India - Transport sector : long term issues

Report No. 13192-trM India Transpor Sector Long Term Issues March 16, 1995 Infrastructure Operatimws Division Country Department l- India South Asia Regiona! Office Document-of ;he Word Bank  Abbreviations CEM Country Economic Memorandum PER Public Expenditure Review GDP Gross Domestic Product ICP International Comparison Program PPP Purchasing Power Parity GNP Gross National Product GOI Government of India HDC High Density Corridor ADB Asian Development Bank RFFC Railway Fare and Freight Committee MOST Ministry of Surface Transport CBR California Bearing Ratio IRI International Roughness Index IR Indian Railways PWD Public Works Department LCL Less Than Carload CONCOR The Container Corporation of India JNPT Jawaharlal Nehru Port Trust (Nava Sheva) SAR Staff Appraisal Report of the World Bank OED Operations Evaluation Department of the World Bank ME Member Electrical of the Indian Railway Board MM Member Mechanical of the Indian Railway Board ISO International Standards Organization MAV Multiple Axle Vehicle BOT Build, Operate and Transfer AACRG Average Annual Compound Rate of Growth R&D Research and Development BUTP II Second Bombay Urban Transport Project (Proposed) CO Carbon Monoxide NO Nitrogen Oxide S02 Sulfates MEIP Metropolitan Environmental Improvement Program SOE State Owned Enterprise NAFTA North American Free Trade Association FNM Ferrocarriles Nacionales de Mexico (Mexican Railways) NHA National Highway Authority LRDSS Long Range Decision Support System GOM Government of Maharashtra R&R Relocation and Rehabilitation EEPS Initial Executive Project Summary  THE INDIAN TRANSPORT SECTOR - LONG TERM ISSUES Table of Contents Page EXECUTIVE SUMARY .............................................. i INTRODUCTION .............................................. i LONG TERM ISSUES ........................................... i THE REFORM AGENDA ....................................... v I. INTRODUCTION ............................................... 1 II. MACRO ECONOMIC LINKAGES AND DERIVED DEMAND ............ 2 Transport Intensity ................................... 3 Growth Rate Differentials and GNP Linkages ........... ................. 5 m. THE INTERMODAL CONTEXT ................................... 6 Road and Rail .......................... 6 Ports and Trade Facilitation ...... ................. 7 TV. THE PAST APPROACH TO DELIVERING SERVICES .............. 8 Physical Planning vs. Flow of Services ..... .......................... . 8 The Importance of Cross Subsidies .............. .................... 13 Perverse Incentives for Management .. ............ ................ 21 Rent-Distribution and Rent-Seeking Activity ............ ................. 25 V. LONG-TERM ISSUES IN A CHANGING ECONOMIC SCENARIO ...... ......... 26 Linkages with Economic Reform Initiatives ........... .................. 26 The Deregulation and Expansion of Foreign Trade ......... ............... 27 Privatization and Deregulation of Domestic Industry ........ ............... 30 Reducing Government Subsidies ............... ..................... 34 VI. LONG-TERM ISSUES IN A CHANGING DEMOGRAPHIC ...... .. ........... 38 Increasing Population ....... ............ ........................ 38 Increasing Urbanization ...... ........... ........................ 38 Technological Change and Obsolescence ............ ................... 40 Energy, the Environment, and Other Externalities ......... ................ 45 VII. THE INTERNATIONAL EXPERIENCE WITH TRANSPORT SECTOR REFORM .... 52 The US Experience ............................................ 53 The Experience of Chile ...... ........... ........................ 54 The Mexican Experience .......................................... 56 VIII. A PLAUSIBLE REFORM SCENARIO FOR INDIA ......... ............... 59 Progress to Date ....... ............. .......................... 60 The Unique Elements of the Indian System ........... .................. 63 Likely Areas for Further Transport Sector Reform .......... .. ............. 64 The Difficult Areas for Reform .. 65 Conclusion ....................... .......................... 70  ii ANNEXES ANNEX 1: SECTOR OUTPUT AND MODAL SPLIT ESTIMATES ................. 71 ANNEX 2: INTERNATIONAL COMPARISONS OF RAILWAY PERFORMANCE ... .... 73 ANNEX 3: CONGESTION ON THE ROAD AND RAIL NETWORK ................ 81 BOXES IN TEXT Box 1: Appropriate GDP Measures for International Comparisons .................... 2 Box 2: The Deregulation of Trucking ...................................... 9 Box 3: The Physical Condition of Indian Roads .............................. 10 Box 4: The Conflict between Rail Freight and Passenger Services ................... 12 Box 5: Ports as a Deterrent to Trade Expansion .............................. 14 Box 6: Rail Management's View of their Relation to Parliament .................... 15 Box 7: The Bulk Freight Rate Tax and its Uses ............................... 15 Box 8: Rail Management's View of the Redundant Labor Problem .................. 18 Box 9: The Impact of Frequent Rail Management Changes ....................... 22 Box 10: The Costs of Delayed Road Projects ................................. 23 Box 11: Police Checkposts as a Deterrent to Interstate Comnerce ................... 26 Box 12: Manufacturing Plant of Indian Railways .............................. 32 Box 13: The Coming Railway Financial Crisis ............................... 