to the private sector can be avoided by concentrating on the short-term issues until transferto new jobs (Box 9).

57. The conflicting management objectives within IR are a result of Parliament's preference forsubsidizing urban and intercity passenger services and vertical integration into manufacturing. The bestinterests of the manufacturing operations, suburban rail operations and intercity passenger operations arenot necessarily consistent with the overall long term health and effectiveness of IR the intercity freighttransport operation. Of all the public sector transport managers, railway management has the mostdifficult and confusing incentive environment within which they must work.

58. For ports the situation is much better. The major ports are organized as port trusts with boardsand managements that, on paper, have considerable autonomy from the central managers in the MOSTin Delhi. Because port areas are physically compact the port management is in constant contact withdaily operations. Representatives of the port users also sit on the Board (unlike the Railways and thePWDs) and there is constant pressure to improve port facilities and performance. There is even anelement of inter port competition in that some traffic may have a choice of ports to use depending on theorigin and destination of the goods. Port managers, therefore, have a continuous stream of reality checksthat they must listen to. Port management has also been reasonably stable in that only the Chairman isusually an IAS generalist while those below him usually spend their careers in one port and are promotedfrom within. The tenures of the Chairman are from three to five years and this gives them time to learntheir jobs from the permanent staff. It is an altogether more promising environment than that of thePWDs - and especially the railroads.

59. Yet, ports have not been at the cutting edge of reform in the transport sector. That role has goneto airlines and road transport. This is partly because the management incentive system in ports is similarto the railways and highways in that the input audit system, and the absence of output or performanceaudits, encourages port managers to push all the controversial procurement measures up in the hierarchyof the MOST.4 ' The management of the port trusts have chosen not to exercise even the limitedautonomy they are currently given and delays similar to those encountered in road building are common.Unlike the railways, the status quo in ports can be sustained because there is no financial crisis as thevarious port authorities are still able to price even very poor service high enough to cover their costs.Absent rewards for taking new and risky initiatives in a profitable organization it is easy to see whyinternally promoted change takes place so slowly in the port subsector.

41. Political pressure from Parliament related to postings, housing and the like are transmitted directly to the highest levelof IR management and usually are dealt with at inappropriately high level. A similar conclusion was reachedconcerning the management of the nations ports in the recently-completed Bank-managed study of Indian ports.

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60. What changes have taken place have been the result of external pressures from port users bothforeign and domestic who have no viable alternative. Also, the MOST management is now sensitive tothe poor performance of the nation's ports and the bad impact this has on the nation's foreign trade.Unlike road and railway users, port users are aware of what good international performance standardsare as they use the other ports in the region. Given their generally good physical facilities, Indian portscan achieve these standards fairly rapidly if port managers respond to the objectives of the nationaleconomic reforms rather than those they have responded to in the recent past.

Rent-Distribution and Rent-Seeking Activity

61. The provision of valuable infrastructure services at prices much lower than users would be willingto pay generates economic rents. Managers and administrators who preside over the targeting ofsubsidies to deserving members of the population are distributing valuable rents. As many as 20 percentof rail passengers are riding at little or no charge. They are the families of rail personnel and Membersof Parliament, students, military, trained nurses and midwives, the handicapped and numerous others.The allocation of scarce rail wagons to private sector shippers (when the private sector was still using railservice) is another case of rent distribution in the railways. The manager or administrator making thesedecisions is far removed from the need to consider newer or better service innovations. Rationing ascarce supply of a basic service dominates his or her thinking.

62. Rent-seeking occurs when informal markets arise to allocate scarce services or when keyadministrative decisions become costly barriers for shippers and system users. The 164,000 portemployees and the unspecified number of customs personnel working in the five major ports of thecountry continue to employ the usual restrictive practices of unreformed ports and payment of "speed"money by port users to facilitate clearances is so normal that it is routinely quantified (Box 5). Truckersface the same problem at the numerous police "checkposts" and octroi posts where the power to delaytruckers and thereby impose costs is turned into an informal revenue stream (Box 10). The widespreadproblem of ticketless travel on the railways and revenue leakages on public buses indicate the presenceof rent-seeking activity in passenger transport as well.

63. Truckers using public roads in India face what is know as an assurance paradox, similar to a"prisoner's dilemma". Collectively, all would be better off if all abided by axle load restrictions,pavements remained undamaged, and vehicle operating costs remained low. But, any single truckerwould be better off if he broke the law and overloaded since the marginal private revenues are so largecompared to the marginal private costs. On the other hand he would be much worse off if he abided bythe rules and nobody else did. The individual rents associated with truck overloading are so large thatthey can be shared with those in charge of enforcement and the system of control breaks down as doesthe pavement on the national highways. This is one the most difficult single problem facing road plannersin India.

64. In summary, the Indian Transport Sector has been reasonably adequate for serving a rural orientedeconomy with low economic growth rates and little foreign trade activity. A very basic system of twolane roads and deregulated private road freight transport together with a railroad specializing in long haulbulk freight provided for most of the increment in demand for freight movement. The emphasis has beenon physical planning rather than services and an elaborate system of cross subsidies has evolved. Aperverse system of incentives is in place for planners and managers of the public transport system andthe emphasis is frequently on the distribution or rationing of low priced, low quality, scarce services to

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.Box 11: Police C posts s a ldtrt to IQtetate Commerce

A recent sample survey of truck operators indicates that the poor condition of the roads is a distantsecond to the dominant perceived.problem of too many:checkposts and police harassment. This isa longstanding problem in India. The National, Transport Policy Committee (1980) quantified partof the costs of such checkposts when it estimated that on selected trunk routes studied by theCommittee that 30 to 46 percent of effective travel time of truckers is lost at such checkposts. Itis not so much the "speed money" that has the costly impact. It is the inordinate time it takes tocollect it.

Source: Table 5.9 TProblems Faced by: Road Transport Operators in: lntearated Rail RoadTransgort System for Movement of iLon DOistance FreiLht, Railway Fare and:Freight Committee,Ministry :of Railways,; 01,F.inal. ,eport, June; 1993, p. V-17. and Report of the NtationalTnsport Policy Committee. Planning:Commsion, GOI, May 1980.

favored sections of industry and the travelling public. It is not a system that can be expected to respondrapidly and appropriately to reform pressures.

V. LONG-TERM ISSUES IN A CHANGING ECONOMIC SCENARIO

65. With a basic understanding of the major elements of the Indian transport sector and the contextwithin which they operate it is possible now to begin examining some of the long term issues that willbe associated with change. These are dealt with under two general headings; those endogenouslygenerated by the economnic reform initiatives and those exogenously imposed by demographic andtechnological change. The former is the subject of Section V, while the latter is treated under SectionVI.

Linkages with Economic Reform Initiatives

66. In recent years the World Bank had conducted research and sector work in the general area ofthe provision of public infrastructure, expanding the inquiry beyond the simple linkage of investment andgrowth to include the actual flow of infrastructure services and their impact on growth, personal welfare,the environment and macroeconomic stability.4 The basic message is that there are multiple benefitsto be gained from good infrastructure policies but, likewise, high potential costs from mistakes.

67. ' The international experience accumulated in the Bank's work suggests that there are a numberof conditions necessary for infrastructure to have favorable impacts on economic development andpersonal welfare. These are:

(i) there should be a macroeconomic policy climate which is favorable to efficient allocationof resources - this implies that major infrastructure investments should be accompanied

42. The Contributions of Infrastructure to Economic Develooment: A Review of Experience and Policy Imolications, byChristine Kessides, Discussion Paper No. 213, The World Bank, 1993, p. 35.

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or preceded by macroeconomic structural adjustment and that where severemacroeconomic distortions persist, even "strictly hardware" projects may not beproductive;

(ii) infrastructure projects can only raise the productivity of other resources when there is asufficient complement and basic productive level of other resources - infrastructureinvestments cannot create economic potential, only help develop it;

(iii) infrastructure having the most significant and durable benefits to both productivity andconsumption is that which provides the degree of reliability and quality of servicesneeded by users; and

(iv) infrastructure is likely to be more economically efficient and have favorable impacts onthe environment when it is subject to user charges based (as much as possible) oneconomic prices and willingness to pay.

68. The first of these preconditions is being pursued in India with the economic reforms now beingput in place. Leading the way are reforms designed to integrate India's economy into the world economyby deregulating foreign trade and promoting its expansion. This is being accompanied by deregulationof domestic industry and administered prices together with financial sector reforms that will allow theprivate sector to compete with the public sector in much freer domestic capital markets. Finally, macroeconomic stability is to be pursued by containing govermment expenditure, reducing governmentsubsidies, reducing central government budget support to public entities, and raising user charges forpublic utility services including specifically electricity, irrigation water, drinking water andtransportation.43

The Derezulation and Expansion of Foreign Trade

69. In 1990, India's exports were only 8 percent of GDP, while the average for all low incomeeconomnies including China was 18 percent.' The Indian reform scenario calls for an expansion of GDPgrowth rates from the historical averages of about 4 percent to an annual sustained rate of about 6percent. Exports and imports are projected to expand at a sustained rate of between 9 and 10 percent perannum. Thus, India's foreign trade (imports plus exports) which is currently about 16 percent of GDPis to expand rapidly to about 19 percent of GDP by the year 2000. This will place certain obviouspressures on ports, inland transport links and international air cargo capacity. Less obvious are thetechnological, administrative and legal implications of integrating major portions of the Indian economywith world markets.

70. International traders find it essential to use compatible transport and communications technology.The main transport technology innovation in foreign trade has been the use of the ISO container forsecure, reliable, intermodal door-to-door movement of goods. Associated with the intermodal and

43. See: ' Policy Framework' in Chapter 4 of India Eiehth Five Year Plan 1992-97, Volume I, New Delhi, 1992, pp. 84-96.

44. World Development Report 1992, The World Bank, Table 9, p. 234.

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international chain of physical moves and lifts is an international system of documentation and informationthat is dependent on modern computer and communications technology. Underlying the documentationsystem which includes international bills of lading, insurance and customs declarations is an implied legalsystem that defines cargo ownership and liability for every step of the chain. Any country that wishesto participate actively and successfully in the international trading system must adjust its infrastructure,admninistration and laws so that they not only allow trade to take place but promote it through efficient,transport, communications, documentation and conflict resolution.45

71. A recent partial attempt to respond to these needs (five years in the making) has been theMultimodal Transportation of Goods Act of 1993. Under this act, 55 Indian transport and freightforwarding companies were granted the status of Multi-modal Transport Operators (MTOs). One of themain foreign ocean carriers serving the Indian market was also given MTO status. Shortly after the lawwas promulgated a set of Multi-modal Transport Document rules (MTD) were issued. The idea was tosupport the development of a network of MTOs to facilitate freight transport marketing domestic andinternational. However, progress has been slow for two major reasons. The first reason concerns lackof precision in the legal definitions used in the MTD rules (e.g. "carrier", "delivery", "goods", "multi-modal transportation"), while the second concerns the question of liability for cargo damage or loss.

72. The International Chamber of Commerce (ICC) has promulgated a model set of transportdocuments that have been widely accepted for intermational trade-related service transactions. In early1994 the MOST sent copies of the new Act and the associated Rules to the ICC with a request for reviewand endorsement. The ICC lawyers found the Indian documents not in full conformity. The mostfundamental problem of inadequate specification of liability has meant that insurance coverage under thenew rules has not been obtainable and trade goes on under the old rules. Attempts are now being madeto solve these problems with appropriate revisions. After a good-initial effort it is important that these"loose ends" be tidied up as soon as possible.

73. Modern infrastructure to international standards is in place at two of the five major ports of thecountry (Madras and JNPT in New Bombay) but the operation of the infrastructure is not yet tointernational standards. This could be achieved fairly rapidly if the container facilities were leased toprivate international firms for operation.46 For inland container movements Indian Railway for the pastfew years has been operating unit container trains between major ports and inland origins anddestinations. However, there are major capacity constraints on the rail links because of the suburban andshort haul passenger services and the service is not to international standards. This conflict between railpassengers and high value freight will remain one of the long term issues facing transport planners inIndia.

74. A system of inland container freight depots has been defined and is partly in place but is beingoperated for the most part by Indian Railways without the participation of other private sector freightcompanies. This too will have to change if sufficient capital is to be attracted and true door-to-doorcompetition fostered to the benefit of the shippers. The danger now is that the railways (and Parliament)

45. The nature of the task is set forth in: India's Growing Conflict between Trade and Transort, by Hans J. Peters,Working Paper No. lNI-69, the World Bank, 1990.

46. A draft lease agreement prepared by consultants financed with Dutch aid has been ready for several months.

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will see the currently captive international container movements by rail as just another source of crosssubsidies for its passenger operations - leading to the inevitable high cost poor quality result.

75. The best way to promote low cost high quality container service is to promote competition fromthe private system of road haulage and freight forwarders.47 There are two problems here - one shortterm and one long term. The short term problem is that import containers cannot yet effectively movein bond over the roads on privately operated trucks.' The fear of the customs service is that importcargoes will be tampered with enroute and customs revenues reduced when collected at the destination.This means that import containers moving by private road haulage must, for the most part, be stuffed andunstuffed at ports for customs examination - losing the benefits of door-to-door service for the shipperand receiver. As import duties decline under the economic reforms the incentive for smuggling and dutyavoidance is greatly reduced and this issue can be dealt with administratively and legally as it is in allsuccessful trading nations. Much more serious for the long run is the inadequate HDC road system.Without an expressway system allowing the efficient operation of multiple axle vehicles it will be difficultfor road haulers to offer good container service at a reasonable price over the present heavily congestedroutes. The solution to this problem is many years into the future.

76. The telecommunications and information processing bottleneck is serious but could be removedin a few years. Much depends on how far and how fast things move in the telecommunications reformeffort. The public telecommunications monopoly is financially self sufficient since it can charge highprices for poor and inadequate service. It has powerful supporters in Parliament based partly on financialinterests and partly on an ideological desire for autarky. The groundwork has, however, been preparedfor the introduction of regulated competition from the private sector.49 This will be a key "leadingedge" sector to watch to gauge the chances for anything similar happening in railways, ports and airports.

77. Two other bottlenecks to efficient foreign trade remain. One is in the Customs Service and theother is in the foreign exchange control system. The disincentive to move import containers in bond overthe roads by private truckers springs from the extraordinary importance of import customs duties toCentral Government finances.50 This revenue source accounts for about 50 percent of total discretionaryrevenues of Central Government. The entire operation is aimed toward maximizing the revenue flow andsuppressing smuggling.5' The rules are complex and subject to various interpretations. The whole

47. Indian laws governing the crucial question of cargo liability under combined transport operations are currently beingchanged to meet international standards. The Multi-Modal Transport of Goods Act (1993) together with variousamendments that are under preparation will address this constraint. This should not be a long term issue.

48. They are allowed to move if a bond is posted by the trucker that is equal to three times the assessed value of the cargo.The high bonding costs has limited the movements by truck.

49. See, for instance, the presentations and background papers prepared for the recent workshop "International Experiencesin Telecommunications Reform and its Relevance to India', New Delhi, November 21-22, 1992.

50. Export container movements by private truck are easier to organize because of the reduced revenue and smugglingimplications.

51. Because of these concerns it is necessary for domestic coastal shipping movements to also be submitted to customsformalities - effectively precluding the use of this mode for most cargoes.

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process of rule application requires filling out many forms and allowing for frequent and comprehensivephysical inspection of cargoes which consumes a great deal of time. The partial results of this exerciseare set forth in Box 5. While serious, this problem will recede in the medium and long run with thereduction of punitive taxes on imports and the consequent reduction of incentives to smuggle. 52

78. The Reserve Bank of India (RBI) and the Foreign Exchange Dealers Association presentformidable administrative barriers to foreign trade in that they are concerned with the earning andsubsequent use of what is frequently referred to in the popular press as "precious" foreign exchange. Forthis reason they are particularly interested in import and export transactions and are very concerned aboutthe possibility of over and under invoicing to hide foreign exchange. Their concerns generate much ofthe costly paper work and regulations involved in foreign trade. Just as smuggling will decline with thedecline of import duty incentives to smuggle, illegal foreign exchange transactions will decline with theincreasing convertability of the Rupee. This should not be a long term constraint. f

79. In summary, the whole complicated process of adjusting current Indian procedures to becompatible with that of the international market is under way on the technological, administrative andlegal fronts. The most serious long term constraint is the inadequate physical capacity of the major roadand rail links for hauling containers inland. The railroads can relax this constraint in the shortest timewith a combination of line capacity improvements and a lower priority (or higher prices) for passengeroperations.53 Absent competition and capital from the private sector, however, even an enhanced railcapacity will probably not provide service to international standards. r

Privatization and Deregulation of Domestic Industrv

80. The current Indian economic reform movement seeks to remove government from much of thenationalized industrial sector and to give private companies more freedom to run their own affairs. Thismovement towards commnercialization has an indirect long term impact insofar as it effects the users ofthe transport system. It has a direct long tern impact insofar as the public sector entities providingtransport or transport infrastructure are themselves commercialized and/or privatized.

81. For the railroads both the direct and indirect impacts are potentially very great. The railroad'smain freight customers are the public sector shippers of bulk products such as coal, foodgrain, iron andsteel, cement, fertilizers and petroleum products. Should these industries begin to be run alongcommercial lines, two implications are immediately apparent. The first is that they will demand betterservice than IR currently provides and they may be willing to pay higher tariffs for that service. Thesecond is that imports of coal, foodgrain fertilizers etc. to coastal cities may displace costly long haulmovements of the domestic products. A third longer term adjustment would be relocation of productionto sites determined by commercial calculations rather than central planning and political factors.

52. The precise nature of the customs barrier to foreign trade and container flows was uncovered during preparation ofthe recently negotiated Container Transport Logistics Project (SAR Report No. 12780-lN, May 9, 1994). A majorpart of the problem was the ambiguity of the regulations. See Para. 1.29 on page 7 of the SAR for the list of actionsto be taken to remove ambiguity and improve transparency.

53. This is the basic idea behind the recently negotiated Container Transport Logistics Project of 1994.

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82. The best example of the first two indirect implications can be found in current efforts to involvethe private sector in the generation and sale of electric power. A key concern of the interested privatecompanies is the timely delivery of steam coal to the power stations. The private companies want betterservice and want penalty clauses in their shipping contracts with the railroads should service to thespecified standard not be achieved. The railroad response has been to propose increased rates for sucha superior service, which may be appropriate. In the long term the railroads would have to concentratemuch more on the quality and pricing of their freight service, something they have almost no experiencewith.'

83. Indian coal is of variable quality and it is located for the most part in the central and easternregions of the subcontinent.5 5 Power stations in southern and western coastal cities will find itfinancially and environmentally less costly to import high quality coal by sea. If allowed to do so underthe new economic regime, then some long haul rail movements of domestic coal could cease. This maybe unpleasant for the domestic coal industry but it may be very good for southern and western regionalconsumers of electric power. This would hurt the ability of the railroads to sustain their freight-to-passenger cross subsidy but it would also help to alleviate the HDC rail capacity constraint.'

84. The direct commercialization of rail services has been discussed on numerous occasions withinIndia. The most obvious first step would be the corporatization and eventually privatization of theindustrial manufacturing operations of the railroad.57 Beyond its function as a transportation enterprise,IR has integrated vertically so that it produces and sells to itself electric and diesel-electric locomotives,wheels and axles for wagons, passenger coaches, signaling systems and concrete sleepers (Box 11). In1989-90, IR purchased about US$ 910 million worth of rolling stock, much of it from its own industrialenterprises. While IR the intercity transport enterprise is close to a US$ 6.0 billion operation annually,IR the manufacturing operation is in the US$ 1.0 billion category.

