Panel 8: Transportation Sector Transformations Thursday, November 17 (11:45-12:45) 12 th Symposium on Development and Social Transformation

Panel 8: Transportation Sector Transformations

Thursday, November 17 (11:45-12:45)

12th Symposium on

Development and Social Transformation

The Impact of Low Cost Arilines on the Patronization of AMTRAK in the US – With

Particular Reference to the Northeast

Anil Pavithran


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Virtually, nothing !!

• For Amtrak rider ship constitutes a miniscule 3/10th of 1% of all inter city passengers in United States.

• Only 60,000 passengers per day.

• Made losses continually from 1972, year of formation.

• From 2001 it has notched up billion dollar losses every year.

Ray of hope for Amtrak?

• Increasing congestion on highways and traffic delays

• Door-to-door travel time high for air travel due to enhanced security procedures and long haul from airports to city centers.

Benefits of Rail Transport

• Helps in reduction of congestion on highways

• Public benefit of improving air quality

• Investment in rail infrastructure increases transport capacity more than investment in other modes of transport

• Expansion of rail transport will increase choice available to traveling public

Are the so called benefits real?• A 1995 study by the GAO revealed that in the busy Los Angeles -

San Diego corridor the introduction of a passenger train kept around 130 cars of the 2,240 cars daily.

• Same study indicated improvement in air quality in above sector to be negligible after introduction of train as the numbers involved are insignificant.

• The 1995 GAO study showed the development costs for both rail and road to be much higher than for air travel.

• Increase in choice to public is meaningless unless there is a viable alternative capable of fulfilling consumer requirements.

Pointers from Canadian Rail

• VIA Canada managed to turn the tide by reduction of workforce and linking wages to worker productivity.

• Renewed focus on customer by eliminating all in fructuous costs not impinging on customer satisfaction.

• Display of requisite foresight to conduct a detailed study of customer preferences and then, necessary political will to implement the same by rolling back loss making services.

Following European Railways’

• Redemption for Amtrak distress could lie in innovative services such as the TGV to snare the fast disappearing intercity traffic.

• Increased attention to passenger needs of speedy travel to inner city areas.

• Provision of inter modal linkages

Conclusions

• Studies reveal intercity rail service can best compete with other modes where travel is between densely populated cities at a distance of about 200 miles.

• Leverage advantages of dove tailing inter modal transport for providing quicker access to city centers.

• Curtail all costs inconsistent with customer satisfaction requirements.

Third Party Logistics Outsourcing in the US and Lessons for India

Prem Narayan


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BACKGROUND Prior to 1978 the US for hire transport industry was

subjected to significant economic regulation. Rates charged, market entry / exit and service levels

were monitored by the Interstate commerce commission for trucking & rail and by the Civil aeronautics board for air freight.

Since deregulation, 3PL companies have emerged as providers of a wide variety of logistics and supply chain management functions.

Some 3PLs grew out of the shipper’s agents and freight brokerages that existed under regulation.

3PL companies originated from their parent transportation or warehousing companies.

Logistics has been legitimate business practice since the 1980s. Proportion of 3PL users has increased to 80%by 2004.

DEFINITIONLogistics is the process of managing both the movement and storage of goods and materials from source to the point of ultimate consumption and the associated information flow1.

Figure 1

The services offered by a middleman in the logistics channel that has specialized in providing a considerable number of the logistics activities including the management of information

1 (Crompton & Jessop, 2001) ; Fig1 (GUPTA, R. p8 MMR Aug. 2005)

SERVICES PROVIDED BY 3PL Transportation (80%) Warehousing (65%) Custom services (25%) Freight finance services (25%) IT support (75%) Product support services (45%) Logistics Management/consulting(65%)

Major 3PL providers in US are nearly 100 (Regan & Song, Nov. 2000)

DRIVERS OF 3PL IN US To control costs and use logistics services as a means of

differentiation in both domestic and international markets.

3PL industry has changed structurally with mergers, acquisitions, company failures, and the entry of many new competitors into niche markets.

The geographic coverage and service offerings of the major providers has expanded dramatically to cope with a significant economic slowdown.

Rapid change in the technology employed by 3PL industry has not only increased the capital costs of the service providers, but also exerting pressure on industry prices.