35 Box 14: The Limited Potential for Private Monies in Road Investment ................. 36 Box 15: The Controversy Over Earmarking for Road Funds ...................... 37 Box 16: The Pros and Cons of Technology Transfer ............................ 41 Box 17: The Stagnation in Rail Technology ................................. 42 Box 18: Indian Trucking Technology ..................................... 44 Box 19: The Railway Electrification Initiative ................................ 47 Box 20: The Potential Impact of Involuntary Resettlement ........................ 51 Box 21: Twenty Years of Self-Criticism by Rail Management ...................... 68 ,,  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.  r  THE INDIAN TRANSPORT SECTOR - LONG TERM ISSUES EXECUTIVE SUMMARY INTRODUCTION 1. The economic reform initiative in India is expected to raise the long term annual growth rate of the Indian economy from the 3.5-4.0 percent of the past to 4.5-6.0 percent. This implies a doubling of freight transport output every 10 to 13 years and a doubling of passenger transport output every 7 to 10 years. Foreign trade flows would then double in about 8 years. These are large pressures to exert on a transport system that is currently saturated on the main road and rail links and the possibility arises that the capacity constraint of the transport system may (together with that of the power sector) serve as a constraint on overall economic growth. 2. In the Indian transport sector there are three important historical developments to bear in mind before examining the present and looking to the future. The first is that India, a rail dominant economy in the 1950s, has become a decidedly road dominant economy in the 1990s. Road transport now accounts for 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 from being a freight dominant operation to a passenger dominant operation. The third development is that the main links of the parallel and competing road and rail networks have become saturated under the current technological and operational regimes. LONG TERM ISSUES 3. The long term issues examined in this report come under two general headings. The first category are those that require or induce transport sector change in response to the Government's proclaimed 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 government subsidies. The second category of issues are those that require or induce transport sector change in response to exogenously imposed demographic and technological changes. These are: (i) a growing population, (ii) increasing urbanization, (iii) technological change and obsolescence, and (iv) energy, the environment and other externalities. Taken together these are a formidable list of forces which the transport 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 percent per annum. This will place certain obvious pressures on ports, inland transport links and international air cargo capacity. Less obvious are the technological, administrative and legal implications of integrating major portions of the Indian economy with world markets. The major physical bottleneck in the long term is the inadequate road and rail capacity for hauling containers to and from ports and inland terminals. The major administrative bottlenecks are the application of the rules of the Indian Customs  ii Service and the interpretation of cargo liability and ownership and related dispute resolution by the Indian legal system. Any country that wishes to participate actively and successfully in the international trading system must adjust its infrastructure, administration and laws so that they not only allow trade to take place 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 the nationalized industrial sector and to give private companies more freedom to run their own affairs. This movement towards commercialization has an indirect long term impact insofar as it effects the users of the transport system. It has a direct long term impact insofar as the public sector entities providing transport 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 a vertically integrated, nationwide, public conglomerate facing increasing financial difficulties; the railways themselves would be a logical target for reform through the "unbundling" of their disparate service and equipment providers into coherent, focused corporate entities - public and/or private. The railroad would also be greatly affected by the different behavior and demands of their privatized and deregulated former public sector freight customers. Rail reform is well advanced in other reforming economies and the experience 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 propose raising charges for most subsidized government services on the grounds that the government cannot afford them 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 and resources. 