85. The present vertical integration of locomotive and rolling stock manufacturing into the railwaysdoes not enhance the performance of the railway as a transport enterprise since there are numerous andconflicting objective functions for management to respond to. One basic conflict is the transport entitiesneed for productive and dependable locomotives and rolling stock and the manufacturing entities need fora guaranteed market for obsolete designs. Also, the skills required to manage industrial manufacturingenterprises are entirely different from those required to manage a transport service industry of continental

54. An agreement between IR and its' container transport subsidiary (CONCOR) has recently been reached in which IRfailure to meet service standards for CONCOR's container shipments leads automatically to a 5 percent discount onthe tariff whilst meeting the standards leads to a 5 percent increase in the specified tariff. This agreement wasnegotiated as part of the Container Transport Logistics Project.

55. There is a wide variation in the quality of thermal coal reserves. Useful calorific value ranges from 1300 kcal/kg toover 6000. Most are in the 3500-4500 kcal range with 26 to 35 percent ash content.

56. The first large scale manifestation of this development is the proposed 2340 MW power complex in Cuddalore, TamilNadu, utilizing imported coal with low ash content. The investment is to be undertaken by a consortium of foreigncompanies and will include a port facility as well as power station.

57. The most recent manifestation of this discussion within India can be found in: Report of the Committee to StudyOrganizational Structure and Manazement Ethos of Indian Railways, Govermnent of India, Ministry of Railways,March 1994, p. 24.

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Box 12: Manufacturine Plant of Indian Railways

.There are currently six major manufacturing enterprises directly under IR employing about 56,000workers. Passenger coach production began at the JR plant in Madras in 1955; electric locomotives.at Chittaranjan in 1961; and diesel locomotives at Varanasi from 1964 on. Further verticalintegration of manufacturing within IR was supported by the Bank in the form of the wheel and axleplant at Bangalore (1978) under MOD 1, A Diesel Component Works at Patiala (1982) under MODII, and a passenger coach manufacturing works at Kapurthala (1988) under MOD IV. In addition,ithere :are other non-rail public and private sector companies that specialize in supplying IR withwagons, coaches, and heavy electrical equipment.

dimensions. At the very least the "corporatization", if not the privatization, of the IR manufacturingenterprises should be considered if manufacturing costs are to be accurately determined and thedesperately needed international technology transfer (through the common route of joint venturemanufacturing and export operations) is to take place.

86. Another operation that greatly complicates the life of rail management is that of money-losingsuburban rail passenger operations. It is desirable that these unique, location-specific services and theirquite substantial capital requirements be commercialized in that a commercial accounting system shouldexist that treats the services and facilities separately. IR could then begin to search for an orderly meansof divestiture of the subsidy burden to state and/or local government even though they might continueto operate on a service contract basis. Various international models of transfer arrangements exist thatIR might consider modifying for the Indian context.5"

87. More fundamentally, can IR continue effectively in the long run as a department under its ownMinister with day7to-day intervention from Parliament? Probably not. IR is no longer the dominantmode in the transport sector and the power to cross subsidize is being eroded as has been the case onmost other market economies. IR management needs a broad and specific mandate from Parliament butneeds to be insulated from day-to-day political pressures if it is to carry out the serious business ofproviding nation wide, financially self sufficient transportation services.59 Related to this is the needto leave senior management in place long enough to effect change and to constitute a Board that isorganized functionally rather than technically. It is difficult to see any management taking on majorinitiatives and risks if they are typically to serve no more than a year in their positions and are in directcompetition with fellow Board members for budget resources and staff positions.

88. For ports, the indirect impact of the privatization and deregulation of domestic industry wouldbe the new demands placed on ports by allowing imports of coal, fertilizer and other industrial inputsrather than exclusive use of domestically produced inputs. Coal for southern coastal power stations wasmentioned previously, but a more dramatic recent happening has developed from the decision to

58. The first tentative steps towards orderly devolution of a suburban rail operation to state and local government aretaking place in Bombay. See: Revised Executive Project Summary, Second Bombay Urban Transport Proiect (BUTPO), The World Bank, July 1994. The commercilization of real estate and air rights in Bombay is likely to be a majornew source of revenue that could not be realized without the active cooperation of the state government.

59. For a good description of the complexity and specificity of the task for serious rail reform see: 'Techniques forRailway Restructuring' by L.W. Huff and L.S. Thompson in Rail International, October 1990, pp. 11-25.

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deregulate the petroleum products industry. India's new policy of allowing the private sector into thepetroleum product import business has led to a boom in the construction of new specialized port andterminal facilities for petroleum products. About 160 private companies entered the field. Newcryogenic terminals and petroleum handling facilities in eight ports are now being entirely financed withprivate capital. Here was a case where a serious infrastructure bottleneck existed that could not berelieved by the current port authorities. However it was the indirect pressure exerted by deregulation ofthe petroleum products industry that made the initiatives possible.

89. There is also great scope for a direct impact through privatization through concessions of manyport operations. Currently Indian port authorities each conduct, with their own staff and equipment, mostport operations. Only stevedoring on board ships and pick-up of cargo for delivery are undertaken byprivate commercial firms. Increasingly, the international experience is that port productivity rises withthe commercialization and concessioning of all cargo handling activity, leaving the port authority withthe planning, lease negotiation and management, safety, navigation and overall coordinating functions.'

90. Some of this is beginning to happen in India. The best example is the petroleum productsterminal investments by the private sector. There are other examples of marginal moves towards moreliberal policies under existing legislation. Tata Iron and Steel has taken on lease several berths at Haldiaport. Private stevedores have been authorized to load and unload cargo at Tuticorin port. Ship repairand dry dock facilities have been leased to private firms and a large foreign carrier has negotiated andpaid for a priority berthing right at the Bombay container terminal. This is a start but the potential formuch more is very great. The state-of-the-art container facility at JNPT in New Bombay could easilybe leased to a private consortium for rehabilitation, operation and maintenance - more than doubling thecontainer throughput overnight. This initiative has little risk associated with it because the revenue streamis reasonably predictable, the up front investment not large and the equipment investments both mobileand useable elsewhere. The legal authority exists as does the draft contract and several qualified groupsare willing to bid. However, no movement has taken place yet as this would be a major precedent thatwould undoubtedly lead to pressure for more. The bottleneck appears to be the reluctance of the MOSTto relinquish authority over a profitable public monopoly and the related question of how to do so in atransparent manner.

91. For roads, the indirect impacts of industrial reform are likely to be an even greater share offreight traffic as the former rail-bound public sector firms begin to search for higher quality services.The direct impacts are limited in that trucking has already been privatized and for the most partderegulated and the process of privatization of bus operations continues steadily. The major direct impacton the road subsector would be the privatization of engineering services previously provided in-house bythe state PWDs.

92. In summary, successful privatization and deregulation of domestic industry under the economicreform program would have (and is beginning to have) quite substantial implications both direct andindirect for ports and especially for railroads. On the highway side the major impact would be on theprivatization of engineering services.

60. For a good example of recent experience in the region see: Privatization in Transport: The Case of Port Kelang(Malaysia) Container Terminal, by H. Levy and A. Menendez, Economic Development Institute, The World Bank,July 1989.

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Reducing Government Subsidies

93. Government subsidies for "essential services" for the "common man" have a long history in India.Urban water supply, electricity, cooking oil, irrigation water, fertilizer, kerosene and urban rail passengerservices have all received direct or indirect subsidies over the years. Part of the macroeconomic solutionto the national financial problem has been to propose raising charges for most of these services on thegrounds that the government cannot afford them and that much of the benefits are captured by the upperand middle classes rather than the poor. The economic argument is that increased charges promote moreefficient use of these scarce services and resources.

94. Such an approach can have long run benefits provided there is competition to promote cost cuttingand service variety as well as revenue raising. A monopoly provider facing commercial or affluent userscan simply raise prices to cover costs; an example is telecommunications and ports. Indian Railwayscould attempt to solve its current financial crisis by raising rates on coal transport, an exercise that isrelatively simple since it involves transfers of resources from one ministry to another and an increase inthe price of coal. This would exacerbate the problems of the electric power subsector and transfers therail financial crisis elsewhere (Box 13). A more efficient response would be to raise rates on subsidizedrail passenger services responsible for congestion on the mainlines and promote an expansion of profitabledomestic rail container services. The latter response requires much more effort and initiative by IRmanagement and might not be forthcoming without clear signals and support from the reform-leadingministries.

95. An example of a more appropriate response to the need to reduce government payments tomonopolies has been the privatization of the marginal bus routes for some of the money losing andoverstaffed state bus monopolies. As monopolies the state bus companies could, in theory, have solvedtheir financial problems, as have the state-owned telecoms and ports, by raising their tariffs. Bus riders,however, are more numerous and less affluent than telephone and port users and privatization of marginalroutes was preferred to general tariff increases.

96. Roads are constructed and maintained from annual government allocations so the question ofadequate user charges has not been a relevant one. Road users as a group do pay in special taxes aboutthree time more than the government spends on roads. They may even be paying more than thegovernment ought to spend on roads. However, the existing taxes are not, and realistically cannot be,earmarked for road maintenance and construction. The long term question is how are roads to befinanced and how should users be charged.

97. A system of partially toll-financed express highways is almost certain to evolve in the future.61

The limited access nature of a toll road has a number of distinct benefits associated with it that attacksome of the very difficult problems in the road subsector. The first, and most obvious, benefit is thestream of revenues that could be dedicated to the maintenance and operation of the facility, a revenuestream that could not be claimed by others for other purposes. This would also provide a commerciallinkage between operator and user that is missing from the free access systems. The existence ofcommercial accounts and unit costs would also serve as an important element of the crucial accountabilitymeasures that are missing in the current state PWDs. There would also be an incentive to construct theroad rapidly since the revenue stream would provide the salaries of those operating the system.

61. The first of these will be the Bombay-Vadodara expressway which is being supported by the Asian Development Bank.This is to be a four lane expressway on a new alignment parallel to the most heavily trafficked road in India and willbe an important test of the land acquisition, involuntary relocation and financial feasibility of the expressway concept.

F

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Box 13: The Cominm Railwav Financial Crisis

Indian Railways has been a remarkably successful financial enterprise, especially when comparedto many other railways in the world. Despite the steady erosion of their national freight andpassenger market share, IR has been able to show a surplus in most years and a satisfactoryliquidity situation.

In 1992, Bank staff examined railway accounts and found that the true costs of the labor force weremuch larger than commonly assumed. The addition to the formal wage bill of the wages to casuallabor, pension payments and provision of housing, medical care and education and other in kindincome raised the true wage bill in FY 1982 to 52 percent of operating expenses instead of theofficial figure of 39 percent. By FY 1991 this had increased to about 65 percent as rail wages rosefaster than labor productivity. In preparing the projected financial statement through the year 2000it was found that the only way to maintain satisfactory financial health was to assume a steadyreduction in the labor force from 1.8 million in 1991 to 1.5 million by the year 2000 - a reductionin force of about 300,000 jobs. This would bring the true wage bill back down to 50 percent ofoperating expenses and sustained financial viability - a positive net result of about 7 billion Rupees.If, however, the labor force stays constant at the 1991 levels then the Rs. 7 billion surplus tnsinto a Rs. 17 billion (about US$ 680 niillion) IO$S in the year 2000.

This trend has been identified in a recent study commissioned by the Railway Fare and FreightCommittee as a steadily rising average capital output ratio since 1986-87 and a steeply risingaverage cost per worker over the same time period. The inability to realize the labor savingbenefits of investments has reduced dramatically the marginal productivity of rail investment whileincreasing the debt burden (See Box 18). The declining budgetary support of the centralgovernment is exacerbating the problem as funds can no longer be found to replace existing rollingstock assets. If the choice is between the wage bill and replacement of locomotives and wagons thewage bill, at least in the short and medium run, will win and Indian Railways will begin to lookmore like the other financially troubled railways of the world.

Sources: India Railway Productivity Improvement Project. Report No. 10054-IN, The World Bank,March 31, 1992. Productivitv Optimization on Indian Railways, India Rail Technical andEngineering Services, New Delhi, 1993.

98. The ability to exclude users would also benefit traffic flows in that animal traffic, oversize loadsand otherwise slow traffic could be excluded. Arguably the most important benefit of toll expresswaysin India would, however, be the ability to weigh all truck axle loads and either exclude or charge thosethat are overloaded a substantial surcharge for the damage caused to the road. This is probably the onlyway that the serious national problem of truck overloading can be attacked with incentives. As the tollexpressway system expands, an increasing number of trips with origins or destination on the free systemwould need to pass over some portion of the toll system and a substantial financial incentive would bein place not to overload. This would also provide an incentive to use more Multiple Axle Vehicles(MAVs). No other proposal has been made to deal with this problem except the extra taxation of singleaxle trucks (or the reduced taxation of MAVs) for their potential damage to the road system. Such a taxpenalizes those who do not overload and, once paid, does not serve as a disincentive. Weighing axlesautomatically at toll booths by a non police administration with a vested interest in collection ofoverloading fees would be both equitable and efficient.

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99. The feasibility of large scale express tollway construction depends much on the ability ofgovernment to acquire land and to relocate those dispossessed by the land acquisition process. Thisconstraint could easily preclude large scale construction of expressways and the potential for toll financingwould then be relegated to bridges and some urban bypasses which also have more potential for seriousprivate sector financing in the form of Build-Operate and Transfer (BOT) schemes.

100. There has been a misplaced hope in India (and elsewhere in the developing world) that large scaleBOT toll operations with mostly private investment would obviate the need to consider new sources ofpublic finance for roads (Box 14). There is a niche for this type of operation with some bridges andurban bypasses that enjoy an effective monopoly position. The private sector does not like to put moneyinto long lived fixed investments if competition in the form of improved parallel roads or alternative freeroutes in an improved network should divert traffic from the toll facility. Typically they want guaranteesthat this will not happen and the best guarantee is a unique physical or urban location where landacquisition for a competing facility would be nearly impossible. Hence, the attractiveness of large bridgesand urban bypasses (where land has already been acquired by government) for BOT operations.

Box 14: The Limited Potential for Private Monies in Road Investment

The flow of private funds for all purposes into developing countries, as a group, has increasedconsiderably in recent years. :But, not more than six percent of .the US$ 62 billion thus involvedbetween 1988 and 1992 benefitted national transportation systems. And, almost 80 percent of the [US$ 3.5 billion of private investment in transport in developing countries during that period wasrelated to acquisition of shares in airlines. Likewise, a substantial portion of the remaining 20percent represents stakeholding in already existing transport enterprises. Thus, the bulk of privatetransport finance in these countries has been in the transfer of ownership of existing transportenterprises utilizing mobile pieces of capital equipment. Through 1992 the private investment innew road capacity was negligible.

Since 1992 there has been much.more interest in toll roads and more ihan 100 private toll roadprojects are under consideration worldwide of which 47 are in developing countries. But, less than40 percent are expected to materialize. The risk profile on most of these projects is very high giventheir long gestation period, long life, uncertain traffic projections, and the possibility of politicalinterference at some time in the life of the:enterprise. While they should not be dismissed out ofhand for India they should notbe considered a panacea.

Sources: Privatization and Foreign Investment in the Develoinag World 1988-92, by: Frank Sader,Working Paper No. 1202, The World Bank, Oct. 1993. and Privatization 1993 - Seventh annual _Report on Privatization, The Reason Foundation, Los Angeles, 1993.

101. Clearly the existing system of general budget funding is not working and toll roads will not dothe entire job. Increasingly, the old idea of earmarking road user charges to a fund for the exclusive useof conserving and expanding the road system (and as a possible alternative to octroi) is receiving supporteven from economists who were once critical of the notion because of the inflexibility of the arrangement(Box 15). That inflexibility is now being seen as an advantage that needs to be exploited in countries

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with large and rapidly deteriorating investments in roads.62 The case can be made, therefore, that anynew taxes or charges on road users should be earmarked for state (and national) road funds. At the sametime, state (and national) highway boards should be set uj l. ensure that those paying the user chargeshave some voice in how the funds are raised and spent and that user interests are represented as well asthose of the public roads bureaucracy. Without some sort of quasi commnercial linkage between the users(and user charge payers) and the providers of roads it will be difficult to provide the incentives necessaryto reform the old system of providing and maintaining public roads in India.

Box 15: The Controversy Over Earmarldna for Road Funds

The 1994 World Development Report was devoted to the issue: "Infrastructure for Development".In this report the pros and cons of earmarking special road user taxes to road funds for theexclusive use of maintenance and construction are set forth.

The basic argument against them is one of economic efficiency. Good budgetary processes allocategovernment revenues to high return investments. In times of budget stringency earmarking shieldsexpenditures in protected sectors and focuses budget reductions on unprotected activities which mayhave higher economic returns, thus distorting the otherwise optimnal allocation of funds. Incountries with narrow tax bases, earmarking can encunber a large share of tax revenues.Colombia, which once had such a fuid, abandoned it in 1991 because the resources were going tosectors other than roads in any case.

The argument for the earmarking of road user charges for road maintenance and improvement isbased on practical administration as well as economic efficiency. Despite enormous rates of returnon road maintenance (and road construction in India) many countries systematically under fund roadmaintenance, and the useful life of costly road investments is greatly reduced. The budgetaryprocess does not always work as economists would wish. As a practical matter, such earmarkingalso reduces the resistance of users to use related taxes. The USA, Japan, Korea and thePhilippines have made effective use of such funds.

Both sides of the argument are in agreement that if such funds are set up they should go tomaintenance first and then to construction and reconstruction. They also agree that the need forsuch a fund should be reconsidered periodically. Finally there is agreement that the establishmentof effective road funds involves more than just earmarking revenues. It also includes reforms toimprove the efficiency of road agencies and the establishment of road boards with technical expertsand representatives of the user community who oversee the allocation of revenues and the settingof priorities.

Source: World Development Report 1994, The World Bank, Washington, D.C. 1994, pp. 49-51.

102. In summary, there is an important but conditional role for increased user charges reducinggovernment subsidies and increasing efficiency in the transport sector. This response to financial crisesmay be inappropriate for the long termn health of the transport sector unless there is sufficient competition

62. The body of work supporting this point of view is based on a series of six reports prepared in the World Bank. Thefirst was the path-breaking 1988 study Road Deterioration in DeveloDing Countries: Causes and Remedies. The mostrecent is the 1992 study by Ian Heggie: Selectine ApDropriate Instruments for Chargine Road Users. All of this workhas been brought together in the 1993 book: Roads: A New Approach for Road Network Management andConservation, Economic Commission for Latin America and the Caribbean, Santiago Chile, June 1993.

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to ensure that monopoly behavior does not simply lead to high cost low quality services. The institutionof a toll user charge regime for new express highways has many desirable features but is renderedproblematical by the land acquisition and attendant relocation problems. Privately financed BOToperations can realistically play only a limited role in road investment in India. Road boards presidingover road funds fed by earmarked user taxes need to be considered seriously if the long term flow offunds required for Indian roads is to be forthcoming.

VI. LONG-TERM ISSUES IN A CHANGING DEMOGRAPHICAND TECHNOLOGICAL SCENARIO

103. There are two major exogenous forces operating in the background of the Indian economicreforms. The first is demographic change while the second is technological change. Both will haveprofound long-term impacts on the transport sector. A third category that is related to the first twodeserves separate treatment; that is energy, the environment and other externalities.

