Energy security and urban infrastructure - Part 2

Many days have passed since my last blog post. Unfortunately, my blogging seems to be sporadic at best. I've got a sinking feeling that this latest effort of mine will end up like previous efforts. In slow death!
Well, I've been busy with household chores, working out at the gym (yeah!) and figuring out how to sue the Government (uh-huh!).

Since my last post, Pranab-da, the darling of the Congress party has presented the Finance Bill in the Parliament for FY 2010-2011. A full speech transcript is available here. Hurrah for reducing my tax burden, Pranab-da. Job well done!

Apart from the changes in the direct taxes structure, there were 2-3 things that caught my eye as promising in the budget. Firstly, it was the increase in petrol prices. Secondly, the modification of fertilizer subsidy mechanism (strictly speaking, done before the budget). And most importantly, it was the plan outlay for infrastructure which is now a whopping 46% of the total plan.

Predictably, there is much outrage on the fuel price hike. There is much breast-beating going on with many Congress allies, especially the DMK and the Trinamool Congress demanding a rollback of the hike as it affects 'the common man'. The rationale is not difficult to follow: an increased fuel price means increased transportation costs, which means an increase in the prices of goods, especially foodstuffs; which really strains the food budget for any household, considering that food inflation has been at double-digits for a very long time now. Of course, they are quite prepared to ignore the massive fiscal deficit that the petroleum subsidy causes, and unwilling to discuss how they will overcome that. More importantly, they are unable to provide any concrete mechanisms for improving the transport infrastructure that will bring down transportation costs.

Let's discuss how transportation affects food prices. Not all food is produced where it is consumed and vice-versa. For food stuff produced in one location, it needs to be transported to its ultimate destination. Depending on the the perishability of food, the mode of transportation is chosen which affects the final cost. The fastest and most expensive transport mechanism is by air, followed by road, then rail and finally by sea or river freight. Foods which are not easily perishable, typically staples like rice, wheat and corn and best suited for cheap haulage by sea and rail. Fresh produce like meat, dairy, seafood and vegetables are best suited to be transported by road and to a good extent by rail as well. However, all food transportation will involve a certain percentage of road transportation which provides the 'last mile connectivity' to the supermarket shelves.

The final cost of a food product on a supermarket shelf is a sum of its component prices which include price at first sale, transportation costs, wholesaler and retailer margins, profit margins (for branded foods) and most importantly; costs incurred due to wastage. Wastage of food can occur either during storage (before and after harvest) or during transit. Let's consider a few food categories.

For a staple like rice, which has low perishability, wastage typically occurs at storage. Due to the policy of needing to maintain 'buffer stocks', millions of tonnes of rice are wasted annually while rotting at godowns of the Food Corporation of India. They serve no purpose (except to fatten rats) and cost millions of rupees which gets added to the final price of rice at the supermarket.

What about a more perishable food like bananas? We've all but forgotten about seasonal foods. Seemingly, all types of fruits and veggies are available year around? Miracle in agriculture or miracle of cold storage? I reckon it is the second. Because farmers are not encouraged to grow seasonal fruits and veggies, prices of fruits and veggies are increased due to the increased costs of storage. Further, cold storage facilities in India are highly suspect and deficient (blame it again on high capital and energy costs). This results in large scale wastage and again pushes up the costs. Not to forget that we're still lagging in the business of food processing which will turn perishable food into processed food instead of waste.

Lastly, highly perishable foods like meat, seafood and dairy. Luckily, the dairy revolution in India has meant that dairy prices are seemingly reasonable and within the grasp of the average Indian. Much needs to be done in the meat and seafoods. As our demand for meat and seafood increases, we need to better streamline the supply chain to reduce prices.

Sadly, an estimate of the cost of food wastage in India is pegged at Rs. 58,000 crores or about USD12.6 billion! This is a shocking figure in a country which is the poster child for a hungry nation.