8. A dominant subsidy in the transport sector is the salaries to redundant management and labor in the 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 rail service and state monopoly bus services. Another is to rural transport in general in the form of money losing branch rail lines and meter gauge rail operations and an extensive system of low volume tertiary roads. A final subsidy stream is directed at the users of urban rail services. The reduction and/or removal of these subsidy streams will be resisted fiercely by those groups that have come to accept them as 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 increasing demand for passenger transport. Indians currently consume about 2330 kilometers of intercity passenger transport per capita per year. For the USA in 1988, with a purchasing power adjusted per capita GDP about nineteen times the Indian level, the figure was 12,774. km per capita, about six times that 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. It would appear that Indians consume much more intercity passenger transport than other nationalities at comparable income levels.  iii 10. This high level of per capita consumption of intercity passenger transport has had very serious implications for the Indian transport sector since buses are competing with trucks for the limited space on the roads and rail passenger services are using at least half the track capacity on the saturated rail links. 11. For the long term, the issues here are: (i) how important is passenger service relative to freight transport service, (ii) are passenger subsidies warranted, and (iii) can the transport system and the economy 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 of India from 28 percent of the total in 1990 to 42 percent in 2010. The share of economic activity in urban areas would also increase from about 56 percent of GDP in 1990 to about 63 percent in 2010. All of this growth in urban population and economic activity is to take place in the three "mega cities" of Bombay (12.6 million), Calcutta (10.9 million), and Delhi ( 8.3 million); the six aspiring mega cities of Madras, Hyderabad, Bangalore, Ahmadabad, Pune and Kanpur (5.4 to 2.1 million); the fourteen other metropolitan cities of more than one million population; the 277 class I cities between 100 thousand and one million and the 3396 cities between 5 thousand and 100 thousand. This shift in the spatial distribution and concentration of population and economic activity will have profound effects on the nature and level of transport demand. 13. The most obvious long term transport impact of urbanization is that the demand for urban passenger and goods movements will grow very rapidly. This will be translated into pressure on the physical infrastructure of city streets and suburban rail. Less obvious is the fact that increasingly the congested urbanized areas on the national transport network are becoming barriers to the free flow of long haul 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 the medium and long term, India needs engineers to design its main roads to be built to efficient specifications by modem capital intensive road contractors. Modern Multiple Axle Vehicles (MAVs) are needed to operate over the new MAV friendly roads with lighter axle loads and more fuel efficient engines. Indian railways cannot afford to continue operating low power, fuel inefficient diesel locomotives of a 1960 design vintage out of a system of redundant workshops and depots based on steam technology. Nor can IR continue to use high tare weight freight rolling stock with only 20 ton allowable axle loads. The foreign trade sector cannot afford to use ports that are still being served by first and second generation container ships and feeder vessels because of the low level of containerization of Indian cargoes and the low service levels in ports. 15. While many of the technology "solutions" to India's transport problems are obvious - their effective (as opposed to superficial) adoption has profound long term implications for labor and management and operational policies in the sector and, for this reason, will not be welcomed by important elements of society.  iv Ener2v 16. The transport sector in 1990 was the second largest consumer of commercial energy (22 percent of total) after industrial users (53 percent). Transport, however, was the largest consumer of petroleum based energy (43 percent). And, petroleum imports in 1990 were about 22 percent of the value of imports and expected to rise to 30 percent of imports by the year 2000. For balance of payments reasons, therefore, great emphasis has been put on energy saving in the petroleum users category. This has 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 of conimercial energy production. This means about 18 percent of commercial energy consumption takes place in road transport (urban and intercity). The greatest potential for energy saving in the transport sector now and in the future is on the road side and this has not yet been pursued effectively because government 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 fossil fuels to produce its 22 percent share of commercial energy. When the results of this combustion are concentrated in urban areas where the polluted air is breathed, then the public health impact can be substantial. There has been a great deal of analysis and discussion but very little action in dealing with this problem. 