Haulage hike: The war rages on
The initial decision of the Indian Railways (IR) to hike haulage charges, effective from December 5, 2014 had sent the Container Train Operators (CTOs) operating in India in a state of frenzy, wherein they are unable to comprehend the reasons behind the steep increase by 27 per cent. Apart from imposing the charges for using railway tracks, signals and telecommunications infrastructure, railways has also demanded a 10 per cent congestion charge on base freight rate for goods that originate at ports. The surcharge, effective since November 24, 2014, is part of a feeble attempt by the government to curtail imports.
The Railway Ministry’s decision to implement the haulage hike in two spheres and postponing the execution of the entire hike till March 1, 2015 came after the Association of Container Train Operators (ACTO) submitting a memorandum requesting the Indian Railways seeking respite from the steep rise in haulage prices. Expressing disapproval of the fact that moving goods by rail is set to get costlier after the enactment of the haulage hike, the ACTO members informed that they would have lost a large chunk to road transportation had the government not come out with the partial roll-back.
Termed as the ninth round of rate increase in Railways Haulage Charges (RHC) since this sector was deregulated in 2006, the rates for Twenty feet Equivalent Units (TEUs) for 20 feet containers have increased by 31 per cent for containers weighing between 10 and 20 tonnes and 16 per cent for containers weighing above 20 tonnes, thus, bringing about an increase in the cost of operations for players such as Container Corporation of India (CONCOR), Gateway Rail Freight, Arshiya Rail, APL Indialinx, Hind Terminals, Container Rail Road Services, Boxtrans and Inlogistics. Explaining the reasons behind the more frequent increase in freight charges as compared to passenger rates, Devi Prasad Pande, Member (Traffic), Indian Railways expressed, “As per our agreement with the CTOs, which is the joint concession agreement we had signed when we opened this sector, we were supposed to enhance haulage charges not more than twice a year depending upon cost increases in the railways. On that basis, the last increase was scheduled sometime in 2013. In 2013, the container industry was totally in the doldrums because exports were lounged; reason being that the internal economy was down. All the rakes of the CTOs, including CONCOR, had started getting stabled for want of business. So, we realised that the business is down and the CTOs are going through a very bad patch. At that time, the Railways felt that it was not the right time to quote the clause of the Model Concession Agreement (MCA) and deferred the increase in price. The hike was deferred for July and then for December. Then the business grew, and since the cost had continued going up, the total costing was therefore taken into account and that came to a figure of 39 per cent which the Railways lowered to 27 per cent. So theoretically, the Railways should have increased by 39 per cent but decided to hike by 27 per cent; 27 per cent hike came for two years actually. It is not a onetime hike; it’s a hike that has a background to it.”
The nine revisions in RHC levied on CTOs have resulted into a cumulative increase of 120 per cent in the base category and a whopping 230 per cent to 265 per cent in the heaviest weight slabs. Expressing his grievances against the unilateral decision taken by the Indian Railways without taking into consideration the views of the CTOs, Manish Puri, Managing Director, APL IndiaLinx revealed, “No official response was taken from the CTOs. Indian Railways claims ‘sovereign rights’ for setting of rail haulage and does not consider it necessary to discuss this extremely critical matter with the CTOs.”
Q2 The reduction in diesel price coupled with the alteration in the structure of RHC by the Indian Railways has dealt a death blow to this sector, that primarily earns its income by transportation of goods by container trains, by increasing the transaction cost of trade, diverting traffic from rail to road and forcing containers to be handled at ports instead of reaching door steps. Talking about the intangible effect as a result of the increase in haulage charges and congestion charge levied, Ranjit Ray, Chief Executive Officer, Arshiya Rail Infrastructure stressed, “There will be adverse effect on environment (due to increase in road traffic) and accidents as a result of congestions. Delivery cargo in bulk will be affected there by affecting supply chain and inventory management both at plant and consumer end.” Revealing that the impact of the charges exercised will be multimodal Puri stressed, “Road diversion will have a negative environmental impact, and will also increase our fossil fuel dependence, as road uses more diesel/tonne of cargo carried than rail. There will also be a decrease in multimodality with more containers getting cleared at ports instead of moving to the hinterland. This is a backward step for trade as more countries move towards greater multimodality; this step of IR pushes us into reverse gear. There will also be an increase in input costs for manufacturing as a lot of the imports impacted by price hike of transport are raw materials into industry and this will have inflationary impact and also make Indian exports more expensive.”