Increasina Population

104. For the transport sector the large and increasing population of India means a large and increasingdemand for passenger transport. Indians currently consume about 2330 kilometers of intercity passengertransport per capita per year. This high level of per capita consumption of intercity passenger transporthas had very serious implications for the Indian transport sector. For roads. buses make up from ten tothirty percent of the vehicular traffic and currently account for about 80 percent of intercity passengerkilometers.

105. For railroads, which carry less than 20 percent of intercity passenger kilometers, there is theimportant development that passenger traffic accounts for more than fifty percent of IR output. IndianRailways has become a passenger dominant railway and this generates special problems for IR operations.For the long term the issue is how important is passenger service relative to freight transport service andspecifically whether or not the transport system and the economy can accommodate a doubling of intercitypassenger demand every seven to ten years. Whatever the answer to this question there is a very weakargument for continuing to subsidize public intercity passenger transport (see Annex 2).

Increasing Urbanization

106. The demographic trends sketched out in the beginning of this paper have a great deal ofmomentum built into them. Natural growth rates and rural to urban migration is expected to raise theurban population from 28 percent of the total in 1990 to 42 percent in 2010. The share of economicactivity in urban areas would also increase from about 56 percent of GDP in 1990 to about 63 percentin 2010. All of this growth in urban population and economic activity is to take place in the three "megacities" of Bombay (12.6 million), Calcutta (10.9 million, and Delhi ( 8.3 million); the six aspiring megacities of Madras, Hyderabad, Bangalore, Ahmadabad, Pune and Kanpur (5.4 to 2.1 million); the fourteenother metropolitan cities of more than one million population; the 277 class I cities between 100 thousandand one million and the 3396 cities between 5 thousand and 100 thousand. This shift in the spatialdistribution and concentration of population and economic activity will have profound effects on thenature and level of transport demand.

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107. The most obvious transport impact of urbanization is that the demand for urban passenger andgoods movements will grow very rapidly. This will be translated into pressure on the physicalinfrastructure of city streets and suburban rail. Very little has been said about urban transport in thispaper up to this point as the emphasis has been on intercity goods and passenger movements. However,the increasing number, density and size of urban centers will increasingly have an impact on intercityflows and cannot be ignored in any discussion of long term implications.

108. For railways a concem is the impact of suburban passenger operations on track capacity in thevicinity of urban areas. Long haul freight trains experience the most congestion in the vicinity of urbanareas where there is a substantial suburban rail passenger operation. On these sections through freightand passenger trains must "interact" with short-haul suburban shuttle operations. The effect of thesenodal constraints is to reduce the capacity of the main line sections. As the urban populations of Indiaincrease the number of urban areas requiring suburban passenger operations will increase, increasing thenumber of nodal constraints. The policy issue here is how to reconcile suburban passenger operationson main line routes with long haul passenger and freight operations. IR analysts have recommended thatunprofitable and interfering suburban passenger operations might be diverted to bus operations on theroads.63 This is neither feasible nor desirable and such an attitude tends to lead to poor suburban railoperations as well since suburban rail passenger operations are viewed by IR as costly nuisances."

109. State and local govemments, which have a vital interest in suburban rail operations, have nocontrol over fares, investments or operations because these are matters officially relegated to the centralRailway Ministry and Parliament. The cities of Bombay, Delhi, Calcutta and Madras all present specialproblems requiring both institutional change and investment financing in the area of suburban railtransport. The more numerous and rapidly expanding next tier of cities are all nodes on the rail networkthat will require special treatment of suburban services as well as rail bypasses, grade separations, freightterminal relocations and other quasi urban investments having a direct impact on mainline track capacity.IR will either have to devolve the suburban operations to state and local governments or take the wholeissue of metropolitan rail passenger transport much more seriously as much to benefit the urban areas asto benefit the intercity linkages joining them.

110. Despite continuous complaints by state and local governments about the inadequate level and lowquality of suburban rail services the states and cities are not anxious to "take over" such services forpolitical, technical and financial reasons. Suburban rail passenger fares are so low in India that even theextraordinarily high density services offered in Bombay cannot cover total costs from the fare box.'5State and local politicians do not wish to pay the political price for fare increases to finance system

63. Planning Group on Technologv Pro2ression on Railways: Group Report, Government of India Planning Commission,June 1987, pp. 59-62.

64. By the railways own accounts, that probably do not include assets at replacement value, the biggest nuisance of all isthe Calcutta suburban service which loses about USS 60 million annually. This is followed by the Madras operationwhich loses about USS 15 million annually. The Bombay service is estimated to actually make a profit of US$ 6million. Source: Railway Fare and Freight Committee Report, Ministry of Railways, Dec. 1993, p. 16.

65. The average trip of 24 km on the Bombay suburban system costs about five US cents (15 cents if purchasing poweradjusted). There are, however, about five million such trips daily on the Bombay system and this allows the Bombaysystem to cover its operating costs from the fare box - a situation almost unheard of anywhere else in the world.

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expansion and do not have the tax base to provide subsidies from other sources. Their preference is togo on cross subsidizing urban rail services from the coal transport revenues of the national railway andto allow the Central Government to take the responsibility for the poor services and unpopular fareincreases. It is not a healthy or stable arrangement in the long term.

111. Road planners face a problem similar to rail planners in that urban street congestion makes itcostly for long haul truck and bus operators to pass around or through an urban area. Urban bypassesand limited access highways are obvious potential investments. The recently completed ExpresswayStudy by MOST highlights the nature of the problem and the high cost of various solutions.

112. Street and overpass construction in urban areas require land acquisition and this leads to seriousproblems of dislocation and resettlement of urban dwellers. A major characteristic of Indian cities is thelarge numbers of illegal squatters who take up residence on unused government land and the rights of wayof road and rail facilities. While government has the legal right to the land, the squatters have thepolitical power to keep government from exercising that right. The dilemma for the government is thatin order to relocate and rehabilitate illegal settlers, they must pay substantial sums and provide alternativehousing to people who are breaking the law.' Much of this confusion arises because private propertyrights in urban areas have been eroded to the point that it is not clear who or what institution has whatrights and each individual case must be handled through the courts rather than through administrativeprocedures.67

113. In summary, the urban nodes of the national transport network will increasingly be the locationof most of the population and economic activity in India. While they are the major origins anddestinations of freight and passenger operations they also serve as barriers to through traffic on thenational network.

Technological Change and Obsolescence

114. Technological change has been a main source of productivity and economic growth in successfuleconomies as has foreign trade and international comparative advantage. While the latter source ofgrowth has become a specific concern of the Indian reform government, technological innovation has notyet received equal attention. Indeed, it has been viewed more as a generator of problems rather than asource of economic growth (Box 16). Partly as a result of this system of disincentives and attitudes, theIndian scientific and engineering institutions have been unable and/or unwilling to either transfer and

66. Even in situations where displaced persons have legal title to the land the government's official land acquisitionprocedures are so cumbersome and land valuation so inappropriate that the final decision of compensation invariablytakes place in the courts - if the individual can afford to pay for the procedures.

67. There are land ceilings acts that limit the scale of private ownership and there are rent control acts that effectively litnitthe private development and use of land. While these laws were encouraged originally by the Central Governmentthey have been promulgated by the various State Governments. The result has been that central, state and localgovernment agencies are the major land owners and developers in urban areas and take varying positions on therecycling of land sites over time and the eviction of illegal squatters. The whole issue of privatization of land marketsin urban areas is of critical concern for economic reformers but too large an issue to be dealt with here. See: Citieswithout Land Markets: Lessons of the Failed Socialist Experiment, by A. Betaud and B. Renaud, The World Bank,Washington, D.C., September 1993.

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adapt new technologies in transport and communications or provide the R&D to develop their own. Thisambiguity about the benefits of technological change has subsequently generated a great deal of India'scurrent investment and operational problems in the transport sector.

Box 16: The Pros and Cons of Technology Transfer

The dilenmma facing the Government on the question of technology transfer is well stated in theEighth Five-Year Plan document: 'The process which economizes most on the use of energy,avoids wastage of raw materials and reduces the time span of processing also tends to involve noreautomation and thus saves on labor use. The higher the pace of growth we desire, the moreadvanced is the technology we need to adopt, and consequently the lower is the elasticity of laborabsorption to growth.....While per capita income and productivity will definitely increase, it doesnot follow as a matter of course that all those seeking jobs will get jobs."

Source: Eighth Five-Year Plan Executive Summarv, GOI, New Delhi, Undated, pp. 13-14.

115. The Indian economy is providing transport services with a predominance of 1960 technologies.More and better services could be provided on congested parts of the systems at less expense with thetechnology of the late 20th century. But, virtually every attempt at technology transfer has itsimplications for not only higher growth rates but for redundant and displaced labor, obsoleteinfrastructure and obsolete management practices as well. The problems of disinvestment and downsizingof capital, labor and management are what really lie behind the failure at technology transfer anddomestic research and development.

116. So called 'appropriate" technologies have been adequate and probably efficient for provision andmaintenance of the low density parts of the road and rail system. Unlike the congested main rail lines,there is no saturation pressure on the low density meter gauge system and labor-intensive technologiesfrequently utilizing fully depreciated steam locomotives and low capacity wagons may be an appropriateloss minimization adjustment in the capital-scarce labor-abundant Indian Rail environment. There is,however, no financially viable solution to the congestion of the main lines that does not make use ofmodern technologies.' The same tension between dual technologies exists between the HDC roadsystem and the rest of the lightly trafficked system. High capacity roads capable of carrying heavy axleloads cannot be constructed and maintained with small scale contracts and labor intensive construction

68. This is because the 'additionality' solution of simply adding additional tracks with old technology beyond the currentdouble track system is so costly in terms of land acquisition and civil works that it is for all practical purposes notfeasible. As long as this can be avoided by utilizing existing track more efficiently with new signalling, locomotiveand rolling stock technology it almost always pays to do so.

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methods.' The administrative bureaucracies and labor forces of the Railway and the state PWDs wereall set up to deal with the old technologies and creating a new set of institutions capable of dealingeffectively with both the old and the new in their appropriate setting has proved to be extremely difficult.

117. Some quite substantial technology transfers did take place in the railways in the 1950s and 60s.The major change was the shift from steam to diesel and electric locomotives together with a shift fromthe old two axle 20 ton freight wagons providing a "light haul" service to the four axle 60 ton wagonswith vacuum braking systems providing a "medium haul" service. These innovations together withelectronic communications and signalling made it possible to run the fairly high density of mixedpassenger and "medium haul" freight operations required to keep up with a slow but steady growth indemand. These first generation technologies were absorbed and indigenized by the IR system ofmanufacturing and operations but had little negative impact on the size and distribution of the labor forceor the management. The capacity enhancement benefits accrued but not the labor saving benefits. Thiswas the origin of today's surplus rail labor force of about half a million workers.

118. Subsequent generations of vastly improved "heavy hau]" rail freight technologies have not beenabsorbed despite the saturation of the HDC rail system. The reasons for this are complex but the failureto do so is not questioned (Box 16).

Box 17: Stastion in Rail Technolo2V

"The fifteen year long stagnation of the Indian Railways during the period 1965-80 was the resultof a faltering pace of modemization initiated in the decades.of its glory, the 1950s and early 1960sby the introduction of dieselization, 25 kv AC electrification, high track loading density, bogie BOXwagons and the like. Although a number of new technologies like concrete sleepers, mechanizedilaying of rail panels, route relay interlocking, microwave communication, and merry-go-round: system for bulk movement of coal were commissioned, yet many of the technologies introducedstagnated for want of upgradation. What little was done was piecemeal without inter-disciplinaryand systems approach towards a well-defined mission or goal and without due coordination withindustry to ensure compliance with requisite standards of quaity control."

Source: Planning Group on Technology Progression on Railways: Group Report, GOI, Planningcommission, June 1987, p. 21.

119. Several interacting factors are operating that have precluded the steady improvement of railtransport technology. The most important of these are: (i) the rapid expansion of road transport

69. This is because hand labor cannot compact base and sub base material of roads to the densities required for highfrequency heavy axle loads. Nor can hand labor consistendy finish pavement to a uniform smoothness and density.It must be done with machinery. And, machinery intensive road construction is subject to scale economies. Thismeans that the small scale labor intensive work of the past must be displaced by large scale machine intensive effortsfor the HDC system of the present and future. It does not, however, necessarily mean the wholesale abandonmentof the old technology for the very extensive low traffic density system.

F

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technology, (ii) the inadvertent shift towards a passenger dominant rail operation, (iii) the erosion of thecross subsidy mechanism, (iv) the fears of organized rail labor, and (v) the management intensive natureof new technology in its introduction and subsequent operation. All of these factors then interacted ina general environment of import restrictions and the desire for self sufficiency.

120. The rapid expansion of road transport "took the pressure off" rail in that LCL traffic was rapidlydiverted to road, allowing the more homogenous bulk movements by unit trains. The increased physicalinteraction between numerous relatively high speed passenger and low speed freight operations has,however, precluded the adoption of heavy haul freight technologies to serve the bulk movements.' Thisin turn has restricted the ability of IR to efficiently haul the profitable bulk freight that is crosssubsidizing the money losing passenger operations thereby hurting the ability of IR to generate the profitsnecessary to modernize. The financial problem is further exacerbated by rail labor's (and Parliamentary)resistance to all attempts at realizing the labor saving dimension of technological change. Finally, veryfrequent changes of senior rail management that must preside over the introduction and subsequentoperation of new technologies precludes intensive and sustained management input to the process. Theeasy capacity gains from modern rail technology in the 50s and 60s that required few changes in trainoperating policies, labor deployment and management practices have been used up. Future gains willaccrue only with major changes in all three areas.

121. For road transport technological stagnation was less obvious because of the rapid increases inoutput. There has, however, been a failure to introduce more fuel efficient, less polluting, low tareweight trucks with heavy haul multiple axles - the exact equivalent of the locomotive and rolling stockproblem of the railway. Given the great concern expressed continuously by government planners overthe need for energy efficiency and pollution control it is difficult to understand the lack of change intrucking technology in the last twenty years. Instead, the workhorse of the Indian trucking fleet hasalways been and remains a rigid two axle Mercedes design of 1960s vintage (Box 18).

122. As in the case. of the railroads, the reasons are complex, interacting and by no means irrational.They include (i) oligopolistic truck production units, (ii) low diesel fuel prices and low labor costs, (iii)extreme overloading of single axles, (iv) perverse government taxes and regulations, and (v) extremelycongested urban streets. Even though the Indian market for trucks is now very large only one privatefirm accounts for 72 percent of the commercial truck market with the second place firm accounting fora 27 percent share. This market structure has evolved from very strict government quantitative controlson production levels in the 1970s. Without competition there was no need for technological innovation.Very low diesel fuel prices and low labor costs also favored small fuel-inefficient units whereas theopposite trends in Europe led to large fuel-efficient units. Probably the greatest explanatory factor,however, is that the allowable 10.2 ton payload of the single axle truck can easily be increased by 40percent with minimal changes in the truck body and suspension. While this has a catastrophic impact onthe pavement it is financially beneficial to the shipper and operator. The same degree of overloading isnot possible on multiple axle vehicles (MAVs) so that nonenforcement of axle load restrictions cancelsout any potential financial benefits associated with MAVs. The one place where MAVs are indispensableis in hauling the standard ISO container but customs regulations and high bonding requirementsdiscourage these movements by private haulers on the roads, thus removing a major potential demand

70. This point is made persuasively in: Planning Group on Technoloev Progression on Railways: GrouD Reort, GOI,Planning commission, June 1987. See Appendix m 'Heavy Haul Freight Trains", pp. 238-243.

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for MAVs from the market. A number of other taxes and regulations favor the single axle truck overthe MAV. Finally, there is the mundane fact that trucking terminals are typically in the most congestedareas of cities and that turning and maneuvering in these areas is extremely difficult for large units.

123. Efficient trucking technology will be introduced and used in India when the perverse system offinancial incentives is corrected. Higher diesel fuel prices will surely come in the long term as will freemovement of containers in bond over the roads. The big unknown is the effective control of truckoverloading and the construction of MAV friendly toll expressways with weighing taking place at tollentrances.

Box 1S: Indian Truckin Tecmologv

The most frequently used tnick in india, the two-axle rigid TELCO SE 1210 has the followingun;desirable characteristics; (i) a tare weight of 8.0 tons compared to a gross fully loaded weight0of6.2 tons when a tare weight of 6.0 tons is possibleand desirable, (ii) low-power to weight ratiosof 3.8 to 5.0 hp per ton compared to a desirable minimum of 6.0, (iii) excessively high enginespeeds, (iv) engines with high specific weights, (v) manifold and combustion chambers which arefiuel inefficient and highly polluting (vi) crash type transmissions with inappropriate ratios, and (vii)obsolete suspension, brakes, wheel equipent, body idesign and components.

LSource:. lnia: Poliw issues in Roa Transport, Report No. 8057-IN, The World Bank: October i

:6, 1989, pp. 1546.

124. More serious in the long term is the failure to introduce new technologies in the design,engineering and construction of the HDC roads. The current design, prequalification, tendering,supervision, and construction technologies for main highways in the state PWDs are as obsolete as thevehicle fleet. The main reasons for failure to change are (i) lack of incentives for PWD management,(ii) confusion over the appropriate use of the dual technologies in road building, (iii) an effective ban onequipment imports and (iv) an effective ban on foreign participation.

125. There is no linkage between output and the reward system for PWD engineers. Regularpromotion of the managerial cadre is based on seniority, entrance examination grades and correct inputprocessing such that there are no "mistakes" on the record. If it takes ten years to build a road insteadof three or four years it makes little difference to anyone provided the input processing rules arefollowed. Despite the saturation of the HDC links there is no sense of urgency. When this attitude islinked with prequalification standards that allow firms with no machine-intensive experience and littlefinancial backing to compete for numerous small contracts with the few domestic, experienced, machine-intensive contractors under contract documents that make no distinction between mechanized and handlabor output specifications and put almost all risk on the contractor under direct PWD supervision, it isnot difficult to see why the actual construction process can quickly degenerate into a series ofmisunderstandings, financial crises and conflicts that tie up expensive equipment, shut down jobs and notinfrequently end up in the courts. There, good lawyers rather than good engineers are required andjudges finally make decisions rather than road planners. Serious, well-organized, machine-intensive, roadcontractors cannot thrive in such an environment. On the other hand, labor contractors with little or no

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equipment or financial assets who have received the mobilization payments are at much less risk and mayeven profit from an environment where little actual construction takes place.

126. Road building equipment is manufactured in India but usually under monopoly conditions whichlead to poor quality and no after sales service. Importing dependable high quality equipment is madeadministratively difficult, time consuming and costly. The result is that machine intensive constructionis more difficult, time consuming and costly than need be.7' The desire for self sufficiency inmanufacturing has imposed big costs on the road building industry.

127. Finally, the desire for autarky in road building has led to an unwillingness to transfer HDC roaddesign and building technology by allowing foreign firms to compete or form effective joint ventures inIndia. If the rules favor small labor intensive jobs where delays and long construction periods are thenorm and litigation is frequent there is little danger of competition from foreign engineers andcontractors. The environment that would encourage a vigorous competitive domestic HDC road buildingindustry is the same one that would allow competition from foreign firms. The rules of the game needto be transparent for all the HDC participants and there has to be some value on and reward for buildinggood roads rapidly. This, together with a large and dependable flow of work, would quickly bring forththe combination of foreign and domestic expertise that could begin to address the problem of main roadsaturation.

