Differential pricing behind Rly turnaround: Sudhir Kumar

Differential pricing behind Rly turnaround: Sudhir Kumar

Sudhir Kumar, Officer On Special Duty to the Railway Minister said freight rates of today are lower than 1997. A differential and dynamic pricing policy is the foundation of for a turnaround in the Railways, he added. Excerpts from CNBC-TV18’s exclusive interview with Sudhir Kumar: Q: The Minister is known as a turnaround artist. Shall we call you a makeover artist? A: It is combination of the two and the 1.4 million employees, which are leading this turnaround. Q: The Minister was waxing eloquent in Parliament about improving railway finances. The cash surplus before dividend has improved by about Rs 4,000 crore. That is the difference between the Budget estimate and the revised estimate. Could not some of this have been passed onto freight suppliers? A: The money has to come from somewhere. So, if it is coming from freight suppliers, it is coming from higher volumes, not higher prices. Higher prices are contributing only a bit of it. But most of it is coming from higher volumes. Nobody is unhappy about this payment because we are carrying their goods and passengers. Q: I had a discussion before the Budget and steel users were particularly unhappy. The number of transfers have comedown in some cases and rates have been reduced. But to a combination of surcharges and other means, the yield per million tonne has actually increased from Rs 55 crore per million tonne, about three years ago, to about Rs 60 crore per million tonne now. Are you actually earning more tonne for tonne? A: If you compare freight rates of 1997 for steel with the freight rates of 2008, those rates are lower. Rates of today are lower than 1997. But rates have gone up in the transportation of iron ore. We have levied 60% surcharge on transportation of iron ore to ports, which is going to various other countries. The iron ore market is booming across the globe. We are also enjoying a piece of the big pie. Q: Even steel producers have been hit hard by the surcharge because you charge the surcharge for the busy season. But steel producers are saying that the whole year is a busy season for them and there is no such thing as a lean season. Don’t they enjoy any discount? A: The lean season is there in every single commodity. We give lean season discount from the month of July to September. Many steel producers have availed of that discount. But now, they also have to pay a surcharge during peak season, when there is so much shortage of wagons. So, this dynamic and differential pricing policy is the foundation of this turnaround. Q: The differential pricing policy is resulting in the yield per million tonne rising to Rs 62 crore in the coming year 2008-2009 versus Rs 60 crore this year. So, isn’t this increase that the customers pay inflationary? A: Yield per million tonne is a function of so many variables. Price is one variable and another variable is the lead of the traffic. The third variable is the composition of that traffic, whether we are carrying high rated commodities or low rated commodities. So, it is not correct to say that yield is improving just because of price. Yield is improving because this year my lead of traffic has gone up by about 2% during the last two months. Q: Could you tell us which are the commodities that will see a reduction in freight rates? A: For petrol and diesel, freight rates will come down by 5%. During the last three years, we have reduced their rates by 17%. Rates for fly ash will come down by 14%. Earlier, if people were booking piecemeal traffic, some traffic of white good or non-white good, cement and sugar commodities, which have not been specified in the schedule, they would have to pay the highest freight rate that is class-210. Now, class-210 has become class-150 for covered wagons and open wagons, class-180 for steel wagons, BRN wagons and class-200 for tank wagons. Q: Which are the commodities that would benefit? A: All commodities except 16 commodities specified in the freight tariff schedule. Q: What are the main ones among these 16? A: We have specified 16 commodities in our freight tariff schedule. So, their rates are given. These are freight-all-kinds rates, which will apply to all commodities other than these 16 commodities. Earlier, if you are carrying other than these 16 commodities, you have to pay class-210. Now, you will have to pay class-150 in a covered train, class-160 in an open train, class-180 in a BRN train and class-200 in a tank train. Q: Are cement companies clear beneficiaries? A: Absolutely. Q: The 5% reduction in freight for petrol and diesel is likely to benefit the oil companies and not the consumers, isn’t it? A: That is not for us to decide. We give the benefit to somebody who books traffic to us. Whether he will pass it on to the consumers or not will be determined by the market forces and the government. Q: Your improvement in railway finances could have been shared with the freight users. Now my question is that you have given 5% discount on sleeper classes. Now, this is a sector that is losing. Why was discountgiven on a losing sector? A: This story of turnaround has been written by making railways profitable and by making it popular among the masses. So, this is a story of blending commercial opportunity with the social commitments of a public utility. That is what is driving this turnaround. So, if we are earning USD 6.5 billion better than the best of Fortune 500 companies, we must share some of it with the common man of India. Q: Even though your operating ratio is going to deteriorate from 76.3% this year, according to revised estimates, to 81.4% next year? A: This is a very superficial conclusion. In last to last year, we promised deterioration by half a percent from 83% to 84%. Last year, we promised 79% instead of 78%. But we delivered 76% this year. You wait for the whole year and see our performance. But do not forget that next year we will see implementation of the Sixth Pay Commission, which will impose a heavy burden on railways of Rs 5,000 crore. Q: Is it all the more reason for being prudent and not giving discounts? A: Wait a while and see how we face this Pay Commission and how we come out with our results in next year. Q: The annual carrying capacity of the railways has improved by about 