Transit and transshipment-strategic considerations
K.A.S. Murshid, Research Director, BIDS
Table 6 below shows a listing of freight charges applied by BR on different items. It should be noted that these charges relate to bulk carriage rather than container cargo, except for item 7.It may be noted that there is a lot of variation in freight rates by commodity, with high value items like cotton yielding a higher return. It may also be noted that containerized items are charged at around Tk. 1 per kg on the Dhaka-Chittagong Port route (the only route where container freight traffic is operational). These figures provide an indication of the sort of charges that BR levies on freight transport. These rates however, include a large element of subsidy given the fact that BR runs huge deficits, with operating costs exceeding operating revenues by almost 100 percent. As a result, the government has to pick up this deficit every year in order to keep BR running. The high cost arises from the need to provide public services, and much more importantly, due to serious management deficiencies that have remained unaddressed for decades notwithstanding various 'reform projects' instituted to improve the situation.
Table 6: Freight Charges by Rail (Tk. per kg on different routes)
Source: Collected from BR or estimated from data in the BR Information Book, 2008.
BR's operating costs were 193 percent of operating revenue in 2008. In other words, BR suffers an annual loss of Tk. 5269 million, a part of which can be attributed to public service obligations and staff welfare costs. However, even after taking this into account, the operating cost exceeded 161 percent of revenues. In other words, given the current state of management in operation in BR, freight rates should be doubled if it is to break even and post a small profit. In the case of transit services, BR should charge a rate that is sufficient to cover costs and post a reasonable profit. In other words it would be difficult to justify a freight charge for transit goods at par with domestic freight.
The opportunity cost assessment and the amount of "savings" likely to be generated is crucial to the understanding of incentives likely to exist in transit trade. Thus, the opportunity cost needs to cover unsubsidized BR freight rates and yield sufficient savings that can be used to provide incentives to Indian traders and allow the Bangladesh government to impose a levy or surcharge to cover capital costs and boost revenues. The opportunity cost is simply the freight rate that is actually incurred by India, e.g. on the Kolkata-Guwahati or Kolkata-Agartala route, at present, (pre-transit situation). The "savings" constitute the difference between this figure and the cost of freight through Bangladesh. This constitutes an Indian portion (for the section up to the point of exit or entry from/to Bangladesh) and the Bangladesh portion. Thus, to arrive at the savings estimates, we need to have freight rates and costs for:
A. Existing Indian routes
B. The Indian portion of the proposed transit routes, and
C. The Bangladesh portion of the transit routes
In other words, the savings will equal A - (B+C).
The Basic Numbers:
The above figures are based on Annex 1 which provides data on distances, freight rates and costs for various sections of the transit routes. The evidence above suggests very clearly, the following:
"There will be no diversion from Guwahati-Kolkata inland trade by road or rail to the Bangladesh transit trade. There is almost a difference of Tk.1000 per ton in freight rates (in favour of the status quo) if Bangladesh Railway charges the full cost of freight. With subsidy, the freight charges appear similar, and there is no incentive to divert. There is significant subsidy on inland trade given by the Federal Government of India. Even lifting this subsidy will not help divert at full BR cost.
"There should be enough incentive to divert traffic on the Silchar-Kolkata route (by train or road) through Bangladesh if transit is allowed. This will allow the GOB to recover the BR subsidy and to make a small profit, of around Tk.470 per ton. As has been argued however, the available traffic on this route is likely to be quite thin.
"The Agartala-Kolkata route provides the greatest incentive to divert trade through Bangladesh transit points, with a true savings (savings2) of Tk.1500. Substantial time will also be saved given that the distance will reduce dramatically from 1680 km to 496 km with transit.
"Assuming a maximum of 4 million tons of traffic through Bangladesh in the medium run (3 million from the Agartala region and 1 million from the Silchar area), the impact on revenue would be $57 million at the rate suggested by GOB (i.e. Tk.1000 per ton transit fee). From this the BR subsidy will have to be deducted to arrive at the net revenue. This is estimated at less than $15 million. Even if we manage to drive a particularly hard bargain and double the charge, this will boost revenue to $30 million.
"Thus, for an investment of $100 million, a return of $15-30 million can be made. This is not bad as an investment but hardly of an order that can make a tremendous difference, e.g. to our balance of payments.
The above scenarios have assumed that cross border movement will be smooth and unhindered. In reality, the situation could be quite different. The existing protocol surrounding movement of goods across land borders is very inefficient and costly. Thus, at Benapole an import shipment has to provide 22 separate documents in 116 copies, with 55 signatures. The transactions costs account for 10 percent of cost (De, 2007, Das and Pohit, 2004). On average, a consignment through Benpole takes 3-6 days to complete formalities and costs around $75 per ton (including taxes). The transaction cost at 10 percent would be $7.5 per ton. In other words a sum of Tk. 500 could be easily added to the transit rates estimated earlier if these transaction costs are included, reducing revenues further. The time delay in the Tamabil-Dawki border is 7-14 days although no estimate of transaction costs seems to be available.
