Chapter 3

Competition and Regulation in Transportation*

1. Introduction[1]

The transport sector has grown at 10 per cent annually for several years now. The growth has been the maximum in road transport (12 per cent). The railways have grown at just under 2 per cent, most of it in the last three years. The overall growth is thus higher than the GDP growth of the last decade. But the overall numbers hide bottleneck issues, which have been widely documented. If remedial action is not taken more speedily, transport could become one more hurdle to more rapid growth. Compared to China, India’s extra shipping costs are higher by as 35 per cent.

A massive enhancement is therefore required in the supply of all transport infrastructure and services. Since the government cannot any longer provide the funds needed, even greater private sector participation has become a must. This will not be difficult if competition and regulation are properly addressed. Where transport services are concerned, the private sector already accounts for more than 80 per cent of the all freight moved and around 50 per cent of the passengers moved. In general, there is a significant degree of competition in transport services and it is also reasonably well regulated. The infrastructure side, however, which is where the bottlenecks exist, is a different story altogether.

The government has been active since the early 1990s (see appendix 1). The Multi-Modal Transport Act was passed to facilitate door-to-door shipments in 1991. In 1993, the Merchant Shipping Act was amended so that Indian owners and operators could access capital markets. In the same year, the Air Corporations Act was abolished to allow the entry of private operators in civil aviation. Between 1994-95 and 2004-05, the number of aircraft kilometres flown grew 205 per cent and the passenger kilometres by 115 per cent. Private operators now carry 68 per cent of the domestic passengers. Similar amendments to ports law have seen an increase in the capacity of ports generally and minor ports in particular. In the last decade, the share of minor ports, many of them privately owned, has increased from 6 per cent to 25 per cent of total port traffic. The Railways Act has been amended in several ways but not yet to allow full-scale competition.

Even so competition and regulation remain problematic. The railways are still a monopoly and the Container Corporation of India (Concor) has only about 4,000 wagons for the whole country. So containers remain for as long as a week awaiting transport. Airport charges are about 80 per cent higher than the international average. At the ports, the cost advantage deriving from lower service charges for cargo gets more than negated by higher vessel related charges. These can be as much four times more. The net effect is to inhibit private investment in major ports. The Tariff Authority for Major Ports used to set floor prices. Ports could not go below this floor. This stifled competition.

1.1 Competition and Regulation: The key thing aboutmodern transport is that, being very capital intensive,there is an automatic limit to the degree of competition that the business can support. But transport is not unique in this sense. In any highly capital-intensive business it is the same story -- limited competition or oligopolistic market structures. This includes the computer software industry where overall financial capital intensity may be low but skill capital is high. This has important implications for the way the industry is regulated. Service providers must not face a flat price line because there are too many of them as happens in the trucking industry, which is controlled by freight aggregators. It is they who have all the real-time market information and usually tend to draw off large rents. In retaliation, the truckers sometimes form unions or cooperatives to extract better prices. But overall the tactic doesn’t really work.

What this means is that entry must to be regulated, mainly by fixing capital requirements in order to inject some sort of countervailing power. This will ensure a sizeof operations that is consistent with efficiency. The same is true of shipping also. There, too, because there are no entry barriers – as in trucking in India, the average shipping firm tends to own less than five ships.

The case of the railways further illustrates the need for capital norms. Indeed, in many ways the railways, because of their huge capital and manpower requirements, function best as monopolies. In India, the railways, standing economic theory on its head, have expanded output while lowering prices. It is said that they have done so at the cost of efficiency. In fact, that is not true at least as far as the efficiency of capital use is concerned. Indian Railways are amongst the best users of capital in the world, whichever way efficiency is measured. In contrast, efforts to introduce competition in British Rail have failed and the UK has reverted to the old system. The problem, if it can be called that, lies in the capital intensity of the business. Nor is it true that the railways in India do not face competition. They do, but from non-railway sources such as buses, cars, trucks and airlines. This leaves open the question of what needs to be regulated and how.

Finally, there is the question of conflicting jurisdictions. Road transport is a state subject while other forms of transport are central subjects. Furthermore, in shipping and aviation, the industry is regulated internationally as well, which limits the role of the domestic regulator of competition if the same firm services both the national and international markets. If the railways are best left as a monopoly with only some common carrier obligations, what is there left for the regulator to do, other than worry about safety and technology?