19. The basic reasons for lack of effective action are rooted in the lack of effectiveness of government vehicle emission mandates and the lack of public support and administrative capacity for non emission control policies. Among these latter are: (i) internalizing the externalities of private motorized vehicle use by charging much more for polluting fuels, charging for parking in congested areas and charging for access to congested areas at peak periods; and (ii) enhancing the quality and coverage of public transport by charging more for a greater variety of services, making use of exclusive bus lanes, removing encroachments from streets, and by providing pedestrian and bicyclist amenities in the form of unencroached footpaths, bicycle lanes and underpasses. Public Safety 20. Roads in India are dangerous by developed country standards with an annual fatal 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 poor roads, mixed traffic, unsafe vehicles, poor driving habits, lack of safety belts and helmets, poor emergency services and lack of police enforcement. The results are about 60,000 fatalities per year, an annual accident cost estimated at 0.5 percent of GDP and an unquantifiable amount of human suffering. The hope is that a four lane divided toll express way system would begin to have an impact by physically separating or excluding slow moving vehicles, reducing congestion, suppressing ribbon development with limited access and providing an incentive for effective policing. At the moment this is no more than a faint hope and high road fatalities are likely to be a permanent feature of the road transport subsector.  V 21. The railways, by contrast, have passenger fatalities due to train accidents of only 100 per year despite the fact that they account for approximately 16 percent of passenger kilometers nationwide. There are however an unspecified number of nonpassenger fatalities which are not recorded. These take place in the approximately 50 level crossing accidents per year and in a large but unspecified number of illegal pedestrian crossing of rail tracks (especially in urban areas). In addition to being more benign environmentally, rail transport is clearly the safest mode of passenger transport (for the passenger) in the country. Involuntary Resettlement 22. It is extremely difficult to provide any new infrastructure in India without displacing individual businesses or residences. The resulting involuntary resettlement is an external cost associated with the provision of transport services to the extent that the individuals displaced suffer a net loss in income or assets. Beyond the quantifiable costs of involuntary resettlement there may be a host of other associated costs. By far the most difficult area for involuntary resettlement in the transport sector is that of urban transport - especially road transport. Any attempt at improving the flow of road vehicles in, through or around urban areas quickly encounters the constraint of land acquisition from individuals who have legal rights as well as those who are squatters. Conclusion 23. Energy, environmental, public safety and involuntary relocation considerations all mitigate against rapid 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 least demanding of land for expansion of capacity. All four of these long term constraints will favor the rail mode if intercity passenger traffic pays its way, the urban tax base allows the financing of suburban and urban rail improvements, and rail management and labor will accept the labor saving and management intensiveness implications of technological improvements. As the reform agenda below indicates, it will be 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 and administrative environment in which private domestic entrepreneurs are willing to finance, maintain and 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 promote price competition as well as service competition. 25. It is on the fixed infrastructure side where the least progress has been made and the private sector has 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 rapidly becoming physical bottle necks that will not allow the efficient use of the generally adequate, privately financed and operated, equipment.  vi The Least Difficult Reforms 26. The most likely areas for further rapid reform in Indian are sea ports, airports, trucking and bus operations, in that order. To reform the nation's seaports the emphasis should be on shifting the government's task from one of providing infrastructure and services to one of regulation of private sector operations. The international experience shows that the "landlord" port concept is the way to go. The new regulatory role of the government would be to let franchises or concessions to prequalified firms for providing mobile equipment and operating specific facilities eg. container terminals under a specific terms of 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 and would certainly double almost overnight with a concession award to a qualified firm. This was the experience with similar reforms in Mexico. 27. The redundant labor problem of the ports is manageable - the total number redundant probably does not exceed 50,000 nationwide and this is feasible for a labor buyout. This was done successfully in Chile. 28. The successful deregulation of international air cargo and domestic air passenger services will lead to very large pressures on the Indian Airports Authority to expand and upgrade airport facilities. This is feasible in the short and medium run because there is upper class elite support for safer airports and air 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 the development of a landlord/coordinator role for the various airport authorities - not unlike that envisioned for the sea port authorities. 