Strategic consideration
It is the view taken here that mainland India is mainly interested in gaining access to the states of Tripura, Nagaland, Mizoram and Manipur through transit rights. Its objectives are complex, and may be listed as follows:
"Open up the region to trade and economic activity, and in particular, to bring it closer both physically and psychologically to the mainland;
"Enable exploitation of the rich natural resources there;
"Pre-condition: end of conflict and insurgency and beginning of reconciliation - it is hoped that transit will help to improve the economy and discourage conflict;
"It will retain the existing infrastructural linkages with Assam, keeping the Assam trade intact, even if subsidies need to be maintained;
"Its ultimate hope is to use the NES as its primary gateway to ASEAN and China.
Even though the direct gains for Bangladesh is small (and these will be reduced further as its existing export market share in NES declines in the face of competition from the mainland), Bangladesh should go ahead, but only connecting up through its rail network in addition to the already existing connectivity through IWT. There are two good reasons for this: it is an opportunity for BR to lift itself up by its bootstraps, and it provides a positive signal to New Delhi that Bangladesh is willing to open a new chapter of cooperation but only cautiously, and that it will expect to be rewarded for it. There are many outstanding issues of bilateral importance which need to be resolved, and the traditional approach has not worked. Mind sets need to be changed over there, in the NES and in Bangladesh. This may well be the entry point on that journey.
As BR makes its decision, it may want to examine which end of the freight market it wants to address. The preference should be to target the containerized, upper-end of the freight market to maximize returns and minimize the load. BR should also take advantage of the new services to introduce passenger traffic, which may well be more profitable.
Bangladesh should maximize the returns to its strategic location by seeking energy exploitation arrangements, access to natural resources, investments in the NES, and setting up of special economic zones along the border to tap their raw materials using Bangladeshi capital, technology and labour to expand employment, trade and exports. There needs to be pro-active action on this front including serious negotiations with the Central and State governments. In other words, we will have to move beyond the paltry revenues associated with transit in order to lay claim to much more significant opportunities.
The "eastern promise" is likely to remain an illusion until such time that we see a change in government in Myanmar.More analysis is needed in one key area: to what extent is Assam likely to participate in this new/emerging economy? The deep-rooted obsession and anxiety with "foreigners" in Assam and the rest of the NES is the most potent threat on this journey. A reflection of this anxiety is self-evident all along the border belt but especially in the adjoining areas of Assam, Meghalaya and Manipur. Indian policy promises made in New Delhi need to be translated into action quickly.
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K.A.S. Murshid, Research Director, BIDS
Table 6 below shows a listing of freight charges applied by BR on different items. It should be noted that these charges relate to bulk carriage rather than container cargo, except for item 7.It may be noted that there is a lot of variation in freight rates by commodity, with high value items like cotton yielding a higher return. It may also be noted that containerized items are charged at around Tk. 1 per kg on the Dhaka-Chittagong Port route (the only route where container freight traffic is operational). These figures provide an indication of the sort of charges that BR levies on freight transport. These rates however, include a large element of subsidy given the fact that BR runs huge deficits, with operating costs exceeding operating revenues by almost 100 percent. As a result, the government has to pick up this deficit every year in order to keep BR running. The high cost arises from the need to provide public services, and much more importantly, due to serious management deficiencies that have remained unaddressed for decades notwithstanding various 'reform projects' instituted to improve the situation.
Table 6: Freight Charges by Rail (Tk. per kg on different routes)
Source: Collected from BR or estimated from data in the BR Information Book, 2008.
BR's operating costs were 193 percent of operating revenue in 2008. In other words, BR suffers an annual loss of Tk. 5269 million, a part of which can be attributed to public service obligations and staff welfare costs. However, even after taking this into account, the operating cost exceeded 161 percent of revenues. In other words, given the current state of management in operation in BR, freight rates should be doubled if it is to break even and post a small profit. In the case of transit services, BR should charge a rate that is sufficient to cover costs and post a reasonable profit. In other words it would be difficult to justify a freight charge for transit goods at par with domestic freight.
The opportunity cost assessment and the amount of "savings" likely to be generated is crucial to the understanding of incentives likely to exist in transit trade. Thus, the opportunity cost needs to cover unsubsidized BR freight rates and yield sufficient savings that can be used to provide incentives to Indian traders and allow the Bangladesh government to impose a levy or surcharge to cover capital costs and boost revenues. The opportunity cost is simply the freight rate that is actually incurred by India, e.g. on the Kolkata-Guwahati or Kolkata-Agartala route, at present, (pre-transit situation). The "savings" constitute the difference between this figure and the cost of freight through Bangladesh. This constitutes an Indian portion (for the section up to the point of exit or entry from/to Bangladesh) and the Bangladesh portion. Thus, to arrive at the savings estimates, we need to have freight rates and costs for:
A. Existing Indian routes
B. The Indian portion of the proposed transit routes, and
C. The Bangladesh portion of the transit routes
In other words, the savings will equal A - (B+C).
