Author: Vijayaraghavan, T A S
Role of Transportation in Logistics
Peter Drucker’s comment on distribution as the `last Dark Continent’ for business to conquer resulted in an important management function that has multiple strides ranging from integrated logistics management to supply chain management.
It is virtually inconceivable in today’s economy for a firm to function without the aid of transportation. Transportation is an essential and a major sub-function of logistics that creates time and place utility in goods. In fact, the backbone of the entire supply chain is the transportation management that makes it possible to achieve the well known seven Rs- the right product in the right quantity and the right condition, at the right place, at the right time, for the right customer at the right cost.
Micro Logistics and Macro Logistics
Transportation decisions affect the other sub-functions, and there is a close linkage between them. Hence, transport decisions cannot be made in a vacuum. This part of the role of transportation in logistics may be termed as “Micro Logistics,” where at the firms’ level, the companies optimize this function for competitive cost advantage.
The importance of transportation should also be seen by looking at the impact of transportation on a country’s economy. Studies reveal that in India the total logistics costs constitute nearly 10 percent of the GNP out of which nearly 40 percent is because of transportation alone. In the U.S., the estimates show that the cost is around 6 percent of the GNP. The major infrastructure required for moving goods from one place to another in India involve the active roles of Roads, Road Freight Industry, Railways, Ports and Shipping, and Pipelines, all of which are either managed or regulated by the government. The efficient and effective management of this infrastructure to enable the smooth flow of goods constitutes “Macro Logistics.” The situation in India is that because of unprofessional management of “Macro Logistics,” the industries are not able to derive the best out of their “Micro Logistics.” Any improvement in the Micro Logistics will be effective only if the Macro Logistics is effective. Also, Indian companies and the industries have not fully optimized their logistics function, as there is a tendency to live with the lacunae in Macro Logistics and the government’s inefficiency.
The objective of this article is to put forth the Macro perspectives in Indian transportation logistics, the scenarios in the infrastructure, which constitute Macro Logistics in the country, and possible remedies.
Components of Macro Logistics Roads
India has one of the largest road networks in the world (over 2.9 million km at present). The growth rate in road traffic has been 10 percent since 1951 and would have gone higher had there been a larger and penetrative road network.
The motor vehicle population has grown from 0.3 million in 1951 to 27.5 million in 1995, marking a 90-fold increase. The road network has expanded from 0.4 million km to 2.95 million km, only a 7-fold increase in terms of length during the same period. It stands at 3.3 million at 1998. However, the upgrading of roads by way of widening of carriage ways, improved surface quality, and strengthening/ reconstruction of old/weak bridges and culverts has not matched with this phenomenal growth. Furthermore, only 20 percent of the surfaced roads are estimated to be in good condition. This compares unfavorably with other countries (Indonesia and Brazil 30 percent, Korea 70 percent, Japan and U.S. more than 85 percent).
National Highways (NHs) are the main arterial roads connecting ports, state capitals, industrial and tourist centers, and neighboring countries. NHs constitute less than 2 percent of the total road network, but carry nearly 40 percent of the total road traffic. Their growth in quantitative terms has been rather gradual, from 22,255 km in 1951, to 34,608 km in 1997. Out of the total 162,920 km of National and State Highways, only 2 percent of their length is four-lane, 34 percent two-lane and 64 percent single-lane. As far as NHs are concerned, only 5 percent of their length is four-lane, 80 percent two-lane and 15 percent continues to be single-lane. The deficiencies in the road network are causing huge economic losses because of slow transportation. These deficiencies also contribute to a high rate of road accidents. The delay on the roads and ports also results in high inventory costs for the industry, thus affecting its competitiveness vis-avis international industry operating on JIT(just-in-time) inventory principles. The congestion at the ports and the insufficiently developed air services also affect foreign investment decisions, which often place a great premium on the infrastructure. International trends indicate that with
the growth of the highway and aviation technologies, the traffic tends to shift away from the Railways. However, in the continental economies like US., China and Russia, the Railways have maintained their dominance. India’s size, geography and resource endowments also mandate a dominant role for the Railways, not to mention the environmental considerations, which in recent years have caused a rethinking even in the developed world.