29. Intercity bus operations in India are being gradually reformed with a steadily increased allocation of routes to private operators. However this is seen in many quarters as an expedient brought on by the inability of states to finance public bus corporation losses rather than a desirable reform. Privatization reforms usually require a shift in regulatory policy designed to promote public safety as well as low fares just as in the case of airline reforms. This shift in focus has not yet taken place in all the states and it needs to if the desirable shift to private sector finance, maintenance and operation is to continue without socially undesirable consequences. 30. Since the shift to private sector bus operations at the state level is taking place slowly, the redundant labor problem can be handled by allowing natural attrition at the state road transport corporations to shrink the public sector operations. Since this will be an industry of steady to rapid growth there should be no long term redundant labor problem. 31. It is also desirable to complete the reform of intercity truck operations. The 1986 deregulation of trucking was the key initiative but two other related initiatives are required. The first is to reduce the number of police check posts and/or increase their efficiency. These operations tie up trucks for many hours of costly waiting and are rated the number one problem facing truckers in a recent survey. The other 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 taxes on diesel fuel and leaded gasoline to municipalities in lieu of octroi. The road fund concept has other desirable aspects as well.  vii 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 road construction industry capable of constructing high quality roads rapidly for high density high axle load traffic. 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 basic rural 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 is to privatize the in house engineering services of the PWDs by making use of private consulting firms for investigation, 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 experienced Indian 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 salaries for good engineers and new domestic firms may be expected to develop in the new competitive environment. These are the same pressures that foreign competition is putting on domestic manufacturing fimis 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 put together large contract packages, mandate rigorous prequalification of construction firms, use internationally accepted contract documents, allow foreign competition for large scale road works, and expedite the import of efficient and dependable road building equipment. As in the case of engineering services the competition will do much to develop a client-responsive domestic construction equipment and road building industry. Also, many potential Indian participants in construction equipment and road building are currently operating abroad for lack of effective domestic demand and would have incentives to 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 maintenance requirements needs to be addressed with a long term solution to the problem of finance. While some private sector money will be forthcoming under a BOT format, this will not do the whole job - nor will public sector toll roads. Assuming that financing from general revenues will continue to be completely inadequate, the only viable alternative is to set up state (and a national) road funds fed by new earmarked taxes on diesel fuel and leaded gasoline. This stream of user revenues could not be used for anything other than maintenance and upgrading of the road system and as an alternative to the octroi for municipalities. State (and a National) highway boards with mixed private public members could be set up to ensure that the management of these funds reflected user interests as well as the interests of the public roads bureaucracy. 36. Rail reforms will be the most difficult because of the huge amount of redundant labor (at a minimum 400,000 positions) and a passenger lobby that has grown accustomed to subsidies in the form or free or very low cost services. Freight services can no longer absorb the burden of redundant labor and below cost passenger services. The very least that can be done in the short run is to run the passenger services as a commercial venture. This would mean no more free travel for anyone and private ticket checking and collection companies with an incentive to stop so called "ticketless" travel. Surveys of train passengers show that they are not a disadvantaged sector of the population and are receiving public funds that could be used with greater social benefits elsewhere.  viii 37. Much of the redundant rail labor is currently absorbed by the very large number of stations, yards and workshops that are no longer required or viable because of technological change and competition from road transport. Some is absorbed by meter gauge services that will never again be viable because of the road alternative. Conventional downsizing and disinvestment is required but is difficult because of the impact on labor. However, the land and buildings associated with the redundant facilities and services are frequently strategically located and valuable for private sector industrial/commercial operations. If properly handled, these facilities could be turned into viable private conmmercial operations to the benefit of the redundant labor - either through buyouts from land sale revenues or through the provision of alternative employment in the new enterprises. International experience has shown that it is fruitless to pursue rail reforms without dealing explicitly with the labor problem in an equitable and financially responsible manner. 