128. In summary, India needs modern engineers to design modern roads to be built to specificationby modem capital intensive road contractors. Modern Multiple Axle Vehicles (MAVs) are needed tooperate over the new MAV friendly roads with lighter axle loads and more fuel efficient engines. Indianrailways is still operating fuel inefficient diesel locomotives of a 1960 design vintage out of a system ofworkshops and depots based on steam technology. Indian ports are still being served by first and secondgeneration container ships because of the low level of containerization of Indian cargoes and the lowservice levels in ports. The message is the same: take advantage of the proven off-the-shelf technologyinstead of trying to provide the costly R&D for domestic modernization - it is what all other successfuleconomies in the region have done.

Energy, the Environment, and Other Externalities

129. The transport sector in 1990 was the second largest consumer of commercial energy (22 percentof total) after industrial users (53 percent). Transport, however, was the largest consumer of petroleumbased energy (43 percent).' And, petroleum imports in 1990 were about 22 percent of the value ofimports and expected to rise to 30 percent of imports by the year 2000.73 For balance of paymentsreasons, therefore, great emphasis has been put on energy saving in the petroleum users category. Thishas been pursued through the traditional import substitution route rather then the end use efficiency route.The idea was to increase domestic production of petroleum and to shift where ever possible frompetroleum based power to coal based power.

71. See: Road Construction Industry Inception Report, GOI, MOST, Asian Development Bank, October 1991.

72. Enerey Indicators of Developine Member Countries of Asian development Bank, ADB, Manila, July 1992, pp.184and 193.

73. Countrv Strateev Paper India, October 12, 1993,

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130. With railways under government control it was possible to mandate the shift out of energy-inefficient steam power into diesel and electric power. The shift out of steam was made for other reasonsas well as energy saving and diesel locomotives dominated the new technology despite the electrificationof about 10,000 km of the most heavily travelled rail routes. Today about 45 percent of rail passengertraffic and 60 percent of rail freight traffic move by diesel power with 29 and 39 percent respectivelymoving under coal-based electric power. About 18 percent of passengers and one percent of freightcontinues to move by steam. However, with rail traffic a minority and declining share of the total theseshifts in rail technology have had relatively little impact on energy use in India. All of the energy use(coal, diesel, and electricity) of India Rail accounts for only 4.3 percent of commercial energyproduction. This means about 18 percent of commnercial energy consumption takes place in road transport(urban and intercity). The big energy saving transport policy would have been to keep as much freighttraffic as possible on rail because of its low energy intensity per ton-km. But, this would have requireda major improvement in rail freight service quality to avoid the shift to trucking and this was notforthcoming as it would have required major changes in priorities and operational policies. It was farless threatening to electrify the main lines and continue with business as usual (Box 19).

131. The greatest potential for energy saving in the transport sector now and in the future is on theroad side and this has not yet been pursued effectively because government mandates, which have themost political support, are not effective and pricing incentives, which are the most effective, have nopolitical support. Probably the biggest single impetus that could be given to fuel efficient road transportwould be raising fuel prices by earmarking a substantial new tax on diesel fuel for construction andmaintenance of a road system with smoother pavements and more capacity. This would help solve theroad finance problem, encourage fuel efficiency in engine design and tare weight reduction and reducerolling friction and congestion-induced speed changes. The 40 percent plus returns on these investmentshave a substantial fuel saving component in the benefit stream. In India the price of a liter of gasolineis about US$ 0.60 whilst that of a liter of diesel fuel is about US$ 0.20. The OECD average price ofgasoline in 1993 was about the same as India but the OECD price of diesel was about US$ 0.45. InJapan, the current price of gasoline is about US$ 1.11 per liter while diesel sells for US$ 0.66 per liter.Raising the price of diesel fuel in India to the OECD level of US$ 0.4514 cents per liter would generateadditional annual revenues of about US$ 325 million - a substantial sum when compared with the US$1.6 billion per year currently spent for construction and maintenance of the state and national roadnetwork and the bare minimum US$ 2.5 bi]lion required.

132. Fuel taxes are the easiest and most efficient to collect. If the increment in fuel taxes is earmarkedfor road funds there is also less taxpayer resistance since the funds are to benefit the road user directly.Fuel taxes currently account for only 21 percent of road user charges in India. This is one of the lowestuser charge shares of road fuel taxation of any petroleum importing country. A fuel tax earmarked fora road fund already exists in India but the amounts are insignificant. The legal and administrativeprincipal is, however, already in place and this would be a good starting place for expanding and refiningthe concept.

74. Taken from: A Survey of Asia's Energy Prices, Technical Paper No. 248, Asia Technical Department Series, TheWorld Bank, 1994. OECD prices are much lower than European prices because of the weighted average effect of thelow USA prices.

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Box 19: The Railway Electrification Initiative

Indian Railways began electrifying their main routes in the late 1950s but progress was slow untilthe late 1970s when the commissioning of routes began to accelerate. By 1992 about 10,000 routekilometers (RKM) of the double track high volume routes had been energized. While feasibilitystudies had been carried out initially, no attempt was ever made to see if the projected benefits ofelectrification has actually accrued at the timing and levels assumed in the studies. The popularassumption was that electrification was "modern" and saved energy and foreign exchange andtherefore deserved to be the centerpiece of modemization and technology transfer in the railways.

In 1984 the Bank made a loan to help finance 3000 RKM of electrification. Ten years later in 1994Bank staff prepared a Project Completion Report (PCR) which among other things revisited the

-economic analysis for two of the electrified sections, Jhansi-Itarsi (381 RKM) and Balharshah-Vijaywada (454 RKM). The Internal Rate of Return (IRR) of the Jhansi-Itarsi section dropped fromthe originally projected 23 percent to 9 percent while that of the Balharshah-Vijaywada sectiondropped from 41 percent to 2 percent. The reasons for the poor results were: (i) the long delayin comnpletion, (ii) the switch from diesel to electric on the energized sections has been slow andpartial, (iii) the 6000 HP locomotives assumed in the economic analysis were never acquired, (iv)train operations with electric locomotives have been such that neither the operational nor the laborsaving benefits expected are likely to accrue, and (iv) international oil prices collapsed in 1986 anddomestic electric power costs increased steadily.

On the foreign exchange side the results were almost certainly negative in that the railways usedscarce and valuable uninterrupted electric power that was denied to industry - forcing industrialusers to provide costly and inefficient backup diesel generators.

With modern fuel efficient diesel locomotives, there may be no energy savings to electrification atall. The real and urgent benefit of electrification of double track mixed passenger and freightoperations in India is in the expansion of track capacity on congested routes and this comes fromthe superior acceleration, speed, maintenance cost and locomotive availability of electric traction.But, to get these benefits requires near optimal train operations and state of the art locomotives,neither of which transpired.

Sources: Proiect Completion ReDort India Electrification and Workshop Modernization Project Ln221-0, The World Bank, Draft March 1995 and Railways and Energy, Working Paper No. 634, TheWorld Bank, 1984.

133. Transport is a major contributor to environmental pollution in that it requires the burning of fossilfuels to produce its 22 percent share of commercial energy. When the results of this combustion areconcentrated in urban areas where the polluted air is breathed, then the public health impact can besubstantial. As an example, the city of Varanasi with a population of about one million depends on acombination of mostly privately owned gasoline and diesel driven vehicles for freight and passengertransport. In 1991 gasoline driven two and three wheel vehicles generated about 60 percent of COemissions in Varanasi while diesel driven trucks and buses accounted for only 30 percent. The two and

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three wheelers also generated 78 percent of lead emissions. The diesel driven trucks and buses howevergenerated 97 percent of NO emissions and 83 percent of particulates." All of this has led to an ambientair quality in Varanasi that far exceeds the standard laid down by the World Health Organization.

134. In the megacity of Bombay, data on ambient air quality indicate that the annual averageconcentrations of S02 and NO meet the WHO guidelines and CPCB standards; whereas concentrationsof suspended particulate matter (SPM) do not. However, peak concentrations of all three pollutantsexceed the regulatory standards by between 100 and 500 percent.76 Transport is said to account forabout 75 percent of the total air emissions. Unlike Varanasi, Bombay does have an effective publictransport system. Almost 80 percent of passenger trips are provided by public transport (44 percent bybus and 36 percent by suburban rail). The problem now is that the quality and coverage of publictransport in Bombay is poor and getting worse while the private motor vehicle population is growingrapidly."

135. The long term implications for India are daunting if the trends of the recent past are to continue.In the last ten years the number of motorized vehicles has grown at a rate of about 13 percent per annum.The growth of two-wheeled motorized vehicles (with the polluting two stroke engine) has been the fastestat about 17 percent per annum. One recent forecast indicates that by the year 2000 two-wheelers willaccount for 82 percent of the motorized vehicle fleet.7" This trend has been accompanied by a dramaticshift from public to private vehicular transport. The reasons for this are similar to the shift from railfreight to road freight services i.e. public transport (though extremely cheap) is of poor quality andcoverage and the true costs of private transport (especially congestion and pollution) are not reflected inits price to the individual. Thus, the CO and lead emissions in Varanasi and Bombay will get muchworse as the urbanization trend continues and petrol driven vehicles using lead additives increase rapidly.

136. Goverrunent initiatives have been limited to mandated emission standards for CO emissions forpetrol driven vehicles and smoke density standards for diesel driven vehicles. The lead content of petrolwas to have been reduced from 560 mg per liter to 150 mg by 1993 but this deadline has now beenextended to 1995. This is a very modest beginning compared to the efforts of other countries in Asiaespecially when the doubtful potential for actually monitoring and enforcing the standards in India isconsidered.79 This is so despite the fact that environmental understanding and awareness in India is

75. Assessment of Transportation Growth in Asia and its Effects on Enerlv Usage. Environment and Traffic Congestion -Case Study: Varanasi, India, Interim Report, National transportation Planning and Research Center, Delhi, February

1992, Table 4.4, p. 4-13.

76. Study on Environmental Management Strategy and Action Plan for Bombay Metropolitan Region: Options for Action,Government of Maharashtra, September 1993.

77. An attempt to rectify this situation is being made with the preparation of the proposed Second Bombay Urban Transport

Project (BUTP 11) which will have a major urban rail component as well as pollution reducing traffic engineering anddemand management. A long term plan has been prepared with the help of international consultants financed by a

Japan Grant.

78. Based on information in: Urban Transport in India, by K. Dharmarajan, Ministry of Urban Development, Delhi.

October 1990.

79. See: Urban Transport and the Environment in the Asia-Pacific Region, The World bank, June 15, 1991.

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generally high and Bombay is one of the five major cities of Asia to participate in the UNDP-World Banksponsored Metropolitan Environmental Improvement Program (MEIP).'

137. The basic reasons for lack of action are rooted in the lack of effectiveness of government emissionmandates and imnplementation and the lack of public support for non emission control policies. Amongthese latter are: (i) internalizing the externalities of private motorized vehicle use by charging much morefor polluting fuels, charging for parking in congested areas and charging for access to congested areasat peak periods; and (ii) enhancing the quality and coverage of public transport by charging more for agreater variety of services, making use of exclusive bus lanes, removing encroachments from streets, andby providing pedestrian and bicyclist amenities in the form of unencroached footpaths, bicycle lanes andunderpasses."

138. With unleaded gasoline soon to be introduced in India it is desirable that, as an incentive, it beless costly than leaded gasoline. One way to achieve this is to keep the unleaded gasoline at the currentleaded level and raise the tax on leaded fuel.' A five cent tax on leaded fuel would raise about US$38 millions annually. This would be a modest beginning to a pollution disincentive that would be verydifficult to criticize. If earmarked for the state and national road funds there would be even lessopposition.

139. The other transnort related externalities with long term implications are public safety andinvoluntary resettlement. Roads in India are dangerous by developed country standards with an annualfatal accident rate of about 2.65 deaths per 1000 registered vehicles. This compares to a range of .15(Japan) to .38 (France) in developed countries a factor between 18 and 8. The generic reasons are poorroads, mixed traffic, unsafe vehicles, poor driving habits, lack of safety belts and helmets, pooremergency services and lack of police enforcement. The results are about 60,000 fatalities per year, anannual accident cost estimated at 0.5 percent of GDP and an unquantifiable amount of human suffering.

140. The World Health Organization (WHO) now sees road accidents as a major public health problemof epidemic proportions in developing countries with an annual cost to these economies from 0.5 to 2.0percent of GDP. The biggest initial need in most countries is for the development of a data base that willallow analysts to understand where the greatest danger to the public lies and where the most cost effectiveinterventions can be taken. Without this sort of data and analyses, it is necessary to fall back on thegeneric initiatives of engineering, education and enforcement (the three Es). The Indian data indicate thatabout 70 percent of Indian road accidents arise from driver failure. From this it would follow that thepriority should be in training, screening and certifying bus (and truck) drivers. However, poorengineering of roads, absence of pedestrian amenities and mechanical failures can easily be construed asdriver failure unless the data collectors are carefully trained. Moreover, the general failure to enforcetraffic laws in India is not even considered as a factor since it is not specific to the individual accidentbut a part of the overall environment.

80. This program was set up in 1989 to support and learn from the various environmental management efforts of Asia'slarge rapidly-growing metropolitan areas. The other four cities are Beijing, Colombo, Jakarta, and Manila.

81. For a generally instructive treatment of all but the public transport enhancement options see: Air Pollution from MotorVehicles: Issues and Options for Developing Countries, The World Bank, April 1992.

82. Singapore has used this mechanism for encouraging the use of lead free gasoline.

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141. A peculiar characteristic of Indian road accident data is that accident rates are low compared tomost developing countries while fatality rates are high. Thus, the official Indian accident rate is said tobe 13.8 per thousand registered vehicles in India, which compares favorably with 11.8 in the USA and10.9 in the UK. However the Indian fatality rate figures are twelve times those of the USA and the UK.One obvious potential explanation is that non fatal accidents in India are systematically under reported.The other noteworthy characteristic of the Indian accident (and fatality) rate figures is that they are saidto have declined by about 50 percent in the period 1981-91. Such an extraordinary trend is either dueto extraordinary actions taken by the public authorities or there is something seriously amiss with thenumbers and how they are collected. This gets back to the need for a reliable data base with good qualitycontrol.

142. Private (and public) intercity bus operations will need to be regulated to promote competition thatis safe for the public. Competition that takes the form of reckless and unsafe bus operation is notdesirable and this concern is frequently used as the justification for maintaining public bus monopolies.The argument is that while most public bus monopolies lose money and do not necessarily provide goodservice they are safer than competitive private operators. One of the major roles of the new state publicregulatory agencies that oversee private sector road transport operations should clearly be in the area ofsafety. This will require a substantial shift in the emphasis of public authorities from that of providingthe services directly to that of making it safe and varying in quality, price and levels of service. It isthe logical and necessary direction to move in a reforming state economy - very similar to the newdirections at the national level with airline reforms. r

143. Domestic air services in India have recently been rated one of the two most dangerous in theworld by the International Airline Passenger Association. The Indian air transport service experiencesfatal accident rates ten times that of the rest of the world. The causes are said to be unsafe airports andpoor infrastructure.

144. The railways by contrast have passenger fatalities due to train accidents of only 100 per yeardespite the fact that they account for approximately 16 percent of passenger kilometers nationwide. Thenumber of rail passenger fatalities are much larger however if non train accident fatalities are considered.The Bombay suburban services alone are estimated to have about 1000 fatalities annually due to falls fromcrowded trains and platforms and passengers making unauthorized crossing of tracks. Nevertheless, inaddition to being more benign environmentally, rail transport is clearly the safest mode of passengertransport in the country (for raifpassengers).

145. It is extremely difficult to provide any new infrastructure in India without displacing individualbusinesses or residences. The resulting involuntarv resettlement is an external cost associated with theprovision of transport services to the extent that the individuals displaced suffer a net loss in income orassets. Beyond the quantifiable costs of involuntary resettlement there may be a host of other associatedcosts (Box 20).

146. By far the most difficult area for involuntary resettlement in the transport sector is that of urbantransport - especially road transport. Roads and streets take up about 12 percent of the urban space inBombay - well below the 18-24 percent accepted as standard by some urban planners. Road space is ata premium and the competition is not only with vehicles but also pedestrians and commercialencroachments. Any attempt at improving the flow of road vehicles in, through or around urban areasquickly encounters the constraint of land acquisition from individuals who have legal rights as well as

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Box 20: The Potential Impact of Involuntarv Resettlement

Production systems may be dismantled and productive assets and income sources lost. People maybe relocated to environments where their productive skills may be less applicable and thecompetition for resources greater. Community structures and social networks may be weakened,kin groups dispersed and cultural identity, traditional authority and the potential for mutual helpdiminished.

Source: Involuntary Resettlement, Operational Directive 4.30, The World Bank, June 1990.

those who are squatters without legal title. In a political, legal and administrative environment wherepublic footpaths cannot be cleared of illegal encroachments that drive pedestrians into traffic lanes, aneffective land acquisition and resettlement system cannot be assumed as part of an attempt to invest inpublic road and street improvements.

147. The second most difficult area for involuntary resettlement in the transport sector is in theimprovement of intercity roads in the HDC corridors. Existing two lane roads are difficult to widen tofour lanes because of strip development and illegal encroachments. Four lane toll expressways in newlocations avoid the strip development and illegal squatter problem but will inevitably require large stripsof agricultural land that cannot be replaced in a country as densely populated (currently about 260 peopleper sq km) as India is. So serious is this constraint that the long term form of the Indian main highwaysystem could easily be a dense system of high quality two lane roads on existing right of wayincorporating not only the existing National Highway System but also the parallel links of the State andMajor District Road System. This would be a second best solution in terms of efficiency and safety butit may be the only way of proceeding.83

148. Current land acquisition procedures in India generally follow a two phase procedure. Phase oneinvolves the normal administrative procedures associated with public acquisition of land under eminentdomain. Civil servants decide the market value of land in making the cash awards. In doing so thepublic budget constraint and potential criticism by auditors of too generous awards ensures that thepayment is too little. The second phase then takes place in the courts where a judge eventually awardsa supplemental amount. The procedures are unfair to those who cannot afford the legal proceedings andtake up a great deal of time and resources.'

83. Recent experience with the preparation of the Haryana States Road Project and that of Andhra Pradesh has revealedthat many State roads are as heavily trafficked as the National Highways and that much of this traffic is diverted fromthe main intercity routes. The upgrading and densification of the two lane network is already proceeding though itis not an explicit national strategy.

84. One of the reasons for the preference for small, labor intensive road contracts is that the large machine-intensive roadcontractor frequently cannot be given access to the entire site because of land acquisition problems. As a result, hisequipment cannot be used effectively and litigation ensues when the delays impose costs.

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149. The modes least affected by this problem are ports and railways. As the shift from breakbulk tocontainers proceeds in ports a great deal of former general cargo quay space becomes available as doesthe old space intensive warehousing. Most ports can be modernized within the existing land confines.The problems come when improvements in access - particularly road access - are required to ports thatare surrounded by urban areas. Since railways are already limited access divided express ways withinpartially fenced right-of-ways, they have the least problem with strip development and capacity expansionthrough land acquisition. This is because modern signalling, rolling stock and locomotives can easilydouble the capacity of existing rail lines without requiring more land. Indeed, modernization of railoperations will generally lead to rendering much rail-owned land redundant as the old steam-based systemof workshops is modernized and consolidated, marshaling yards are abandoned and stations closed down.The existing meter gauge system, much of which is redundant, is also a potential source of trouble freeland acquisition for the railroads in that select segments may be incorporated into the existing broad gauge rsystem after conversion.