Another imbalance is the rural-urban dichotomy. Much of the network of rail, roads, ports and airports is geared to the needs of the urban economy, while the vast rural hinterland is very poorly served by communications. Of the nearly six lakh1 villages, only about three-fifths are known to be connected by all-weather roads at the end of the Eighth Plan.
Distortions in the Inter-modal Mix
The Railways and the Roadways are the two main modes of transport carrying the bulk of freight and passenger traffic. Freight transport by road has risen from 6 billion ton km (BTK) in 1951, to 400 BTK in 1995. Passenger traffic has risen from 23 billion passenger km (BPK) to 1,500 BPK during the same period. Freight and passenger traffic are expected to increase to 800 BTK and 3,000 BPK respectively by the year 2001. Commercial vehicles in India are able to run only 250 km on average per day as compared to 600 km in developed countries. Successive policy statements and the Plan documents have recommended that the Railways should be given the lead role in the transport sector because of their greater energy efficiency, eco-friendliness and relative safety. However, the Railways have continued to yield their dominant position to the road transport. There is a major shift of movement of freight and passengers from rail to road since 1951.
The main reason for this continual slide in the Railways’ share has been the inability of the system to cope with the traffic growth of the growing economy and under supply both quantitatively and qualitatively. Faced with capacity constraints, the Railway system chose to concentrate on the movement of bulk materials for the core sector like power, steel and cement. Because of this, the system lost its clientele in the high value non-bulk sectors which often recorded higher growth rates. The skewed tariff policy of subsidizing passenger traffic and an increase in freight rates are driving away even some of the long distance bulk traffic from the Railways to the Roadways. Road traffic, being largely in the private sector, has moved aggressively to exploit this opportunity which was facilitated by a liberal permit and regulatory system for national trucking, cheap finance made available by the banking sector and an energy pricing policy which has subsidized diesel.
Problems, Issues and Strategies
The Indian government, through the Ministry of Surface Transport (MOST), announced incentives and tax holidays in its efforts to invite and encourage private sector in road infrastructure. Because, by nature, private sector responds to shortterm returns, infrastructure investments having long gestation periods are unattractive to private investors. However, while the private roads that operate on a commercial basis will be confined to high-density corridors, the rural roads will still be the responsibility of the government. If development has to be spread evenly, much greater attention needs to be paid to roads, which are outside national highways. The number of vehicles on our roads is expected to double in another five years. Investments go heavily into production and manufacturing of vehicles, and lack in infrastructure to support this growing demand.
Roads are the lifelines of an economy. The Rakesh Mohan Committee on Infrastructure highlighted several facts and issues. The public sector outlay for road development in the First Plan was 6.7 percent. It dropped down to a mere 3 percent in the Eighth Plan. Investments in NHs went down from 1.4 percent of the total outlay to 0.6 percent in the same period.
While in India the road development doesn’t have any strong lobby, the automobile industry has gone for an overkill. The present limited road space with an unbalanced growth of vehicles can only be ignored at a great cost to the economy. The backbone of Macro Logistics is the roads. Unless the anticipated growth of vehicles is accompanied by super highways, NHs and SHs, the economy will get a set back as the basic logistics of both Micro and Macro will be at a snail’s pace. The Rakesh Mohan Committee estimated that the economic cost of bad roads ranges from Rs.20,000 crore2 to Rs.30, 000 crore annually.
In India, hardly 30 to 40 percent of the revenue realized from roads are thrown back into road development. In advanced economies like U.S., Switzerland and Japan, the entire amount is thrown back into road development. These countries realized that the expenditure on roads is an investment leading to accelerated growth in every other sector. The roads in India have become cash cows. It is estimated that the transport sector pays Rs.4500 crore every year to various state governments as taxes. The present practice of taxation in the road transport sector was the practice during British India when the government wanted to protect Railways in which the British had financial interests. There is certainly a need to rethink the entire taxation on the road transport sector if the government wants the road and freight transport infrastructure to support Macro Logistics in India.