2. Road transport

2.1 The nature of the business: Trucking in India is a cottage industry of sorts that is dominated by freight forwarders who determine the degree of competition and therefore prices.

While the total length of the national roads network has increased 3.4 times between 1951 and 1995, the total vehicle fleet has grown from 0.3 million in 1951 to 12.5 million in 1998, and truck registrations have gone up 32 times from 82,000 in 1951 to 2.64 million in 2000. India spends around 0.7 per cent of GDP on roads each year, the US spends 1.3, and Japan 3.9. China has 15,000 km of 4 or 6-lane access controlled expressways. India has only under 5,000 km of four-laned highways. There are around 2 million trucking firms, about 80 per cent of which own less than five trucks.

Only about 2-3 per cent of the customers directly access the truck owners and book their goods. Most big transporters, in fact, have very few trucks of their own. The intermediaries include the booking agents (also called transport suppliers or transport contractors) and the brokers. These players basically perform the function of middlemen for the truck owner’s majority of whom are unorganised owning just one to two trucks. While broker is a person (or a group of persons) who takes commission from the truck owners and ensures the supply of trucks to the transport contractor, booking agent is a person engaged in the business of collecting, forwarding or distributing goods carried by trucks. In addition, some of these agencies also provide finance and godown facility.

The booking agents, brokers etc. employ few permanent staff and often hire unorganised labour. Their services extend to providing cash advance for wayside expenses to the small operators, discounting their freight bills, etc. They are usually paid a fixed amount, which currently varies between Rs. 300-500 per load. These intermediaries have become an integral part of the trucking industry. Despite provisions in the Act for their registration, booking agents/transport contractors, and brokers are, at present, an unregulated lot. No code of conduct has been stipulated for them.

The total size of the orders booked is around Rs 200,000 crore. Large logistics firms account for around 20 per cent of this. Parcel booking firms who account for around Rs 100,000 crore of annual business generally pass on between 30 and 40 per cent to the truckers. Transport contractors, typically small operators, pass on around 60 per cent of freight to the truckers. All told, of the Rs 160,000 crore business, around Rs 100,000 crore gets paid to the truck owners.

The short-term issue, until large trucking firms come into being, therefore is to regulate the freight forwarders. These agents determine the freight rates and act as powerful agents of the trucking industry. Therefore the possibility of bringing them within the purview of legislation needs to be examined.

Overloading is rampant, serious and is in the region of 100 per cent now, ie, on average trucks carry double the sanctioned load. This has been made possible by the practice of state governments issuing passes for Rs 12,500 per month that legalise such practices. Some states also fix minimum freight rates – indeed, Section 67 of the Central Motor Vehicles Act even provides for fixing this floor rate. Overloading refers to the practice of carrying more than the rated vehicle capacity. The phenomenon is an instance of a problem caused by the trucking industry. Overloading leads to negative externalities such as pavement damage and lower road safety. For the individual truck operator, overloading implies shorter vehicle life, and higher risks of vehicle damage. However, even with these increased costs, overloading remains endemic in the road transport industry. Estimates for levels of overloading have gone up to as much as 80 per cent of the trucks on Indian roads. The phenomenon is only the symptom of many deep-underlying issues at the policy, legislative, enforcement, and financing, regulatory and other levels.

Overloading offences are compoundable under the Motor Vehicles Act. Most of the states have their own rules for compounding the offence. States like Gujarat, Rajasthan, UP, Orissa issued special tokens whereby overloading is permitted on payment of prescribed fees. This allows an illegal action on payment of a fee. The weight of the vehicle has shown the strongest association with fatal accident rates. Accidents caused by overloading hamper timely delivery of the goods to the consignee.

Efforts need to be made to eliminate profits from overloading. The easy way of doing this is to impose heavy fines. The long-term solution lies in restructuring the trucking industry. Fleet formation is a possible solution. In that case, there would be a strong incentive at the operators level to keep all the assets in view rather than overload just a few of the vehicles. To achieve this objective, it is essential to undertake a comprehensive overhauling of the financing and regulatory systems. Truck operators should be encouraged to purchase multi-axle vehicles since scope of overloading in their case is more limited. Besides, compounding provision should be deleted from the Motor Vehicles Act.

Truck operators can be classified on the basis of the fleet owned by them as indicated below:

  • Small truck operators (owner-cum-operator) own one or more than one truck but up to the limit of 5 trucks.
  • Medium-size fleet operators operate with a fleet size of about 40 to 50 trucks.
  • Large-size fleet operators operate with more than 50 trucks.

