MORGAN STANLEY REPORT: The Next India Industrials – The Return of the Transportation Behemoth

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The report can be found here. REPORT Morgan Stanley 2015

A Summary of the Plan & Implications

Morgan Stanley Report

According to Morgan Stanley, achieving a sustained and measurable improvement in customer experience is important. “…though there is lack of political will to raise passenger fares, the reluctance is not shared by passengers. An NCAER survey including both suburban and non-suburban and reserved and unreserved passengers indicated that they are willing to pay more, if they get better services – easier reservations, cleanliness, on-time arrival of trains, food and safety.”

Highlights

In our opinion, the most critical element in infrastructure, from a productivity addition perspective, and hence an enabler to the story, is transportation infrastructure. The World Bank estimates that India’s logistics costs are 2-3x the best practice benchmark costs, hurting India’s manufacturing competitiveness. We believe that the key reason for this is the underinvestment in Indian Railways – with budget allocation vs. roads significantly lower than global standards. Rail is a significantly cheaper mode of transport than roads, yet the share of roads in Indian freight movement is >1.5x that of the railways, owing to the congestion on the rail network and poor policies. The current Railway Minister, Dr. Suresh Prabhu, is in the process of bringing change to a relatively moribund ministry. He has promised to spend US$132bn on the railways over F2015-19e, a 285% step-up over the US$34bn spent over F2009-14.

Rail is a cheaper mode of transport than roads (by 20%), yet the share of roads (at 57%) in Indian freight movement is >1.5x that of the railways, owing to the congestion on the rail network and poor policies.

Rail Spending (% of rail & road spending), C2013

We believe that the correction of the sub-optimal mix in the mode of transport, especially for freight, could give a sustainable boost to productivity, driving jobs and GDP growth, becoming a true enabler.

Indian Railways Exiting the Time Warp to Yield Outsize Benefits to India:

A historical perspective will help understand the size of the underinvestment better. In 1951 just after the British left India, its rail network was 53,596kms

– yet 63 years later, today, it has only grown 21% overall, to 65,436kms. In 1951 India’s rail network was 2.3x China’s; today China’s is 1.6x India’s. We believe that a rightsizing between roads and rail could result in a 10% decline in logistics costs, in turn leading to a savings of 120-150 bps of GDP, a potential 5-6% increase in trade, and a 100-120% increase in the range of products exported.

The Decline of the Railways – Understanding the Reasons

We believe that there are three key reasons for the massive decline in the share of the railways in transporting Indian freight and to some extent passengers:

1)            Underinvestment: Budget allocation in rail, at just 20% of roads, is significantly lower than global standards.

2)            Poor utilization of funds: With 60%+ of funds being allocated to projects with negative rate of return, the railways choked off internal funding too.

3)            Cross-subsidization: Passenger fares have moved up just 28% over the last decade vs. a 91% increase in freight rates, with passenger losses being compensated by squeezing the freight customers. This has caused both freight to move over to road and choking of internal generation of funds.

The Plan for the Fix

The new Railways Minister, Dr Suresh Prabhu, has formulated a multi-pronged approach to resolve the issues created over the last few decades:

1)    Improving customer experience: We think this is key to increasing passenger fares and reducing the losses.

2)    Making rail a safer means of travel

3)    Expanding capacity: 60% of railway lines and 88% of the high density network run at 80%+ capacity utilization

4)    Making Indian Railways financially self-sustainable: The goal is to enable them to service debt and invest in renewal of assets.

Is Ambition Likely to Lead to Disappointment Again?

India has traditionally been the land of opportunity as far as infrastructure (including the railways) is concerned – high on promise and low on delivery. However, we expect this time to be different for the following reasons:

1) PPP renegotiation to lead to a more robust model: Railways are in a position to take advantage of the evolution (through challenges) of the PPP model in India.

2) Strong political mandate, infra focus already visible: An increased allocation to infrastructure (mainly roads), plus measures to reduce risk for the private sector and ease funding challenges, reflect strong intent.

3) Focusing on the right problem: The focus on speed rather than the historical solution of throwing more rolling stock on the burdened tracks is a game-changer.