The 20-year Road Development Plan (1981 – 2001) envisaged a need for 66,000 km long NHs and 1,45,000 km long SHs network by the year 2001. There is also a need for a 10,000 km long Expressway network by the year 2015. In addition, there is a need to upgrade the road system in the country by widening and strengthening existing highways, reconstruction/widening bridges and provisions of user friendly improvements. Private sector participation in the highway sector is under the build, operate and transfer (BOT) concept. There are already contracts for about 10 BOT road projects involving bridges and by-passes with a total investment of Rs.400 crore.
External assistance is being obtained for the improvement of NHs through international agencies such as the World Bank, Asian Development Bank and Overseas Economic Cooperation of Japan. The Government of India has entrusted the National Highways Authority with the Asian Development Bank Project costing about Rs.800 crores in five states. The government is expecting about Rs.2,500 crore in the coming years from the private participation in building and developing roads.
Bad roads not only obstruct and delay movement of goods and passengers, but also increase the cost of vehicle maintenance, and endanger safety. It is necessary that the government should strive not only to release adequate funds for road maintenance, but also to follow through with the proper maintenance.
Road Freight Industry
Because of the inadequacy of an interlinked, exhaustive and all penetrating Railway network or inland/coastal water– ways or airways, road transport has assumed a pivotal role in the predominantly agrarian economy in India with heavy rural concentration. The history of road– way transport in India indicates that the industry went through a rapid growth in the second half of the decade, 1980-1990. This growth resulted in a major shift in the movement of goods from Railways to roads. The industry is still coping with an inadequate and poor quality of road network. It suffers from a near absence of technological improvements in the design and manufacture of vehicles.
Profile of the Road Freight Industry
* The industry continues to comprise small operators accounting for as much as 85 percent of the total fleet. The industry generates considerable local employment opportunities. Nearly two– thirds of the drivers are engaged on a full-time basis.
* The total transport function is shared among several actors. For example, operators perform only the haulage function, while the marketing, aggregating, storing and delivery functions are undertaken by agents and brokers.
* The two principal manufacturers of trucks, TELCO & Ashok Leyland, account for more or less the entire fleet of heavy vehicles in the country. Owing to their monopoly, technology and price are dictated by the sellers market.
* The industry is strongly agitated over the issue of octroi3, not so much on the basis of its justification, but as over the irksome features entailed in its collection. The industry also recommends abolition of the permit system, as it does not square up with the present policy of liberalization.
* The industry productivity could be further improved since only one-third of the trucks operate between 300 to 400 km per day and about 12 percent of trips are empty trips without load.
* Truck drivers belong to the age group between 18 and 40 years and are mostly educated up to under-matriculation level. A high percentage of the drivers (88 percent) have learned to drive without attending driver-training schools.
* Operators suffer to a great extent in the absence of proper arrangements for night halts and other wayside amenities.
The Industry also suffers from the problems of structure, proper legislative measures to regulate and control, financing, problems of inter-state barriers, technological up-grade, lack of traffic education and awareness.
Need for a Fresh Look at the Industry’s Structure
We should turn our attention to the need for viable units, which could provide garage facilities, ensure proper repair and maintenance, and induct professional skills. Transport cooperatives could be an interim measure. However, if the mobility gaps have to be bridged in keeping with the growth of the economy, it is time the corporate sector entered the industry in a big way with large fleets. This would ensure the standards of operation and quality of employment be raised for the benefit of the entire economy.
Trends in Port Traffic
The long coastline of India is dotted with 11 major ports that are managed by the Port Trust of India under Central Government jurisdiction. There are also 139 minor operable ports under the jurisdiction of the respective State Governments. The ports are located at Calcutta/Haldia, Mumbai, Jawaharlal Nehru Port at Nhava Sheva, Madras, Cochin, Vishakhapatnam, Kandla, Mormugao, Paradip, New Mangalore and Tuticorin. The major ports handle 90 percent of the all-India port throughput, and thus bear the brunt of sea-borne trade. During 1996-1997, the total cargo handled at major ports was 227.13 million tons, registering a growth of 5.6 percent over 1995-1996. Dry and liquid bulk make up about 80 percent of the port traffic in volume with general cargo, including the containerized cargo, constituting the remaining traffic.