150. In summary, energy, environmental, public safety and involuntary relocation considerations allmitigate against rapid and effective expansion of the currently dominant road transport mode - especiallyin urban areas. Railroads are by far the least energy intensive and polluting mode as well as the safestand least demanding of land for expansion of capacity. All four of these long term constraints will favorthe rail mode if intercity passenger traffic pays its way, the urban tax base allows the financing ofsuburban and urban rail improvements, and rail management and labor will accept the labor saving and rmanagement intensiveness implications of technological improvements. L

VII. THE INTERNATIONAL EXPERIENCE WITH TRANSPORT SECTOR REFORM

151. As the previous two sections indicate, there are powerful economic, demographic andtechnological forces operating on the transport sector that will, in the long run, effect major changes.The purpose of this section is to demonstrate how similar forces have led to sector reforms in othereconomies. The reform scenarios are given for the United States, Chile and Mexico since all threecountries have substantially different geographic, economic and political environments.85 Yet,recognizable patterns of reform are discernable. These patterns plus the vocabulary developed in derivingthem are essential in speculating on what the Indian experience is likely to be.'

85. There are a multitude of international experiences with transport sector reform some of which are comprehensive suchas the UK and New Zealand and some of which are partial such as Japan, Germany, France, Canada, Sweden andArgentina. The experiences cited herein are selected because of their potential relevance for India and because ofspace constraints.

86. The definition of the term 'transport sector reform" is not precise but is generally associated with economic liberalismand involves one or all of the following initiatives: (i) the privatization of a state owned enterprise (SOE) operatingin the sector, (ii) the privatization of ancillary services provided by SOEs, (iii) the awarding of concessions to run thesector-related infrastructure and (iv) the deregulation and subsequent reregulation of the sector under more marketoriented rules.

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The US Experience

152. The wisdom, from an economic point of view, of extensive government regulation andinvolvement in the transport industry was first questioned systematically in the United States during the1950s. Even though the US Government was still passing regulatory legislature such as the 1958Transport Act, various studies were published putting into question the existing transport sector regulatoryframework. In 1959, "The Economics of Competition in the Transportation Industries Study" waspublished, with the following conclusions:

(i) technological, demographic, structural and political changes were making transport sectoractivities intrinsically more competitive;

(ii) the growing degree of competition in the transport sector made government regulationof the industry increasingly cumbersome leading to the poor allocation of resourceswithin the industry; and

(iii) cross-subsidization between profitable and non-profitable transport activities within firmsincreasingly threatened the viability of the whole enterprise. A case-in-point was therailway industry, where non-profitable passenger services placed an increasing burden onmore profitable freight operations, thereby jeopardizing the very existence of the wholeindustry.

153. The erosion of the railway cross subsidy mechanism from freight to passenger traffic was soadvanced by the late 1960s that the US Congress took on the burden of intercity passenger services ofthe railroads by creating the National Railroad Passenger Corporation (AMTRAK) in 1971. It was toolate to help the Penn Central Railroad which entered bankruptcy in 1970. Congress had to take over thePenn Central by setting up a wholly owned corporation (CONRAIL). Both of these organizations showedlarge and growing losses, making explicit the costs of government regulation that had previously beenburied in the accounts of the privately owned railroads. Serious deregulation in the US then started withpartial nationalization of the rail system and the appearance of the costs of regulation on the governmentbooks.

154. One inspiration (beyond the unacceptable financial drain) for taking the next steps in deregulationof surface transport was the success of the 1978 Airline Deregulation Act: it eliminated all capacity, entryand pricing regulations from the domestic airline industry; ushering in an era of free-for-all competitionwithin the industry with substantially lower fares for the consumer. The only regulations that remainedin force were the ones regarding all safety related aspects of the industry and these, the record shows,have been effective.

155. In 1980, the US Congress passed the landmark Staggers Act and the Motor Carrier Act;effectively reversing 100 years of government intervention and regulation in railways and trucking. TheBus Regulatory Reform Act of 1982, completed the deregulation of the US surface and air transportindustry by eliminating route, entry and capacity regulations in the inter-city bus industry.

S7. 'The Economics of Competition in the Transortation Industry, by J. Meyer, J. Kain, and M. Wohl, HarvardUniversity Press, Cambridge Mass. 1959.

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156. Thus, the US, with substantial deregulation of the railway, trucking, intercity bus and air-transportindustries, provided a powerful role model for other countries considering transport sector reform. Ittook about ten years to effect these reformns in a political system where the various vested interests werewell represented at the national level. The initial impulse to reform was brought on by a financial crisisthat threatened to engulf the whole rail industry and where failure to deal with the problem would leadto large government subsidies. The reform move was then supported by consumer groups wanting lowerair fares and those with an ideological preference for a private sector market-oriented solution. This inturn received the intellectual and analytical support of important elements of the academic community.In the end the reform forces prevailed over the unions and other who benefitted from governmentcontrols.' Subsequent attempts at measuring the effects of reforming airlines, trucking and railroadsin the US yield savings in the area of US$ 40 billions per year about .7 percent of GDP.'

The Experience of Chile

157. The Chilean experience with transport sector reform is interesting because it has been in placethe longest of any developing country, was even more comprehensive and the results better documentedthan that undertaken in the US. The origins of the Chilean transport sector reforms were, unlike thoseof the US, rooted in a massive attempt at reform of the Chilean economy by a military government thatsought in 1973 to reestablish macroeconomic balances, stabilize prices and policies and promote high andstable economic growth. One of the means of doing so was the use of market incentives and the relatedprivatization of the large number of money losing state owned enterprises (SOEs). Another major support reffort was the adoption of a trade oriented growth model to displace the earlier import substitution model.A related objective was the reduction in the political power of organized labor.90 Thus, transport sectorreforms were linked directly to a larger macro economic and political reform effort.

158. The Chilean State Railway (EFE) was an early target in that receipts covered only 42 percent ofexpenditures and there was a large redundant labor force. The major cost savings was to be had inreducing wage costs and the reduction of labor was the main feature of the reform process. From a peakof 27000 employees in 1973, employment levels at EFE fell to 6800 in 1990, a reduction of 75% in 17years. In the process EFE was reorganized into three operating companies (Southern Railway, NorthernRailway, and the Arica-La Paz Railway). All direct government subsidies (except for the pension fund)were phased out by 1980.

159. Trucking tariffs and entry were deregulated in 1976 and this led in the short run to oversupplyof capacity, rate competition and trucking industry business failures which also put a great deal ofpressure on the reforming railway.

88. For a good treatment of the US experience see: 'Regulatory Reform of Transport' by Thomas G. Moore and 'TheEvolution of Railroad Regulation in the United States' by Louis Thompson in: Regulatorv Reform in Transport -SomeRecent Experiences, The World Bank, 1993.

89. World Development Report 1994, The World Bank, Washington, D.C., p. 57.

90. Privatization in Chile - An Economic Aopraisal, by D. Hachette and R. Luders, International Center for EconomicGrowth, ICS Press, San Francisco, 1993.

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160. Ports and shipping were prime candidates for reform because they were seen as potentialbottlenecks to the expansion of foreign trade. Law 18032 passed in 1981 terminated vessel and landsidecargo handling monopolies as well as the distinction between those activities. On-shore operations wherereformed and private companies were permitted to enter all on-shore activities with the exception ofcustoms and warehouse operations. On-ship work practices where changed through the abolition of thehighly restrictive system of work permits, union referrals, national level collective bargaining andrestrictive work rules. As in the case of the railways, employment at public ports was severely cut froma peak of 5257 in 1973 down to 1372 in 1988, a reduction of 74% in personnel levels.

161. In Chile the landlord port concept has been adopted and it is expected that all new developmentin port infrastructure will be financed by the private sector. The port system has been able to adjust toshifts in trade patterns and shipping technologies providing a much improved services to the countriestrade sector. The operating ratio improved dramatically during the 1980's from 1 in 1980 to .5 in 1989.

162. Chile's cargo reservation rule of 1956, which reserved a 50% share to Chilean flagged ships onexternal trades, was changed to one of reciprocity. All Chilean shipping companies were granted equalaccess to the coastal and external trades and the cargos that fell under the reserved rule provisions couldnot be charged more than prevailing international market rates. Restrictions on out-flagging vessels werelifted. Coastal shipping was partially deregulated by allowing foreign flagged ships to take cargoes abovea certain tonnage.

163. The characteristics of the Chilean merchant fleet improved dramatically after deregulation. Newor young ships were introduced, and the technical composition of the fleet improved to better cater to theneeds of the trade sector. More bulk and container capacity was provided and there was a shift towardsmultipurpose and reefer ships. The aggregate share of Chile's national companies in freight revenue fromChile's exports and imports after deregulation was, if anything, somewhat higher than the revenue shareof the national flag had been before deregulation. The larger Chilean shipping companies have enteredthe port services market, and new destinations where added to serve new emerging markets.

164. Air transport reform in Chile began in 1978 when the Chilean government adopted a domestic"open skies" air transport policy which included free entry, freedom to set tariffs, and no restrictionsconcerning: equipment, destinations, capacity offered, or frequency of service. However, on theinternational transport segment of the industry is still regulated by bilateral treaties between Chile andother countries.

165. LAN-Chile, Chile's official flag carrier, was privatized in 1989 with the sale of 51 % of its sharesto a Chilean company called ICAROSON for US$ 42.3 million. Subsequently, ICAROSON sold a 30%stake in LAN-Chile to the Scandinavian Air System for US$ 25 million introducing foreign participationin the national flag carrier. In 1993 the Chilean government has decided to sell another 25% of itsremaining share holding in LAN-Chile to Ansett of Australia giving effective control of LAN-Chile toforeign investors.

166. LADECO has become the second airline of Chile and has expanded aggressively in theinternational markets. It has also expanded and modernized its fleet in order to offer a competitive servicein competition to LAN Chile and foreign carriers serving Chile. LADECO's entry into international airservices with a modern fleet of aircraft enabled Chilean airlines to maintain their share of internationaltraffic to and from Chile despite increased international competition.

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167. After LAN-Chile was privatized it was thoroughly restructured resulting in sharp cuts in personnellevels from 5000 to 700. Furthermore from a technical point of view it modernized its aircraft fleet andwas the first airline in Latin America to introduce non-stop-over-the-water flights to Europe using Boeing767 200ERs. LAN Chile's financial and operational performance has improved dramatically

168. Private Chilean carriers surpassed LAN Chile in domestic passengers and freight traffic after thegovernment introduced its domestic "open sky" policies. Due to increased competition domestic andinternational airline fares have decreased. Freight cargo capacity constraints have decreased helping Chileto become a major exporter of off-season fruits to markets in the U.S. and Europe.

169. The least satisfying results in the transport sector reform effort in Chile have been in the urbanareas. Urban bus reforms were effected and these led to large fare increases and a fall in ridership.Today a poor family in Santiago is estimated to spend up to 20 percent of its income on urban transport.In urban areas the important externalities of congestion, air pollution and indirectly subsidized automobiletransport are not easily handled by the market. The parallel effort in telecommunications reform alsoexposed weaknesses in the regulatory regime that was to set the rules for the private sector participants.The important message here is that careful reregulation against private sector monopolistic behavior isas important as the deregulation that precedes it.

170. The Chilean experience with transport and telecommunications sector reform reads like a textbookcase when it is extracted from the very large number of economic reforms undertaken in that country Fsince 1973. It is important to recognize, however, that these reforms where not undertaken in acomprehensive and coordinated manner from a reforming ministry of transport. They evolved over atwenty year period in response to opportunity, high level support, politics, mistakes and lessons learned,much of the direction coming from a relatively small group of technocrats outside the ministry oftransport.

The Mexican Experience

171. The Mexican experience with transport reform is linked to the larger macro economic reformsthe caine about because of seven years of economic stagnation between 1981 and 1988.9' The decisionto "open" the Mexican economy to the world trading system was similar to that taken in Chile in 1975and the success of the Chilean experiment was there to be seen. The old system of import substitutionand economic isolation was clearly not working and, after eight years of declining standards of living,support for major reforms was emerging. The big difference with the Mexican initiative, other than thefact that it began over ten years after that of Chile, was the importance of the physical and economiclinkages with the US to the north. The proposed North America Free Trade Association (NAFTA) wasto be the main initiative in opening the Mexican economy to foreign competition and export markets.

172. Political and technocratic power in the civilian govermnent of Mexico was much more dispersedthan in the case of Chile's military government and comprehensive reform of the sector was even lessfeasible. In Mexico it was a reforming Ministry of Commerce with support from the highest levels thatbegan the sector reforms recognizing that expanded trade would put new pressures on the transport andcommunications system.

91. The principal source of the Mexican experience was a report prepared in 1994 for the Bank by Dr. Felipe Ochoa,Ochoa and Associates, Mexico City.

I--

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173. The bankruptcy and subsequent restructuring of Aeromexico in 1988 was the beginning. Beforethen the airline industry had been dominated both at the domestic and international level by the duopolycomposed of Mexicana and Aeromexico. In parallel with the bankruptcy, down-scaling and privatizationof Aeromexico, the government decided to liberalize the domestic air transport regime and in 1989 alsoMexicana was privatized. In 1991 the Mexican Government decided to liberalize domestic air-transportprices.

174. New trunk airlines such as TAESA and Aero California have sprung up providing increasedcompetition to Aeromexico and Mexicana. TAESA has equipped itself with a modern fleet of aircraftwhich includes top of the line A320s offering better service to domestic passengers. The recentinvestment by Mexicana of over US$ 50 million in Aero Peru shows the importance placed by Mexicanain becoming a major regional player in the face of increased competition in the region from internationalcarriers. The overall financial results of the privatization of both airlines have been somewhatdisappointing due to increased competition both domestic and international. To improve the balance sheetof the two airlines it seems that they will trade major share holdings making them effectively one airline.The main beneficiaries have been the users who now have lower fares and better services.

175. Airport ancillary services have been subject to continued devolution and privatization. Recentlythe government has announced a program to promote private capital investment for airport expansion inselected terminals and is studying an all out privatization program for the near future.

176. The most spectacular part of the Mexican transport reform process was the highly publicizedtaking over of the main port of Veracruz by the government and the subsequent dismissal of the highlyunionized work force of the port. The impact of the government takeover was immediate and substantial:traffic doubled from 1989 to 1991 and productivity in container handling improved by 329% from sevencontainers per hour in 1989 to 30 containers per hour in 1991. By taking on the port union at Veracruzthe government wanted to send a clear message that the interests of a privileged elite (the port union)would not stand in the way of the modernization of the Mexican economy.

177. Port tariffs, which are uniform throughout Mexico, have subsequently been simplified and maybe deregulated. Stevedoring companies have lost monopoly rights in port areas meaning that shippingcompanies cannot be forced to do business with them. Private ports have been given the right to handlecargoes for third parties. And, in 1992 an extensive port privatization program was announced forimplementation in 1993 with the objective of shifting the capital cost of improving port facilities fromthe central government budget to the private sector.

178. Reform in the trucking industry was to prepare for increased competition from US trucking firmsonce NAFTA came into effect. The trucking industry carries close to 80% of the country's freight whileover 95 % of all passengers using public inter-urban transport use the buses. To move a ton of cargo over30 km would cost between US$4.50-6.00 in Mexico compared to only US$3.00-3.50 for the samemovement in the US. In 1989 the Mexican trucking industry, which had been organized into regionalcartels with government regulated tariffs, was deregulated. Numerous bureaucratic restrictions wereeliminated, entry and exit was free and tariffs were no longer subject to rate caps and minimums.Trucking rates on the Laredo-Mexico City corridor dropped by more than 40 percent. It is estimated thatthe efficiency gains to the economy caused by the deregulation of the trucking industry will amount toover US$ 500 million annually primarily caused by better service, lower effective rates (average declinesof about 25%), increased flexibility, and higher quality.

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179. Perhaps the most innovative initiative in Mexico was the attempt to attract private capital to theconstruction of roads that the government could not afford. A very ambitious plan of allowing the privatesector to finance, construct and build 5,300 km of access-controlled toll roads between 1989 and 1994was adopted. The investment to complete the toll-road construction program was estimated at US$ 9.8billion with most of the money to come from the Mexican private sector (primarily the banking sectorand construction companies).' The concessions are awarded to consortiums usually composed of banksand construction companies on the basis of the bid with the shortest concession period. Minimum trafficlevels are guaranteed and if the traffic volumes are below the projccted levels the concession period islengthened. To overcome the constitutional ban that prohibits the tolling of roads where there is no freealternative the whole program was geared towards the construction of new toll roads.

180. The program was initially deemed a qualified success with over 1,000 k1m of toll roadsconstructed by the end of 1991. The cost to the government has been kept to, at the most, 25% of thetotal with the government providing primarily the right-of-way. Subsequently, another 4000 km of roadswas built by the end of 1994. Problems have arisen with unrealistically high tolls (25 US cents per kmin some cases) due to the nature of the concessions which are awarded on the basis of the bid with theshortest concession time. Also, projected guaranteed traffic flows have not always materialized leadingto discussions on the lengthening of concessions and in some cases the merging of losing projects withprofitable ones.

181. The current evidence is that the public financial constraint was not relaxed at all except in atemporal sense. Many of the big state-owned banks that were directed to finance the Mexican projectsare now experiencing, partly as a result of nonviable toll road projects, extreme financial distress that willlikely have to be relieved by public funds. It is through this route also that foreign funds are finally beingobtained for Mexican toll road investments that have turned sour. Private bankers, foreign and domestic,were not willing to risk their funds on most of these projects and, in retrospect, they were wise not todo so.

182. The reform of Mexican Railways (FNM) has reflected the unique role played by Mexican raillabor unions in the history and politics of the country. While it was politically possible to take on aregional port union at Vera Cruz it has not been feasible to take on the nationwide union of rail workerswhich played an important role in the Mexican revolution and subsequent national political arrangements.This is so even though rail plays a relatively marginal role in the transport sector today. Should theNAFTA reforms proceed, however, long haul cross border trade could make the rail mode an importantfacilitator to economic activity.

183. The process for dealing with FNM in the economic reforms has been described as "peripheralprivatization". The idea is to progressively privatize as many services as possible with the coreinfrastructure remaining in state hands. Labor reduction is to take place over a longer period throughattrition and voluntary retirement incentives.

92. It is important to recognize that such an approach to road finance does not increase the pool of private savings - itmerely shifts them from one type of lower yielding investment to roads. This means that the profitability of theinvestments must be very high. In the Mexican case the officially acceptable level of profitability is about 20 percent.In fact when the profits of the construction company are considered together with the financial gains of the publicoffering of stock subsequent to the risky period of construction and actual traffic flows, the financial returns may beas high as 40 percent.

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184. Private companies were allowed to lease space on freight trains and then to rent out the leasedspace to shipping companies and the construction of inter-modal terminals by the private sector is beingencouraged. The tariff structure was modified in order to encourage private operators to use their ownwagons or to lease wagons from specialized firms. This is in order to increase the percentage of privatelyowned wagons from 20% to a level closer to the U.S. which is 70%. However, the ownership of thelocomotives remains in the hands of FNM in order to comply with a constitutional provision which statesthat FNM can be the only operator of locomotives in the country. New capital construction and heavymaintenance of the network is being contracted out to private firms and the contracting out of themaintenance of the rolling stock is being evaluated. The transfer of branch lines to the private sector isbeing studied but will not go through unless the constitution is modified.