Q 7 CTOs fear that it will be difficult to convince customers about justification of increase in rates of services through containers as the cost of transportation by road has been hovering pretty close. As surviving in this business has become more of a struggle for the CTOs, Ashok Kumar Tandan, Deputy General Manager (Logistics), Kribhco Infrastructure revealed, “Shift of cargo to road is inevitable under the present circumstances, thereby, decreasing rail share. Sharing and pooling of resources to economise, value additions, and complementing road traffic may be the way forward.” As survival in cut-throat competition has become difficult, Puri accentuated, “As CTOs there is little option, but many operators will look at widening their service portfolio and considering road transport services as a serious option in terms of services offered.”
Q 3 Informing that the concession agreement agrees to a ‘maximum’ of two rate increases every year, Puri said, “IR seems to take the view that they must necessarily have two increases. The idea of rate increase is not what the sector objects to. There is a need to make it more transparent, time bound and based on a clear formula that allows business to be more predictive in nature.” As the hike in haulage charges would have a devastating effect on the CTOs, IVS Murlidhar, Senior Vice President – Sales & Marketing, Boxtrans Logistics India Services explained, “Increase is one thing; the manner it is done is a further deterrent and dampener to the PPP model with the Indian railways. CTOs need to be treated as partners whereas the fact is that they are not even being treated as customers. There should be absolute clarity on how and when the rate increases will take place. Also the quantum of increase should be benchmarked to some index (say to the WPI). This will give predictability about the amount and periodicity of the rate increases which in turn will allow all concerned the liberty to plan their respective businesses.” Offering suggestions to curtail the frequent rate of increase in freight rates, Ray insisted, “The rate revision needs to be looked in to once in a year and in consultation with stakeholders and keeping in mind other factors like diesel pricing.” Offering suggestions to to curtail the frequent rate of increase in freight rates, Sharat Chandra Misra, President, Association of Container Train Operators suggested the following: * Annual increase not to exceed five per cent; * Haulage charges to be announced every year at the same time with a six weeks’ notice; * Charges for empty container and empty wagons to be reduced significantly from the current levels; * Need for an independent agency to determine, based on stakeholder consultations, haulage charge and other issues related to CTOs.
Q 4 The cumulative increase in haulage rate for containers on rail in the last decade has ranged between 90 per cent and 265 per cent depending on the weight of cargo. In comparison, rail freight for general or non-container cargo has gone up by a mere 52 per cent. Members of ACTO expressed, “Since the cost of rail haulage is actually lower for containers, where operators provide their own wagons and operate mostly from private terminals, the higher charge being levied by the railways is clearly an indication of uneven treatment between cargo that the railways considers it ‘own’, and container cargo where the railways does not face the customer directly but instead operates through the licensed container train operators.” Murlidhar opined, “The industry has not grown an inch during the last eight years of its existence. All operators have been incurring losses. Constant hikes in haulage charges have made it impossible for us to survive.” Puneet Agarwal, President, Darcl Logistics remarked, “This is indeed unfortunate that railways make a distinction between its ‘own’ cargo and the cargo handled by CTOs. While they should ideally support this new sector to win over traffic from roads by giving them concessions, their various moves of frequent and steep price increases and commodity restrictions have hardly helped.” Tandan said, “The approach of ‘our’ traffic and ‘their’ traffic is sounding the death knell for the CTOs.” Pande, when asked, shared a completely different perspective of the same. He elaborated, “The Railways treat container haulage charges separate from normal freight haulage charges and that is what exactly had happened. If I had increased twice in 2013 and once in 2014, there would have been only eight per cent increase this time. If the cost borne by Railways is going up, it has to recover. The Railways cannot supply its things below cost. The Railways is already moving passengers below cost; it needs development capacity to pay for the DFC too. Hence, the increase in haulage cost.” However, Misra retorted, “Indian Railways plays conflicting roles as the sole operator of rail services, and its regulator, apart from being the controlling shareholder of the market leader in the industry. The private train operators are finding it difficult to survive in this scenario.”
