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Restructuring of Indian Railway IDF Section A, Group 8
Restructuring of Indian Railways
Submitted in partial fulfillment of the requirements of the course
Infrastructure Development and Financing
to
Prof. Sebastian Morris
Prof. Raghuram
Prof. Rekha Jain
on
24th August, 2001
by
Group 8
Amit Dinakar
Dipayan Chakraborty
Prashant Yadav
Rajesh Kumar I
Sudip Sharma
Indian Institute of Management
Ahmedabad
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Restructuring of Indian Railway IDF Section A, Group 8
Table of Contents
Contents Page
Chapter I - Background 1
Chapter II - Reorienting the Investment Decisions of the Indian Railways 6
Chapter III - Global Experiences in Railway Restructuring and Lessons for 8
Chapter IV - Financing 12
Chapter V - Restructuring Of Indian Railways 21
Chapter VI - Revamping Railways: the strategy for over all structure 31
Chapter VII - Conclusion 38
Chapter VIII - Bibliography 41
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Restructuring of Indian Railway IDF Section A, Group 8
Chapter I - Background
s
The role played by the Indian Railways in our country’ socio-political development is
indisputable. Apart from its stated duty of transporting men and goods across the length
and breadth of the country, it has played a stellar role in times of natural and man-made
disasters. The role of the railways becomes even more crucial to the development of the
country as we enter the 21st century and the pace of the growth of the economy
accelerates. The need for a efficient transportation sector would become more crucial
with every passing year. Thus it is necessary for the Railways to remain competitive, in
terms of both cost and quality of services, to ensure an efficiently functioning transport
sector in the country.
As is obvious railways form part of the basic infrastructure of the country. Broadly all
infrastructure services can be divided into the following two categories
1) Open Access Services : These services are those from which people cannot be
easily excluded, irrespective of whether they have contributed monetarily to the
establishment and maintenance of the service or not. Some examples of this
service include public lighting, intra city roads etc.
2) Limited Access Services : These services are those which can be provided
exclusively on an user pays basis and those who do not pay can be excluded from
enjoying the benefits of this service. These services thus can be self-financing.
Railways ideally would fall in the latter category, as it would not be too onerous a task to
prevent somebody who has not paid for the service from enjoying its benefits. However,
in India the railways have come to symbolize an institution which exists to serve a social
purpose as well as a commercial one and often this has led to policy distortions away
from the most economically sound ones. One major byproduct of this perception of the
railways has been the system of cross-subsidization of lower class passengers, which is
the category with the thinnest margins, by freight services and higher class passengers,
who provide the heftiest margins. This has led to a severe financial crunch in the Indian
Railways and as result the railways has failed to pay a dividend to the government for the
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Restructuring of Indian Railway IDF Section A, Group 8
first time in 17 years. Further its ability to invest in facilities required for modernizing the
railways has also suffered a body blow.
With the liberalization policies of the Narasimha Rao government the railways faced
newer challenges from without. As the country integrated with the global economy all
prices in the economy had to align themselves to those prevailing in the international
markets. Thus as prices of transport services fell internationally the natural protection that
the domestic sector, including the railways, enjoyed became a thing of the past. At the
same time it faced increasing levels of competition from other sources of transport from
within the economy
a) Post deregulation of the trucking industry the roadways have captured a huge
s
chunk of the railway’ market share. This has been achieved with increased
customer orientation, flexibility and lower costs for short distance routes.
b) The development of expressways and six lane highways have only led to the level
of competition being offered by the road sector increasing. With the
announcement of the ‘Golden Quadrilateral’ project the competition to the
railways can only increase.
c) Petroleum products, once a stronghold of the railways, has been increasingly
moving towards exploring pipelines as the preferred mode of transport.
d) Coastal Shipping and Inland Waterways have also taken away market share from
the railways, with the Government providing active support in terms of favorable
policy decisions. Products like cement and coal have increasingly started using
these as the preferred mode of transportation.
One of the obvious reasons of the decline of the market share of the railways is the ratio
of its freight fares to its passenger fares, which is one of the highest in the world. Apart
from the cost angle, the poor quality of the services that the railways provide have also
led to its losing market share to its competitors. Transport models over the last few
decades have been driven by cost reduction and increased speed of freight movement.
This has led to the development of a multi modal system of transport involving
containerization of freight and interactive coordination between railways, ports and
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Restructuring of Indian Railway IDF Section A, Group 8
roadways. Thus, the neglect of containerization of freight has also led to the railways
falling out of many customers consideration set.