185. Agreements have been reached with US railroads that allow double stacked container trains tomove directly between Mexico City and points north (eg Chicago), providing extraordinarily efficientlong haul services for high value manufactured goods. Mexico is the only developing country to takeadvantage of the economies of double stack container operations.

186. Rail fares have not yet been deregulated but they have been restructured to eliminate crosssubsidies and reflect costs and market forces. The successful reduction of personnel levels within FNMof approximately 30% will certainly reduce the gap in labor productivity between U.S. and Mexicanrailroads.

187. The recent financial crisis in Mexico has led the government to abandon the gradual approach torail reform and to approach the matter directly. As so often happens with reform initiatives the first stepsare tentative and then, once the idea is accepted that changes can be made, the pace of reform accelerates.A comprehensive rail reform program is now being prepared for implementation in 1995.

188. The most extraordinary feature of the Mexican transport sector reform has been the fact that mostof it has taken place in the short space of five years. While more remains to be done, especially in therail subsector and in government regulatory capacity, the major steps have been taken and the resultsmade manifest.

VIII. A PLAUSIBLE REFORM SCENARIO FOR INDIA

189. The economic reforms are to raise the long term annual growth rate of the Indian economy fromthe 3.5-4.0 percent of the past to 4.5-6.0 percent. The historic elasticity of demand for freight transportwith respect to GNP growth was about 1.3. If we assume this is to decline to about 1.2 for the long termfuture, the average annual compound rate of growth (AACRG) for intercity freight traffic would varybetween 5.4 and 7.2 percent. The historic elasticity of demand for passenger traffic with respect to GNPwas about 1.9 which reflects today's high per capita consumption levels of passenger transport in India.If we assume this declines to about 1.7 in the long term future then the AACRG for intercity passengertraffic would vary between 7.7 and 10.2 percent. This implies a doubling of freight transport outputevery 10 to 13 years and a doubling of passenger transport output every 7 to 10 years. For foreign tradeflows the expectation is an AACRG of 9 to 10 percent for the short and medium term eventuallydeclining to 4 to 6 percent in the long term. Foreign trade flows would then double in about 8 years.

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190. These are formidable pressures to exert on a transport system that is currently saturated on theHDC network and the possibility arises that the capacity constraint of the transport system may serve asa constraint on overall economic growth. Similar fears exist for the electric power sector of the countryand it may well be that physical infrastructure rather than economic policies are the dominant and mostenduring constraints to rapid growth.

Progress to Date

191. It is because of these pressures that a considerable amount of reform has already taken place intransport in India or is in the process. By far the most important was the 1986 decision of the CentralGovernment to remove ceilings on the number of national trucking permits. The inability orunwillingness of the government to promote regional trucking cartels and rate making bureaus such asthose that existed in the US, Chile and Mexico makes India an early participant in the transportderegulation process. The privatization of intercity and some urban (eg Calcutta and Delhi) busoperations is also well advanced.

192. In 1989 another major step was taken when the Indian government proclaimed an "open skies"policy for air cargo services. This allowed foreign cargo airlines to provide services without the needfor reciprocity. This immediately relieved a constraint that was inhibiting high value Indian exports.This reflected the "open seas" policy that already existed for sea container services. Eighty five percentof Indian sea container movements now move in foreign bottoms at competitive rates and there is noshortage of shipping capacity. Both of these policies were pragmatic and enlightened reactions to seriousconstraints and were promulgated before the economic reform movement which began in 1991.

193. Perhaps the most dramatic recent initiative has been the introduction of private sector domesticscheduled air services in competition with Indian Airlines. It is now estimated that 45 percent of thedomestic air transport market has been taken over by private airline operations and the improvements inservice quality have been substantial. Introduction of domestic airline competition was a prominentfeature of the transport sector reform efforts in the U.S., Chile and Mexico. The symbolic importanceof this initiative is as great as its' practical import as it shows in a very high profile way how effectiveappropriately regulated private participation can be in virtually all the transport modes.

194. Ports and shipping have also been major areas for recent reform activity. The Multi-ModalTransport Act was passed in an attempt to provide an enabling environment for international door-to-doorshipments. Because of deficiencies in the wording of the act, however, it is not yet serving its purposeand amendments will be required. The private investments in petroleum products terminals have alreadybeen described as have several marginal moves towards commercial behavior on the part of the variousport authorities. The single step that will signal substantial reform will be the long-awaited tendering forthe right of a private firm to rehabilitate, operate and maintain the container terminal at JNPT port inNew Bombay. This will raise port reforms into the same class as those taken in airlines, trucking andbus operations.

195. Very desirable changes were recently (1993) made in the Merchant Shipping Act which have beeninstrumental in opening private capital markets to Indian vessel owners and operators. The amendmentsin the Act (made through a Presidential order) have created a situation whereby foreign interests can setup companies that own and operate ships under the Indian flag. They can also acquire up to 51 percentof shares of existing Indian carriers. Under the revisions it is now possible for companies to acquire

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ships (except oil tankers and off-shore supply vessels) without going through the previous protractedapproval procedures. Restrictions on ship registrations and mortgage procedures have also been removed.Shipping companies have also been allowed to keep a substantial proportion of their revenue earningsabroad. Under these reforns a number of Indian shipping companies have been successful in tapping theEuro Currency markets through general deposit receipts and bond issues. What this demonstrates is thatsome restrictive laws and regulations can be changed fairly rapidly and, just as important, there is a rapidentrepreneurial response to these changes.

196. On the road side the first toll expressway in India is being designed now between Bombay andVadodora and foreign engineering firms are involved in the design. A more recent initiative has comeat the state level: in preparing the Andhera Pradesh, Tamil Nadu, Gujrat, Rajastan and Orissa StatesRoad Project the state governments and PWDs have agreed to foreign participation in design andsupervision as well as contracts and contract documents designed to attract foreign contractorsindependently or as joint ventures.

197. The new National Highway Authority (NHA) at the Central Government level could be theinstitution that leads the way to relaxing the highway engineering/construction constraint in India. TheNHA is being set up to preside over the 34,000 km National Highway System which is generally the mostdensely utilized. The idea is to gradually take back from the state PWDs the responsibility for NationalHighway construction and maintenance that the Central government relinquished in the past through anagency arrangement with the state PWDs. All new National Highway projects and toll roads would beundertaken by a very lean NHA without the in-house engineering staff of the state PWDs. They wouldmake use of the "modem" private engineering and construction sector together with internationallyaccepted arrangements for prequalification, tendering and subsequent supervision under modern contractdocuments. The law bringing the NHA into existence was passed in 1988, but the Authority was nevermade operational. Currently a study is being completed which will specify precisely the nature and extentof the new organization and how it will operate. Some of the key appointments have been mnade and itremains to be seen how effective the new organization will be. This is a major legal and administrativemove on the part of the Central government that will do much to determine the future of roadconstruction in India.

198. A new initiative that is receiving much attention in the MOST is the promotion of build-operate-transfer (BOT) toll road schemes in which the government supplies the right-of-way and private foreignand domestic investors do the rest. Currently the plan is to complete 11,000 km of such four-lane tollroads in twenty years. The new NHA would presumably preside over the planning, tendering,negotiation and award of these projects. The concept is attractive but the international experience withsuch large undertakings has not been good. The Mexican experience with 5,000 km in five years is byfar the most ambitious that has been effected and the financial fallout from the state owned banks thatsupported the schemes (foreign support was not forthcoming) has been negative and widespread. Not allof the schemes were failures but enough were to raise serious questions as to how "easy" this was as asolution to the problem of inadequate public finance for roads.

199. A less ambitious attempt to make the concept work in India is going forward with various bridgesand urban bypasses. The work MOST is doing to set forth guidelines for the larger schemes and toprovide the enabling legal environment will be useful for the smaller schemes as well. It is a worthwhileeffort but probably should not be leaned on too heavily for "solving" the problem of rapid expansion ofroad capacity in the HDC corridors.

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200. The major on-going initiative on the rail side has been the rapid expansion of container operationsto and from the major ports by the Container Corporation (CONCOR). Related to this initiative has beenthe first ever service agreement entered into by IR with cash penalties for failure and rewards for success.The other important element of this initiative has been the agreement of the Customs Department to ceaseusing unrealistic bonding requirements and unclear regulations to block container movements by road.

201. Another major rail initiative has been the recent agreement between the Minister of Railways andthe Chief Minister of the State of Maharashtra to share the investment costs in Bombay urban rail 50-50and to share the net revenues of rail station air rights and other rail land conmmercial development inBombay on a prearranged basis. For the first time ever, a State government has recognized itsresponsibility for urban rail passenger services.

202. A more ambitious program for the railways is the recently advertised BOLT scheme. Theacronym BOLT stands for build-own-lease-transfer. The idea is to allow private consortiums to build(or rebuild) a needed facility such as an electrified line or communication link for railway use in exchangefor an annual lease payment which will cease after 20 years when the "ownership" reverts to IR. Thisis a mechanism that has been successfully used in Germany to fund highway, rail and waterway projectsassociated with the reunification effort. It is an off balance sheet form of financing that appeals to IRmanagers in that the asset does not enter their capital-at-charge total and they are able to judge as bestthat technically acceptable offer which asks for the lowest lease payment.

r203. A lease contract is, however, a claim on future revenue streams and the private investor in ahighly specialized and immobile railway infrastructure investment must judge the net revenue earningpower of IR in the future. That may not be good because of a fast growing and money losing passengerservice, a large collection of money losing low density lines, a labor force of about 1.7 million whosesalaries have been rising faster than their productivities and a surplus labor force of about 0.5 million.

204. The BOLT schemes have been advertised recently and expressions of interest requested. No draftlegal documents for a generic scheme are yet available and preparations have not advanced as far as thosein the roads subsector with the BOT initiative. The scheme has worked in Germany because thegovernment is making or guaranteeing the lease payments. In India, the success of this scheme willdepend much more on the financial condition of the railways rather than an enabling legal andadministrative environment. The chief obstacle to this initiative, therefore, is an unreformed railway thathas a very uncertain financial future.

205. In sunmmary, a great deal of transport sector reform has already been accomplished in India withprivate: trUcking, bus, rail container, shipping and airline oRerations. India has already set up a legal _and administrative environment in which private domestic entrepreneurs are willing to finance, maintainand operate extremely mobile pieces of capital equipment - trucks, buses, flatcars, ships and airplanes -in a competitive environment. What has not yet transpired is the development of effective regulatory

authorities to promote safe, non damaging and non polluting operation of this equipment and to promoteprice competition as well as service competition.

206. It is on the fixed infrastructure side where the least progress has been made and the private sectorhas been virtually absent. Thus, the roads, ports, airports and rail lines used by private trucks, buses,

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ships, air planes and flat cars are all provided and maintained by the public sector and are rapidlybecoming physical bottle necks that will not allow the efficient use of the generally adequate privatelyfinanced and operated equipment.

The Unigue Elements of the Indian System

207. It is important to recognize that India does not have an authoritarian government that will allowit to make Chile-like reforms by decree. Furthermore, the power of individual state governments is verygreat in some matters especially in the areas of roads and urban transport. This makes the US experiencewith politically negotiated reforms within a democratic environment more relevant for India than theexperience of Mexico - and especially Chile.

208. Terrain, haul distances, and the distribution of population and economic activity in India allsupport a much larger potential role for railways than in most countries - certainly more so than inmountainous Chile and Mexico. Further, the energy, environmental and public safety advantages of therail mode vis a vis roads gives it a decided economic, if not financial, advantage in densely populatedurban and suburban areas. The extreme congestion on Indian roads, the limited implementation capacityof the domestic road engineering and construction industry, and severe problems with land acquisitionfor roads is another set of circumstances unique to India that gives the rail mode, with its potential forrapid expansion of intercity freight hauling capacity, the potential for releasing the impending freighthauling constraint to reform-induced economic growth. For all of these reasons, comprehensive reformof the railroads in India is at least as important as it was in the US and probably more so. This is notthe case in most countries where the rail mode has been marginalized and rail reform can be delayedwithout severe economic consequences.

209. A major center of resistance to reform in the transport sector is public sector employees from thelowest paid labor to the highest paid managers. All derive their income, economic security and statusfrom their positions in government. The huge amount of redundant labor in the railways, airlines, statebus monopolies, state PWDs, the ports and the customs service are all aware of the uncertainty thatreform and market forces would bring. There is also an influential group of intellectuals in the academiccommunity who, for ideological reasons, oppose the materialistic philosophy lying behind market orienteddecision making which is seen to place commercial concerns over social and environmental concerns.There are also large private interests that have benefitted from high import tariffs and governmentsponsored control of competition such as truck, bus and construction equipment manufacturers. Thus,organized labor, government employees, some large private industry and a portion of the academiccommunity form the chief opposition to economic liberalization in India. A similar situation obtainedin Mexico.

210. Those in favor of transport reform in India are the upper class consumers of poor quality airpassenger transport and the middle class consumers of poor quality urban and intercity public transport.Industries with an export orientation and smaller industries previously excluded from competition byrestricted entry also favor change. Finally, there is another group of intellectuals and business leadersthat for both ideological and practical reasons see that economic liberalization is likely to be beneficialto the economy and society in the longer run, believing that an economy so organized can continuouslyincorporate demographic and technological change into the national production function and grow faster.

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Likely Areas for Further TransRort Sector Reformn

211. The most likely areas for further transport reform in Indian are sea ports, airports, trucking andbus operations, in that order.

212. Port reform is at the interface between "easy" and "difficult". It is difficult because there are noupper class consumer elites wanting better service as is the case in air transport. It is easy because it isa central government subject with local or regional rather than national labor support. It is also relativelyuncomplicated technologically - making better use of a half dozen existing container facilities. Thepatently inefficient and costly labor practices in the ports are also an easy target. In the absence of adesire to make an Mexican-like example of restrictive port labor, the Chile experience with buying outport labor makes sense in that the numbers are relatively few (about 180,000 total), the buy outaffordable, and the subsequent solution of awarding operating franchises to the private sector well triedand tested. The results would certainly be dramatic with a doubling or tripling of container handling ratesas was the case in Vera Cruz in Mexico. The full benefits would not accrue immediately, however,unless customs procedures were reformed, containers could move inland under bond on private trucks,container depots were privatized and road and rail capacity inland could be provided. Ports are part ofthe intermodal chain and removing them as a bottleneck simply shifts the bottleneck elsewhere. Thislimited objective is, however, worthwhile in that the pressure for reform would focus on the newbottleneck. It is this indirect and subtle benefit that needs to be appreciated and exploited. Increasingly,as the process continues reforms will arise because of related changes elsewhere.

213. The successful deregulation of international air cargo and domestic air passenger services will leadto very large pressures on the Indian Airports Authority to expand and upgrade airport facilities. Thisshould not be difficult because there is an upper class elite support for safer airports and because theairport users are affluent and easily identified and charged for using the facilities. This sets the stage forthe commercialization and partial privatization of the major airports and the development of alandlord/coordinator role for the various airport authorities not unlike that envisioned for the sea portauthorities. The problem now is that all airports are under one central authority and the deeply rooteddesire to effect large cross subsidies between major hubs and rural landing strips will dominatediscussions. Progress in this area will depend much on the extent of decentralization and local initiativeallowed and external pressures from users - foreign and domestic.

214. Further deregulation and some reregulation in trucking is both feasible and desirable. At present,so-called "national" trucking permits allow transit across only five states and there are still locations inIndia where trucks are unloaded at a state border and reloaded for the rest of the journey. There is nolonger any justification for such measures as the railways no longer have much to lose from long haultrucking competition. Similar impediments to interstate commerce in India exist in the plethora of policeand border check posts and octroi posts. These are based on the desires of some state governments topreclude interstate movement of food grains without permits, and to collect a form of road toll for"foreign" trucks using state (rather than national) highways. Thus, long haul trucks attempting to avoidcongested national highways or simply taking a shortcut are stopped at the border by some states and atoll for state highway use extracted. From the point of view of economic efficiency the worst of theseimpediments are those that involve long delays either for inspection and/or negotiation. Unambiguousand "transparent' fees and tolls have the virtue of raising revenues and allowing the truckers to move onrapidly. This should be the objective of further reforms in trucking.

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215. The octroi tax is a tax by local governments on goods entering a city for sale. It is collected fromtruckers on entry into the city and is responsible fur many hours of detention and negotiation. Numerouscommissions have studied this "problem" over the years and all agree that it is a major impediment tothe free flow of goods. However, the revenue from this tax is so important to some municipalities thatits abolition would lead to the fiscal collapse of already over strained urban administrations. Theinstitution has, therefore, endured. In the very long term this problem will be solved with comprehensiveurban administration, financial and land reforms that allow "normal" urban public revenues from propertytaxes, sales taxes and user fees to underpin urban finances. Currently these hardly exist and octroirevenues figure heavily in the overall scheme of some cities. A more immediate feasible alternative foroctroi revenues would be the allocation of part of newly constituted state road funds fed by earmarkednew taxes on diesel fuel and leaded gasoline. The rationale for this institution has been set forth earlier.Fuel taxes have very low collection costs and avoidance rates if collected centrally and can be allocatedgeographically according to estimates of fuel sales or vehicle usage estimates.93 If tied to the abolitionof octroi, truckers would have much less reason to object to the new tax. As part of a comprehensivescheme to improve the financing of public roads the initiative would have a good chance of wide spreadpublic acceptance.

216. The reform in intercity bus operations is a "quiet" one in that it is taking place at the margin ofgrowth in the rural areas in response to the inability of most state governments to continue subsidizingmoney-losing state bus monopolies. The next step will be to make an explicit virtue out of this necessityby putting in place a proper regulatory environment and then gradually expanding the role of the privatesector within this environment. This would require state governments to admit that the private sectorparticipation was not simply a temporary expedient and was there to stay.'

The Difficult Areas for Reform

217. The most difficult areas for reform in the Indian transport sector are intercity roads (financingconstruction and maintenance) and railways. Urban road and rail transport constitutes a separate difficultreform category.

218. As automobile ownership increases in India there will be some upper class elite support for betterand safer roads as has been the case for air transport. If containers are allowed to move under low costbond on private multiple axle trucks this will generate another relatively affluent commercial pressuregroup for good roads. As long as the atomistic two axle truck industry dominates there will be littleorganized pressure for reform. The small truckers have no international experience or standards forcomparisons. And, they have no voice in matters concerning roads.

219. This lack of voice by those who pay in special taxes about three time the annual expenditures onroads is an anomaly that should be removed by a reform-minded government. The same goes for avoiceless private engineering and road construction industry. Many countries have instituted highway

93. Since 20 percent of road user revenues is generated by urban vehicle users, the case can be made that some of thisshould go to municipal authorities.

94. The Planning Commission is sending this message to the various state governments as part of their revenue sharingand allocation function.

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boards with considerable influence to bring together the planners, designers, constructors, maintainersand users into a forum that can guide or make recommendations concerning road finance, constructionand maintenance. When combined with a road fund designed to guarantee a given level of financialsupport from road users for road maintenance and construction, state highway boards can have a seriouspurpose. None of this is even being discussed in India and government highway engineers and politicianscontinue to monopolize, at the national and the state level, an arena in which a completely inadequateallocation from general revenues is programmed for poorly engineered, constructed and maintainedroads.95

220. The most likely break with this tradition will come at the central government level by makingoperational the National Highway Authority (NHA) and bypassing the state PWDs when improving theNational Highway System with multilateral and bilateral aid funds. Another approach will be to workdirectly with the more progressive state PWDs with large scale improvements in their State and MajorDistrict Road systems. The idea is to make a break with the tradition of small contractors supervised byPWD engineers taking many years to complete work appropriate only for low volume roads. It is alsothe quickest and most natural way modern administration, engineering, construction procedures andtechnologies can be transferred to domestic firms.

