TRAI released its recommendations on auction of spectrum on April 23, 2012. The recommendations are in pursuance of the Supreme Court order cancelling 122 telecom licences. The cancellation was ordered on grounds of procedural irregularities and arbitrariness in the first-cum-first-serve policy for allocation of spectrum. The recommendations, if adopted by the Department of Telecommunications, would change various aspects of the present telecom policy, including (a) relationship between a telecom licence and spectrum; (b) procedure for allocation of spectrum; (c) pricing of spectrum; (d) limits on spectrum allocation; and (e) use of spectrum. Relationship between telecom licences and spectrum Previously, under the Telecom Policy 1994 (updated in 1999), spectrum was tied in with telecom licences. Since 2003, licence conditions provided for award of two blocks of 6.2 MHz of spectrum for GSM technology and two blocks of 5 MHz for CDMA technology. As per the government’s decision of January 17, 2008 (as explained in TRAI's consultation paper, see page 3 paragraph 7) additional spectrum would be awarded on the basis of increment in the number of subscribers. Service providers had to pay a licence fee (on obtaining the licence), an annual licence fee and a spectrum usage charge determined on the basis of their adjusted gross revenue. TRAI has recommended that telecom licences and spectrum should be de-linked. The service provider would thus pay separately for the value of the licence and the spectrum. With this formulation an entity that does not hold a licence, but is eligible to secure one, may also procure spectrum. This would help in avoiding situations where licence holders have to wait to secure spectrum or offer wire line services in the absence of spectrum. Procedure for allocation of spectrum TRAI has recommended that spectrum be auctioned by means of a simultaneous multiple round ascending auction (SMRA). This means that the service providers would bid for spectrum in different blocks simultaneously. In the first round of auction a reserve price (base price) set by the government is used. Reserve price for auction and payment mechanism A reserve price indicates the minimum amount the bidder must pay to win the object. In case it is too low, it may reduce the gains made by the seller and lead to a sub-optimal sale. If it is too high, it may reduce the number of bidders and the probability of the good not being sold. Various countries have adopted a reserve price of 0.5 times the final price. TRAI has recommended that the reserve price should be 0.8 times the expected winning bid. It has also recommended that telecom companies pay 67% to 75% of the final price in installments over 10 years, depending on the spectrum band. TRAI has reasoned that a higher price would reduce the possibility of further sales upon bidders securing spectrum. However, this may lead to fewer bidders and ultimately fewer service providers. It is argued in news reports that this may increase investments to be made by the service providers and eventually an increase in tariffs. Spectrum blocks and caps TRAI has recommended that the spectrum cap should be determined on the basis of market share. A service provider can now secure a maximum of 50% of spectrum assigned in each band in each service area. However, a service provider cannot hold more than 25% of the total spectrum assigned in all the bands across the country. As per the January 2008 decision, additional spectrum could be awarded to telecom companies when they reached incremental slabs of subscribers. This could extend to two blocks of 1 MHz for GSM technology, and two blocks of 1.25 MHz for CDMA, for each slab of subscribers. TRAI has recommended that spectrum should be auctioned in blocks of 1.25 MHz. Each auction would at least offer 5 MHz of spectrum at a time. Smaller blocks would ensure that service providers who are nearing the spectrum cap may secure spectrum without exceeding the cap. However, experts have argued that 1.25 MHz block may be too limited for launching services. Also, TRAI in the recommendation has noted that a minimum of 5 MHz of contiguous spectrum is required to launch efficient services with new technologies. Use of spectrum TRAI has recommended that the use of spectrum should be liberalised. This implies that spectrum should be technology neutral. Telecom companies would now be free to launch services with any technology of their choice.
Recently, the Indian Railways announced rationalisation of freight fares. This rationalisation will result in an 8.75% increase in freight rates for major commodities such as coal, iron and steel, iron ore, and raw materials for steel plants. The freight rates were rationalised to ensure additional revenue generation across the network. An additional revenue of Rs 3,344 crore is expected from such rationalisation, which will be utilised to improve passenger amenities. In addition, the haulage charge of containers has been increased by 5% and the freight rates of other small goods have been increased by 8.75%. Freight rates have not been increased for goods such as food grains, flours, pulses, fertilisers, salt, and sugar, cement, petroleum, and diesel. In light of this, we discuss some issues around Railways’ freight pricing.