The Looming Financial Crisis
The ability of Indian Railways (IR) to invest adequately in carrying out the required
investment and maintenance activities is being called into question. Historically the
investment in IR has been controlled by the planning commission, the financing has come
from mainly three sources i.e. internal generation of funds, budgetary support and market
borrowings.
s
After the passage of the fifth pay commission’ award the internal finances of IR have
come under increasing pressure due to the bloated workforce that it carries. Budgetary
support has been steadily drying up, from 75% in the fifth five-year plan to 23% during
the eighth plan. The primary reason for this is the increasing burden of non-plan
expenditures mainly interest payments and salaries. Non-plan expenditure has increased
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from 10% in the early 1980’ to about 13% of the GDP presently. Further due to most of
this investment being of the non-developmental nature they have not provided the
government with any substantial financial benefits, which has further exacerbated the
financial distress that the government has to face. Hence more often than not the railways
has had to turn to the market for funds, which obviously have increased the financial
burden on it due t the dearer rates of interest that they have to play.
Due to the above difficulties in procuring finance at reasonable rates and the loss of
market share in the lucrative freight segment along with unremunarative investments and
high cost of internally sourced products and services, the rate of growth in the costs of the
railways has been much faster than the rate of growth of revenues. Over the last two
years whereas costs have been growing at a rate of around 15% per year, revenues have
only managed to grow at around 13% per year.
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Restructuring of Indian Railway IDF Section A, Group 8
The primary reason for the slow growth in revenues is faulty route planning and
saturation of the present freight routes. Costs have accelerated primarily due to
unremunerative investments and the increase in salaries and pensions due to the passage
s
of the fifth pay commission’ award. Besides having a bloated workforce the productivity
levels of the railways are also abysmally low further compounding the problem. This has
led to expenditure on the areas of repairs and maintenance being significantly lowered,
thus drastically reducing safety levels.
To stop the continuous decline in its financial capacity the railways urgently needs
investments in infrastructure. However at the present rates of revenue and cost growth
this seems to be almost impossible. At current performance levels the railways are
schedules to face an operating deficit of Rs. 3700 crores. With budgetary support
dwindling and slated to meet just 25% of the outlay, the total amount of borrowings that
the railways would require is to the tune of Rs.5000 crores per annum by 2003.
Issues the Railways need to Address with Extreme Urgency
I. Matching Customer Requirements : The railways have to provide higher
reliability, more flexibility and lesser documentation for their freight services if
they are serious about winning back the share that they have lost to other sectors
of transport.
II. Clarifying its Purpose : The railways should stop viewing itself as a government
department and start operating like a commercial organization, which would be
financially self-sufficient.
III. Adopt a Contemporary Business Structure : IR should start focusing on its core
competencies and start empowering employees to take quick decisions.
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Restructuring of Indian Railway IDF Section A, Group 8
The Rakesh Mohan Committee
The committee was set up in 1998 to find ways of making private investment in the cash-
strapped Railways more lucrative and profitable at a time when the government had set
up similar committees to encourage private investment in roads, telecom and shipping
and announced several benefits, including a tax holiday for investors. The committee
submitted the interim executive summary on the 17th of February to the then Railways
minister Ms.Mamata Bannerjee.
The report made recommendations on reform in the following areas
? ? Pricing strategy for Freight and Passenger services and for different classes within
Passenger Services.
? ? Restructuring the entire approach taken so far for Investing the railways
resources.
? ? The various options open to the Railways to finance its investment and
maintenance activities.
? ? The utilization of Information Technology for restructuring the railway’s
operations.
? ? Reinventing the entire organizational structure of the railways.
We shall attempt to make a critical appraisal of the recommendations of the committee
and comment on their feasibility and implementability
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Restructuring of Indian Railway IDF Section A, Group 8
Chapter II - Reorienting the Investment Decisions of the Indian
Railways
The current planning process if IR does not follow normally accepted practices, which
has resulted in falling productivity. The Khanna Committee on Railway safety had
predicted Rs 15,000 crores shortfall over a period of five years.1 With the financial
crunch that they are undergoing, each investment should be extremely carefully
monitored and approved. Currently there is no prioritizing of projects on basis of
remunerativeness. The standards of project selection have also slackened considerably
and most projects now have started yielding diminishing returns.
Due to the works program being a part of the annual railway budget all the investment
initiatives are imparted very short-term focus. Further, the absence of any significant
project management skills has made project completion uncertain which results in
significant cost overruns. This has also resulted in a short-term focus to all investment
decisions. The major weaknesses identified by the committee in the railways investment
process are
? ? Incremental approach to planning and hence a backward focus.
? ? Emergence of the departmental fund quotas.
