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Container Movement by Rail

Evolution and Impact of Policy


G Raghuram
Rachna Gangwar
Indian Institute of Management, Ahmedabad

Outline
What is the policy and how was it
evolved?
Who are the entrants and what impact
have they made?
What are the post policy issues and how
can they be addressed?
What should the CTOs, IR and the
government do?

Background of Policy Evolution


MR announced intent to permit private operators to
run container trains in the budget speech (26th
February, 2005)
Two earlier initiatives (1994 and 2004) had failed
due to
Lack of clarity on CONCORs role
CONCORs own resistance
RITES, a subsidiary of IR, was appointed to
formulate the policy. The report was submitted in
September 2005.

RITES Recommendations
Category

Areas of Operation

Minimum trains
per week
(pairs per week)

Traffic level
most likely to
materialise

Proposed
Entry Fee (Rs
crores)

JN Port/Mumbai Port Delhi


Area rail corridor

II

Rail corridors serving JN


Port and its hinterland other
than Delhi Area

70

III

Rail corridors serving


Pipavav, Mundra, Chennai,
Ennore, Vizag and Kochi
and their hinterland

45

IV

Rail corridors serving ports


of Kandla, New Mangalore,
Tuticorin, Haldia/Kolkata,
Paradip and Mormugao and
their hinterland

15

130

RITES Recommendations
Entry fee payable for each route
One or more routes from among the
categories could be selected
Minimum traffic commitment for each route to be achieved in one year
Bidding for capacity constrained routes
Additional revenue sharing with IR, if traffic
levels exceed the most likely to materialize

Background of Policy Evolution


Many interministerial deliberations
involving MoR, Ministry of Shipping (MoS),
Ministry of Commerce & Industry (MoCI),
and Planning Commission (PC) took
place. RITES recommendations were
questioned by PC for
Entry barriers
Entry fee
Level playing field with CONCOR

Entry Barriers
PC
Entry fee proposals were a double
jeopardy since CONCOR already had
monopoly power and enjoyed first
mover advantages
Route specific entry fee
Bidding for constrained routes

Entry Fee
PC
Entry fee would kill competition
Objective of policy started with introduction of
competition but expanded to protection of IR revenues
Competition was in interest of IR as it would increase
the share of container movement by rail
Higher haulage charge or cess could be imposed
rather than charging entry fee
Investments in terminals, wagons, containers would
prevent risk of frivolous entrants

Level Playing Field


PC
Ownership of CONCOR, the track and locos with MoR: risk of
discrimination against private parties
Provisions required for treating private operators at par with CONCOR
Despatch of trains on first come first served basis
Operations of rail linked terminals, haulage charges, documentation,
legal liabilities
Use of underutilized railway facilities
Transit guarantees and time-tabled paths
Freedom for setting tariff to end users

Protection of Users Interest


MoCI and MoS
Fear of cartelisation and users interest to be
protected by a regulator

MoR and PC
Competition would ensure fair charges for
users
Competition Commission of India could act as
a regulator for grievances

Other Inputs by PC
Scope of Licence should
include domestic cargo
be over the entire network and not limited to port categories
not have minimum traffic commitment

Entry fee is discriminatory and more so since it increases


with level of traffic
Revenue share on incremental traffic contradicts IRs policy
of volume discounts
Maintenance of rolling stock should be opened to agencies
other than IR
Services for shunting and formation of trains should ensure
level playing field with CONCOR

The Final Policy


After several rounds of discussions,
the final policy was announced on 5th
January 2006 by the Minister of
Railways in a press conference.

The Final Policy


Category Areas of Operation

Registration Fee
(Rs crores)

JNP/Mumbai Port - National Capital Region rail corridor


and beyond. This category will also include all
domestic traffic.

50
(automatically includes
all four categories)

II

Rail corridors serving JNP/Mumbai Port and its


hinterland in other than National Capital Region and
beyond. This category will also include all domestic
traffic except on category I routes.