38. If the experience of reformed railroads is transferrable, then Indian Rail also needs to concentrate exclusively on being an intercity freight and passenger transport operation. The IR conglomerate suffers from the conflicting objectives of the urban passenger and equipment manufacturing operations vis a vis the main passenger and freight business. New lines of freight business should also be explored by IR with the most obvious being profitable domestic double stack container operations that would reduce pressure 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 joint ventures including technology transfer and export sales can take place legally, so that bidding can take place for multilateral financed investments, so that true manufacturing costs are known and so that quality r can improve through the use of meaningful post delivery warranties. Whatever the past benefits of vertical 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 management attention. This cannot take place with the current policy of frequent senior rail management changes with tenures of six to eighteen months not unusual. A minimum of three to five years in a senior position is required in order to push through any change. The specification of much longer job tenures for managers is, therefore, an essential ingredient of meaningful rail reform. 41. Related to management tenure reform is the whole question of the role of Parliament in railway management. While public entities should certainly be responsible to Parliament in terms of their overall mandate, 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 terms of 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 national transportation services in a competitive environment. In an economy dominated by roads and road transport the annual ritual of the rail budget presentation in advance of the National Budget is no longer appropriate.  ix Conclusio 42. A substantial amount of progress has been made with the first phase of transport sector reform in India in which the government has allowed the private sector to finance, operate and maintain in a competitive environment the nation's fleet of buses, trucks, airplanes, and ships. The second phase of reform involves the improved regulation of private sector operations and improved provision and maintenance of physical infrastructure - ports, airports, railways and, most importantly, roads. There are some promising beginnings of this phase on the roads side with the BOT initiative, the National Highway Authority initiative and moves by some progressive state governments to reform their ways of obtaining good roads rapidly. However, progress on rail reform is lagging. This is disquieting because the rail mode is uniquely positioned to relieve the high density corridor capacity constraints in the short and medium term and help meet future transport needs in an environmentally and socially sustainable fashion. 43. The great advantage that India has at this stage is the plethora of successful models of transport sector reform that now exist worldwide. There is no longer a need to proceed into the unknown for most of the required initiatives. This factor, plus the steady pressure of the long term forces identified in this paper, could conceivably make the process in India more orderly and less painful than has been the case elsewhere.  I  THE INDIAN TRANSPORT SECTOR - LONG TERM ISSUES I. INTRODUCTION 1. The intention with this exercise is to look beyond the current organization and functioning of the Indian transport sector to the logical impact of demographic trends, economic growth, technological developments and economic reform efforts on the various transport modes. It is proposed to treat in considerable depth the demand for and supply of both freight and passenger movements for intercity road and rail services, and freight movements for port services. A separate treatment of intermodal transport and 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 be treated 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 modal ministries, the Planning Commission, The Asian Development Bank and the World Bank in India. Taken together, this body of work explains why things work as they currently do in the sector. Except for the opening section on macro economic linkages and derived demand there is little new information presented in this document. While there has been no lack of information in the recent past, there has been a lack of integrated analysis that pulls together in a coherent fashion the discrete pieces of descriptive and analytical 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 Indian economy, linking the growth in transport output with the growth of the economy. This is followed by an integrated dynamic description of the transport system in the sense that road, rail and ports are described as functioning together over time. The usual static descriptions of the various subsectors is kept to the bare minimum needed to sustain the analysis.' The subsequent section involves a policy-oriented analysis of past and current approaches to the actual delivery of transport services as opposed to the standard 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 the title. Economic, demographic, environmental and technological trends that are already becoming apparent will be introduced with an attempt to define the implications of dealing with each of these issues in a useful way. Most of the appropriate responses require a change in the current way of doing business and this imnplies reforms of some sort. The basic menu of reforms is then set forth based on the international experience of other liberalizing economies and transport sectors with due account taken of the unique elements 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 Asian Development Bank, Manila, February 1993.  - 2 - exercise in dynamic political economy, the one set forth herein will certainly be wrong but it does serve to highlight realistically the nature of the steps that will need to be taken if the reform process is to go forward 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 1994 WDR list of Bank member countries - following the U.S.A., Japan, China, Germany and the Russian Federation (Box 1). The economy is varied in that GDP in 1992 was 32 percent agriculture, 27 percent industry and 40 percent services with over two thirds of GDP emanating from the private sector. With only 10 percent of GDP exported it is safe to assume that most current transport activity is associated with 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 i reflect the relative domestic purchasing power of currencies. The United Nations International Comparison Program (ICP) has developed measures of real GDP, on an internationally comparably scale, -using purchasing power parities (PPP) iinstead of exchange rates as conversion factors. The 1992 ICP estimates of Indian GDP quadruple the size of the Indian economy relative to that of the U.S. That of China is also about four times that based on official exchange rates. Hence, the importance of using ICP estimates in calculating and comparing energy intensity or transport intensity. 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 two GDP 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 demand for freight and passenger transport. According to the 1991 census 26 percent of the Indian population lived in urban areas which generate about 47 percent of GDP.2 This is expected to rise to 35 percent of the population and 60 percent of GDP by the year 2000. UN population forecasts project India's r urban 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 400 persons per sq km and with a minimum of 75 percent of the male working population in non agricultural pursuits.  - 3 - decline by 26 million.3 Well-defined urban centers of production and consumption linked by a road, rail and air transport system are evolving rapidly from what was, until recently, an overwhelmingly rural society. Transport IntensitY 7. In Figure 1, the total domestic freight ton-km in of several economies are divided by their ICP estimates of GDP to provide internationally comparable measures of freight transport intensity for 1989.4 Subcontinental 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) but expectably 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 subsector of India have resulted from Indian central planning, an argument that cannot be made for the economies of Poland, Bulgaria, Hungary and the former Yugoslavia. There are numerous reason for this positive development in India of which the most important has been the relatively large share of GDP in private hands, 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, The World 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 care must be exercised in making comparisons because the intercity freight ton-km measured are those that take place on the soil of the nation state. The international portion of freight ton-km of imports and exports are excluded from the statistics. Thus, physically small but rich island states such as Singapore and Hong Kong will have few domestic freight ton-km associated with large GDPs. Most of the transport associated with their economies will be over international waters or in other countries. They will therefore have very low transport intensity measures. Large continental economies will be more freight transport intensive because of the relatively small amount of international ton-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 well defined 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 estimate of 2058 billions of passenger-kilometers is divided by the 1992 population, the Indians currently consume about 2330 kilometers of passenger transport per capita per year. For the USA in 1988, with an ICP per capita GDP about nineteen times the Indian level, the figure was 12,774 km per capita, about six times that 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 a matter of state policy, the average person travelled only 252 km per year intercity.5 If anything, it would appear that Indians consume much more intercity passenger transport than other nationalities at comparable income levels. This is an important statistic to bear in mind for subsequent analyses since difficult demand management decisions are likely to be required in the near future in India and the relative 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 an average annual rate of about 5.3 percent (See Annex 1 for details and sources of estimates). GNP over the same period grew at an average of 4.2 percent yielding a growth rate ratio of about 1.3. In the last ten years the ratio of growth rates has risen to about 1.5. A recent international comparison based on cross sectional rather than time series analyses suggests that the ratios of freight traffic growth to GNP growth for developing countries is generally above 1.25 while that for developed countries is close to unity.' 