221. The "Mexican solution" of large scale toll concessions to consortiums of private road contractorsand bankers is not currently feasible (nor was the Mexican experience an unqualified success) becausea modern domestic road construction industry does not exist in India as it does in Mexico nor is therea domestic banking industry capable of large scale undertakings of this type. Furthermore, difficultieswith attempts at such undertakings with foreign firms in the power sector indicate that the build, operateand eventually transfer (BOT) approach to road building has very limited potential in India.' One ofthe obstacles to serious reform in the road subsector has been the misplaced hope that a "painless" BOTapproach would do the job. It is important that this hope be removed so that the more painful butfeasible approach of public toll authorities and downsized state PWDs governed by highway boardspresiding over user financed road funds be pursued.

222. The opposition by government engineers to PWD downsizing through privatization of highwayengineering services and the promotion of a sophisticated large scale mechanized road constructionindustry is already manifest and their fears understandable. However, given the huge backlog of workto be done, the large amount of multilateral financing available and the continued rapid growth of roadtraffic, there need be no serious fear of unemployment by PWD employees if some effort is made toinform them of the very great demand for experienced people in their field by an invigorated privatesector facing an almost endless demand for road building and maintenance services. All foreigncontractors and engineering firms will make maximum use of local skills and will pay well for them.A large amount of voluntary privatization and PWD downsizing will take place in this manner and therewill be a need to pay commensurate salaries to PWD engineers to keep them. The situation is not unlikethat obtaining in the telecommunications sector where the fears of organized labor and governmentemployees has, until now, slowed the progress of reforms despite the enormous employment growthpotential of a reformed subsector.

95. See: India: Road Planning and Budgeting - A Review, The World Bank, November 11, 1991.

96. There is scope for bridges and some urban bypasses and these should be pursued recognizing that they are a 'niche'operation and are unlikely to account for a substantial flow of funds into the road building sector.

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223. In the railways, the dominant consumer group with influence is that of rail passengers who wouldlike to have more and better services at the same or lower (preferably free) rates. This is a major reasonfor the lack of optimism for rapid and extensive reform of intercity rail services. It is the underpricedand track capacity consuming passenger service that now dominates rail operations, priorities andfinances. Reform implies reduction of stopping passenger trains in high density corridors, fare increasesfor express passenger services, the removal of all free travel provisions and a private sector managedincentive system to reduce "ticketless" travel. There is no one receptive to this message until economicreforms in the industrial and power sector allow commercial interests to have a voice in the relativeimportance of rail freight services. The AMTRAK solution used in the US in which the government tookover the money-losing intercity passenger service is not feasible. The government in India, through itsMinistry of Rail, already has the service and it is much larger than it was in the US - over half IR'soutput.

224. There is some hope for the devolution of the money-losing suburban passenger services to stateand local governments, as was done in the US but, initially, only in the case of Bombay where the uniquegeography and the huge volume of passengers makes fare box financing of operating costs feasible andwhere development of station air rights and other rail real estate can make a major contribution tofinancing investments in capacity expansion.

225. Another reason for lack of optimism in the rail subsector is the need for disinvestment anddownsizing of low density meter gauge sections and superfluous stations, yards and workshops throughoutthe system. The 1.7 million man nationwide labor force is aware of the findings of the 1990 manpowerstudy which estimates conservatively that 400,000 workers could be dispensed with without a negativeimpact on operations and indeed would improve operations in many areas. Unlike air transport, containermovements, telecommunications or roads, there is no obvious potential for rapid expansion of output thatcould serve as the solvent for labor concerns.

226. The onre possible exception to this statement is the potential for a much larger domestic railcontainer operation, especially urgent if the road expansion programn fails. The CONCOR initiative isrestricted to import-export flows and is still small scale and restricted by track capacity constraints. Thebig technological and service breakthrough could come in the form of double stack container trains whichhave 40 percent lower unit costs than the conventional single stack operations. This is the area wherethe looming intercity freight transport constraint could be most easily and efficiently relaxed. The Indianbroad gauge rail is particularly appropriate for double stack container operations and such trains can moveat the speed of passenger trains and, therefore, can be scheduled.' Unfortunately, the overheadcatenary for electric service on the main lines serves as a physical barrier as double stack operations werenever considered when the electrification was undertaken. There are, however, alternative nonelectrified routes between most major cities and the service could be provided rapidly if private sectorcontainer terminal and shipping operations were encouraged.98

97. Double stack container cars have been known to overturn in high winds. The width of the Indian broad gauge reducesthis risk to a minimum.

98. Some bridges with overhead obstructions would have to be replaced as was the case in the US. It is an obvious areafor CONCOR expansion and could be financed by the sale of shares. It would also be an appropriate time forCONCOR to purchase their own locomotives as well as specialized rolling stock.

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227. The other positive feature of the rail scene is the demonstrated professionalism of the operatingcadre of the railways in providing steadily growing, safe, low polluting, high density, mixed, passengerand freight services. Amongst management there is also a reasonably clear notion of what the "railwayproblem" is and how it might be dealt with as evidenced by the numerous reform-related studies carriedout in the last twenty years (Box 21). This latter characteristic of a self critical management cadre willingto do its own reform analysis is extremely unusual in the rail industry.

228. It is possible to speculate on a variety of desirable transitional and ultimate reforms of IR but allwould begin with the abolition of the ministerial form of control and the micro management of Parliamentand therein lies the problem. Such a change would have to come from the top and be approved byParliament. There is no evidence that anyone in Parliament (or rail management) favors such a changeand there is no experience anywhere with self induced public rail reform even by a self criticalmanagement facing a serious financial crisis.'

Box 21: Twenty Ye ofelf ;Critsm: by R;I Manaement

"Indian Railways have been looked at by more Committees, Groups and Commissions than .any;; .other activity in India, except perhaps banking; certainly more an the other communication6iisystems, the roadways, airways and telecommunications. The very repetitiveness of these exercises..iindicates the importance attached. to the Railways. Yet, the desire ifor improvement fappearsmnotlto:.0.have been matched by a desire to accept change and therefore there has been little action."'

Source: Report of the Committee to Study OrManizati2O Strutrand Management th aIndian Railways, Govt of India, March 1994. p. 5.

229. As in the case of the US, Mexico, Chile, Japan, Argentina, New Zealand and almost everywhereelse, the major force behind eventual rail reform in India is that of impending financial catastrophe.Financial projections associated with past trends of labor costs and freight and passenger traffic growthshow how rapidly the financial picture is degenerating (See Box 12). The erosion of the cross subsidymechanism from slow-growing, profitable, captive bulk freight traffic to faster growing, money-losingpassenger traffic has ended the ability of IR to bury the redundant labor and subsidized passenger servicesin the railway accounts. Increasingly it will appear explicitly in the official IR financial statistics andlorin the operating efficiency statistics which will reflect a declining quality of passenger and freight service.For rail reform, therefore, it is the reaction to financial crisis that will likely determine the direction of _change and the magnitude of financial losses that will determine the rapidity and extent of change. Theterm "change" is used herein instead of reform in that initial reactions to financial crisis will notnecessarily lead in the direction of desirable reformn.

99. While the Tandon Report recommnends the separation of rail ownership from management it does not recommend theabolition of the ministerial form of control. Rather it recommends the restructuring of the Board to reflect modernfunctional tasks and recommends a minirnum three year tenure for Board members.

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230. The most obvious reaction to financial crisis will be to increase already high freight rates tocaptive shippers - shifting the problem to the books of the coal industry and the electric power sectoramong others. The second reaction will be to avoid cutbacks in low return electrification and gaugeconversion projects by leasing essential rolling stock and locomotive replacement. Both of theseinitiatives are under way but cannot be construed as reforms. If financial crisis alone is to be the enginedriving change, the erratic stop-start experience of the US and Japan and the near twenty year tirneframes associated with them would be more relevant for India than the more abbreviated experience ofChile or Mexico where reform rather than change were pursued from the outset.

231. Under the more likely 'stop-start" scenario, the anachronism of the annual rail budget precedingthe national budget to Parliament would then continue for many years even in the face of a minority anddeclining share of national traffic, high freight tariffs, large deficits requiring public funds and poorwvice. The best hope for helping the rail mode to play a positive role in such a minimum reformenvironment would be to promote congestion reducing capacity expanding investments such as heavy haulfreight operations and double stack containers that would allow them to take as much pressure off theHDC road system as possible until the toll expressway system is in place. The private trucking and busindustry, with all its unpleasant externalities, would do the rest.

232. None of the national economic reforms considered to date in any sector have addressed a politicalproblem of the magnitude of that raised by the redundant facilities and labor force and inappropriatem1anagement structure of Indian Rail."°° The general problem of money-losing state enterprises, soclled sick industries and an appropriate exit (in the rail case selective down sizing) policy for industrieswith no financial feasibility are areas of national economic reform that have not yet been implemented.In this sense meaningful rail reform is very much tied to the larger question of meaningful reform ofstate-owned enterprises in general.

233. In the event that the second and more difficult phase of national economic reform were to proceedand the problem of SOEs was addressed then it is possible that a reform minded Ministry of Commerce,as in the case of Mexico, could address the national freight hauling constraint with a reform agenda andan appropriately expanded role for railways and roads. There is more than enough room for both modesin the transport sector in India but rail freight services will have the greatest difficulty in being allowedto fulfill its potential.

234. Urban transportation is generally subsumed under the rubric of urban planning in India and thisis largely the tradition of British town planning of the 1950s. Generally speaking it has been anineffective tradition in India, partly because the local governments have neither the authority nor theresources to implement the plans and partly because there is no provision for market forces to operateconstructively. Various State government entities have taken on the responsibility for land developmentin the urban areas and there has been little or no role for the private sector. Progress is slow and isinevitably overtaken and distorted by squatter settlements and rent seeking activity. There is little to bepositive about here except that the 74th Constitutional Amendment Act 1992 begins to recognize andaddress some of these deficiencies. In the meantime, urban transport, like urban housing and urban watersupply and sewerage, is in a state of continuous crisis.'10

100. The telecoms sector comes close but this sector reform is aided gready by the relatively small potential laborredundancy and the huge potential for immediate expansion plus the pressure for reform from consumers.

101. See: India Public ExDenditure Review - Infrastructure - Urban Sector, The World Bank, Draft, June 11, 1993.

- 70 -

235. Urban road and rail services is a difficult area for reform because of transport's linkage withdistorted land markets and the important role played by external economies and diseconomies. Themarket is not working when it comes to urban road congestion, pollution, the loss of amenity topedestrians and the costs of involuntary resettlement (R&R). Nor is there a functioning land and housingmarket for poor but employed residents - hence the plethora of illegal squatter settlements and the longcommutes from residence to work place."'

236. The costs of pollution and road congestion could be partially internalized by, among other things,higher prices for leaded fuel and higher prices for and controls on parking. Just clearing the footpathsof encroachments and not allowing curb lanes to be used for pedestrian ways and vehicle workshopswould greatly improve the availability and utilization of street space and the safety of pedestrians. Eventhe largest cities have completely inadequate traffic engineering staffs for planning and implementingparking controls, bus lanes and intersection improvements.

237. The suburban rail services of Indian Railways have inadvertently become urban rail systems inthe larger cities but, with the important exception of Bombay, this has not been recognized explicitly bythe State and local authorities. Without working agreements between the Rail Ministry and the variousurban planning groups it is difficult to take advantage of the large amount of rail right-of-way andpotential capacity in the urban rail systems.

Conclusion

238. A substantial amount of progress has been made with the first phase of transport sector reformin India in which the government has allowed the private sector to finance, operate and maintain in acompetitive environment the nation's fleet of buses, trucks, airplanes, and ships. The second phase ofreform involves the improved provision of physical infrastructure, ports, airports, rail capacity and, mostimportantly, roads. It is not difficult to construct a long and painful reform scenario for the road and,especially, the rail components of the second phase. At least the NHA initiative is taking place on theroad side. Nothing comparable is happening in the railways and this is disconcerting because the railmode is uniquely in a position to relieve the high density corridor capacity constraints in the short andmedium term.

239. The beneficiaries of reform are dispersed and those potentially injured by reform are well definedand generally in positions to impede change. However, this situation obtained in many other countriesthat have experienced successful reforms and, in retrospect, the major observation to be made is howquickly difficult reforms have transpired once the process began. Three years ago no one would havethought that domestic airline deregulation and competition would come to India any time soon. Yet, theprocess is well advanced, and the quality of service benefits already made manifest.

240. The great advantage that India has at this stage is the plethora of successful models of transportsector reform that now exist worldwide. There is no longer a need to proceed into the unknown for mostof the required initiatives. This factor plus the steady pressure of the long term forces identified in thispaper could conceivably make the process in India more orderly and less painful than has been the caseelsewhere.

102. In Bombay the average trip on urban rail is 24 km.

- 71 -Annex 1Page 1 of 2

ANNEX 1

SECTOR OUTPUT AND MODAL SPLIT ESTIMATES

1. One of the main messages in the text is how the rail dominant Indian transport sector of the 1950ssteadily lost market shares to road transport until, in the mid 1980s it became road dominant. At thesame time the rail output, which was freight dominant, shifted to a passenger dominant mix. While theinformation is reasonably precise for the railways, it is of necessity an estimate for roads, based largelyon the size and capacity of the bus and trucking fleets and measures of the annual utilization rate of thatcapacity. It is the purpose of this annex to set forth the sources and assumptions that were used in thereport.

2. There are two basic sources of information concerning road freight and passenger traffic and thesewere both prepared in the late 1980s. The first of these was produced for the Ministry of SurfaceTransport (MOST) by Consulting Engineering Services Ltd. in a 1987 report entitled Estimation of TotalRoad Transport Freight and Passenger Movement in India, hereinafter referred to as the "MOSTestimate". The second is a 1988 study prepared for the Planning Commission entitled PerspectivePlanninz for Transport Development - Re_ort of the Steering Committee, hereinafter referred to as the"PC estimate". Their estimates for 1985 are given in Table 1 below.'

Table 1

Road and Rail Modal Split Estimates for 1985

MOST PC AVERAGE

MODE BTKM BPKM BTKM BPKM BTKM BPKM

Rail 182 (43) 227 (20) 182 (53) 227 (23) 182 (48) 227 (21)Road 238 (57) 919 (80) 161 (47) 739 (77) 200 (52) 829 (79)

Total 420 (100) 1,146 (100) 343 (100) 966 (100) 382 (100) 1,056 (100)

3. The Planning Commission estimates for road freight and passenger traffic are considerably belowthose of the MOST estimates and it is not possible to ascertain why this is the case as the numericalassumptions concerning fleet capacity and utilization rates are not given in the sources. The MOSTestimates show that roads were carrying 57 percent of intercity freight ton-km and 80 percent of intercitypassenger-kIn in 1985 while the PC estimates show the numbers as 47 and 77 percent respectively.

1. BTKM refers to billions of ton kilometers while BPKM refers to billions of passenger kilometers.


4. For purposes of a working estimate the two sets of figures were averaged to show a 52-48 percentfreight split in favor of roads and a 79-21 percent passenger split in favor of roads in 1985. A fivepercent GDP growth rate was then used in connection with the historic ratios of growth rates (1.5 forfreight and 2.0 for passengers) to estimate total output in 1992. The actuals for rail freight and passengertraffic for 1992 were then deducted to estimate the road traffic for 1992. The results of this exercise areshown in Table 2.

Table 2

Road and Rail Modal Split Estimates for 1992

MODE FREIGHT BTKM PASSENGER BPKM

Rail 250 (39) 307 (15)Road 384 (61) 1,751 (85)

Total 634 (100) 2,058 (100)

5. By 1992 there can be little disagreement concerning the dominance of the road mode for bothintercity freight and passenger services. An independent estimate for the modal split in the high densitycorridors in 1991 for use in the expressway study confirms this statement.2 Freight and passenger flowson about 5071 kIm of main road and parallel rail links were compared. The average modal split in 1990for the seventeen links examined showed 42 percent of the freight on rail and 58 percent on road with43 percent of the passengers on rail and 57 percent on road. These statistics would tend to underestimatethe road share at the national level since, given the much larger road network, there are many placeswhere there is no rail alternative. The message, however, is clear - even when competing head to headin the high density corridors, the road mode dominates the intercity travel picture.

2. Development of a Lone-Term Plan for Exoresswavs in India, Final Report, GOI, MOST, October 1991, Table 4.14,p. 4-31.


ANNEX 2

INTERNATIONAL COMPARISONS OF RAILWAY PERFORMANCE

1. A good way to get some feeling for the nature of Indian Railways as a transportation enterpriseis to make some international comparisons. The attached table la does this in terms of size and outputfor three European, one Latin American, and one US railway as well as the rail system of China. Tablelb compares the productivities of the same rail systems. Figures 1, 2, and 3 give internationalcomparisons of freight and passenger tariffs corrected for purchasing power.

2. In terms of ReograDhic coverage, the broad gauge Indian rail system is a network of about 35,000Iam, roughly the size of the French system with an annual output of traffic units about four times that ofthe French system. The Indian broad gauge system serves 93 sq. km. per route km. This is comparableto the 90 sq km per route km for the system of China. The European systems are much denser, from9 sq km per route km in Germany to 40 sq km in Spain. The US Class I railroads are serving 46 sq kmper km of rail.

3. If the total traffic units in 1988 are divided by the length of the Indian broad gauge rail systemit yields a network productivitv figure of 12.6 million traffic units per route-km. This may be comparedwith 2.1 million in Spain and 3.7 million in Germnany. For US Conrail the figure rises to 7.1 million.China is in a class by itself with an incredible 24.7 million traffic units per route-km. This implies thatthe Indian network, is very heavily trafficked, compared to the European and US systems, but only halfthe overloaded system of China.

4. The best measure of wagon Droductivity is the net ton-km per annum for each ton of wagoncapacity. In India the figure is close to 24,000 ton-km. For the US Class I railroads it is about 12,000ton-km. For European railroads it varies between 5,000 and 7,000 ton-km. China Rail at about 54,000ton-kan is far ahead of all other railroads.'

5. For locomotive productivitv, the most accessible (though not the most appropriate) measure isto divide the number of annual traffic units (ton-km plus pass-km.) by the number of diesel and electriclocomotives. For India, the figure was 99 million. In Europe the figures varied between 18 million for

1. The low figure for the US Class I railroads as a group is due to the large number of specialized wagons owned byleasing firms and shippers - not the railroads. These wagons allow the U.S. Railroads to provide services andfrequencies that are not offered by the other railroads. The Burlington Northern in its coal operations is able toachieve wagon productivities in excess of 70.0 thousand ton-km per ton of wagon capacity, which probably representsthe upper boundary of physically achievable wagon utilization rates.

- 74 - Annex 2Page 2 of 8

Germany and 27 million for France while China was 217 million.2 Conrail achieved 55 million trafficunits per locomotive. After China, the Indians are getting the most output from their locomotives.

6. To compute the productivity of labor, a useful measure is to divide the annual traffic units by thetransportation labor force. In India the figure is a very low 329,000 traffic units per year per employee.This is comparable to France (538,000), Spain (435,00) and Germnany (398,000). In China it wasestimated to be 729,000 units per employee while the figure was over four million traffic units peremployee for Conrail. Conrail labor is in a class by itself being seven to ten times as productive as theEuropean and Asian systems.

