Comparative Evaluation of Highway and Railway Development in China and India 1992-2002

1. Comparative Evaluation of Highway and Railway Development in China and India 1992-2002 Clell Harral and Jit Sondhi March 28, 2005 HARRAL WINNER THOMPSON SHARP LAWRENCE,INC. Contrasting Approaches to Transport Constraints on Rapid Economic Growth: Lessons Learned and Transferability Issues

2. Our presentation today • What was accomplished ?-- Early 1990s vs 2002 • Economic Development • Highway Development • Railway Development • How was it accomplished? • Investment Priorities • Financing Mechanisms • Key Strategies Pursued by China • Institutional Development • Potential Lessons for India

3. Table 1. Key Economic Data for India and China, 1992-2002 Source: World Bank “India at a Glance” and “China at a Glance”.

4. HIGHWAYS/1 • At the beginning of the 1990s, India’s highway and railway infrastructure was ahead of that of China. • Highways • In total route km • In route km/square km • In route km/population • Highways & vehicles in both countries, however, were well below world standards, and railways dominated in all but short-haul transport. • Geometric standards • Pavement standards • Mixed traffic – much congestion & accident rates world’s worst point • No modern large trucks, few modern buses

5. HIGHWAYS /2 • Over ensuing years, China leapfrogged India in highways construction. • China’s annual allocations for highway construction jumped from about US$ 1 billion in 1991 to $38 billion (3.1% of GDP) in 2002 • India’s highway allocation grew negligibly by comparison, rising from about US$ 1 billion in 1991/92 to $3 billion in 2002. • India built more road km (600,000 vs China’s 443,000 km), but no high-standard arterials. • The choice of investment priorities was very different. • China chose to focus first on arterial networks linking its 100 largest cities – the 35,000-km National Trunk Highway System + additional 25,000 km of 4-lane highways without access control • 60% of China’s investment funding went to new arterial networks, 25% to upgrading existing networks, and 15% to rural roads

6. HIGHWAYS /3 • China chose (mostly) high design standards for its new highways • The National Trunk Highway System (NTHS) is a 35,000-km network, all 4-lanes with controlled access… 27,000 km (77%) of which completed by 2002 • An additional 25,130 km of 4-lane highways without access control were also completed • Building an arterial highway system of over 52,000 km in only 10 years is an extraordinary accomplishment -- the USA took more than 30 years to complete its Interstate System of 69,000 km. • Unfortunately pavements were commonly designed to accommodate legal axle load limits, contrary to actual practice of overloading. • India has not yet completed Golden Quadrilateral which will connect 4 largest cities by 4 lanes, but without controlled access and traffic flow is still mixed.

7. HIGHWAYS /4 How did China do it?1. Sources of construction finance • A wide spectrum of financing methods was employed, with extensive innovation of both private and public modalities. • Private finance contributed some US$ 11 billion, more than in any other emerging economy • Private finance was virtually total equity, as lack of maturity of China’s capital markets & associated regulatory & legal infrastructure causes high risk perceptions precluding most private loans, bonds, & BOT structures. • > 80 PPP joint ventures between private developers in Hong Kong & provincial or local governments in China contributed > US$ 9 billion • Post-construction sale of equity in established toll roads raised $ 2 billion

8. HIGHWAYS /5How did China do it? 1. Sources of construction finance (continued) • The total private finance was under 10% of China’s total road construction costs… => more than 90% of construction funding came from public sources. • Since 1998, virtually half of road development has been financed by domestic bank loans guaranteed by local government and by central government bond proceeds which were on-lent to local governments. This is unlikely to be sustainable.

9. HIGHWAYS /6How did China do it? 2. Cost recovery: tolls, taxes, & other user charges • China’s existing system of road use taxes is poorly related to road use & funds only about 25% of road costs. • China has not yet imposed a significant fuel levy to support road costs. • Tolls are expected to provide major source of cost recovery & debt service in future. • The tolls & proliferation of toll stations have caused substantial under-utilization of new high standard highways & continued congestion of existing lower-standard but untolled routes. • Arranging sustainable, economically efficient sources of finance for a highway system that is still expanding rapidly is as yet an unresolved set of issues in China.

10. HIGHWAYS /7 How did China do it? 3. Physical implementation: planning, tendering, & supervision • Like India, China was not equipped with modern industries for highways planning, design, or construction in 1992, and the massive expansion of construction engendered countless problems. • The problem-solving capacities of its civil works industries -- fueled by vast sums of money & assisted in some key aspects by the international community -- rose to meet the challenge, but the transition of this sector to a competitive market-based economy is still a work in progress. • International Competitive Bidding introduced from 1985 & competitive tendering of one form or another (whether local or international) has since grown to supplant direct labor (‘force account’) for most road construction projects. • Construction enterprises were removed from the roads authority [PWD] & many have been reorganized as financially autonomous corporations.

11. HIGHWAYS /8 Lessons for India • China gave first priority to development of its arterial networks, with high design standards, allocating 60% of a vastly expanded budget for more than a decade to achieve that. The result is a highly modern arterial network integrating markets across the country & the rest of the world. • Many segments were built ahead of demand, & tolling of these facilities in parallel with untolled facilities has reduced utilization further – yielding a poor return on invested capital. • India has made almost exactly opposite decisions, focusing on secondary & tertiary networks with minimal design standards to stretch limited budgets as widely as possible. This has left India with severe congestion bottlenecks between its major cities & severe accidents problem. • The best strategy lies between these two extremes, varies from segment to segment, and can be identified by proper analysis.

