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Concept Note: Logistics Efficiency Enhancement Program (LEEP)—Development of Multimodal Logistics Parks

 

1. Background

 

Logistics costs in India are in a higher proportion of the total value of goods as compared to developed nations—13-14 per cent in 2015-16, compared to other developed economies (7-8 per cent). Further, this proportion has significantly increased over the last 15 years, indicative of structural inefficiencies in logistics. A comparison across India and the US highlights the difference in road freight cost per ton per km (ptpk)—the cost in India (adjusting for Purchasing Power Parity) is Rs 1.9 ptpk, almost double that of the US.

 

In addition, the average speed of freight vehicles on Indian roads is about 25-30 km/hr, which is 50-60 per cent lower as compared to the US, adding to the freight cost. While factors like topography do play a role in daily distance covered, the magnitude of difference is indicative of the inefficiencies present in logistics movement in India.

 

In addition, variability and unpredictability of time required for freight movement adds to the logistics problem. Moving across the same route has time variability as high as 15-20 per cent. Further, there is a ~50 per cent variability in average speed across Indian states (with average speeds ranging from 37-40 km/hr in states like Gujarat and Rajasthan to 18-20 km/hr in states like Odisha and West Bengal), driven by differences in infrastructure and documentation complexity. This results in a need for higher inventory holding across the supply chain, in turn, further increasing the logistics costs.

 

Higher logistics costs in India are primarily driven by five key factors

 

1.1 Unfavourable inter-modal mix

 

Road transport in India carries ~60 per cent of total freight movement—twice than compared to 20 years ago. Coastal movement and inland waterways are in its nascent stages and hence the only viable alternative to road freight movement in the immediate term is to move freight by rail.

 

Inspite of lower freight cost of rail (45 per cent cheaper than road freight on a ptpk basis), adoption of rail for freight movement has been limited, primarily driven by -

 

* Adverse pricing and rake booking policies adopted by the Railways.

 

* Lack of intermodal facilities to enable easy freight transfer between rail and road, needed to ensure seamless first mile and last mile connectivity.

 

1.2 Inefficient fleet mix

 

India’s fleet mix is characterised by smaller, inefficient trucks. Historically, 16T and 25T GVW trucks have been the highest selling categories in India, as compared to China where 26-39.9T truck categories lead the market. Trucks with higher payload are more efficient than the trucks with lower payloads (freight cost on a ptpk basis for a 9 MT truck is Rs 3.56, 2.5 times that for a 40 MT truck). Absence of logistics hubs to act as zones for freight consolidation and disaggregation results in higher point-to-point freight movement on lower sized vehicles, compared to more efficient line haul freight.

 

1.3 Underdeveloped material handling infrastructure

 

Warehousing landscape in India is characterised by the presence of large number of private/unorganised warehouses, with an average size significantly lower than that of the US. Unorganised and fragmented nature of the industry has resulted in smaller sized warehouses with very low investment in this sector. Adverse banking policies (limitations in higher tenure loans for warehouses) and the indirect taxation on goods movement, restricts larger sized and consolidated warehousing with mechanised material handling facilities. Smaller sized unorganised warehouses with limited mechanisation results in higher storage and handling losses, thereby increasing the supply chain costs.

 

1.4 Underdeveloped road infrastructure

 

Limited presence of 4/6 lane national highways adds to the freight transit times and hence the freight cost. In addition, inconsistent infrastructure along key routes adds to congestion on Indian roads. Also, India ranks 61 in the global road quality.

 

5. Bottom-up costing developed based on transporter interviews; comparison is for average freight transportation cost by road accounting for cost differences between different truck sizes.

 

6. Bottom-up costing developed based on transporter interviews; competitiveness assessment by the World Economic Forum, indicating the need for better quality roads to ease movement across corridors.

 

1.5 Procedural complexities

 

Documentation and procedural complexities related to toll collections, inter-state freight movement and ex-im impact the time taken for freight movement in India, leading to a time loss of 15 per cent of the trip time on key freight routes, hence adversely impacting the freight cost.

 

Developing multimodal logistics parks will address three of the aforementioned five issues, viz., unfavourable modal mix, inefficient fleet mix and underdeveloped material handling infrastructure. Impact of multimodal logistics parks on India’s freight transportation have been detailed in the subsequent sections.

 

2. Proposal

 

Development of multimodal logistics park is proposed to improve the logistics efficiency of the country, enabling reduction in logistics costs. It is proposed to develop logistics parks in 15 cities with highest freight movement (covering more than 40 per cent of the total road freight movement in India) in Phase I of the program. Logistics parks in the next 20 nodes (accounting for ~20 per cent of the total road freight movement in India) can potentially be developed in the next phase. Details of potential locations for Phase I of the program are provided in Annexure 1.

 

These multimodal logistics parks are expected to serve four key functionalities as highlighted in the figure below:

 

7. Based on truck GPS data and transporter interviews; Includes only the Engine time and doesn’t include the driver rest time.

 

8. Planning Commission – RITES Total Transport System Study (2008) updated for FY15 and projected for FY25.

 

Figure 1: Key functionalities of logistics parks

 

2.1 Freight aggregation and distribution

 

Logistics parks act as hubs for freight movement enabling freight aggregation and distribution. Logistics parks will typically be developed outside the zones of urban agglomeration. Freight from production zones will be shipped to nearby logistics parks, where it will be aggregated and shipped to a logistics park near the consumption zone on a larger sized vehicle. Freight arriving at the destination logistics park will be disaggregated and distributed to the consumption zones inside the city. Logistics parks acting as freight aggregation and distribution hubs enable line haul freight movement (between hubs) on larger sized trucks and, thereby, aiding in reduction of freight transportation cost.

 

2.2 Multimodal freight transportation

 

Logistics parks with road and rail connectivity enable multimodal freight transportation. This aids freight transportation on line haul (between hubs) to shift from road to rail and waterways (wherever possible), thereby reducing the freight cost. In addition, completion of the proposed rail dedicated freight corridors (Delhi to Mumbai, Ludhiana to Kolkata) and focus on developing coastal and inland waterways will accelerate adoption of rail and waterways for freight movement, respectively.

 

2.3 Storage and Warehousing

 

Logistics parks provide modern mechanised warehousing space, satisfying the special requirements of different commodity groups. For example, logistics parks will provide cold storage facilities required for perishables, racked warehousing space for storing palletisable cargo (e.g. parcel, apparel, etc.). With higher proportion of mechanised material handling, warehousing in logistics parks will reduce storing and handling losses.

 

2.4 Value-added services

 

Logistics parks also provide value-added services such as Customs clearance with bonded storage yards, warehousing management services, etc. Customs clearance at logistics parks enable the waiting time reduction at the ports and, thereby, reduce the freight transportation cost and time for export cargo.

 

With the aforementioned functionalities, logistics parks will be attractive for industries and commodities with a higher proportion of Business-to-Consumer (B2C) freight movement, which needs freight aggregation and distribution. Details of adoption of logistics parks for different commodities based on attractiveness of value proposition provided by logistics parks are highlighted in Annexure 2.

 

(Courtesy: Ministry of Shipping. To be continued)

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