? ? Lack of integration with business objectives.
? ? Imbalance between annual outlays and total commitments.
The committee recommends the following steps to be undertaken to get maximum results
out of the investment.
? ? Prioritization : A strict criteria for selection should be set up and all projects
should be screened and a select group of projects should compete for the limited
corpus of investments. All investments would require a fully endorsed business
plan.
1
http://www.financialexpress.com/fe/daily/20470228/fec48538.html
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Restructuring of Indian Railway IDF Section A, Group 8
? ? Quick Implementation : To ensure this the most important requirement is to
identify the sources of funds for each selected project.
? ? Coordinated Investments : This would result in the minimization of operational
costs. Also, this would allow complementary projects to reach their full potential.
? ? Scrap the incremental plan heads based approach to allotments : The current
method of fund allocation pumps too much funds into on-going projects which are
unremunerative and shuts out newer projects.
The basic objective obviously is to get projects that have returns over and above the cost
of funds. In this respect the screening process, prioritization etc would be a step in the
correct direction obviously but there are two points to be considered which might harm
the implementability.
? ? There is a self-confessed lack of project appraisal and project management skills
at the middle and top management level of the railways. Thus the entire selection
process would come to naught if professional skills in these areas are not sought.
This would entail either the railways hiring such professionals as employees or
retaining them as consultants.
? ? Most of the projects that are taken up are done so with a political motive in mind.
So the entire exercise that has been detailed above will again amount to nothing if
the operational side is not separated from the policy making side.
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Restructuring of Indian Railway IDF Section A, Group 8
Chapter III - Global Experiences in Railway Restructuring and
Lessons for Indian Railways
s
The late 70’ marked the beginning of the period when European railways were facing a
severe erosion of market share and thus profitability. Their market share halved from
s s.
30% in the 1960’ to 16% in the late 1980’ Two major reasons for this decline were
? ? The increasing customization of services by the trucking companies.
? ? The increasing containerization of cargo.
This was a situation very similar to the one being faced by Indian Railways at this
moment. The increasing burden of social security subsidization was also taking its toll on
the governments and as a result the budgetary support to the railways was also coming
down.
Most of the railways were caught in a debt trap with German railways leading the pack
with a total liability of $33.5 billion and France with $28.8 billion. The accumulated
losses had almost wiped out their entire net worth with Germany again the worst sufferer
with $2.5 billion in accumulated losses as compared to $2.2 billion for France and an
astounding $11.3 billion with Japan.2
However thankfully the Governments of the EU and Japan woke up to the situation fast
and started on reforms to ensure the survival and growth of the railways. Two major
reasons for the government to support the railways in this endeavor were
? ? Railways were a cleaner and more energy efficient means of transport as
compared to roads.
? ? They were more economical for passenger services
If we study the efforts of all the countries in detail three common restructuring principles
come to light
2
Source:EU,SJ,East Japan Railways,Deutsche Bahn,SJ Cargo, Railtrack
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Restructuring of Indian Railway IDF Section A, Group 8
1. Create an arms length relationship between the railways and the
governments.
2. Induct professional management with a commercial focus..
3. Narrowing down business focus and spinning off non-core activities.
Today most major railways including Deutsche Bahn in Germany, Railtrack in UK,
Ferrovie Dell Stato in Italy etc are autonomous companies distinct from the governments.
However they are still fulfilling their public service obligations. The European
Commission further inducted two important structural changes
1. Separate the infrastructure and operations for most railways
2. Created an independent regulator to oversee all forms of contractual
relationships.
If we take a look at the restructuring exercise of the European Railways the following
elements come into broad focus.
?? Separating the infrastructure
i. Effective separation to facilitate access to infrastructure equally to all
operators.
ii. Setting an access fee to finance the infrastructural requirements at least
partially.
?? Opening up the sector to competitive forces
i. Gradual competitive bidding of passenger railroad markets, clarifying
rules and access mechanisms
?
? Stage One : Regional and commuter traffic
?
? Stage Two : Long distance traffic
ii. Liberalization of the freight market with free access to the rail network
?? Active role of the state
i. Creation of a regulatory body independent of the operators and the
infrastructure-to act as an arbitrator.
ii. Structural rationalization of the railroad system in terms of debt and
surplus staff.
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Restructuring of Indian Railway IDF Section A, Group 8
The benefits of this restructuring exercise was felt immediately in terms of improvement
in market share, productivity and investments.
