Pricing railway safety

Yet another railway accident has happened. As someone on twitter pointed out,

The problem with the Indian Railways is that there is no real measure of safety. How do we know how much safer the trains and tracks are compared to last year? Given the way the Railway finances are put out currently, there is no way to figure this out. Without the railways putting out more disclosures, is there a way to put a number on how safe the Indian Railways are? In other words, is there a way to “price” railway safety?

As you are well aware, and as the above tweet points out, it is standard practice in Indian Railway accidents for the Railway Minister to announce an ex-gratia payment to the families of the dead and the injured in case of any accident. I’m not sure if there is a formula to this but one cannot rule out the arbitrariness of this amount. As I had pointed out in an earlier post on RQ, accident compensation needs to be predictable and automatic. Can we use this to price railway safety?

First of all, we need to point out that the railways follows a cash accounting system, and thus doesn’t need to account for any contingent liabilities such as ex-gratia payment (last weekend I sat through an awesome lecture by Prof. Mukul Asher (councillor to Takshashila) on public finances, and he pointed this out). Hence, it would be prudent on behalf of the Indian Railways to hedge out this contingent liability.

How do you hedge a contingent liability? By buying insurance! What the Indian Railways needs to do is to buy group accident insurance – all the ex-gratia payments will then by paid out by the insurance company, and the railways will only pay a premium to these companies, thus hedging out the risk! And this process will help put a price on railway safety!

How is that? Let us say that given the railways’ bad record in safety, and its continued promises that safety will be improved each year, the railways decides to take up group accident insurance on an annual basis. Let us say that there is a competitive bidding process among general insurers in India (both public and private sector) to provide this insurance (railways is a large organization, and insuring them will be a matter of prestige, so companies will bid for it). The premium as determined by this competitive bidding process is the price of railway safety!

We can do better – instead of buying one overall policy, the Railways can think of insuring different routes separately, or perhaps zones. This will help put a price on the safety of each route or zone! There will be some transaction cost, of course, but price discovery will happen, and we will be able to put a price on risk!

But then, this is all wishful thinking. It is unlikely this will happen because:

1. Given the cash accounting system followed by the railways, there is no incentive to hedge contingent liabilities
2. Buying insurance means increasing scrutiny. The railways will not want to be scrutinized too hard. It is currently an opaque organization and it will want to be that way.
3. Given the railways are wholly government owned and there are government owned general insurers, there might be some collusion which might  result in underpricing the risk.
And so forth…

Nevertheless, the point of this post is that it is possible to put a price on safety!

Journal of Bad Statistics: Road Accidents in India

Occasionally, this blog takes a break from presenting interesting data to critiquing data-related journalism in the media. Our object of attention for this post is a report in the Hindustan Times that states that “Maharashtra has highest number of road accidents in the country”. The headline is factually correct, if you go by the data on the website of the Ministry of Road Transportation and Highways. The problem, however, is that it is a meaningless statistic.

It might be intuitive to you that one cannot compare the number of accidents in a large state like Maharashtra to that of a small state of Manipur – the former is so much larger than  the latter that it is bound to have more accidents. Extending this argument, does it makes sense to compare states on the basis of sheer number of accidents? Does the statistic of “state with highest number of accidents” make sense? If not, what is a good metric to compare road safety in various states?

Comparing values that are measured in ‘absolute numbers’ across geographies makes no sense, for it doesn’t take into account the difference in size of the various geographies. In order to get a good comparison we need to “normalize” the measure that takes into account the relative sizes of the geographies. And it is important that we use the right metric in order to normalize the measures.

So how do we compare the accident rates in Maharashtra and Manipur, given their different sizes? An intuitive normalizing factor is the state population. Population might be a good metric for comparing birth rates or disease incidence rates, but road accidents? Population doesn’t account for people in one state driving more than in another state. We need a better metric.

Going back to the basics, what are we trying to achieve here by comparing accident rates across states? The accident rates is probably going to be used as a proxy for road safety. So how would you compare road safety across two different regions? A good metric, I would argue, is the likelihood of having an accident if you were to drive 1 kilometer. Or the number of accidents per vehicle kilometer. Notice that this at once takes care of both problems we have discussed above – sizes of states as well as propensity of people in various states to drive.

However, whether this is the best metric is debatable. For example, this metric ignores the “vehicle mix” in various states – so would “passenger kilometer” (rather than “vehicle kilometer”) be better? Perhaps. Again, this metric assumes that all kinds of roads are similar, and treats traveling along a kilometer of a highway as equivalent to traveling a kilometer on a village road. There are no “perfect” metrics or “normalizing factors” – so we have to choose one that is “good enough” and go with it.