7. Despite the low productivity of Indian labor, the cost of labor for IR is not yet the problem it isfor some railroads. The ratio of the wage bill to total revenue sheds some light on this matter. The ratiowas 90 percent in France, 126 percent in Germany and 125 percent in Spain. In the latter two cases totalrevenues are not enough to cover the wage bill. By contrast, in India, the wage bill was about 51 percentof revenues while that of China was only 23 percent. In Conrail the wage bill was about 40 percent ofrevenues. Thus, the US and Asian systems form a distinct cluster as do the European systems.

8. A rough estimate of the annual cost of a rail worker yields the following figures: $33,000 (US),$4,000 (Mexico), $1,700 (India), and $600 (China). This explains why China and India can have suchlow labor productivities and still have such a low wage bill compared to revenues. European wage costsof the same order as the US combined with Asian productivity levels explain the financial problems of rthe European systems.

9. Average revenue per freight ton-kan in India in 1991 (purchasing power adjusted) was about 6.1US cents (Figure 1). This compares with about 1.9 cents unit revenue for US Class I railways, 4.0 forChina railways and 5-7 cents for European railroads. Thus, the Indian revenue structure for freightoperations which should be close to the high density long haul US and Chinese operations are morecomparable to those of the low density short haul European operations. The reason for this, as can beseen below, is that freight profits are necessary to cover passenger losses.

10. Average revenue per passenger km in India for the same period was about 2.0 US cents - by farthe lowest in the world (Figure 2). This may be compared to 4.0 cents for China, 7-12 cents forEuropean railways and 11.5 cents for the US. The Indians charge about three times as much to movea ton one kilometer as they do to move a passenger one kilometer. The ratio of passenger unit rates tofreight unit rates (Figure 3) shows that with the exception of Sri Lanka, India has the lowest ratio in theworld at 32 percent. For China the figure is 152 percent, similar to the railroads of Europe.

11. A comparison of passenger revenue shares of total revenue and passenger traffic as a share oftotal output is revealing. The railways of France and Spain have become increasingly passenger railways.In 1987-88 rail passenger traffic in France was 55 percent of rail output and accounted for 59 percent ofrevenues. In Spain the equivalent figures were 58 percent passenger traffic and 64 percent passenger

2. The European productivity figures are overstated because a substantial amount of their passenger traffic is carried inmultiple unit passenger cars that do not require a separate locomotive. In the computation this MUV traffic is added -

to that carried by the locomotive fleet. The productivity figures for China and India are also overstated because thetraffic units in the numerator includes those pulled by steam locomotives but the denominator includes only the dieseland electric fleet. If the steam locomotives are included in the denominator then the locomotive productivity figuresfor India (based on 1985-86 figures) drops to 44 million traffic units while that of China (for 1987) drops to 97 million.

Annex 2Page 3 of 8

revenues. Germany at 41 percent passenger traffic and 50 percent passenger revenues was at theborderline. India with 53 percent passenger traffic and only 28 percent passenger revenues is a specialcase of a railway that is primarily passenger in terms of output and freight in terms of revenues,indicating the presence of a massive cross subsidy from freight to passenger operations. China, with 25percent passenger traffic and 21 percent passenger revenues remains a freight railway as does Mexicowith 12 percent passenger traffic but only 4 percent of revenue from passengers.

Table la

International Comparisons of Size and Output3

Passenger Passenger Avg. Labor'Railway Route Output4 Share Share Freight ForceCountry Km. Billion TU Output (%) Revenue Haul (Km) (1000)

Mexico 20,400 47.8 12 4 718 81

France 34,600 114.6 55 59 360 213

Germany 27,300 100.0 41 50 316 251

Spain 12,700 26.4 58 64 215 61

Conrail 17,900 127.3 729 31

India BG 35,000 442.0 53 28 698 1,500

China 53,000 1,311.7 25 21 701 1,800

3. The most important source for this information is the Intemational Rail Data Base maintained by the Transport Divisionof the Infrastructure and Urban Development Departmnent of the World Bank. Most of the non financial data employedherein (1988) is extracted from the October 31, 1991 print-out. The financial information (1987) is largely extractedfrom the July 2, 1990 print-out. The non financial data for Mexico are extracted, for the most part, from the FNMstatistical abstract 'Series Estadisticas FNM, 1990'.

4. TU is Traffic Units - the sum of ton-km and pass-km.

5. Adjustments had to be made to the labor force statistics of India and China to delete the industrial and constructionworkers in order to arrive at an estimate of the transportation workers. The Indian figures are for 1985-86 while thosefor China are for 1984. See: PPAR India: Railway Modernization and Maintenance Proiect, OED Report No. 7020,November 30, 1987, p. 7.

-76- Annex 2Page 4 of 8

Table lb

International Comparisons of Productivity

Railway/ TU (1000)/ TU (1000)16 TU (1000)/ Wages/'Coumtry Route-Km Locomotive Employee Revenues (%)

Mexico 2,343 27,440 587 85-45

France 3,312 26,863 538 90

Germany 3,663 18,051 398 126

Spain 2,079 19,144 125 125

Conrail 7,112 54,800 4,174 40

India 12,629 99,017 329 51

China 24,749 217,421 729 23

6. See footnote 23 of the text for qualifications.

7. The 85% figure for Mexico was for 1980; the 45% figure was for 1984. See: SAR Rail V, Annex 2, Table 1. p.70. It is not known to what extent the Chinese figure included income in-kind in the wage bill. This is a substantialelement of income for Chinese rail labor. However, the estimate of USS 600 per year for Chinese rail labor doesinclude an estimate of in-kind as well as cash income.


Figure 1.

International Rail Freight Rate Comparisons(US $ per ton-kilometer)8

India

C;hina;

Pak istan

Sri Lan ka ME:\\\\S\

Indonesia (1987)

Thailand (1990)

Turkey

Portugal

Korea

Greece

United Kingdom l

France _

Germany ;_ ._______________:

Japan

Canada (CP-1990) .

United State- s I

0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18

_ constant 1991 $ M internat'l $, PPP

8. Source: World Bank Rail Data Base


Figure 2.

Intemational Rail Passenger Fare Comparisons(US $ per passenger-kilometer)9

Ind ia

China

Pakistan

Sri Lanka

Indonesia (1987)

Thailand (1990)

Turkey

Portugal

Greece

United Kingdom

France

Germany _.Japan

Canada (CP-1990)

United States

0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16

constant 1991 $ @f internat'l $, PPP


Annex 2Page 7 of 8

Figure 3.

International Passenger Fare to Freight Rate Ratios(Ratio $ per passenger-kilometer to $ per ton-kilometer)

Sri Lanka 19.5

India 32.4;

Paklatan 33.8

Greece 34.3

Turkey 42.7

Indonesia 43

Thailand 03.8

Portugal 7

Korea 387.4

France 141.2

China 151.6

United Kingdom 180.2

Germany 104.2

Japan 1191.6

Canada 347.6

United States 625.i

0 100 200 300 400 500 600 700

in percent(Indonesia-1987; Thailand-1990;Canada-19 90)

- 80- Annex 2

Page 8 of 8

Figure 4.

Staff Cost as a Percent of Revenue 1980-1992'°

Percent60

503

401

30 _ _ _ _ 30~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

-201\

10:

O , ~~~~~~~~F l F I F F I e I

80 81 82 83 84 85 Be 87 88 89 90 91 92

Year

IndIa China e USA-Conrail



ANNEX 3

CONGESTION ON THE ROAD AND RAIL NETWORK

1. One of the main findings of the report is that key sections and corridors of the road and railnetworks are so congested that the road and track capacity of the system could serve as physicalconstraints on economic growth. The purpose of this annex is to support that statement with the actualevidence that exists about network capacity and utilization.

I. ROADS

Corridor Capacity and Saturation on Indian Roads in 1988

2. The best comprehensive information for a single year is found in a 1988 study by MOST.' In1988 a sample of sixty six, twenty-kilometer sections of the National and State Highway system wereexamined by the consultants. This sample constituted about one percent of the 137,000 km arterialnetwork. The actual traffic flows on these sections was measured as were the physical characteristics ofthe road section. From the latter the practical or design capacity of the road was estimated. This couldthen be compared with the actual and expected future traffic volumes to get some idea of how serious theproblem was in 1988 with the arterial network.

3. In an attempt to spread available resources as widely as possible, a great deal of single lane (3.75m wide carriageway) and one-and-a-half lane (5.5 m carriageway) pavements have been put in place onthe 105,000 km arterial system at the State level. Most of the 32,000 km National system is a full twolanes (7.0 m carriageway).

4. The consultants and the Central Roads Research Institute in Delhi (CRRI) modified the capacitystandards previously adopted for Indian roads by examining the actual distribution of hourly trafficvolumes throughout the day. An analysis of the peak hour flows was then used to arrive at flowcapacities in vehicles per hour over the three pavement widths in three different kinds of terrain (plain,rolling and hilly). These hourly capacities were then translated into daily capacities through the typicaldistributions of hourly volumes. The results are set forth in Table 1.

5. A single lane pavement has a practical capacity ranging between 1100 and 1600 vehicles per day.The one-and-a-half or intermediate lane roads vary between 3600 and 4800 vehicles per day. Thestandard two-lane road varies between 4,000 and 12,000 vehicles per day. These vehicle units are thesum of automobiles, buses and trucks and are not expressed in so called passenger car units (PCU).

1. Final Report on Vehicle Fleet Modernization, Volume 11, Highway Systems Study, Ministry of Surface Transport(Roads Wing), New Delhi, December 1988.


Table 1

Capacity Standards for Indian Roads(in buses, trucks and cars per day)

TERRAIN AND CURVATURE

PLAIN ROLLING HILLYRise & Fall: 0-15 rn/km Rise & Fall: 15-30 m/krm Rise & Fall above 30m/knI

Low High Low High Low High0-50 deg/ above 50 deg/ 0-100 deg/ above 100 deg/ 0-200 deg/km above 200

kirn n km km deg/km

Vehlh Vehld Vehlh Veh/d Veh/h Veh/d Veh/h Veh/d Veh/h Veh/d Veh/h Veh/d

Single Lane 100 1600 100 1600 90 1400 90 1400 90 1400 70 1100

Intermediate Lane 300 4800 290 4600 285 4500 280 4400 260 4100 225 3600

Two Lane 750 12000 630 10000 550 8800 500 8000 350 5600 250 4000

f iI , IR r-1 r---,_


6. If the capacity figures from the 66 sections of arterial roads are compared with the actual 1988flows, seven of the sample of 66 were operating at or in excess of the practical capacity. This impliesextreme congestion on eleven percent of the arterial system in 1988, assuming that the sample wasrepresentative of the system as a whole. With traffic growth rates of about seven percent per annum,four other sections of road would soon be at capacity. Thus, seventeen percent of the arterial system(about 23,000 Iam) was extremely congested and overdue for expansion in 1988.

7. On closer examination, five of the bottleneck sections (20 percent of the National highway sampleof 25 sections) were on the 32,000 km National system. Four of these were two-lane roads in rollingterrain with capacities and traffic of about 9000 vehicles per day. Only one was a two-lane road in theplains in which the 11,000 vehicles per day capacity was being approached.

8. Six of the bottleneck sections (15 percent of the State highway sample of 41 sections) were onthe 105,000 km State arterial system. Five of these were one-lane roads in the plains where the 1600vehicles per day capacity had been reached. The other bottleneck was a two-lane road in rolling terrain.

9. The general picture projected by the 66 samples examined is that the network as a whole in 1988was not uniforrnly saturated. Most of sections (83 percent) were operating far below their practicalcapacity and offered no major constraint (in a capacity sense) to intercity movement of goods andpassengers. However, the bottlenecks that did exist (seventeen percent) were clear and dramatic and inneed of immediate alleviation. At the national level in 1988, the task was to expand two lane roads tofour lane while at the state level the main task was to expand one lane roads to two lane.

1990 Data at the National Level

10. In 1990, MOST commissioned a study for a National Expressway System.2 The Nationalnetwork accounts for about 35 percent of intercity vehicle-kilometers while the combined National andState network accounts for about 75 percent. This is a statistic of extreme importance since most of thenation's commerce flows over the 160,000 kmn National and State system.

11. The highest volume National sections in 1990 were as follows in Table 2 in Buses (B), Trucks(T) and Cars (C) per day:

2. DeveloDment of a Long-Term Plan for Expresswavs in ndia, Final Report, GOI, MOST, October 1991.

- 84 - Annex 3

Page 4 of 7

Table 2

High Volume Sections of the National System in 1990(in Buses, Trucks and Cars per Day)

Stretch Length B T C Total Capacity

Km

Bombay-Thane 50 1,910 8,920 5,096 15,926 Four Lane

Karnal-Ambala 80 1,619 6,630 5,413 13,662 11,000

Delhi-Karnal 119 1,619 5,420 5,413 12,452 11,000

Surat-Vadadora 159 1,439 7,770 2,513 11,722 11,000

Vadadora-Ahmedabad 120 1,859 5,670 4,188 11,717 11,000

Thane-Pune 140 1,910 4,530 5,096 11,536 8,400

Ambala-Ludiana 109 1,225 4,100 4,095 9,420 11,000

Valsad-Surat 66 1,439 5,150 2,513 9,102 11,000

Total 843

The capacity estimates are based on Table 1 above and are not in passenger car units (PCUs). Note that

commercial vehicles (buses and trucks) are well over half the traffic composition and as much as three [quarters in some cases. The 843 kilometers identified above were about 3 percent of the National

Highway System in 1990. These were loaded at or beyond practical capacity four years ago and were

the most critical sections that needed to go to four lanes at that time. With road traffic growing at a rate

that doubles volumes every ten years the number of critical bottleniecks at the National level will increase

far more rapidly than current plans for expansion can accommodate.

1994 Data at the State Level

12. In 1994, the State of Andhra Pradesh had consultants prepare a strategic options study in

preparation for World Bank lending at the state level. 3 With a 1991 population of 66.5 million and an

area of 275,000 square kilometers, the state of AP is larger than most World Bank member countries.

It is served by 137,000 km of road. The paved network, however, is 44,344 km of roads of which 2949

km are National, 8746 are State and 32,649 are Major District. There are 5,000 km of railways. The

attached link-node configuration of the State and Major District Road network (Figure 1) is given to

illustrate the extraordinarily well articulated road network of one of India's states. Most of these roads

are paved but only 33 percent of the State roads were double lane (7.0 meters) with 53 percent single lane

(3.75 meters) and 15 percent intermediate (5.5 meters). About 90 percent of Major District Roads are

single lane.

3. State-Wide Strateeic Options Study Andhra Pradesh State Road Improvement Project, Final Report, Volume I, Roadsand Buildings Department, Government of Andhra Pradesh, April 1994.


13. In this case 1994 traffic counts were converted to Passenger Car Units (PCUs) and compared withthe capacity standards set forth below in Table 3.4

Table 3

Capacity Standards for Indian Roads(in Passenger Car Units (PCUs) per Day)

Carriageway Width Design Service Maximum Economic(meters) Volume Capacity Capacity

Single Lane (3.75 m) 2,000 5,000 4,000

Intermediate Lane (5.50 m) 6,000 15,000 12,000

Double Lane (7.00 m) 15,000 30,000 20,000

The Economic Design Capacity is the point at which congestion costs become substantial and justify theexpansion of capacity. The maximum capacity is just that, the point at which no more traffic can bepushed through the system. Volumes slightly in excess of 30000 PCUs per day have been recorded onsome of the most heavily travelled two lane routes in India (See Table 3 above). Attempts at goingbeyond this point leads only to a fall in volumes as extreme congestion sets in and speeds rapidly decline.It is interesting to note that the carrying capacity of Indian roads is up to twice that of other countries,largely because of the more even distribution of flows throughout a 24 hour period in which the normallyoff peak capacity is utilized

14. Of the 2798 km of candidate State and Major District roads examined in the AP study it wasfound that 1648 km had actual volumes of traffic in excess of the economic capacity. Thus, of the38,652 km of paved State and Major District roads in AP, about 4 percent were operating in excess ofeconomic capacity in 1994 (assuming that all of the overcapacity roads were in the candidate selection).This illustrates the point made in the 1988 national sample that the great bulk of the Indian secondary andtertiary road network is not congested. The past emphasis on coverage, connectivity and rural access hasinsured that outcome. The problem now is that the small percentage of the network that serves the greatbulk of the traffic is under extreme stress in terms of congestion and heavy axle loads. And, thecapacities and designs needed to cope with this stress are very different from those routinely providedfor the low volume network.

4. One bus = 3 PCU and one truck = 2.67 PCU


II. RAILWAYS

15. The first published document on rail capacity and route saturation was prepared in 1987 underthe auspices of the Planning Commission.5 It applies a computer simulation model to the congestedMoghulsarai-Allahabad section of the network and found that on this double track section the technologyand operating policies would allow no more than 39 pairs of freight trains and 17 pairs of passenger trainsper day. No more freight could be pushed over this section with the technology extant unless thestopping passenger services were suspended (See Box 4 in Text).

16. A year later the Planning Commission published the first comprehensive look at capacity andcongestion on the main road and rail corridors.6 For the rail network the emphasis was on the so called"golden quadralateral" - the connections between the four cities of Delhi, Calcutta, Madras and Bombay.These include the four sides of the quadrilateral (Delhi-Bombay, Delhi-Calcutta, Calcutta-Madras andMadras-Bombay) and the two diagonals (Delhi-Madras and Bombay-Calcutta). About 80 percent of therailways total freight traffic moved over these lines.

17. Two measures of capacity were used. The first was the charted capacity in freight and passengertrains per day on the double track sections. In 1986-87 this varied between 27 and 59 pairs of freighttrains per day. The second measure was the entire annual throughput (passenger and freight) in theloaded direction measured in millions of gross tons (MGT). The threshold limit of 50 MGT was selectedas the maximum one way capacity for a double track.

5. Planniny Grout, on Technoloev Progressin on Railways: Group Report Goverment of India Planning Commission,June 1987.

6. Perspective Planning for Transport Development - Report of the Steerinf Committee, Government of India PlanningConunissiion, December 1988.


18. The three most congested corridors all converged on Delhi. A summary of the volume capacitysituation in 1986-87 is given in Table 4.

Table 4

Rail Line Capacity and Utilization on Congested Sections 1986-87

Charted No. of Traffic TrafficCapacity Trains/Day Percent Density Density

Section No.Pairs Run Utilization (MGT) AD 2000Trains/Day 1986-87

Delhi-Calcutta (six sections) 45-59 42-57 80-99 35-44 70-88

Delhi-Madras (seven 27-54 27-61 89-119 13-33 26-66sections)

Delhi-Bombay (five 34-53 38-52 98-122 23-31 46-62sections) I _

19. According to the Committee these lines were already saturated seven years ago and new capacityhad to be found or put in place to handle the expected doubling of traffic by the year 2000. TheCommittee then recommended the construction of 1666 km of new line and 1015 km of conversion frommeter gauge to broad gauge to expand the corridor capacities. Significantly, there was no discussion oftechnology transfer in signalling, communications, locomotives and rolling stock to effect capacityincreases with the existing tracks. Nor was there a discussion of the impact of short haul passengeroperations on freight hauling capacity.

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report no. india transpor sector - world bank€¦ · a transport system that is currently...

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