1. Customer Service : In terms of quality , prices and safety the customer has
significantly gained. For example the average delay per passenger in UK fell from
2.5 minutes to 2.2 minutes. In Japan the traveling time reduced by almost 25
percent. Prices in Sweden fell by 5 percent in the passenger segment and 7
percent in the freight segment. Accidents in Japan reduced by fifty percent and in
Britain by 67 percent.
2. Market share : Most railways have arrested the decline in market share and are
beginning to grab an increasing share of the pie in both the passenger and the
freight segments. For example cumulative traffic in Britain, Germany and Sweden
had been declining at 7.5 percent per annum, but post-restructuring it started to
grow at 2 per cent per annum.
3. Productivity : post-Restructuring the productivity levels in Japan tripled from
s
500-passenger ton km per employee in the early 80’ to 1500-passenger ton km
per employee five years after restructuring started. In Germany too this figure
rose by 95 per cent.
4. Infrastructure Investments : Even with reduced public subsidies infrastucture
investments rose in most of the countries. In Japan it increased by 400 percent
s.
from $500 million in the mid 80’ While in UK it doubled from less than $1.4
s
billion in the late 80’ to $2.8 billion in 1999-2000.
Lessons for IR
?? Involve the unions : The unions have the potential to become a severe
roadblock to progress if they are not involved in the process from the outset as
happened in Italy and France. Whereas continuous dialogue as in the case of
Germany and Sweden ensures their commitment to the reform process.
?? Find the correct model to implement : The correct approach would differ
from country to country. For example in UK the extent of unbundling was
probably a tad too much as the railways were split into more than 100 companies
and some of them were unable to exist on their own. Late 3 of these freight
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Restructuring of Indian Railway IDF Section A, Group 8
companies remerged. Whereas in Germany and Sweden the approach was much
more gradual and cautious. Hence country and region specific factors do need to
be taken into account when deciding upon the model of restructuring to
implement.
?? Right mix of external and Internal Managers : External managers are
needed to bring in the commercial focus and internal managers are required for
their domain knowledge of operating railway services.
?? Time Bound process : Creation of a roadmap and adhering to it religiously
is absolutely necessary if success is desired in the restructuring process. The
actual details might differ e.g. Britain completed its exercise in 2 years while it
took Germany 10 years to do the same. However the important thing is that once
fixed the roadmap was strictly followed.
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Restructuring of Indian Railway IDF Section A, Group 8
Chapter IV - Financing
Let us now look at the options IR has as far as financing is concerned and the means of
exploiting the same.
Right from the time, when the first railway line was built, the restructuring process of
Indian Railways has continued. From the earlier Build Operate Transfer (BOT) system,
it went on to become a completely nationalized organization in the twentieth century and
now there are talks of commercialization and privatization.
Issues
The report extensively deals with the issues involved in financing Indian Railways. The
need for a total overhaul right from the prevalent accounting standards to means of long-
term capital financing of the railways is underlined.
Indian Railways are faced with an impending financial crisis due to the GoI being cash
strapped and the Railways itself being in need of huge investments in near future. The
surplus generated by the operations of the Railways is simply not enough to supply the
requisite funds. Thus it becomes imperative to look for external sources of funds. In this
context, adoption of accounting standards which are understood by all becomes
important. Unless the accounting procedures of railways are transparent and intelligible
to all, external investors cannot be expected to put in money.
Other benefits of switching to Indian GAAP are:
? ? Increased transparency in operations and finances of railways.
? ? A prerequisite for implementing financial discipline, which is very necessary for
long-term viability of the railways.
The report also stresses that standardization of accounting system is not related to
privatization. It is in a sense linked with the very viability of the railways.
A very important lacuna in the accounting in railways is inadequate handling of
depreciation. The written down value of the asset is not shown and this leads to massive
overcapitalization. This coupled with inadequate provisioning for the depreciation makes
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Restructuring of Indian Railway IDF Section A, Group 8
The problem
s
IR’ immediate needs: Rs 20,000 crore for new projects, Rs 9,000 crore for gauge
conversion, and Rs 15,000 crore for track renewals and replacements.
Unfortunately, its coffers are empty. Railway Fund balances have plummeted from a
comfortable Rs 3,565 crore in 1997-98 to a paltry Rs 253 crore in 1999-2000, and are
expected to further drop to Rs 180 crore in 2000-2001. Budgetary support from the
Government Of India (GOI) has declined from 75 per cent of the total Railway Plan in
1974 to 23 per cent in 1999-2000, forcing the Railways to turn to costly market finance.