10

III

Rail corridors serving the ports of Pipavav, Mundra,


Chennai/Ennore, Vizag and Kochi and their hinterland.
This category will also include all domestic traffic
except on category I routes.

10

IV

Rail corridors serving other ports like Kandla, New


Mangalore, Tuticorin, Haldia/Kolkata, Paradip and
Mormugao and their hinterland and all domestic traffic
routes. This category will also include all domestic
traffic except on category I routes.

10

Location of Ports

Important Policy Elements


The operator can carry all goods subject to
conditions specified in the goods tariff, red tariff
and under provision of Indian Railway Act and
any other instructions issued on the subject by
MOR from time to time.
The operator will pay to the railways haulage
charges applicable uniformly to all operators,
as notified/fixed by the Railways from time to
time.

Important Policy Elements


Maintenance of track will be done by the operator at his
own cost, with IR being paid for inspection/supervision
according to the prescribed prevailing rates.
Maintenance of rolling stock will be done by IR, for which
the prescribed charges will be recovered from the
operator.
For resolving disputes on the issues pertaining to the
siding for the ICD, claims for damages, haulage charges,
etc. The operator can seek redressal by resorting to the
relevant provisions of siding agreement, Railway Claims
Tribunal or Railway Rates Tribunal also.

The Entrants
14 players, including CONCOR, obtained
licences.
New entrants (other than CONCOR) are
referred to as container train operators
(CTOs) in this presentation.
Concession Agreement (CA) was signed
between the entrants and MoR in January
2007.

Concession Agreement
The Central Government shall have the right to specify
certain commodities, which ordinarily move in railway wagons
in trainload as notified commodities, which may be subjected
to different tariff and conditions for haulage. Provided further
that the tariff so specified for notified commodities shall not
exceed the freight rate as per the prevalent freight tariff
schedule with chargeable weight, as for the trainload of
railway wagons, generally used for their carriage.
Ores, Minerals, Coal and Coke will be in Restricted
commodities for movement by containers. (Accounting for
over 65% of IRs traffic by originating tons and over 60% by
freight revenue).

Concession Agreement
Wagon Maintenance
The Parties hereby acknowledge and agree that wagon
maintenance charges for maintenance by Railway
administration of the Concessionaires Wagons shall be
included in the Haulage Charges as notified from time to
time. The extent of such maintenance charges that are a
part of haulage charges and any charges therein shall be
specified by Railway Administration so that in case the
Wagons belong to another party or maintenance is done
by other agency, at any future date, the same can be
separately accounted for. It is expressly agreed that the
present Haulage Charges include 5% thereof by way of
maintenance charges.

Concession Agreement
Dispute Resolution
Any Dispute, which is not resolved amicably as
shall be finally decided by reference to
arbitration by a Board of Arbitrators, appointed
pursuant to this Article. Such arbitration shall
beheld in accordance with the Rules of
Arbitration of the International Centre for
Alternate Dispute Resolution, New Delhi (the
Rules) or such other rules as may be mutually
agreed by the Parties and shall be subject to the
provisions of The Arbitration and Conciliation
Act, 1996.

The Entrants
Two more players obtained licences in 2007 and 2008 respectively, making
total entrants as 16.
Of the 15 CTOs:
12 are from private sector
1 is a joint venture
2 are public sector entities
Profile based on their ability to offer/influence traffic:
3 are from the container shipping lines
4 are container terminal operators
1 is a commodity manufacturer
2 are CFS operators
4 are from service sectors
1 from other sector
5 CTOs are driven by significant international interests
Of the 15 new entrants: 11 chose category I (pan India), 4 chose the others

Impact by CTOs
They have brought in

Choice to end users


Faster growth in rolling stock
Some new terminals
Domestic containerisation growth
Marketing orientation, and efficiency in asset utilisation
(A to B and B to A markets)
Test to the definition of a container
A sense of threat to the IRs own business, questioning
its role as a
service provider (haulage),
operator,
policy maker-regulator