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 the tendency towards unity as development and urbanization proceeds would suggest that the figure of 1.5 is 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 recent international comparisons of this statistic but it is surely high in the Indian case and consistent with the high per capita consumption figure of 2330 pass-km in 1992. The substantial differentials in growth rates for freight and passenger traffic in India is an important factor to bear in mnind for the future as it again raises the important question of the relative importance of intercity personal mobility and its impact on the public budget. 5. Transport in China: A Comoarison of Basic Indicators with Those of Other Countries, World Bank Staff Working Paper No. 723, 1985, p 24. 6. Creightney, at the end of his recent survey, makes the point that: "(transport) infrastructure services that are strongly oriented to household final consumption may be generally less important to structural adjustment." See: Transport and Economic Performance - A Survey of Develoving Countries, by Cavelle D. Creightney, World Bank Technical Paper No. 232, 1993. p. 34. 7. Esra Bennathan, Julie Fraser and Louis Thompson, What Determines Demand for Freifht Transport?, Infrastructure and Urban Development Department, The World Bank, Washington D.C., October 1992.  - 6 - 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 the transport sector in India. For freight, rail output expanded at 3.3 percent annually over the twenty year period 1967-87 while road output was expanding at 8.8 percent annually. For passengers rail output was expanding at 4.7 percent annually while road output was expanding at 9.8 percent annually. While both modes were experiencing substantial growth in output the more rapid growth in the road sector led to dramatic shifts in the shares of total output (See Annex 1). The year 1985 was the first time that the road freight share of output exceeded that of the railways (52 percent vs. 48 percent). Passenger shares which were about equal in 1961 had become 79 percent road by 1985. Application of the historical modal growth rate ratios makes it possible to estimate the 1992 modal splits in which road accounts for 62 percent of national freight output and 84 percent of passenger output. Thus India, a rail dominant economy in the 1950s has become a decidedly road dominant economy in the 1990s. This is entirely consistent with the experience of most free market economies but it has not become the core of policy discussions in the transport sector as it ought because it has been contrary to the official Indian policy of a dominant rail service.8 12. Support for overlooking the reality of the current modal split has been the general feeling that road transport is energy intensive, polluting and unsafe. And, since all the road freight operations and most of the passenger operations are in the private sector, that profit maximization overrides social concerns. Furthermore, a technology based on the combustion of imported fossil fuels is in the long run fundamentally unsound. All of this was good reason to give roads and road transport a low priority in the overall scheme of things and to give rail investments such as gauge conversion and electrification a high priority. This is reflected in the Eighth Plan document. The problem here is that most future gauge conversion and single line electrification investments, even with the most generous assumptions concerning benefits have economic returns less than 10 percent, whilst the road investments show returns as high as 40 percent. Private shippers stubbornly prefer the polluting, energy intensive, unsafe road technology 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 able to 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 system carrying about three quarters of the intercity freight and passenger traffic in the country. The most heavily travelled elements of the HDC system are those linking the cities of Delhi, Bombay, Calcutta and Madras. 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 rest of the national budget is one obvious manifestation of this historical bias. The first substantial step towards explicit recognition of the current dominance of road transport in India has been the recent completion of the Railway Fare and Freight Committee's report on potential integrated rail-road transport services. See: Integrated Rail Road Transport System for Movement of Lone Distance Freight, Railway Fare and Freight Committee, Ministry of Railways, GOI, Final Report, June 1993.  form the main corridors linking these cities. Virtually all of the four-city core road and rail links are experiencing extreme congestion (See Annex 3). Yet, rarely are the two systems considered in an integrated 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.'