4) Innovative funding options being explored: With $25bn of funding already raised from LIC (Life Insurance Corporation of India) and land monetization and bond issuance on the cards, the railways are seeking differential sources of funding. That reduces the challenge posed by India’s constrained banking sector.

Annexure I of the Report: Deliveries for the Promises made by Indian Railways

Improvement in customer experience

  • New department created for housekeeping to keep stations & trains clean
  • Instructions issued to provide disposable bags for garbage collection with OBHS facilities to maintain hygiene
  • New Non-AC coaches will have dustbins from 1 May 2015
  • NIFT, Delhi has been engaged for designing bedroll which will improve quality & cleanliness of bed linen
  • 3 new mechanized laundries have been started and IR has identified 29 more locations
  • All-India helpline no. 138 became functional to address customer grievances and 182 for security-related complaints
  • Mobile application to redress Railway-related complaints is launched
  • Operation Five Minutes launched to reduce the transaction time of travellers by setting up facilities like coin vending machines, modified hot buttons etc
  • Instructions issued for differently-abled travelers to purchase concessional E-tickets after one-time registration
  • Paperless unreserved tickets on mobile phones launched
  • E-ticketing portal in Hindi launched
  • E-catering has been introduced in over 1,000 trains for better food experience
  • Online booking of retiring rooms functional
  • Policy for water vending machine issued to ensure clean drinking water at a very low cost. IRCTC to provide machines at select stations
  • Centrally managed railway display network technology approved. This will help customers in providing information on train status, reservations, general & emergency messages
  • MOU with NID signed for replacing the present ladders for climbing to upper berths and introducing folding ladders for easy climbing
  • Pilot project for providing surveillance cameras launched in selected mainline coaches and ladies’ compartments for safety
  • Instructions issued for mobile charging facilities in all new general coaches as well as 3,000 existing coaches.
  • Quota for lower berths for senior citizens increased from 2% to 4%
  • E-concierge services started in 22 railway stations for assistance in pick up & drop
  • Instructions have been issued for reserving middle bay for women & senior citizens
  • Construction of 100 toilets at 67 stations completed up to June 2015 and further work in progress
  • All new ICF coaches & LHB coaches to be fitted with bio-toilets from 1 July 2015
  • Destination Alert Service has been introduced on all Rajdhani and Duronto trains on 8th July 2015
  • Onboard Entertainment implemented on New Delhi-Chandigarh Shatabdi and tendering is in progress for other six trains
  • 143 Railway stations approved for development as Adarsh Station for upgrading passenger amenities at station
  • Wi-Fi commissioned at 11 stations. All A1 & A category stations targeted for completion by Dec 2016
  • New LHB manufacturing unit dedicated to the nation on 6 July 2015. Under this, IR intends to progressively replace all coaches with LHB design coaches
  • An IT advisory council has been set up, draft likely to be submitted by Aug 2015 with the aim to reduce Customer’s time & effort by launching mobile app including station navigation system etc
  • Parcel management system has been implemented on Delhi-Howrah and Delhi-Mumbai corridors, which includes features
  • like Bar-coding & online tracking of parcels.
  • Digitized mapping of Land record introduced. Data of 40K land plans out of 52K Land plans, have been entered in TMS
  • Scrap disposal policy reviewed for speedier disposal