The medium and large size fleet operators charter trucks to the extent of 10 to 12 times of their own fleet. They get the supply either through lorry suppliers or directly from single truck owners. Survey has revealed that big fleet operators handle about 12% to 15% business in their own trucks and the balance by hiring trucks from small truck operators either on their own or through brokers.

The industry has a large number of unions and associations of transport operators at local, district, state and national levels representing the small operators, fleet owners, booking agents and others. These associations view the industry in their own micro perspective rather than have a macro perspective. At the apex are the All India Motor Transport Congress and the All India Confederation of Goods Vehicles Owners’ Associations. Their membership includes not only the vehicle operators but also brokers, booking agents and others. These act as an interest group for influencing government policy on transport legislation and taxation. Their stand on the various issues appears well campaigned through various forms of representation including agitations and strikes. However, these have a limited role in promoting better management of the transport system or promoting viable transport companies, etc.

The users of goods transport services are manufacturers, distributors, retailers and the general public. The user’s choice of a particular truck operator is influenced by factors, such as transit time, availability of warehousing facility, safety of cargo, freight rates and the extent of credit facility provided by transport companies. Some users prefer entering into contracts with large fleet operators who assure them safe and timely delivery of their consignments. The users satisfaction with the freight transport services is a grey area. This would require interviews with the users to elicit their views on the subject. However, the common feeling is that the quality of services is not good; security of goods is also uncertain unless the consumer cares to get the goods insured.

2.2 Laws: The important laws governing the trucking industry are as follows:

2.2.1 Motor Vehicles Act

The laws relating to the trucking industry, including the provisions of the Motor Vehicle Act, are outmoded and do not meet the demands of modern transport industry. The hours of work of any person engaged in operating a transport vehicle are regulated by the provisions in the Motor Transport Workers (MTW) Act, 1961. Based on this provision, Section 91 of the MV Act provides for 8 hours of work for the drivers. However, these provisions are not enforced strictly in the trucking industry; it is common knowledge that drivers work for long time beyond stipulated hours without rest endangering road safety. The hours of work are not enforced by the Motor Vehicles department. Majority of the owners of goods carriages do not maintain any record of the duty hours of drivers and other employees. Further, the MTW Act is applicable only when the undertaking employs 5 persons or more. Considering the present ownership pattern of the industry with dominance of single truck operators, this is a major limitation.

The management practices of Motor Vehicles department are age-old. The skills of officials deployed in the MV department are not being upgraded commensurate with the technology of vehicles being introduced from time to time. The technology in terms of use of sophisticated computers for information or communication is conspicuous by its absence. The infrastructure needed for driver testing and fitness testing is hardly available. MV departments are seen mainly as revenue earning sources and contribute nearly 10% of the state’s tax revenue. Thus, the focus of these departments is on collection of tax revenue from motor vehicles and not on enforcement of the various provisions of the Act; important functions, such as mobility, safety, fuel conservation, environmental protection, etc., do not get adequate attention. In short, the regulatory mechanism has fallen far short of expectations.

2.2.2 The Carriers Act

The Carriers Act was passed in 1865. It lays down the liability for the loss of or damage to the goods caused by negligence of the carrier or fraud of his servants/agents. It is well known that highway safety and security has deteriorated due to poor law and order situation in the country. Besides, bandhs and civil disturbances have become frequent. Instances of vehicles being waylaid and robbed and manhandling of drivers have increased over the years. Though the carrier may not be responsible for such losses, he is held liable under the Carriers Act.

There is also a multiplicity of taxes, varying basis for taxation and complicated procedures for computation and collection of taxes. Motor vehicle tax rates vary widely in different states. This has resulted in differing incidence of taxes per vehicle in different states. Besides, this results in inconvenience to the operators, obstruction to free flow of inter-state traffic involving detention at every check post with attendant consequences. Further, the tax system is inappropriate for multi-axle commercial vehicles which pay more tax in relation to the road cost these cause than two-axle vehicles. States may consider reducing the excise duty on multi-axle vehicle to promote these because of many advantages these have over two-axle vehicles.

There is an urgent need to rationalise the motor vehicle tax structure; central government should formulate principles for taxation to serve as guidelines to the states while deciding on tax rates. An efficient tax system would help the free flow of inter-state traffic and provide a buoyant source of revenue to the states. Overall, it would pave the way for healthy growth of road transport in the country.