40% now than when Lalu Yadav took over in 2004 and over the next four-years, it is going to increase by another 40% and you are going to ensure that the railways are going to carry 1,100 million tonnes of cargo in 2012 by reducing the tier weight of wagons by increasing their capacity by lengthening the racks and also by investing in rail capacity. Now where is this money going to come from? A: Now we have drafted a plan for about USD 60 billion over the next five-years, more than 80% of it will be funded by railways internal generation and market borrowings. Some of it will be funded by budgetary support and another sizable portion of it will be funded by public-private partnership projects. So believe me, money is not a constraint. The constraint is in our capacity to spend and we will spend. Our annual plan size has gone up by about 3 times during the last four-years and we want to double it again over the next four-years. China was investing in the 90s at about USD 7-8 billion per annum, now we are investing about USD 11-12 billion per annum. So we have to match China in terms of our capacity augmentation, in terms of modernization, upgradation of railways and in terms of providing world-class facilities to our customers. Q: But isn’t there a limit to how much you can push the system? How much you can tweak the system without actually expanding it? A: We are expanding at a much-much larger pace. Earlier railways were building 800 Km of broad-gauge line in a year. This year we did 2,300 Km. Next year we will do 3,500 Km, so our expansion has gone up by about four times. Wagon production has gone up from 6,000 wagons a year to 25,000 wagons a year. Loco production has gone up from 160 locos a year to 600 locos a year. We are investing the hard earned money for the expansion of railways and for the modernization of the railways. Q: No, I am not under any mistake in impression because the Railway Minister himself has said that the 20,000 Km of railway lines will yield 75% of your revenues, these lines are working to 100% capacity. So how can you get them to deliver more? A: We are installing intermediate block signaling. This work is going to be completed by March 2009. This will increase the capacity by about 15% on the high-density network of 20,000 route Km. Now this is for the next one-year. Then we are going to install automatic block signaling over this entire high-density network, wherever it is feasible and that will augment the capacity by another 20%. Q: So in other words you are saying that there is considerable slack in the system even now? A: Absolutely, there are so many low hanging fruits to be plucked. Q: The plan size for the 11th plan is Rs 2,50,000 crore and you are saying that through public-private partnership, you intend to gain about Rs 1 lakh crore. Now we find with the railways that they are not willing to let go control. When you are not willing to let go control, why should people invest? A: That is not correct. Last year we privatized running of container trains by private parties and you see the response. 16 persons have become our partners till date and this year, they will be contributing about 4 million tonnes of container traffic, hopefully next year it will go to 10 million tonnes. Q: Now, they are no container operators, there are actually terminal operators, the operations are done by the Railways? A: The Railways will always do the basic operation of haulage. Now, the entire operation of booking traffic, aggregating it, putting it in the train, taking delivery, and then disaggregating and distributing it to the consumers has gone out of Railways. This is what we mean by door-to-door solution to customers. We are performing the role of a hauler and they are servicing the role of a door-to-door logistic service provider. Q: There has been some convoluted way of calculating the reduction in A/C fares or the relativity index. Could you tell us about some of the classes, which will actually see a benefit? A: Earlier, the relativity between second-class and A/C fares were 1:14. So, if the second-class fare is Rs 10, the A/C fare is Rs 140. That was the difference. We had decided to bridge this gap. This relativity shouldn’t be more than 10. Since the last two years, we have reduced First A/C fares by 24%. This year again it has been reduced by 7%. Overall, the relativity has come down from Rs 1,440, all the way to Rs 1,000. There is absolutely no jugglery in this reduction of nearly 31%. The 31% reduction in prices is done not out of charity but because of the stiff competition we are facing from low cost airlines. Since we have introduced a dynamic and differential tariff policy, this reduction will be less during the peak season and popular trains. The reduction will be a full 31% during the lean season and on unpopular trains. Nonetheless, even in the peak season and popular trains, reduction over the last three years is over 24%. Q: And this benefit is going to be available immediately, one doesn’t have to wait for some new coaches to be introduced? A: No, you will have to wait till April 1. Q: The minister made a curious announcement in Parliament. He spoke about starting work on Kolkata-Delhi, Delhi-Mumbai freight corridors but the Budget highlights don’t mention it. He has said it in passing. Is the rail serious about it? I thought he was going to leave a monument to remember him by in the closing years of his tenure? A: This is our most ambitious project. The minister made a very emphatic statement that we will start actual construction of the dedicated freight corridor during the year 2008-09. Allocations have been made. The process of land acquisition has begun. By the first half of next year, people will see work happening on the ground on both these corridors. Q: Who is going to finance it, the Japanese? A: Don’t forget, we are earning Rs 25,000 crore per annum. Today, the Railways are a grossly under leveraged company. I can leverage Rs 25,000 crore to raise any kind of money from the market. We welcome Japanese assistance and assistance from other countries. But make no mistake, we can fund it from our own resources. Q: The Japanese investment is not going to come for the Kolkata-Delhi Corridor? A: We can fund both the corridors from our own resources, but we welcome Japanese assistance. It is coming for the Western corridor.