Make IR financially Self-Sustainable

  • Kayakalp Council formed for the purpose of business re-engineering and innovation in Railways
  • A committee under Shri Ajay Shankar has been constituted for revamping the PPP cell, which will help create more jobs in the economy vis-à-vis augmenting capital for Indian Railways
  • MOU with LIC has been signed to initiate the mobilization of extra-budgetary resources by seeking advice from experts
  • Committee has been formed to set up a Regulator for the purpose of orderly development of infrastructure services, determining tariffs & setting performance standards etc
  • MOU signed for setting up Railway Research Centres to strengthen the RSDO organization of excellence for applied research
  • Instructions issued to set up Divisional Committee which will serve as an important link between Railways & the people
  • Review of Private Freight Terminal policy completed. Application & Security fee has been reduced and revenue sharing is discontinued
  • The Policy Circular on Automatic Freight Rebate for Loading in Traditional Empty Flow Direction has been issued to reduce empty flows of wagons
  • Implemented order issued on Setting up of Core Team for Technology Mission for Indian Railways on investment sharing model
  • Project of rail connectivity to Dighi has been sanctioned. MoU between RVNL and Port for Dighi has been signed to mobilize investments
  • Rail connectivity to Jaigarh Port has been sanctioned. The concession agreement for Jaigarh Port has been signed in the month of June 2015. This will ensure ensures a level playing field, simplification of procedures and consistency of policy.
  • 17 states have given in-principle approval for formation of SPVs. A note for consideration of CCEA has been sent. This will ensure faster completion of work and generate revenues for Railways
  • Financial Services Cell headed by Adv Finance has already been constituted in Railway Board aimed at seeking advice from experts in this field
  • Approval to ports of Rewas, Chhara, Nargol & Tuna have been granted. This will ensure rail connectivity to these places and expected to mobilize investments of Rs20bnn
  • Tender for financial consultant for Kazipet-Vijaywada opened and under finalisation. RITES is exploring implementation through JV.
  • Instructions issued to arrange training on soft skills for all front line staff by linking up with professional training institutes
  • Identification & repairing of quarters and RPF barracks is being taken care of and is ahead of target. Holiday Homes are also identified for upgrade for recreational pursuit of IR’s staff
  • Board wide letter advised all Zonal railways to carry out energy audit to conserve energy 152 locations for a water audit and 32 stations to set up Water Recycling Plants(WRP) have been identified for 2015-16
  • 23 workshops have been accredited for environment management. Balance are planned to be accredited by Mar 2016
  • MOU with Ministry of Skill Development and Entrepreneurship signed to make as spare railway infrastructure available for setting up of Skill Training Centres

Rail – a safer means of travel

  • Recommendations made by High Level Safety Review under Corporate Safety plan have been examined by the Board
  • Signal design project from IIT Kanpur has been approved for safety of Unmanned Level Crossings

IR Capacity Expansion

  • 05 trains have been identified for augmentation of capacity from 24 to 26 coaches
  • Target of 1,000 coaches in 460 trains has been set for permanent augmentation… However, 123 coaches in 114 trains have been permanently augmented
  • Technical specification for EMU train set prepared & RFQ document has been finalised in May 2015 to introduce modern train system. This will ensure higher capacity, greater energy savings & increased throughput.
  • Cabinet approval for station development received
  • Concerned Zonal Railways have been requested to submit the proposal and scheme for approval for setting up of Satellite stations in major cities
  • Trial for 25T Track friendly bogie under BOXN wagon completed. Initiated for better fuel efficiency and carrying capacity
  • National Productivity Council (NPC) team has commenced their study at ICF in order to undertake measures for technological upgrade & enhancing productivity to make it self-sustaining
  • Malaviya Chair has been setup at IIT (BHU). MOU signed between MOR & IIT (BHU) which will help in development of new materials to be used in all assets of Railways
  • MOU signed with Ministry of Coal for Rowghat -Jagdalpur Project for expansion of new lines
  • MOU signed with Ministry of Coal & Govt of Odisha to implement identified Coal Connectivity Projects in Odisha
  • E & R directorate has circulated a comprehensive document covering the best technology available across the globe in order to carry out the key operating and maintenance activities.
  • Model document for EPC system is ready, which aims timely completion of projects
  • Consultant has been appointed for Bhadrak – Nargundi 3rd line, where Railways proposed to launch Rs25bn projects through BOT/Annuity route

 

The report can be found here. REPORT Morgan Stanley 2015

News Article

http://economictimes.indiatimes.com/industry/transportation/railways/india-may-spend-95-billion-on-railways-over-5-years-morgan-stanley/articleshow/49968669.cms

http://www.financialexpress.com/article/economy/india-may-spend-95-bn-on-indian-railways-over-5-yrs-morgan-stanley-irctc-co-in/171993/

 

 

 

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