A Self-Inflicted Constraint of Indian Railways

As per today news, Indian Railways has unveiled what seems like an innovative capital funding mechanism: inviting oil companies to invest in POL-specific rolling stock (BTPN tank wagons) under a Build-Operate-Transfer (BOT) lease model. On the surface, this appears to be a progressive public-private partnership aimed at modernizing freight logistics. But a closer inspection reveals a deeper structural issue—the scheme is not innovation by choice, but by compulsion, emerging from a legacy of distorted freight pricing and an absence of transparent cost-reflective tariff policy.

The POL Tariff Paradox: Disconnected from Reality

For over two decades, freight tariffs for Petroleum, Oil, and Lubricants (POL) have remained largely unchanged, even as inflation, infrastructure costs, and capital investments have increased drastically. Unlike other commodities:

Commodity                       Approximate Freight Rate Increase (2005–2025)           Coal                                     ~100%

Cement                                ~80–90%                               

Iron & Steel                        ~70–80%   

Containers                         ~60–70%       

POL                           ~0–10%        

The logiic often cited is that rail tariffs need to be lower for petroleum products to contain inflation. But even if POL tariffs were doubled, the per litre impact would be just Rs.1–2, compared to Rs.45–50 per litre that Central and State Governments collect via excise and VAT. The short sighted reason may be to give competition to Pipeline transportation, though the later is more safer and greener with low specific energy consumption.

Hence, continuing this low-tariff regime on the pretext of consumer protection is not only economically unjustified but also outdated. It likely stems from an earlier directive to subsidize kerosene and LPG, once essential for low-income groups. But POL traffic today primarily covers diesel, petrol, ATF, and bulk lubricants — where the consumers are already paying high retail prices.

A Model Undermined by Its Own Tariffs

The BOT scheme for tank wagons offers oil companies an 11% annual return over 15 years, with the wagons reverting to Indian Railways after that. However, this is barely sufficient when the post-tax IRR hurdle for most oil companies is 12% or more. With no terminal value retained, the scheme is financially marginal.

This reflects a deeper issue: Indian Railways is unable to fund this rolling stock capex internally because it has suppressed the tariff for decades and now lacks the pricing leverage to recover costs directly. Hence, it must resort to off-balance-sheet investment mechanisms while retaining operational control.

DFC Case Study: When Capex is Accounted Properly

Contrast this with the Dedicated Freight Corridors (DFCs), which are funded by JICA and World Bank loans, and partly by Government equity. Here, the cost of infrastructure—including track, signalling, electrification, safety, and land—is fully accounted for.

When Indian Railways uses the DFC, it pays an access charge to DFCCIL. Although these charges are still negotiated rather than market-driven, they provide a closer approximation to full cost recovery. If such pricing were applied systemically across all freight, POL tariffs would increase dramatically to reflect:

- Continuous track maintenance,            

- Electrification and energy cost,            

- Wagon and rake utilization,   

- Safety systems and signalling,              

- Opportunity cost of land and capital.

Ironically, DFCs show what tariffs look like when infrastructure is costed transparently. Yet, Indian Railways chooses to apply this selectively.

Absence of Tariff Methodology and Its Impacts

The current framework lacks:  

- A published cost-plus tariff model,     

- Transparent commodity-wise classification,  

- Open stakeholder consultation in freight revisions,    

- Uniform cross-subsidy principles.

This leads to:   

- Investment deterrence (as seen in the new BOT scheme),      

- Cross-commodity distortions,              

- Disincentives for efficiency and modernization.

Claims that rail is losing modal share to pipelines or roads need nuanced examination.

In reality: - Pipelines are a safer, greener, and low-specific-energy mode, but new pipeline investments have become increasingly uneconomical, with raising ROU costs (post RFCTLARR Act) and steel prices.  .

- Road is primarily used for last-mile delivery to retail outlets or by private players who lack rail connectivity.    

- Where rail sidings and terminal facilities exist, rail continues to handle a large share of POL movement.

The issue, therefore, is not modal competition, but a distorted pricing model that prevents Indian Railways from fully leveraging its network and scale advantages.

The Need for a Rail Tariff Regulatory Authority

India has successfully implemented independent regulators in telecom (TRAI), power (CERC), and gas pipelines (PNGRB). Railways urgently needs a similar body to:             

- Ensure cost-reflective pricing,              

- Balance social obligations with commercial logic,       

- Regulate access charges and BOT/PPP frameworks,  

- Reduce political interference in commodity-wise tariffs.

What Govt Wants to Subsidize, It Should Fund Transparently

If the government genuinely wants to keep POL tariffs low for socio-political reasons, it should do so via direct budgetary grants, much like VGF in highways or renewable energy. The burden should not fall on Indian Railways' already strained financial structure.

Subsidies must be targeted, time-bound, and transparently funded, not embedded in a legacy of distorted pricing that undermines investment, efficiency, and public trust.

Conclusion: Rational Tariff Reform is the Real Innovation

The BOT model is not a bold new financing idea. It is a symptom of deeper systemic dysfunction—a freight pricing model that has decoupled from cost, market forces, and economic logic.

True reform lies in replacing ad-hoc tariff control with transparent, regulated, market-aligned freight pricing. Until that happens, Indian Railways will continue to innovate not for progress, but to compensate for policies that make investment irrational in the first place.