Market borrowings stood at Rs 3,000 crore in 1999-2000 and lease or interest charges
amounted to Rs 2,615 crore. Sums up Y.P. Anand, 65, former chairman of the Railway
Board: ''The Railways is bankrupt. There is no other way to describe it.''3
It is evident from the state of affairs that the government is not in a position to finance the
new projects it is planning in the near future. It is thus imperative that it has to generate
huge funds and immediately at that. One of the obvious options is to go for debt but the
borrowing rate is already so high that it is finding it difficult to service this debt.
Solutions?
Attracting Lenders by taking steps towards restructuring and in the process improving the
internal sources of funds
the
There have been suggestions by ‘ expert group’ set up by the Government of India that
this debt should be converted to equity. Given this situation the idea of the expert group
to improve the accounting systems to attract the lenders seems to be a bit out of place but
it is perhaps one of the few options on hand. But the concept itself, of recasting the
accounts, has other benefits, apart from clearing the haze so that the lenders can
understand the functioning of IR better, which are as under:
The Indian Railways (IR) has to first identify the profit centers and allow them to operate
as individual units. This decentralization can be based at the division level. Wherein each
division will be a profit center. The accounts recasting will come into play in a major way
3
http://www.india-today.com/btoday/20000607/policy.html
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Restructuring of Indian Railway IDF Section A, Group 8
at this stage. IR should have separate accounts for each of these divisions wherein targets
could be set and the profit / loss of each of these units could be clearly brought out. Thus
the divisions could be monitored and assessed against the targets set and the profits made.
This might also encourage interdivision competition for freight bookings.
Another issue, which needs to be addressed in this regard, is the depreciation. It is clear
that depreciation has to be accounted for to show the exact picture about the state of
affairs. But the question is whether to write-off the accumulated block in one year or to
do that gradually over say 5 years. If we go by the former plan then the figures of the
current year will be distorted to a great extent, thus it could be avoided.
The third issue, which is relevant here, is the basis for allocation of overheads. Should
that be on the basis of assets, costs, staff strength etc. This issue needs to be thought
about by the railways and an appropriate criteria is to be set.
These methods if nothing could show that railways is on its way towards restructuring
and thus give some confidence to the lenders in investing their money.
Pricing Structure.
Another way of generating funds is to change the pricing policy. Politics, not the market,
dictates the pricing structure in India currently. Politicians force it to subsidise some of its
potentially most profitable businesses, like the Bombay suburban routes, which carry 6
million people a day. About 70 million passengers a year do not contribute to revenue
because they travel without tickets4
Another issue relevant here is the low demand routes. The expert group has brought out
this issue clearly and its applicability in the Indian context is spot on. The government
can consider differential pricing. This differential pricing should be based not just on the
low demand routes, wherein low prices are charged but also in the off-seasons and non-
peak hours in an otherwise high demand route. Extending this point further the
government could go for congestion pricing in routes where there is very high demand
for this service and the supply is limited by charging higher prices in these areas.
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Restructuring of Indian Railway IDF Section A, Group 8
The ability of IR to accelerate growth rate of their revenues from freight and passenger
traffic is central to the success of any effort to restructure the organization. No
organization can hope to survive for an extended period of time by being dependent
solely on external sources of finance.
Currently the ratio of freight to passenger rates in the revenues of IR is approximately
70:30. Hence a restructuring would be required in both the sectors for the restructuring
exercise to be worthwhile.
As is well known, political compulsions have forced the railways to subsidize lower class
passengers with higher class passenger fare and freight. In recent years the growth rate of
passenger services, which has been around 5.8%, has outstripped that of freight thus
leading to an erosion of margins. Moreover within freight services the railways had
traditionally concentrated on bulk commodities, which were those used in sectors
dominated by the PSUs. In non-bulk items, where IR faces competition from other modes
of transport, the share of the railways has been continuously falling .
One disturbing trend is the slowdown in the growth of manufacturing as a component of
s
the GDP. Whereas historically it has gone up to 50% of the country’ GDP before falling,
s
in India it has remained stagnant at 30% of the GDP with services taking the lion’ share.
As manufacturing serves as the base for the growth of any railways traffic and thus
revenues, IR has to compete even harder to sustain its traffic volumes.
Based on the above stated reasons and the facts that the steadily increasing disposable
income of the middle and upper classes has made them less price sensitive than earlier
the committee made the following recommendations.
? ? Revenue potential from the upper classes needs to be exploited to the maximum
extent. They also need to rebalance passenger revenues in a manner consistent
with the elasticities of demand for various classes.
4
http://www.ft.com/reports/z7c3aa.htm
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Restructuring of Indian Railway IDF Section A, Group 8
? ? Creative pricing techniques designed to maximize utilization of available
capacity, like off-season discounts, standby discounts etc to be used to augment
revenues.
