Sep 8, 2016

Coal hole in Railways book looms large despite unprecedented number of policy tweaks

With lukewarm power demand and change in generation scenario, the Railways is getting less coal to transport, resulting in loss of freight income

Halfway into the current financial year, the country’s largest freight mover, Indian Railways, is staring at a crisis it does not know how to tackle on its own. Since the beginning of the year, it is getting to carry less and less of the one item in its freight basket that makes or breaks its yearly revenue figures — coal.
Numbers are reaching Rail Bhavan every day from its 16 zones across the country supplying coal to power plants from pit heads. They are not encouraging.

In August alone, there was a shortfall of 50 rakes (trains) per day in demands generated from thermal power plants in 12 main power-producing states across India.

Meetings with sector-specific bigwigs have revealed an even gloomier picture for the transporter. The power plants are sitting on a huge stockpile of coal going unutilised, sources said. A large number of them, including state-owned behemoths have pending dues with coal suppliers, notably Coal India. And plants whose power production traditionally have heavy logistics associated with them, impacting the variable component of the cost of the power, are getting scheduled less than those which are, say, at pitheads, requiring next to no transportation of coal from faraway coal fields. In other words, on the face of it, it would seem that an economy described by the government and international agencies as a global “bright spot” is not generating enough demand for power — conventionally a telling parameter to measure industrial activity. Amid all this, the top bosses at Rail Bhavan are a worried lot.

Mohammad Jamshed, Railway Board Member (Traffic), the top boss in charge of passenger and freight business of Indian Railways, has been initiating an unprecedented number of policy tweaks since the beginning of this fiscal to arrest the decline despite the ominous signs. The latest, that came two weeks ago, rationalised the freight rates for long leads (average distance travelled) of coal carried to power plants. The idea was to incentivise the carriage of coal over longer distances across the country in a manner that producing power in and carrying coal to a large number of “rail-fed” power plants become a win-win deal for all three parties — generation companies, coal suppliers and of course, Railways.

The decrease in freight in this category has been to the effect of up to 13 per cent for distance slab of around 1,500-2,000 km and a reduction of about 15 per cent for distances upwards of 2,000 km.

“We are prepared to carry the entire load projected by the sector for Railways. In fact we have been investing in the system to align ourselves with the current projections of coal movement and power production. But the fact is, the sector itself is not matching up to its own projections, leading to a shortfall reflecting at our end,” Jamshed told. What he means is that in the beginning of the year, ministries of Coal, Power and Railways — basically three top bureaucrats and later on two ministers, Suresh Prabhu and Piyush Goyal — sat together to work out an outlook for the sector for the whole year. A number was arrived at. It was given to Railways that the power production would be such that Railways would get to carry around 253 rakes of coal every day.

Accordingly the transporter made available more wagons than last year, and expedited ongoing works on lines at relevant sectors to boost its carrying capacity. But seven months later, the figures show a shortfall of 50 rakes per day from 30 main power plants. In fact, a couple of months ago, Railways was getting to carry as low as 185 rakes per day — around 20 rakes less than even last year when the average was around 203 rakes per day.

Notably, the latest policy tweak of rationalising the freight tariff also resulted after a meeting of the three ministries including at the ministers’ level when the coal/power ministries sought this.

With things not showing any signs of improvement and the transporter, which survives on derived demands, left high and dry, railway minister Suresh Prabhu has now placed the matter on record by writing a letter to his coal/power counterpart, Piyush Goyal appraising him of the grim scenario and requesting him to meet the coal-power ministries’ end of the bargain.

It is simply a transporter seeking more business from its largest client. But at another level, it is also a state-owned transport behemoth bending over backwards to adjust to the trends of a changing economy.
Unforeseen competition

Over the last couple of years, with cross-country transmission grids getting commissioned rapidly, it has become more economical to wheel power over the grids to faraway places — up to and also beyond 1200 km — than to lug coal across vast distances and produce power locally. This trend is here to stay, says Neelkanth Mishra of Credit Suisse. “… improving power transmission capacity has meant that more power can be wheeled from pithead plants (from example in the west to the north), instead of the railways carrying F-grade coal over 1,000-1,200 kms … why set up a power plant in Punjab with coal linkage from Odisha — wouldn’t it be cheaper to just move the power? It seems that’s starting to happen now. Good for efficiency in the country, but not so good for railway revenues at least in the short term,” he said.