SELECTION OF 3 PL Initially cost considerations dominate the decision. The quality of service delivered during the life of the

contract carry considerably more weight in the renewal process.

A combination of service, cost, and other considerations lead to a final renewal decision.

The final decision on contract renewal made by a committee generally consisting of representatives from several functional areas of the firms.

At an individual’s level the decision of renewal in their companies are taken by Director of Supply Chain, Director of Logistics etc.

IMPACT OF USING 3PL The negative impact- related to the downsizing of the

logistics workforce. Due to outsourcing of logistics functions, the remaining workers become more skeptical about their future.

A positive impact - due to logistics costs found improving year to year and continues to be important because the logistics outsourcing is initiated due to cost considerations.

Competitive pressures in the global marketplace will continue; To focus management attention on controlling

logistics costs. To draw attention to the service offerings of

3PL providers.

IMPACT OF IT The main drivers of changes in 3PL industry are

advances in information and communication technologies, development of on-line freight market places or dot-coms.

The cost of entry into the 3PL arena now includes information technology and implementation capabilities for warehouse management, transportation management, and web-enabled communications.

The minimum requirements from a 3PL provider is to provide IT capabilities.

IMPACT OF IT... Users of 3PL services anticipate that the near-term

differentiators will include electronic markets, supplier management systems, and supply chain planning.

The success of 3PLs will depend on their ability to deliver an integrated, end-to-end solution that provides significant financial and operational performance improvements.

The RFID technology has already been implemented by Wal-Mart, Gillette, and the Department of Defense of US within their logistics networks 3.

3 (Lieb R. Sept.2004)

3PL MARKET IN INDIA A relatively younger industry and currently

undergoing transition which however has lot of potential for further growth.

Indian logistics market (ILM) was valued at USD 14.31 billion (Rs 620.34 bn) in 2004.

India will continue to grow in importance to large north American manufacturers as centers for sourcing, manufacturing locations and end markets for many of their products.

3PL MARKET IN INDIA 20 US based companies are using 3PL services out of

which 18 support their sales efforts and 10 support their manufacturing operations in India.

Among the most commonly used 3PL services are transportation services, shipment consolidation, warehousing, customs brokerage, freight forwarding, and contract manufacturing.

Maruti udyog, Toyota, Hero Honda, Mahindra and Mahindra, Tisco and other MNCs operating –using 3PL providers so as to remain cost competitive and can better concentrate in their core competencies.

3PL PROVIDERS IN INDIA Western arya

logistics ltd.Surat

Welgrow India Pvt. Ltd. Mumbai

Fast freight services online

Global presence in 35 countries. Provides all logistics functions.

Global presence in 65 countries. Provides all logistics functions.

International logistics and freight forwarders

CHALLENGES OF 3PL IN INDIA Due to inadequate road, power supply and

telecommunication infrastructure, companies are facing logistics problems.

3PL providers are either not available in backward areas or others located in suburban areas are not interested to undertake contracts due to inadequate infrastructure.

Significant problems in finding or using 3PL providers are related to the limited scope of 3PL operations in India.

The delays in customs clearance as their main problems.

LESSONS FOR INDIA Large American manufacturers are continuously

expanding their use of 3PL industry outside US and most rapid growth has occurred in India.

India will continue to grow in importance to large American manufacturers as center for global manufacturing, sourcing and sales (end market).

G.O.I has gone ahead in liberalizing the economic policy to fetch foreign investment in various sectors and accordingly development of 3PL industry is at rapid pace in India.

LESSONS FOR INDIA The Golden quadrilateral highway project with 8-

lane is a path breaking innovation would meet the future need & integration of 3PL infrastructure in India

A large no. of 3PL firms of India are developing and have their infrastructure world wide and growing to a greater extent to meet the need of 3PL users of US.

3PL industry has potential to grow due to low manpower cost, end market and scope for manufacturing facilities being created by US companies.