? ? Streamlining the ticketing procedure by exploiting opportunities on the net.
? ? A serious relook has to be taken at concessional fares.
? ? Improving freight services in terms of waiting times, certainty of delivery
schedules, convenience of loading unloading etc.
? ? To compete in the non-bulk segment, apart from pricing the services
competitively, integration with other modes of transport i.e. road and sea shall be
essential.
? ? IR has to offer a total logistics package, i.e. it has to develop the capability to
picking up small roads, aggregating them initially then disaggregating and
delivering them.
The margins on the lower class passenger seats range from the non-existent to very
minimal. Hence any profit that has to be met has to be through exploiting the higher class
passengers. Moreover increasing lower class passenger fares represents too much of a
political risk, so that is unlikely to take place. Due to the ill developed air travel market
and the pathetic condition of most of our highways, railways often represent the sole
option for a large segment of the middle of the transportation hierarchy. Hence this
opportunity to increase the usage of higher class services and increase revenues. One area
that has been neglected is the business traveler segment. More services of the kind
provided by trains like Shatabdi should be started between major business centers e.g.
Madras-Bangalore etc.
Differential pricing on the basis of income elasticities, while theoretically a very
attractive proposition, would not be simple to implement due to the difficulty in
calculating elasticities of demand. However a differential pricing scheme based on price
discovery by trial and error would be ideal for this case. This might lead to a slight drop
in passenger volumes in the immediate aftermath but this would only be a temporary
correction.
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Restructuring of Indian Railway IDF Section A, Group 8
Another technique that IR might consider developing is the policy of recovery of at least
all of the variable costs associated with every seat in a train. This method is known as
marginal cost pricing and was pioneered by Southwest Airlines in the USA. The seats
which would otherwise have gone unsold on a particular trip could be sold off at
minimum prices subject to the fact that the price at least recovers the variable cost. The
options like off-season discounts, standby discounts etc could be utilized in this manner.
However this would require a high degree of local autonomy at the lowest levels of
decision making. This is necessary as most of the events triggering the need for such an
action would be highly localized in nature and unless the decision making authority is
delegated to the ground level authorities the opportunity would be lost due to delays in
decision making. Thus, a necessary precondition for this option to succeed would be
devolution of authority to the lowest level of hierarchy.
As far as the option of providing ticketing facilities through the net is concerned, while it
is again theoretically a very attractive proposition implementability issues can again arise.
First of all is the question of Internet accessibility, except for the metros the net has not
yet penetrated to such a level which would facilitate the exercise of this option at a mass
level. Secondly, the issue of the medium of payment could also represent a hurdle in the
path to successfully implement this option. The most common form of payment over the
net is credit cards and here again the question of penetration levels would arise. While
this might be an idea which could be explored with an eye towards the future when
electronic methods of payment would have become more commonplace in the Indian
scenario, at this point in time it might only apply to upper class travelers in urban centers.
A detailed cost benefit analysis needs to be done to ensure that the returns expected from
this system, given the above mentioned constraints, would be enough to make the
investment in the infrastuctural backbone necessary for such a service a positive NPV
investment. Another minor point that might arise is that of default on part of the ticket
holder in case payment is in the ‘on-delivery’ mode. It would not present a significant
problem in a busy route where the ticket could simply be passed on to a waitlisted
passenger or sold under the Tatkal scheme, on a thinly traversed route this might lead to a
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Restructuring of Indian Railway IDF Section A, Group 8
potential loss in revenues. While this might not be a major problem it does deserve to be
considered.
As regards concessional fares, it has been estimated that the proportion of passengers
utilizing this service across all classes is to the tune of 15% and might be even more in
the upper classes. Needless to say, this causes a major erosion in revenues and ideally the
railways would like to suspend such services. These services should only be allowed on a
standby basis and they should not displace fare paying passengers. However, considering
the fact that a significant portion of these passengers are railway employees themselves
the inevitable internal counter pressure would have to be dealt with proactively when
implementing this option.
In the matter of freight services there is no arguing with the fact that the quality of
services in terms of all the parameters mentioned do need to be upgraded substantially
and fast. The possibility of loading, unloading activities being contracted out to private
parties, as happens in most ports with Stevedoring companies, should be explored to
improve the quality of service.