The predominant commodities handled at these ports are POL (42 percent), iron ore (18 percent), coal (15 percent), containers (8 percent), fertilizers (5 percent) others (12 percent). Major increases in traffic were observed in food grains (26.7 percent), other liquids (33.3 percent) and containerized cargo (19.1 percent). The composition of traffic has undergone significant changes in recent years. Berths in India, very often, are occupied 100 percent leaving no time for maintenance. The Indian ports are characterized by the following:
* Ships have to wait long in the channel for berthing, and productivity in loading and unloading is low. The national average turn-around time of vessels for liquid, dry bulk, general cargo and containers is estimated at 3.4 days, 9 days and 3.6 days respectively.
*It is labor intensive and mechanization process is non-existent or slow.
* Night navigation is not available, and ships have to wait for daylight.
* Equipment used is outdated and obsolete.
* Restrictions in navigation channels do not allow bigger vessels to be berthed.
* Handing vessels and feeder vessels in container berths is time consuming.
* The road links to ports are insufficient and badly maintained.
* Lack of coordination between ports and the custom authorities delays quicker dispensation of documentation and goods.
Projections and Investments
In the wake of India’s achieving export target of $85-90 billion (1 percent of world trade), the value of two-way trade in 2002 would be in the range of $180 billion. So the total volume of traffic projected would be around 356-360 million tons by 2002 assuming a growth rate of 9 percent in the annual traffic. The additional capacity required is 300 million tons, and the estimated investment for this purpose will be about Rs.30, 000 crores at Rs.100 crores per million tons of additional capacity. If we assume the conservative 70 percent capacity utilization as essential for efficient operation of ports, then 677 million tons of additional capacity would be required. But, the available capacity after implementing Ninth Plan Schemes will be only around 263 million tons.
According to the World Bank estimates carried out in 1992, the import through port cost for containers in India is higher (U.S.$500-520/TEU) compared to the cost in neighboring ports (in Colombo, Singapore and Bangkok) (US.$330-350). The terminal charges (shore handling, storage, delivery and transport in ports) are the major reasons for this escalation, besides the custom agent charges and the speed money incurred. This is the serious set back in achieving the desired goal of globalization of the Indian Economy.
Besides augmenting the capacity in ports, the government should also initiate few policy measures to achieve its goal. Although the government has initiated policy reforms and opened up the ports sector allowing private sector participation, privatization in the port sector has been very slow. What is required now is not peripheral changes, but to move toward “Landlord Port concept.” This is where the port authority exercises control over infrastructure and land and leave operations to be run by third party (private sector). This calls for a complete change in the institutional set up and other legal reforms. Strategic direction would be on the following four major dimensions.