Impact by CTOs
Rail share: increased (even on routes where
CONCOR services existed)
Rail share of the 700 mt export import containerized
movement was 30% (23 mt) in 2008-09
Domestic containerized movement is a very small
share of the 2.5 bt domestic freight segment. The
definition is a little fuzzy, especially on road. As per
an industry estimate, in 2008-09, 25-30 mt was the
domestic containerized movement by road, of which
7 mt was by rail. The rail segment, though small,
has grown significantly.

Impact by CTOs
Investments: nearly Rs 30 b in terminals, rakes, and rakes
handling equipment (December 2009).
Payment to IR: Apart from the one time licence fee of Rs 6.4 b,
they paid Rs 5.9 b as haulage in 2008-09 to IR. (CONCOR had
nearly 2.5 times the traffic and haulage)
Infrastructure: acquired 120 rakes and had built 12
ICDs/CFS/logistics parks till March 2011 (CONCOR has 238 rakes
and 59 terminals).
Services: more commodities moved in containers and new value
added services were being provided on routes where road was a
monopoly
Still, the growth and performance of the 15 new CTOs have not
been upto expectations. There are many issues.

Impact on CONCOR
Market share dropped from 95% in 2007-08 to 76% in 2008-09
Reduced tariff for FEU (8% for containers between Ludhiana
(Punjab) and ports on the west coast)
Introduced incentive schemes (volume discounts, bulk discounts,
rebates, lower rates for moving empty containers and longer free
time for clearing loaded import containers )
Lost some of the experienced managers
Formed joint ventures with Reliance Logistics and Transport
Corporation of India to provide end-to-end inter-modal logistics
solutions to its customers
Plans to set up five logistics parks that will offer single-window
solutions to customers.
Considering to enter new businesses such as container shipping
and air cargo

Post CA Issues
Haulage Charge
IR increased haulage several times but the
situation has been made worse since
September 2010 with RCs 25, 30 of 2010, and
RC 5 of 2011 where a new pricing concept
container class rate has been introduced for
certain commodities, a departure from freight all
kind policy for container haulage
Container class rate is haulage charge for
commodities notified in RC 25, 30 and 05. In RC
30 and 05, its applicable class rate (freight rate
for movement in railway owned wagons) minus
(%) concession.

Post CA Issues
Haulage Charge

RC 25 (announced in September 2010)


Notified five commodities
(i) cement
(ii) stone other than marble
(iii) iron & steel
(iv) alloy & metals and
(v) POL

that would be charged at container class


rate.
Applicable in both exim and domestic
segments.

Post CA Issues
Haulage Charge

RC 30 (announced in October 2010)


Notified nine commodities
(i) cement other than white cement
(ii) food-grain
(iii) chemical manures
(iv) iron & steel
(v) stone other than marble and ceramic tiles
(vi) sugar
(vii) oil cakes
(viii) alumina and
(ix) POL products

that would be charged at container class rate.


Container class rate would be applicable class rate 10%
concession.
Applicable only in domestic segment.

Post CA Issues
Haulage Charge
RC 05 (announced in February 2011):
Same as RC 30 of 2010, except that the
container class rate would be
applicable only if more than 30
containers of a notified commodity are
loaded in a rake.
Container class rate would be applicable
class rate 15% concession till 31 st
August 2011 and thereafter 10%.
Applicable only in domestic segment.