Offering a total logistics package, i.e. developing the capability to pick up small loads,
aggregating them initially then disaggregating and delivering them presents a perfect
opportunity for the railways to leverage its extensive network of tracks across the
country. This type of operation would require a hub and spoke system of operation. The
aggregation would be done at the hub and the dissagregation would be carried out in the
various nodes along al the spokes. The hubs can be identified quite easily in each sector
that the railways is currently operating in e.g. Calcutta for the eastern sector, Raigarh for
the central etc. The extent of the coverage provided by each hub also need not be fixed
and could be decided on a sector by sector basis.
A similarly encourageable initiative is integrating railway services with other transport
sectors like sea and roads. However, due to the small scale nature of the Indian road
transport sector this would entail several bilateral contracts with multiple parties. Also
20
Restructuring of Indian Railway IDF Section A, Group 8
another prerequisite for such complex interlinked services is regular and timely arrivals
and departures. The railways will have to get their act together in this department if they
have to carry off this exercise successfully. However this represents a great opportunity
to push the entire Indian transport sector a couple of generations forward.
While on this it is very important to stress that this logic should not be extended to the
freight services. The cost of a sending freight one kilometer is now 3.5 times the cost of a
passenger traveling the same distance. This ratio should normally be 1:1, and in some
countries freight rates are dwarfed by passenger rates5. IR could still consider giving
special discounts on routes that have low traffic like say the Konkan railway but the
congestion-pricing model could not be applied since the freight services are already
grossly overpriced.
Privatization Proceeds
This is another attractive option in generating finances. IR can use its strengths to attract
private participation in IT, real estate and other areas, it is already doing so, as detailed
below.
Privatization Through IT
The Railways plans to use its right of way over 63,000 km to lay optic fibre cables along
railway tracks. These lines will then be leased out to internet service providers,
companies, and media houses for transmitting data and multimedia content. This is a
right move in the right direction and could generate huge funds.
5
http://www.indiaabroaddaily.com/watch/budget/25rail.html
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Restructuring of Indian Railway IDF Section A, Group 8
Tapping Real Estate
The IR is also planning to use its real estates in a commercial way. The IR could occupy
the necessary portion of the railway station building , while the rest could be taken up by
shops, restaurants, and offices. The other option is to lease land near railway stations to
private firms to build hotels on a Build-Operate-Transfer (bot) basis. This would also
generate lot of revenues. The railways is already taking up some of these activities
seriously.
Plantations are also on the agenda. The Railways Board is finalising a policy that will
allow railway land, with areas varying between 3 acres and 50 acres, to be leased to
private firms to grow trees. The brainwave came after the Railways raked in Rs 3 crore in
1999-2000 by harvesting teak, eucalyptus, and sheesham trees grown on its land.
With freight accounting for two-thirds of revenue, wooing that traffic back is also getting
top billing. Realising that a lot of freight traffic is lost to roads because of poor
connectivity to ports and warehouses, the Railways is addressing these issues. More
importantly, the Railways is getting private investment for rail links to ports and
godowns.
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Restructuring of Indian Railway IDF Section A, Group 8
Chapter V - Restructuring Of Indian Railways
The expert group says conclusively that for IR to become commercially viable it has to
follow a path of high growth. For this the revenues from freight and passengers has to
increase considerably. But this cannot happen unless IR takes immediate measure to
promote its image as the best mode of transport. So this calls for an overall marketing
strategy. In this regard Dr.P.K.Goell has developed a marketing strategies for IR6 which
his worth studying and understanding.
Marketing
Each product's features should be communicated to appropriate segment using suitable
media. By product we mean the different kinds of services it is offering for different
segments.
Station, City Booking Agencies/Out agencies/Reservation offices are basically Sales
Offices. The network should be increased by involving the agencies, Rail Travel Sales
Agents and General Sales Agents, which have been appointed. But their services need to
be standardised and improved (in terms of prices and connectivity).
Train/Station/Goods shed/Container Freight Station (CFS) are basic physical service
delivery systems. These have to be carefully designed for each segment of market
Numerous customer interface processes / management processes exist in complex
Railway systems for example- Reservation Process / Refund process / Claim process.-
Communication process.- Entraining / Detraining process.- Loading / Unloading process.
The basic principle to follow is to mechanise, rationalise and simplify the processes.
Investment in improving qualitative aspects is very important. Customer care/courtesy
and service attitude have to be built in. Maximum input is required in this segment. Again
response should be differentiated according to service product. For example for
unreserved segment there is no need for packaging the food in great ala-carte style -
simple clean hygienic and cheap food is more suitable since this service is not expected
by this segment in any case.