Public Private Partnership in the Transportation Sector

V. Sivasubramanian


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V Sivasubramanian (24)V Sivasubramanian (24)

Road transportationRoad transportation

Roads are the dominant mode of transportation Roads are the dominant mode of transportation India: 84% of passenger traffic and 67% of freight movementIndia: 84% of passenger traffic and 67% of freight movement US: 99% of passenger traffic and 31% of freight movementUS: 99% of passenger traffic and 31% of freight movement

Roads are also big businessRoads are also big business Road transport sector contributes to about 5% of Indian GDPRoad transport sector contributes to about 5% of Indian GDP Total expenditure on roads in US ~ US $ 80 billion per yearTotal expenditure on roads in US ~ US $ 80 billion per year Revenues (excluding tolls)Revenues (excluding tolls)

Highway Trust Fund (US) ~ US $ 20 billionHighway Trust Fund (US) ~ US $ 20 billion Road Cess Fund (India) ~ US $ 3 billionRoad Cess Fund (India) ~ US $ 3 billion


Traditional modelTraditional modelDesign-bid-build modelDesign-bid-build model

Separate contracts for design and constructionSeparate contracts for design and construction Detailed plans, specifications and estimates preparedDetailed plans, specifications and estimates prepared Bids solicited through public advertisement and award to L1 bidderBids solicited through public advertisement and award to L1 bidder Construction Supervision usually by the agency itselfConstruction Supervision usually by the agency itself

Arms length relationship between Government and private sectorArms length relationship between Government and private sector

Risk aversion and not risk managementRisk aversion and not risk management

Cheapest (L1) cost and not necessarily best ‘value of money’Cheapest (L1) cost and not necessarily best ‘value of money’ Life cycle cost (from inception to end of design life) not consideredLife cycle cost (from inception to end of design life) not considered

Funded through general budget, fuel tax, user fees or bondsFunded through general budget, fuel tax, user fees or bonds

No incentive for innovationNo incentive for innovation TechnologyTechnology MaterialsMaterials Financing techniquesFinancing techniques


Experience in India so farExperience in India so farNational Highway Development Programme National Highway Development Programme

12000 kms at estimated cost of US $ 12 billion12000 kms at estimated cost of US $ 12 billion Expanded further: US $ 40 billion to be spent by the next 7 yearsExpanded further: US $ 40 billion to be spent by the next 7 years

Innovation in oversight/construction supervision mechanismInnovation in oversight/construction supervision mechanism Bipartite model to a tripartite modelBipartite model to a tripartite model Outsourcing of contracting and consultancy servicesOutsourcing of contracting and consultancy services

National Highways Act amended in 1995National Highways Act amended in 1995 Private persons can invest in national highways, collect fee, regulate Private persons can invest in national highways, collect fee, regulate

traffic, etc.traffic, etc.

Standardized contract conditions (FIDIC, World Bank, ADB)Standardized contract conditions (FIDIC, World Bank, ADB)Quality and Cost based selectionQuality and Cost based selectionFinancing mechanismFinancing mechanism

Road cessRoad cess Capital gains tax free bonds (54EC)Capital gains tax free bonds (54EC) World Bank, JBIC and ADB loansWorld Bank, JBIC and ADB loans Private sector participation under BOT/Annuity modelsPrivate sector participation under BOT/Annuity models


PPP initiatives in USPPP initiatives in USInnovative contractingInnovative contracting

Traditional Design, Bid, BuildTraditional Design, Bid, Build Design-BuildDesign-Build Build-Operate-Transfer (BOT)Build-Operate-Transfer (BOT) Design-Build-Finance-Operate (DBFO) Design-Build-Finance-Operate (DBFO) Build-Own-Operate (BOO)Build-Own-Operate (BOO) Purely privatePurely private

Innovative financingInnovative financing Flexible MatchingFlexible Matching Toll CreditsToll Credits Grant Anticipation Revenue Vehicle (GARVEE)Grant Anticipation Revenue Vehicle (GARVEE) Federal credit assistanceFederal credit assistance

Innovative project managementInnovative project management


PPP experience in USPPP experience in US

Significant project cost savings/overrunsSignificant project cost savings/overruns Ranging from 6 to 40% of Engineer estimated costRanging from 6 to 40% of Engineer estimated cost

Reduction in overruns from 12.4% to 3.6% (Florida)Reduction in overruns from 12.4% to 3.6% (Florida)