Now, onto how transportation costs affect food prices. As we've already discovered, the cost of food must include the cost of transportation. So, in order to reduce the price of food, we must need to reduce the cost of transportation and also increase its efficiency. A more efficient transportation system will ensure lesser wastage which in turn decreases food prices. Tranportation costs are calculated as a function of weight and distance. In other words, how much does it cost to transport 2 tonnes of bananas over 1000km? Now, the reason sea and rail transport are cheaper is because of their ability to transport large quanities over large distances within specified transit times. A train needs to stick to its schedule and is usually not bogged down by hassles like traffic and border checkposts. So, in order for road transport to become cheaper and more efficient, we need to reduce the transportation cost/tonne and the time taken for transportation. Let's look at ways to do this.

The easiest way to reduce the cost of transportation per tonne is to increase the tonnage capacity of road vehicles which perform long distance haulage of food. Note that this also applies to non-food stuff. It is evident that higher capacity vehicles are more efficient at haulage simply because the capacity to cost relation is not linear. A 6 wheel, 10 ton truck is cheaper to run than a 18 wheel, 26 ton truck. But if you divide the running cost by the tonnage hauled, then the 18 wheel truck is more efficient by far. So, how do we promote the use of larger trucks for haulage. Simple answer: improve the highways and urban infrastructure. By providing highways that are capable of handling 18-wheeler trucks, you're providing the first steps to encourage people to convert to these vehicles. Most of today's National Highways are quite capable to handling 18-wheeler trucks, but not all. However, this must apply to every single km of national and state highways. There is no point of constructing a 100 km highway that can support an 18-wheeler if in the last 2 kms it becomes a one-lane highway suitable only for a 10-ton truck! Sadly, that is the case today. In developed western countries, it is not uncommon to see 18-wheeler trucks traveling downtown, because roads are constructed such that the maximum possible transport is done using these efficient vehicles. Is it any wonder then that prices of retail products in America and often cheaper than in India (after adjusting for purchasing power)? But that's only one piece of the puzzle. More important is to ensure that 18-wheeler drivers are comfortable driving on India's highways. Imagine driving a truck costing 1 crore rupees on the highway at a 110 kmph only to be slowed down by a cyclist coming down the wrong side. More on that later, though!

The other aspect is of course speed. Speed of transportation is critical for 2 reasons. Firstly, it reduces transit time which reduces the possibility of wastage due to spoilaeg, an important factor in food stuffs. Seondly, it allows a fleet operator to achieve quicker turnaround times thereby providing them with more trips in a time period. This allows them to reduce the margin charged on transportation costs and make it up by volume. It is not unsurprising to see hundreds of trucks to be stuck at border checkposts waiting to get the appropriate clearance. A quick and paperless way of flagging trucks through state borders is essential to achieve this. By creating a system akin to a flight plan, it is possible to reduce and eliminate unnecessary and time consuming border checks. For e.g.; a trucker needs to provide a 'flight plan' for the transport: typical stuff like origin, destination, weight, nature of cargo, etc. prior to the start of the journey. This can be done by the trucking company itself, without having to visit the notorious inspection office. This gets uploaded to a centralized system. Every border patrol office then has access to this data. In order to further streamline this, each truck which has filed a valid 'flight plan' is then tagged using a smart device (RFID?) which can then be read by remote devices at border patrol stations. This reader can then compare it against the previously uploaded 'flight plan' and determine if the truck is to be stopped or waved through. A cursory check to ensure that the contents are as yet sealed would ensure a simple and tamper-proof mechanism to prevent fraud and smuggling. Oh well, just an idea. Pipe dreams in India.

Finally, the most important takeaway from implementing the above 2 ideas. The improvement in road transportation will reduce our total consumption of fossil fuels. By reducing the fuel wastage due to vehicle inefficiency and wait times, the potential savings of fossil fuels is enormous.

Let's see where these ideas all go. Will I ever become energy and transport minister?