The government’s UDAY scheme, aimed at financial turnaround of distribution companies in states, while resulting in savings for the discoms, is resulting thousands of crores in notional revenue forgone for Railways. This means, the high logistics cost in power generation, which Railways traditionally hogged, are being knocked off by the UDAY scheme, impacting the national transporter and while it is good for the economy, there is nothing that can be done at the moment to arrest the trend. But the biggest challenge has come from an overall shift in the way the country generates and consumes electricity. Over the past few years, the emphasis has been to setting up power plants at pitheads to do away with transportation costs altogether. Policies also stress power plants in proximity to ports for swifter utilisation of imported coal and the like.

In its June report on the sector, Credit Suisse red-flagged the issue. “Lead fell 10 per cent Y-o-Y: while lead rationalisation likely has a role to play, it seems commissioning of several pit-head power plants last year has led to plant-load factor (how much is being generated as opposed how much can be generated at full capacity) falling in rail-fed plants,” it says. In fact in its July report, the agency cautions that the trends indicate meeting budgeted targets would be difficult at this rate. Notably, to shore up revenues, Railways in the same recent rationalisation scheme has raised the freight rates for distances between 200 and 700 km. It, however, maintains that overall the tariff tweaks are revenue neutral and in the best interest of the stakeholders.

Then there are pressures from other sectors like a change in procurement policy for foodgrains by FCI means less foodgrains to carry, but that’s another battle. Overall, what is considered positive transformation of the coal/power and some other sectors is proving to be at the cost of Railways.

To buck the trend

It is not like Railways is unaware of the realities. It has been introducing policy changes and creating new capacities, trying to make itself more responsive to the market as well as its offerings more lucrative.

Along with making longer distances slightly more economical, it has also stepped up its foray into making All Rail Route options more attractive, especially in Southern states. In the South, power companies have coal linkages from Mahanadi Coal Fields Limited situated in Odisha. Over the years, with capacity constraints on the East Coast rail routes, Railways had advised them to get the coal moves through a combination of rail cum sea routes. This means the journey would be partly on railway, then travel by sea and come back on the rail route again. Overall an expensive and inconvenient proposition.

Now, Railways has this year created additional capacity in East Coast route through third lines and doubling and is urging the states to come back to All Rail Route abandoning the sea route. Thanks to the recent rationalisation, the cost of transportation to at least three states, Karnataka, Andhra Pradesh and Tamil Nadu would see substantial decrease in the cost of coal carried. The estimated reduction is between 84 paise and 100 paise in the cost of power per unit or Rs 1,200-1,400 less per tonne of coal. Since April, there have been other tweaks like Merry Go Round rationalisation of rates and in the pipeline is a scheme to provide huge discounts to fulfillment of long term commitments to customers in terms of loading figures. The biggest complementary move to the sector as far as Railways is concerned, however, came last month when the Cabinet approved nine projects of capacity augmentation in Delhi-Chennai and Howrah-Mumbai. Railways would spend around Rs 24,000 crore in about 4 years to build 1,927.28 km of third, fourth and double lines along the existing network just to be able to carry more volumes of freight, or about 1.5 billion tonnes of freight by 2020.

“We want to make sure that Railways matches up to the country’s future need for movement of goods. These projects are for that,” Chairman, Railway Board, AK Mital said. Additionally, to move towards other business avenues, Railways has been exploring possibilities of expanding its freight basket by carrying anything between automobiles, more perishables, a plethora of white goods and even, Ganga jal riding on the postal department’s latest initiative. But all put together is nowhere close to compensating for the loss of coal, the “black diamond”. It is a bitter reality that is sinking in to the age-old transport juggernaut.

Asked if the trend of pithead power houses was a concern, this is what the Railway Board Chairman said. “Of course as a transporter it is a cause for worry. But my worry cannot be at the cost of the country’s economic development.” (Courtesy: Indian Express)

 

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