12. HIGHWAYS /9 Lessons for India (continued) • A vast expansion of investments in highways will be required for Indian industries to become more competitive in world markets & sustain more rapid economic growth – of the order of 3% of GDP while catching-up. • Public finance is more severely constrained, but private finance can play a larger role in India than in China • domestic capital markets & legal infrastructure better established • the arterial networks yet to be built in India provide attractive opportunities for Private-Public Partnerships • ownership & management of toll roads can be better organized with multiple projects grouped under regional authorities with risk pooling • … but private finance unlikely to carry the major burden. • Reform of the construction industry in India is vital • greater, genuine competition among domestic contractors is needed • state construction units could be spun off and made autonomous, accountable entities • international contractors can play a more effective role • private finance will spur improved construction management.

13. HIGHWAYS /10 Lessons for India (continued) • India should seek to minimize China’s problem of a myriad of short tolled segments with attendant high costs of collection & delays to travelers by grouping toll finance initiatives through state- or region-wide highway corporations that can pool assets to reduce operational costs, improve risk management, & facilitate network extension through securitization of revenue streams from existing assets. • Until such time as revolutionary new technologies may be invented that permit tolling of all highways, India’s current policy mix -- to place main reliance on fuel levies combined with direct tolling on new facilities primarily where the traffic is heavy with inelastic demand -- is appropriate.

14. The Railways of China and India1992-2002

15. RAILWAYS OVERVIEW • ROUTE KM: Similar size – China network 6% smaller in 1992 but 14% larger than that of India in 2002. • TOTAL OUTPUT (equated units= pass km + ton km): CR two-and-a-half times that of IR in 1992 & in 2002. • TRAFFIC GROWTH: The growth rates of passenger (57/58%) and freight (31/34%) in decade 1992-2002 of the same order in both countries.

16. RAILWAYS in CHINA (1) • Four types of railway in China • National Railway (CR) is the main system (84%) owned and managed by the Ministry of Railways. • Joint Venture Railways (9%) • Local Railways (7%), and • Private Railways (negligible). • CR was until recently a vertically integrated railway • it has now divested most of its social support, manufacturing, and construction activities. • CR has become more commercially oriented • former subsidiaries now compete with other suppliers for CR needs • incentives established to encourage commercial attitudes & results • about 100 unprofitable branch lines separated from CR and operating losses reduced • assistance provided to redundant employees to qualify for new roles.

17. RAILWAYS in CHINA (2) • MOR retains all profits, pays taxes on profits, and finances most of its own construction and purchases of rolling stock. • Construction surcharges on all freight transportation • used only for investment in railway construction with the approval of NDRC and the government • The fixed and rolling assets (except freight wagons) allocated to Regional Railway Administrations (RRAs) • which are required to pay MOR a rate of return on the value of assets allocated to the respective RRA. • Wagon allocation and operations are managed on a system wide basis from Beijing using a computerized transport management information system (TMIS). • RRA pays hire charges to MOR for wagons in use on its territory. • Managers in RRAs receive bonuses that are linked to performance.

18. TRAFFIC AND ASSET UTILISATION • In 1992 and 2002 thetwo railways carried almost exactly the same volume of passenger km (314 vs 315 billion pkm in 1992 and 493 vs 497 in 2002) • ButCR carried 4½ times the freight of IR (1,157 vs 257 billion tkm in 1992 and 1551 vs 336 in 2002). • In fact, the increase in freight on CR over 10 years was more than the entire freight carried by IR in 2002 (394 btkm vs 336 btkm) • CR achieved this through more efficient exploitation of track, locomotives, and wagons.

19. TRAFFIC AND ASSET UTILISATION • China has a larger proportion of double as well as electrified track. • CR has adopted automatic signaling more aggressively than in India. • Reliability of CR assets is higher, as they are relatively new, and quality of maintenance is better. • As a result CR operates roughly twice the number of trains on electrified double tracks as IR.

20. FINANCIAL PERFORMANCE

21. COST and FARE STRUCTURE 2002

22. EXPENDITURE • Staff costs IR 53%, CR 25% of ordinary working expenses • IR’s staff cost level is not sustainable • Depreciation • IR 2% of historical value of assets • CR 4.4% of net value of assets • IR is eroding its asset base

23. ASSET and LABOURPRODUCTIVITY

24. FREIGHT BUSINESS

25. STRATEGIES IMPLEMENTED IN CHINA • Focus on core business, separated non-core activities, established independent entities that compete for CR business • Passenger services profitable, separated on accounting basis within CR • Minimize labour costs, assist excess labour to set up small businesses • Rail Construction Fund to develop railways • Technology upgrades to improve capacity, service quality and efficiency • Asset Operation Liability System with RAs (to promote benchmark competition and financial performance and provide management incentives).

26. AREAS WHERE IR COULD EMULATE CR (1) Government should • Resolve the conflict between IR’s role as a commercial organisation and one to serve social obligations • Support IR in making only financially viable investments • Fund all social/politically driven investments and resulting operational losses • Hold IR management accountable for service and financial performance –benchmark against CR • Offer significant incentives to railway managers and labour if agreed targets are exceeded. • Have an independent operations auditor carry out an annual review of IR’s operational performance over time, across units within IR and across railways in other countries, including an assessment of the impact on Indian economy.

27. AREAS WHERE IR COULD EMULATE CR (2A) IR should • Recognize that highways and airlines will increase competitive pressure on IR immensely • Recognize the substantial scope for improving productivity of assets and labour and reducing unit costs on IR • Recognize that railway restructuring is inescapable if IR is to serve the needs of the growing Indian economy • Separate non core activities, reorganize management on business lines focusing on customers • Implement an incentive system for managers based on “benchmark competition” between zonal railways.