Home > Uncategorized > Laloo’s Center of Plate Pricing Strategy for Railways

Laloo’s Center of Plate Pricing Strategy for Railways

Laloo’s Center of Plate Pricing Strategy for Railways

 

Indian train fares are among the cheapest in the world.  A journey by first class air conditioned coach costs a small fraction of what it would cost in the US or Europe.  Second class fares are even cheaper.  Indians will be quick to point at their low disposable incomes as justification for low fares.  They will never ponder the fact that their disposable incomes are low because their infrastructure is mispriced.  With the average savings rate of 30%, it is stupid to argue that Indians can’t “afford” higher fares.  But that is besides my point.  The fact is that it costs a certain amount of money in diesel, power, labor and rolling stock wear & tear to transport a person from point A to point B whether the person or the train be in the US, Europe or India.  About 40% of the train fare is just energy which in India is plagued by shortages.  So how can Indian Railways recover their full economic costs if train fares on an average are just 20 to 30% for comparable journeys abroad?  The fact is Railways being government, they do not even attempt to record the full cost of a journey in their books.  Depreciation on rolling stock is 3% per annum while that would be 20% in the private sector.  Interest cost again is purely notional.  Only Indian labor is cheaper.  All told Railways attempt to recover only their variable costs and totally ignore capital costs.  That generates a meager cash surplus leaving little for track expansion, modernization and safety equipment.  The net result is poor quality of services.  What can be done to improve things?

 

If one looks at the sub-urban train service in Mumbai one sees the true dimensions and nature of the problems the railways face.  First is the tyranny of sheer numbers.  The Mumbai sub-urban service caters to a city of 10 million passengers.  It carries roughly 8 times the number of passengers carried by the New York metro service daily.  Its train density on tracks is about 5 times that of the UK underground.  It runs the world’s highest number of trains per day.  On all the parameters of technical efficiency, barring quality of service, it is perhaps the world’s most efficiently run rail systems.  The only problem is that it transports people as cattle packed like sardines.  Its “technical efficiency” does not translate into commercial success, quality of service and safety because the train fares are set by unimaginative and lazy politicians looking for an easy way out for themselves.  The train fares are so low that the railways system doesn’t even recover the variable costs of the sub-urban services.

 

The problem is not that people can’t afford to pay a higher fare in return for a more comfortable journey.  On a variety of parameters it is possible to show that while passengers are more than happy to pay a higher fare in return for better service, it is the politicians in their anxiety to earn a few brownie points via populism who are to blame for the vicious cycle of low fares, poor quality of service, migration to private transport, under investment in public transport, etc.  Laloo Prasad Yadav in his tenure as the Minister for railways showed superb imagination in breaking out of this vicious cycle.  His innovation lay in blunting the populist argument for cheap fares for the poor by keeping II class unreserved coach fares constant while allowing the railways to charge extra for everything else in line with demand.  The other subterfuge that Laloo adopted was in allowing the railways to add to sleeper capacity in 2 and 3 tier AC coaches in line with demand without insisting on a proportionate increase in the capacity for II class unreserved coaches.  Effectively, on a per train basis, Laloo was thus able to increase fares in line with demand giving the railways the much needed cash flow to improve services.  Unfortunately his successors have discarded Laloo’s shrewd pricing strategy & railways have tamely slipped back into their old shabby ways.

 

The problem with railways is that a network of sub-continental size and complexity is run by a caboodle of civil servants under a politician from Delhi.  This over centralization means that despite the wide variations in local demand for train services, the central bureaucracy always comes up with one-size-fits-all solutions that are inherently sub-optimal.  Setting of rail fares is no exception.  There is little in common between a train journey from Mumbai to Pune, a run of about 4 hours to an overnight journey between Kochi and Trivandrum.  The passengers are different, the times are different, and the nature of services required by passengers is different.  However, the present system of setting fares ignores these differing characteristics and fixes a fare for both the journeys by a standard cost per KM travelled.  The central bureaucracy tries to reduce its internal complexity but ignores passenger requirements & needs and either fails to meet them or doesn’t charge for them properly.  This lack of differentiation between local needs is the key to using Laloo’s innovative approach to railway service pricing.

 

Simply put, rail fares need to be split into two parts.  One part is the basic cost of transporting a passenger per KM of distance travelled.  This cost is a function of fuel & energy costs, labor, depreciation and interest.  All these costs are centrally determined for the railways as a whole.  It is this basic fare to cover basic costs that must be set by the railway minister for various classes of travel.  The second part should be train and service specific.  For instance the train to Pune from Mumbai need only have two kinds of coaches; the general unreserved variety and chair cars.  There is no need for any other kind of coach.  The second part of the fare should be set by the Zonal railway HQ that runs the train.

 

It is the Zonal Railway that owns the train and is responsible for running it on time.  Zonal HQ decides what rake to use, what kind of coaches to put in the rake, what services to offer.  It is the Zonal Railway that sells the tickets, knows its passengers first hand and is best placed to figure out what they need and how much they can pay for the service.  This local information & intimate knowledge of local market is simply not available in Delhi and is completely ignored even if available.  The Zonal Railway can be given discretion to add on up to 50% of the basic fare to the total fare for the journey depending on its judgment of what services to offer and how much the passengers will be willing to pay for them.  This would put the local add-on outside the direct responsibility of the Railway Minister enabling him to rightfully claim that he had no hand nor responsibility for setting fares for local services added on to the basic train journey giving the railways a certain degree of flexibility in fare setting according to market conditions.

 

There is an urgent need to find a way to raise resources for the railways.  The cost of transporting one person by car from Bandra to Nariman point by car is roughly about 2000 times the cost of doing the same by a rail service.  You may argue that this cost is paid by the car owner.  But regardless of who pays for it, the economy as a whole incurs this cost and suffers a productivity loss.  If we are to move people from private to public transport, not only must the rail service get better but it must also raise the resources to pay for improved services.  The existing rail services are extremely efficient in a technical sense.  It is the sub-optimal under-pricing that has negated the technical efficiency and driven passengers to either private transport or the more expensive air travel.

 

Laloo showed that passengers will willingly pay more for basic services and that it is possible to raise fares politically provided you arm the politician with a politically sound argument.  Decentralization & delegation of the responsibility for setting part of the fares to Zonal Railways can be the institutional change that insulates the politicians, gives the railways more commercial freedom and the public better services and lower overall cost of travel.  The productivity gains from moving people from private to public transport are humongous and something quite easily done.

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Categories: Uncategorized
  1. Beenit Bhagat
    September 2, 2012 at 5:16 am

    I would also like to add that railways should be decentralised for it to come out of this viscous loop of populist politics.Or how on earth can you expect a mamata banerjee,”a poor people leader”,to make sweeping changes for a delhiwala just to make his journey more luxurious

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