The Basic Numbers:
The above figures are based on Annex 1 which provides data on distances, freight rates and costs for various sections of the transit routes. The evidence above suggests very clearly, the following:
"There will be no diversion from Guwahati-Kolkata inland trade by road or rail to the Bangladesh transit trade. There is almost a difference of Tk.1000 per ton in freight rates (in favour of the status quo) if Bangladesh Railway charges the full cost of freight. With subsidy, the freight charges appear similar, and there is no incentive to divert. There is significant subsidy on inland trade given by the Federal Government of India. Even lifting this subsidy will not help divert at full BR cost.
"There should be enough incentive to divert traffic on the Silchar-Kolkata route (by train or road) through Bangladesh if transit is allowed. This will allow the GOB to recover the BR subsidy and to make a small profit, of around Tk.470 per ton. As has been argued however, the available traffic on this route is likely to be quite thin.
"The Agartala-Kolkata route provides the greatest incentive to divert trade through Bangladesh transit points, with a true savings (savings2) of Tk.1500. Substantial time will also be saved given that the distance will reduce dramatically from 1680 km to 496 km with transit.
"Assuming a maximum of 4 million tons of traffic through Bangladesh in the medium run (3 million from the Agartala region and 1 million from the Silchar area), the impact on revenue would be $57 million at the rate suggested by GOB (i.e. Tk.1000 per ton transit fee). From this the BR subsidy will have to be deducted to arrive at the net revenue. This is estimated at less than $15 million. Even if we manage to drive a particularly hard bargain and double the charge, this will boost revenue to $30 million.
"Thus, for an investment of $100 million, a return of $15-30 million can be made. This is not bad as an investment but hardly of an order that can make a tremendous difference, e.g. to our balance of payments.
The above scenarios have assumed that cross border movement will be smooth and unhindered. In reality, the situation could be quite different. The existing protocol surrounding movement of goods across land borders is very inefficient and costly. Thus, at Benapole an import shipment has to provide 22 separate documents in 116 copies, with 55 signatures. The transactions costs account for 10 percent of cost (De, 2007, Das and Pohit, 2004). On average, a consignment through Benpole takes 3-6 days to complete formalities and costs around $75 per ton (including taxes). The transaction cost at 10 percent would be $7.5 per ton. In other words a sum of Tk. 500 could be easily added to the transit rates estimated earlier if these transaction costs are included, reducing revenues further. The time delay in the Tamabil-Dawki border is 7-14 days although no estimate of transaction costs seems to be available.
Strategic consideration
It is the view taken here that mainland India is mainly interested in gaining access to the states of Tripura, Nagaland, Mizoram and Manipur through transit rights. Its objectives are complex, and may be listed as follows:
"Open up the region to trade and economic activity, and in particular, to bring it closer both physically and psychologically to the mainland;
"Enable exploitation of the rich natural resources there;
"Pre-condition: end of conflict and insurgency and beginning of reconciliation - it is hoped that transit will help to improve the economy and discourage conflict;
"It will retain the existing infrastructural linkages with Assam, keeping the Assam trade intact, even if subsidies need to be maintained;
"Its ultimate hope is to use the NES as its primary gateway to ASEAN and China.
Even though the direct gains for Bangladesh is small (and these will be reduced further as its existing export market share in NES declines in the face of competition from the mainland), Bangladesh should go ahead, but only connecting up through its rail network in addition to the already existing connectivity through IWT. There are two good reasons for this: it is an opportunity for BR to lift itself up by its bootstraps, and it provides a positive signal to New Delhi that Bangladesh is willing to open a new chapter of cooperation but only cautiously, and that it will expect to be rewarded for it. There are many outstanding issues of bilateral importance which need to be resolved, and the traditional approach has not worked. Mind sets need to be changed over there, in the NES and in Bangladesh. This may well be the entry point on that journey.
As BR makes its decision, it may want to examine which end of the freight market it wants to address. The preference should be to target the containerized, upper-end of the freight market to maximize returns and minimize the load. BR should also take advantage of the new services to introduce passenger traffic, which may well be more profitable.
Bangladesh should maximize the returns to its strategic location by seeking energy exploitation arrangements, access to natural resources, investments in the NES, and setting up of special economic zones along the border to tap their raw materials using Bangladeshi capital, technology and labour to expand employment, trade and exports. There needs to be pro-active action on this front including serious negotiations with the Central and State governments. In other words, we will have to move beyond the paltry revenues associated with transit in order to lay claim to much more significant opportunities.
The "eastern promise" is likely to remain an illusion until such time that we see a change in government in Myanmar.More analysis is needed in one key area: to what extent is Assam likely to participate in this new/emerging economy? The deep-rooted obsession and anxiety with "foreigners" in Assam and the rest of the NES is the most potent threat on this journey. A reflection of this anxiety is self-evident all along the border belt but especially in the adjoining areas of Assam, Meghalaya and Manipur. Indian policy promises made in New Delhi need to be translated into action quickly.
http://www.weeklyholiday.net/Homepage/Pages/UserHome.aspx?ID=10&date=0#Tid=1589
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