Now, let us compare states based on their likelihood of accidents. Unfortunately, data on “vehicle kilometers” is hard to come by – in the absence of tolled roads, no one really keeps track of this. So we need to use a proxy. Again, it is debatable about what is the best proxy (remember there was already a debate on what is the best measure), but for ease of data capture (if not anything else) let us use “accidents per total road length” as a metric here. Drawbacks of this metric is that it doesn’t capture how busy these roads are, and are only a loose proxy for how much people drive.

The graph below shows the relative safety of roads in Indian states. Based on accidents per 10000 kilometers of roads, we see that Maharashtra (green) is quite close to the national average (blue). It turns out that it is the union territory of Lakshadweep that is the clear outlier on number of accidents per kilometer of road.

Road accidents per 10000 Km of roads, per state (2008). Source: Ministry of Road Transportation and Highways
Road accidents per 10000 Km of roads, per state (2008). Source: Ministry of Road Transportation and Highways

Based on this, we can say that the article in the Hindustan Times quoted at the beginning of this piece, while factually correct, does not present a correct picture.

Car Ownership

People, especially in the US, make a big deal about home ownership. In fact a large part of the current economic meltdown has its roots in the American craze for home ownership. Fannie and Freddie were created to help home loans become cheaper, then there was the CDO wave. Then came subprime. NINJA (no income no job amortized). All that. Boom. Bust. Jai.

A related concept that no one seems to talk about is car ownership. They say that the safety of a neighbourhood goes up if the proportion of owner-occupied homes goes up. And this is the underlying theory behind most of the home ownership craze.

|||ly, road safety is directly proportional to the proportion of owner-driven vehicles on the road. Take Bangalore for example. Till the late 90s, the traffic there was excellent and well-behaved. Some roads were already clogged, yes. But drivers were in general very well behaved. And the reason behind that was that most people owned their bikes and cars. They had a greater incentive to make sure that there was no damage done to their vehicles nad drove more carefully.

Yes, personal safety also plays an impact and is independent of whose vehicle the driver is driving, but I think in the progression of severity of accidents, vehicle safety gets compromised before personal safety. In other words, there is a one-way implication here – if you drive keeping in mind the aim of not damaging your vehicle, it is more likely that you are not going to get injured. The reverse doesn’t necessarily hold. And that is why car ownership is so important.

So what happened in Bangalore in the early 2000s when traffic suddenly became horrible? This thing called BPO happened, which brought with it the mostly chauffeur-driven taxis. Now, on one hand, these guys had perverse incentives as their efficiency was measured on the speed from which they got from point A to point B. Apart from this, most of them were not driving their own vehicles (this was a departure from the earlier wave of taxis and autos, most of which were owner-driven) and so they didn’t care so much about damaging their vehicles, which led them to drive more rashly.

Similar is the case with Delhi, which is known to have always had horrible traffic. Being the political capital, Delhi has always had a reasonably high proportion of chauffeur-driven cars. Which is why, for a long time, its roads have been known to be rasher than roads in other cities. And things still haven’t improved.

The thing with car ownership is that it forms a positive-feedback loop. Suppose the number of chauffeur-driven cars goes up. Then, the traffic in general becomes more rasher. And driving becomes more of a headache for you. Which increases your incentive to employ someone to drive your car. Which further pushes up the proportion of chauffeur-driven cars. This is what has happened in Delhi over the last 50 years. This is what has happened in Bangalore over the last 10 years.

In order to make our streets safer, we need to incentivize people to drive their own cars and bikes (one clarification – by own, I mean either your own or something that belongs to close family or friends; in both cases, incentive to keep vehicle safe is high). If I’m not wrong, people can claim tax exemption against the salaries they pay their driver. This needs to go first. Next, insurance companies need to have different levels of payout for self-driven and driver-driven accidents (I know this is going to be hard to be implement).

Yes, this might increase unemployment since driving other people’s vehicles is a major occupation nowadays. But is greater unemployment too high a price in order to ensure greater safety? (ok I can quickly think of one counterargument for this – if people become unemployed, the chances they’ll become goons rises, which makes society in general less safe)

Sit down behind the wheel, and be counted. Say no to drivers. Drive your own car. It is in your own, your car’s , other people’s and other people’s cars’ interest. You don’t need to be driven. You need to be in the driver’s seat.