However some contrary experiences in Florida and WashingtonHowever some contrary experiences in Florida and Washington

Faster completion of projects Faster completion of projects Upto 50% reduction in project durationUpto 50% reduction in project duration

Allocation of Risk to the party best able to manage riskAllocation of Risk to the party best able to manage risk Risks such as setting and monitoring safety standardsRisks such as setting and monitoring safety standards

Transfer of risks of price escalation & tort liability with private Transfer of risks of price escalation & tort liability with private sector may increase costs and lead to sub-optimalitysector may increase costs and lead to sub-optimality

State’s ability to raise funds for other purposes not State’s ability to raise funds for other purposes not jeopardizedjeopardized



State procurement statutes incompatible with PPPState procurement statutes incompatible with PPP Only 28 States have allowed for design-build Only 28 States have allowed for design-build Only 21 States have allowed for private participationOnly 21 States have allowed for private participation

Private sector funding does not ensure financial solvencyPrivate sector funding does not ensure financial solvency Dulles Greenway, Virginia – partly defaulted in 1996Dulles Greenway, Virginia – partly defaulted in 1996 Investment rating problems for Pocahontas Parkway’s and Investment rating problems for Pocahontas Parkway’s and

Southern ConnectorSouthern Connector

Greater time and efforts to be spent by senior officialsGreater time and efforts to be spent by senior officials Need for developing new systemsNeed for developing new systems Earlier approach was risk aversion Earlier approach was risk aversion Lack of experience with private sectorLack of experience with private sector

Local opposition to tolls and toll financingLocal opposition to tolls and toll financing



Private sector concernsPrivate sector concerns Financial feasibilityFinancial feasibility

No tax exemptionsNo tax exemptions

Uncertainty of revenue streamsUncertainty of revenue streams

Tort liability Tort liability

Land/RoW acquisition and environmental clearancesLand/RoW acquisition and environmental clearances

Changes in political leadershipChanges in political leadership

Smaller firms at a disadvantageSmaller firms at a disadvantage Inability to manage large projectsInability to manage large projects

Cannot bear the risk transferredCannot bear the risk transferred

But they could come together to form joint venturesBut they could come together to form joint ventures


Lessons for IndiaLessons for India

Innovative contractingInnovative contracting Only two methods allowed so farOnly two methods allowed so far Elements of other methods present in some casesElements of other methods present in some cases

Bonus allowed for earlier completionBonus allowed for earlier completion

Pre-construction activities continue with public Pre-construction activities continue with public authoritiesauthorities

Tort is not a major issue in India so farTort is not a major issue in India so far

Innovative Contract ManagementInnovative Contract Management Tripartite approachTripartite approach

Issue of ‘Engineer’ as an adjudicator under FIDICIssue of ‘Engineer’ as an adjudicator under FIDIC

Expertise in the form of dedicated cadreExpertise in the form of dedicated cadre


Lessons for IndiaLessons for India

Innovative FinancingInnovative Financing No matching required from StatesNo matching required from States

Compartmentalized approachCompartmentalized approach

No federal control over State expenditure on roads No federal control over State expenditure on roads (except on national highways)(except on national highways)

Central/State finances and user fees/tolls to be Central/State finances and user fees/tolls to be leveraged for attracting private investmentleveraged for attracting private investment

Difficulty in allowing a PPP to default debt repaymentDifficulty in allowing a PPP to default debt repayment


General conclusionsGeneral conclusions

Specification to performance based contractsSpecification to performance based contracts Level of service requirementsLevel of service requirements

Role of public and private sectorsRole of public and private sectors Difference in goalsDifference in goals

Life cycle costingLife cycle costing

Risk sharingRisk sharing

Financial leveragingFinancial leveraging

Quality and cost based selectionQuality and cost based selection

Issue of unsolicited projectsIssue of unsolicited projects


Thursday, November 17 (11:45-12:45)

Anil Pavithran The Impact of Low Cost Airlines

Prem Narayan Third Party Logistics Outsourcing

V. Sivasubramanian Public Private Partnership in the Transportation Sector

12th Symposium on


Documents

Panel 8: Transportation Sector Transformations Thursday, November 17 (11:45-12:45) 12 th Symposium on Development and Social Transformation