Q 5 As the steep increase in haulage charges translates to roughly between Rs 5000 and Rs 8000 per container, the CTOs are left with no option than to pass on the entire hike to their customers. Though the private operators fear that they would lose out their cargo business to the road if they pass on the hike to their customers, Ray informed, “We will be constrained to pass the hike 100 per cent to customer. This is because we are working now with a very thin margin.” Fearing that passing on tariffs would mean losing out to road transporters, most CTOs prefer to absorb the hikes to avoid losing out on the domestic segment. But due to the low rate of margins being earned by the CTOs currently in the business, there seems to be no other option left for some CTOs other than to pass on the buck in rupee terms to their customers. The recent cut in diesel prices have already resulted in lessening of the rates charged by the truckers shifting cargo traffic from railways to roads. Aditya Prakash Mishra, Managing Director, Kutch Railway said, “It can’t be said with certainty as to how much increase in the tariff will be passed on the customers. However, it is inevitable that the end users will have to bear a part of the hike.” Terming the fear of the CTOs, that they would lose a portion of their domestic traffic to road transport, as baseless, Pande stressed, “The importers will now unload the material at the port from there they will take it to a Container Freight Station (CFS), which is next to the port and then they will road bridging into the Inland Container Depot (ICD). ICD traffic will not go down; it will go down via rail. The threat for CTOs is that the traffic is being forced to the road. Whenever the Railways have increased the haulage charges, this should have happened, but it has never happened. Whenever the freight has been increased, the traffic should have got diverted. Our experience has been that it has never got diverted except marginally. From the CFS, some part does go to the hinterland and moves because there is something called cabotaging in container business. And the road haulier does cabotaging, which is against the law. But since the road haulier can do cabotaging, there are some people who prefer to go by the road mode due to benefit in cost and that business was going on even before November 24, 2014. If cabotaging does not take place, road movement will not increase. This fear or threat that it will get diverted to the roads is baseless. If it is viable to go by road because of my increase in costs, it will go by road. There is no way the Railways can stop it.” Considering the hit that the CTOs would suffer on their existing margins after they fail to pass on the hike on to their customers, Anil Kumar Gupta, Chairman and Managing Director, CONCOR suggested, “All CTOs would need to concentrate upon increasing volumes, especially in export directions, so that empty haulage costs, both for containers as well as wagons, are minimised. This would need to be accompanied by strict operational cost controls at the terminal level. At the same time, recourse needs to be taken for enhancing the basket of services, and concentrate more on provision of ‘value added’ services under a single roof so that compensatory savings are made in other components of overall ‘Inland Haulage’ charges paid by the shippers.”
Q 6 The CTOs may be, in due course of time, left with no other option than to close their businesses to prevent losses or continue their businesses with no margin at all. The steep haulage hike that is being termed as one of the reasons for CTOs to get derailed and bail themselves out of the business of transporting goods by rail. Misra believes, “Most still see light at the end of the tunnel, even if the tunnel is long and dreary. The new government had brought in new hope, and the next six months are critical.” Tandan ruefully said, “Despite there being a ‘technical’ exit clause in the MCA, the CTOs are unable to exit due to high investments already made by them. There are no takers for the sinking ship of CTOs.” However Agarwal continues to be optimistic about the future of CTOs. He added, “We still feel that this sector, fundamentally, is a very promising sector. Railways’ hostile treatment with this sector wasn’t anticipated and we hope with a powerful government is in the Centre, we look forward to the policy initiative from the Ministry for growth in container train business in future and win-win for both the Railways and CTOs.”
Q 8 Despite the recent traffic hike, CTOs feel that for distances 1500 km onwards the rail freight will be still viable, Misra said, “Survival is going to be difficult for many CTOs.” Tandan explained, “Even long distance traffic will get diverted to road with ‘golden quadrilateral and diagonals’ having been developed. Road infrastructure is also excellent and offers ‘price for money’.
Q 9 The CTOs have demanded for an independent regulator considering the constant increase in haulage charges by the Indian Railways on a compounded basis annually. Tandan underlined, “So far as both the roles, regulator as well as facilitator, are performed by a single agency which too, is in the same quest, there will be a conflict of interest as Railways will always consider CTOs as threat. The hike has already been implemented by the Railways.” The ACTO has requested for intervention at inter-ministerial level to help resolve the issue of levy of haulage hike along with other tariffs imposed by the Railways. Considering the plea made by the members of ACTO to the Competition Commission of India and the officers in Railways, Pandey explained, “The ACTOs said that they had expected the hike but not such a steep hike. They requested the Railways to relook at the same. On behalf of the Railways, I said, “Definitely we will go through it with an open mind. We don’t want to affect your business prospects without covering my costs.” The CTOs also said that it would cause a lot of discrepancy to hinterland traffic. The CTOs have a regular meeting with the ACTO members at the level of Additional Secretary. Issues which are coming up after every three months are solved there. They have made a request; the Railways is looking at it. The Railways can give them a relief but not at its own cost.” AP Mishra said, “Railways will definitely give due consideration to the plea made by the CTOs. I am informed that the Container Train Operators have made a request for intervention from the Railway Minister. As the Railways are seeking a high level of private participation, I am sure such a request will be given the importance it deserves.” Misra emphasized, “We are very hopeful. Apart from CTOs, the entire community connected with containers has come together and spoken with one voice.”