Realizing the role of private sector participation, the policies should address:
* Long-term strategies of the port sector
* Master plan defining the role of public and private sector including relative roles, responsibilities and obligations
* Issues relating to planning and investment, port pricing, environment and safety
* Dock labor deregulation
The following need to be resolved:
* Enabling legislation for private sector participation in port projects
* Legislation governing project implementation, contract disputes and arbitration procedures
* Recourses in case of default by government
* Land acquisition rights and development rights
* Concession arrangements and their loyalty
The following is required to promote private participation:
* Investor friendly package
* Realistic port throughput guarantees
* Adequate financial incentives
* Removing unnecessary clearances from government authorities for implementation of projects and time consuming procedures
* Development of additional ICDs for aggregation and movement of traffic
* Improving road and rail links for quicker transportation
* Mechanization of port operations with modem equipment
* Automation and computerization
* Dredging of channels
The Indian Railway consists of extensive network spread over 62,915 km covering 7068 stations considered as the second largest in the world. Almost 85 percent of rail network was inherited from the British. Operating on three gauges – broad gauge (1676 mm), meter gauge (1000 mm) and narrow gauge (762 and 610 mm), trains in India carry about 12 million passengers and 1.2 million tons of freight every day. Broad gauge, although forming 64.5 percent of the route, generated 95.9 percent of freight output and 90.6 percent of the passenger output during 1995-1996. Almost all the double/multiply track sections and electrified routes lie on broad gauge. Approximately 12,306 route km, constituting over 19.5 percent of the total network and 30 percent of broad gauge network on Indian Railway, is electrified. This carries approx. 41 percent of the passenger traffic and 52 percent of the freight traffic on Indian Railways. The Indian Railway system has developed a capacity to carry 410 million tons of originating revenue-earning traffic, which in turn of transport output is 283 BTKM. During 1995-1996, the revenue earning freight traffic moved by Railways was 390 million tons growing at the rate of 7 percent. The total passenger traffic in the year 1995– 1996 was 4018 million.
According to the World Bank’s estimate in India, a unit increase in GNP generates an increase of 1.5 times in freight transport demand and 1.9 times in passenger transport demand. Expecting Indian economy to grow at more than 6 percent per year in the near future would imply doubling of freight transport output in about 14 years and passenger transport output in eight years. The increased output of basic industries such as power, steel, cement and fertilizers would necessitate facilities for bulk transport in which the Railways have a comparative advantage. The increasing rate of urbanization would also generate demand for rapid transit system. It is anticipated that within the next decade Indian Railway would have to almost double its transport output.
The Railway plans are financed through three main sources: (1) internal resources, (2) market borrowing through Indian Railway Finance Corporation (IRFC) and schemes like OYW (Own Your Wagon) and BOLT (Build, Operate, Lease and Transfer), and (3) capital from General Exchequer. The dilemma before the Indian Railways is about the Capital from the Exchequer and the level of market borrowings. The trend shows that the share of General Exchequer has shrunk, and the market borrowing has gone up. The average cost of market borrowings is high, and there is also a repayment obligation. The generation of internal resources is seriously affected by various factors such as staff cost accounting for 56 percent. Besides other strategies to improve efficiency by adopting to few management concepts, tapping of non-traditional sources of funding will have to be at the center stage of Railway financing strategy. Non-traditional funding mechanisms could include attracting external private funding at concessional rates, leveraging right of way of Railways to attract investments in fiber– optic telecommunications network, commercial exploitation of air space above stations, exploiting leasing routes, innovative financing techniques such as ‘Deep discount Bonds’ with repayments at the end of the term, `Sell and Lease Back’ mechanisms to leverage existing as well as mobile assets.
The present problems and crises facing the transport sector, to a great extent, are the results of lack of integrated thinking of the government from the beginning. India was one of the few countries that attempted to evolve a cohesive transport policy. The initial attempt in the mid-60s by the Committee on Transport Policy and Coordination (Tarlok Singh Committee) and the second attempt in 1980, by the National Transport Policy Committee (NTPC) did not make any major ripples in the transport policy of India. The patronage of road transport was totally unanticipated and caught the government on the wrong foot. The government had no mechanism to formulate policies to steer this growth. In spite of lower allocations, there has been tremendous growth in our transport throughput resulting only in a distorted optimal inter-modal mix. In all transport modes, the technology needs to be upgraded. Most of the studies, including the Rakesh Mohan Committee Report, indicate that only 15 percent of the investment can come from abroad, and a great bulk of it has to be from our own resources. In the Eighth Plan, it is observed that in all modes, only one-third of the investment required came from external funding. Hence, the sources of the transport development in India have to be from within. The Ninth Plan and the subsequent plans need to step up the required budgetary support.
As a proportion of Gross Domestic Product (GDP), total investment in infrastructure ranged from about 4.5 percent to 6 percent, but broadly averaging about 5.5 percent of GDP during the late 1980s and early 1990s. Future investment needs are projected to be much higher because of demands created by rapid urbanization, and the need to make up for past inadequate investment. In order to satisfy the upwardly spiraling demand, it is necessary to evolve an organizational format where development of the sector is less dependent upon government funds. Also, investment needs to be financed from the capital markets and internal resources on a self-sustaining basis.
The Expert Group on Commercialization of Infrastructure estimated that total infrastructure investment requirements would be about Rs. 4,000 to Rs. 4,500 billion (U.S.$115 to $130 billion) over the next five years. During 2001-2002 to 2005– 2006 it would be about Rs. 7,500 billion (U.S.$215 billion). The Expert Group has provided directions for policy reforms, which can help in greater commercialization of infrastructure along with the promotion of public-private partnerships.
There is an urgent need to revise our strategies and approaches to the infrastructure and our transport policies to facilitate free flow of goods and services. We need to make the Micro Logistics function more effective in order to allow Indian companies to compete globally.
1. Lakh: A unit of measurement.
Rs 1 lakh = Rs 100,000 ( 0.1 million)
Rs. 10 lakhs = 1,000,000= 1 million
Rs.100 lakhs = 10,000,000= 1 crore (10 million)
2. Crore: A unit of measurement.
US$1 = approx. Rs.46
Rs. I crore is approximately
3. Octroi: Tax levied by a local government (state or municipality), on certain categories of goods as they enter the area. Octroi is a source of revenue for the state government’s budgets for state administration. Though it is abolished in most of the states, there are still five or six states in India which still levy octroi on incoming goods to the states.
1. Road Goods Transport Industry in India-A study of its structure and organization, 1994, Central Institute of Road Transport, Pune, India
2. The India Infrastructure Report, Rakesh Mohan Committee Report, 1996
3. Infrastructure for Development, World Development Report, 1994
4. Reports of the Ministry of Surface Transport and Railways, Government of India
5. Reports of the National Highway Authority of India
6. Proceedings of the Fifth CIT International Conference on South Asia Transport Vision- 2020, February 1998, New Delhi organized by the chartered Institute of Transport in India
Presently, Dr. Vijayaraghavan is a Professor in the Information Systems & Operations Management Area in XLRI, Jamshedpur (Xavier Labour Relations Institute, Jamshedpur), one of the premier management institutes in India. He has worked with the Xavier Institute of Management, Bhubaneswar and the Central Institute of Road Transport, Pune prior to joining XLRI, Jamshedpur in 1995.
Dr Vijayaraghavan has a B.Sc. (Mathematics) from the University of Madras, India; a M.Stat. ( Master of Statistics) with specialization in Statistical Quality Control and Operations Research from the Indian Statistical Institute, New Delhi, India; a Postgraduate Diploma in Statistical Quality Control cPc Operations Research from the Indian Statistical Institute, Calcutta , India; a Doctorate (Ph.D.) from the Indian Institute of Management, Bangalore, India – worked in the area of Scheduling in Transportation for the Doctoral Thesis work.
He has published papers in International journals such as Transportation Planning & Technology, Garden&Breach Publishers; Transportation Research, Elsevier Computers & Operations Research, Elsevier; International Journal of Public Sector Management , MCB University Press.
Dr Vijayaraghavan has undertaken consultancy work for the Ministry of Surface Transport, Government of India City & Industrial Development Corporation of Maharashtra (CIDCO) in Transportation related areas and consulting for restructuring for a subsidiary of State Trading Corporation of India and Paradip Port Trust. He is presently the Coordinator of the Centre for Logistics and Transportation Management (CLTM) in XLRI, Jamshedpur the editor of the e-Newsletter LogistiX and also, the Coordinator of the Executive Postgraduate Programme in Management.
Memberships include INFORMS (Previously Operations Research Society of America); UITP (International Union of Public Transport), Brussels, Belgium; SOLE – attached to the Pentagon Chapter; Operational Research Society of India; and the Institute of Rail Transport, India.
Copyright Society of Logistics Engineers Jan-Mar 2001
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