Post CA Issues
Haulage Charge
RC 05
Breakeven comes to about 32 tons for TEU
for notified commodities having class 180.
For an FEU, the breakeven will 64 tons
implying that CTOs are bound to use FEUs
that can not be lifted

Post CA Issues
Haulage Charge
In RC 25, 30 and 05
Weight categories are removed
Fixed charge per TEU
FEU charged twice (earlier 1.8 times)
No rationale for notified commodities

Post CA Issues
Sidings
Restriction on use of private/factory
sidings since 2009.
However, a circular dated 10th December
2010 allowed use of private sidings but
(i) the siding can not be used for any third
party and
(ii) the permission is initially for 6 months and
will be reviewed yearly thereafter

Post CA Issues
Maintenance
Limited rake maintenance facilities
Levy of haulage charges for empty rake
movement for maintenance
The train examination is done only by a
railway staff, CTOs cannot hire their own
staff
Containers have to be offloaded from the
rake for examination

Post CA Issues
Service Level Guarantees
No transit time guarantees offered in CA, train
dispatch on first come first served basis
Assured Transit Time (ATT) scheme on limited
routes was announced in December 2009 at
10% premium. Eg
On JNPT to Tughlakabad Depot route, ATT offers 3639 hours against 42-45 hours (15% reduction)
On JNPT-Loni Depot, ATT offers 42-43 hours against
60-odd hours (28-30% reduction)

In case of non compliance, IR will refund the


premium
Scheme not successful. No takers.

Post CA Issues
Other Issues
Levy of haulage charges on own brake
vans
Stabling charges
Service levels not as expected
Conflict of interest with CONCOR: Land
allotment, certain operational flexibilities

Post CA Issues
Other Issues
Absence of an independent regulator
Strong influence of CONCOR (executives
in CONCOR are primarily deputationists
from IR)
Half hearted effort by IR to make this
policy a success? This is evident even in
policy evolution phase

Recommendations
Pricing and Service Levels
Independent regulator (IR vis--vis
CTOs)
Competitive environment (CTOs
vis--vis customers)

Recommendations
Maintenance
Provide more facilities IR, CTOs
More staff, certified by IR, can be hired by
CTOs
Separation from haulage charges
Pit lines and mechanical testing facilities for
greater efficiency

Recommendations
Terminals
Priority to modernization of existing terminals
Common user development for private sidings
Independent third party organisation(s) for
upgradation and maintenance of these
terminals (like in telecom sector: towers vs
services)

Conclusions
What should the operators do?
Share facilities, consolidate
Differentiate services through value adds
Lobby with railways to get them to change
What should IR do?
Should review the strategies towards the implementation
of the policy.
The Railway Board Members roles should be redefined
towards strategizing for key market segments
What should the government do?
Separate IRs roles of licensor, operator and regulator
Separate infrastructure and operations

Conclusions: Open Questions


Should IR dilute its ownership in CONCOR in a
manner that it does not exercise management
control?
Should CONCOR be divided into at least two
organizations so that each of them has at least
one organization of their size to compete with?
What value does the IR see in this whole
privatisation process? Why should it want to
yield to organisations which it feels are
encroaching on its rightful business of
movement by rail?

Conclusions: Open Questions


Is the only need to respond to a larger public policy
that is possibly perceived as being thrust on it?
How does one change the attitude of IR to a more
proactive one of problem solving in partnership with
the private operators, unless the gains are very
clear?
Are more fundamental changes required in terms of
top management restructuring and even separation
of infrastructure and services with a strong public
policy commitment of privatizing the services?

Thank You

Scenario in Other Countries


Many developed countries have undergone reforms and
restructuring of railway systems to convert the state owned
monopolies into public private partnerships with a competitive
environment.*
Both freight and passenger services are provided by
multiple operators.
Freight operations, including container, are subject to open
competition.
In some developing countries including China, Russia,
Malaysia, and India, all freight and passenger operations are
managed by the government owned railways.**
Railways of these countries have segregated the container
operations by creating subsidiaries which are the sole
providers of container rail haulage.
*Gouvernal and Daydou, 2003; Hafer, 1996; Pittman, 2005; Vassallo and Fagan, 2005
**Al-haj, 2003; Baskakov, 2007; Wan and Liu, 2009