Suggesting measures that can resolve the hike in haulage charge issue and allow the container train operators to work amicably with the Indian Railways, Rajaji Meshram, Director, Advisory-Infrastructure, KPMG said, “The haulage rates that Ministry of Railways levies on container train operators is completely under the control of the Ministry and in the current system there is no mechanism for the container train operators to appeal against an increase in haulage rates. While the Ministry does have mechanisms to ascertain the ability of a cargo commodities to bear the tariff rates and a benchmarking with road is done as a part of the process of rate setting, the known fact is that freight cross subsidizes passenger traffic in India today. The level of cross subsidization is pegged at close to Rs 30,000 crores. The setting up of a Rail Tariff Authority has been propagated in 2013 railway budget and an interim Railway Traffic Authority has also been formed. In the longer term, a regulator with an unbiased and matter-of-fact view on tariffs and costs is the solution to resolve matter of haulage rate setting. This would not only be essential for container train operations, but also for the success of the various other schemes that the railways have announced.”
With both CTOs and the Railways at loggerheads with each other over the issue of haulage hike, there is a critical need at this hour to review the unilateral action taken by the Indian Railways. The problem has to be seen from a national ‘macro’ perspective. The insignificant incremental revenue (approximately Rs 1500 crore per annum) that IR hopes to gain from this act will have a far greater negative impact on business and trade, and this is the perspective that needs to be applied when looking at the sensibility of such a decision.
Quote Blurbs:

DP Pande, Member (Traffic), Indian Railways
“So theoretically, the Railways should have increased by 39 per cent but decided to hike by 27 per cent; 27 per cent hike came for two years actually.”
Manish Puri, Managing Director, APL IndiaLinx
“Indian Railways seems to take the view that they must necessarily have two increases. The idea of rate increase is not what the sector objects to. There is a need to make it more transparent, time bound and based on a clear formula that allows business to be more predictive in nature.”
Ranjit Ray, Chief Executive Officer, Arshiya Rail Infrastructure
“The rate revision needs to be looked in to once in a year and in consultation with stakeholders and keeping in mind other factors like diesel pricing.”
Ashok Kumar Tandan, Deputy General Manager (Logistics), Kribhco Infrastructure
“The approach of ‘our’ traffic and ‘their’ traffic, by the Indian Railways, is sounding the death knell for the CTOs.”
IVS Murlidhar, Senior Vice President – Sales & Marketing, Boxtrans Logistics India Services
“CTOs need to be treated as partners whereas the fact is that they are not even being treated as customers. There should be absolute clarity on how and when the rate increases will take place.”
Puneet Agarwal, President, Darcl Logistics
“Railways’ hostile treatment with this sector wasn’t anticipated and we hope with a powerful Government is in the Centre, we look forward to the policy initiative from the Ministry for growth in container train business in future and win-win for both the Railways and CTOs.”
Sharat Chandra Misra, President, Association of Container Train Operators
“Indian Railways plays conflicting roles as the sole operator of rail services, and its regulator, apart from being the controlling shareholder of the market leader in the industry. The private train operators are finding it difficult to survive in this scenario.”
Aditya Prakash Mishra, Managing Director, Kutch Railway
“It can’t be said with certainty as to how much increase in the tariff will be passed on the customers. However, it is inevitable that the end users will have to bear a part of the hike.”
Anil Kumar Gupta, Chairman and Managing Director, CONCOR
“All CTOs would need to concentrate upon increasing volumes, especially in export directions, so that empty haulage costs, both for containers as well as wagons, are minimised.”
Rajaji Meshram, Director, Advisory-Infrastructure, KPMG
“In the longer term, a regulator with an unbiased and matter-of-fact view on tariffs and costs is the solution to resolve matter of haulage rate setting.”

Key Points: * The combined effect of current reduction in the diesel price along with the steep hike in rail rates for containers will sound the death knell for the CTOs; * The haulage charge increase will have a much larger downstream impact that will further erode investor confidence and lead to higher costs in the manufacturing sector apart from creating a diversion toward a more environmentally costly method of transport over land; * All future Public Private Partnership (PPP) initiatives will be adversely impacted due to erosion of investor confidence in railway policies; * The manufacturing sector which relies on low value imports as inputs will be unable to bear such a high increase in logistics cost.

Non-quote Blurbs: