Wednesday, December 7, 2011

Challenges to railways connection in South Asia

Following the two-day Inter-governmental Committee (IGC) meeting of commerce secretaries of Nepal and India, India has agreed to waive off additional customs duty on 162 Nepali export items.It had imposed an additional customs duty on 331 Nepali exportable items in 2006. It waived off the duty on 169 items in 2008, but continued to impose duty on 162 items. The waiver will come into effect from Mach 2012. It is good news to Nepalese exports exporting goods (such as metal products, steel, iron alloy, copper sheet, yarn, textile and cotton, tea, ginger) to India.

The two sides also agreed to hold a meeting to review the Railway Service Agreement (RSA). Nepal has been pushing for the revision of RSA to pave the way for linking cargo train services between Birgunj dry port and Bangladesh via Rohanpur-Shinghabad route, and Visakhapatnum port in India. It appears that both sides are positive to operationalize Rohanpur-Shinghabad railway line and Visakhapatnam ports at the earliest. Meanwhile, at the 17th SAARC Summit in Addu, the Maldives, the attending heads of state decided to finalize a Regional Railways Agreement and complete the preparatory work on an Indian Ocean Cargo and Passenger Ferry Service by the end of this year. The declaration also decided on early demonstration run of a Bangladesh-India-Nepal container train.

Establishing railways link between nations is not an easy task because each time a train passes through a country it is under different jurisdiction, and the operating cost and hence pricing could be different in the connected countries. There has to be transnational railways policy coherence to run such arrangements smoothly and successfully. And, ensuring this coherence is more of political stint than anything else. It would require political will to let the transnational railways system run by an independent body that can fix prices and operate under set guidelines under different jurisdictions.

Below are three fundamental points outlined by Paul Collier in a discussion related to transnational railways initiative in Africa. It is relevant to the proposed railways connection in South Asia (and between Nepal and India).

Railways are a primary example of a network industry. The key feature of a network industry is that its operations are so interconnected that it is more efficient to run it as a single entity. This presents an unavoidable role for public policy: how to manage a monopoly provider in the public interest.

They are a classic example of high fixed costs relative to operating costs. In the parlance of economics, the marginal cost—the cost of producing one more unit—is well below the average cost. For social efficiency, prices should be set around the marginal cost, but for an activity to be commercially viable prices must at least equal the average cost. This tension in pricing calls for a political solution: typically either a subsidy from the government or cross-subsidization from users who are not very price sensitive to those who depend on cheap rail service.

The mainland continent of Africa is split into so many countries that inevitably rail lines need to be international, especially because many of the countries that would benefit most are landlocked. Yet a transnational network investment is potentially at risk from each national polity. Indeed, each time rolling stock crosses borders a valuable asset moves into a new jurisdiction.

Because African governments have yet to tackle these three political challenges, the African rail network remains inadequate.