Railways’ sources of internal revenue
Railways earns its internal revenue primarily from passenger and freight traffic. In 2016-17 (latest actual figures available), freight and passenger traffic contributed to about 63% and 28% of the internal revenue, respectively. The remaining is earned from miscellaneous sources such as parcel service, coaching receipts, and platform tickets.
Freight traffic: Railways majorly transports bulk freight, and the freight basket has mostly been limited to include raw materials for certain industries such as power plants, and iron and steel plants. It generates most of its freight revenue from the transportation of coal (43%), followed by cement (8%), food-grains (7%), and iron and steel (7%). In 2018-19, Railways expects to earn Rs 1,21,950 crore from its freight traffic.
Passenger traffic: Passenger traffic is broadly divided into two categories: suburban and non-suburban traffic. Suburban trains are passenger trains that cover short distances of up to 150 km, and help move passengers within cities and suburbs. Majority of the passenger revenue (94% in 2017-18) comes from the non-suburban traffic (or the long-distance trains).
Within non-suburban traffic, second class (includes sleeper class) contributes to 67% of the non-suburban revenue. AC class (includes AC 3-tier, AC Chair Car and AC sleeper) contributes to 32% of the non-suburban revenue. The remaining 1% comes from AC First Class (includes Executive class and First Class).
Railways’ ability to generate its own revenue has been slowing
The growth rate of Railways’ earnings from its core business of running freight and passenger trains has been declining. This is due to a decline in the growth of both freight and passenger traffic. Some of the reasons for such decline include:
Freight traffic growth has been declining, and is limited to a few items
Growth of freight traffic has been declining over the last few years. It has declined from around 8% in the mid-2000s to a 4% negative growth in mid-2010s, before an estimated recovery to about 5% now.
The National Transport Development Policy Committee (2014) had noted various issues with freight transportation on railways. For example, Indian Railways does not have an institutional arrangement to attract and aggregate traffic of smaller parcel size. Further, freight services are run with a focus on efficiency instead of customer satisfaction. Consequently, it has not been able to capture high potential markets such as FMCGs, hazardous materials, or automobiles and containerised cargo. Most of such freight is transported by roads.
The freight basket is also limited to a few commodities, most of which are bulk in nature. For example, coal contributes to about 43% of freight revenue and 25% of the total internal revenue. Therefore, any shift in transport patterns of any of these bulk commodities could affect Railways’ finances significantly.
For example, if new coal based power plants are set up at pit heads (source of coal), then the need for transporting coal through Railways would decrease. If India’s coal usage decreases due to a shift to more non-renewable sources of energy, it will reduce the amount of coal being transported. Such situations could have a significant adverse impact on Railways’ revenue.
Freight traffic cross-subsidises passenger traffic
In 2014-15, while Railways’ freight business made a profit of about Rs 44,500 crore, its passenger business incurred a net loss of about Rs 33,000 crore.17 The total passenger revenue during this period was Rs 49,000 crore. This implies that losses in the passenger business are about 67% of its revenue. Therefore, in 2014-15, for every one rupee earned in its passenger business, Indian Railways ended up spending Rs 1.67.
These losses occur across both suburban and non-suburban operations, and are primarily caused due to: (i) passenger fares being lower than the costs, and (ii) concessions to various categories of passengers. According to the NITI Aayog (2016), about 77% to 80% of these losses are contributed by non-suburban operations (long-distance trains). Concessions to various categories of passengers contribute to about 4% of these losses, and the remaining (73-76%) is due to fares being lower than the system costs.
The NITI Aayog (2016) had noted that Railways ends up using profits from its freight business to provide for such losses in the passenger segment, and also to manage its overall financial situation. Such cross-subsidisation has resulted in high freight tariffs. The NTDPC (2014) had noted that, in several countries, passenger fares are either higher or almost equal as freight rates. However, in India, the ratio of passenger fare to freight rate is about 0.3.
Impact of increasing freight rates
The recent freight rationalisation further increases the freight rates for certain key commodities by 8.75%, with an intention to improve passenger amenities. Higher freight tariffs could be counter-productive towards growth of traffic in the segment. The NTDPC report had noted that due to such high tariffs, freight traffic has been moving to other modes of transport. Further, the higher cost of freight segment is eventually passed on to the common public in the form of increased costs of electricity, steel, etc. Various experts have recommended that Railways should consider ways to rationalise freight and passenger tariff distortions in a way to reduce such cross-subsidisation.
For a detailed analysis of Railways revenue and infrastructure, refer to our report on ‘State of Indian Railways’.