6
http://www.rscbrc.ac.in/abh-arch/jan-mar-97/CHAPTER11-ABHI.htm
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Restructuring of Indian Railway IDF Section A, Group 8
Marketing Strategy: Broad strategy consists of segmentation of Market, based on
expectations, Measuring expectations and managing expectation. Some of the broad
strategies could be:
1) Make Marketing a key issue in the organisation and change the culture from
production led to customer led organisation. The consumer satisfaction index
level to be made key organisational mission and an important element in the
appraisal system.
2) Focus on service products and develop suitable business plan for each service
product making it a profit center. Thus we can have ‘brand managers’ who would
be responsible for each of these products and thus accountable for meeting the
profit targets of that product!
3) TQM to be applied in all management and customer interface processes. This
would be a step in setting standards for each of these critical services and
maintaining them on a regular basis.
4) Computerize all customer interface areas, like Reservation, Information Systems
(Develop local language modules) unreserved booking, Claims, public dealing
office etc. This again is to convert the IR from a system that operates according to
its convenience to one where they are built purely to facilitate the customers.
5) Switch over to Dynamic Rating & Pricing based on market prices not on cost plus
basis. Indian Railways should make the concession granted as unique selling
proposition (USP). As discussed earlier, this would allow IR to maximize the
overall revenues given the resource / demand constraints. The process itself might
be complicated in terms of the authority that would decide on these prices or if it
would be based on standard computer generated programs (keeping the
constraints in mind), but the concept as also discussed by the expert group is very
appealing.
6) Three products: Wagonload, small parcel products, unreserved segments need
more focus (we can not run Indian Railway profitably with uniproduct like bulk
freight). These areas require attention because there is a huge potential in these
products in generating revenue but due to bad pricing and lack of proper systems
of control this is going untapped. For instance the unreserved segment generally
24
Restructuring of Indian Railway IDF Section A, Group 8
becomes no-ticket segment not just because of travel without ticket (bad control)
but also because of rock bottom prices (bad pricing).
7) Horizontal integration with modes where the product is inherently weak by
methods such as road bridging, extension of siding for providing door-to-door
service. This could be done in areas where there are considerable synergies
between the various modes of transport in term of meeting the needs of the end
customer. This would encourage the freight service users to adopt these modes of
transport to maximize his benefit and not just look at it as an issue of
transportation of either road OR rail but as the best package.
8) Develop Freight Operating Information System (FOIS) quickly. This will
improve wagonload segment, smalls/parcels segment, and Container segment
flow more than bulk traffic flow. The expert group recommends this as well.
9) We cannot remain oblivious to customer where there is capacity constraint.
Correct strategy like demand management strategy, peak / off peak pricing etc.
are important to tackle capacity constraints as discussed earlier.
10) Fill in the market space vacated by wagonload traffic by containers by quickly
developing container links. Organisation should do R & D by innovating service
products in this segment.
11) The issues of environmental degradation, congestion, pollution, energy costs to
be exploited fully for promoting Railway Industry.
12) Aggressively Market with Government/Opinion makers and planning
commission the social cost benefit of Railways. Design a careful strategy so that
in development of Railroads is seen by society at par with other modes as an
Infrastructural development with level playing field with Road sector.
13) Rationalise and simplify all interface processes - like Claim process, Refund
process, Communication process and clearly identify the interface point for each
service product. This would go a long way in making the railways most preferred
mode of transport, if it seems that it already is then this will improve its
popularity further.
14) Create production/Marketing synergy - Specially design, develop, deliver,
appropriate "Service Product'' quickly and modify the products as per needs and
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Restructuring of Indian Railway IDF Section A, Group 8
wants of customers. With aggressive marketing alone we can regain the lost glory
and greatness and of course market share of Indian Railways
Use of IT
The Committee seems to have recognized the importance of Information Technology for
the future growth and development of Indian Railways. The following are the chief
recommendations of the committee with regards to the application of IT for Indian
Railways:
??Freight Revenue Enhancement: Emphasis is laid on the use of Yield
Management Systems with Variable Pricing for customers based on dynamic
demand situation. The mechanisms suggested here are creation of an open freight
exchange where Indian Railways participate as a customer and applications for
efficient scheduling of freight trains.
??Passenger Revenue Enhancement: The emphasis here is on the use of Revenue
Management Techniques to not only enhance its revenues but also to improve its
information and customer service. The various acknowledged steps in this regard
are:
o Better utilization of MIS Reports to be used for decision support systems.
o Identification of means to increase the coverage of Passenger Reservation
System (PRS) from the present 20% in case of long distance passengers.
o Outsourcing of distribution for better efficiencies and reducing costs.
o Revenue Management System – variable pricing depending on demand.
??Operational Cost Reduction: Freight Related Management Systems such as
Wagon and Crew Management system, Parcel Management System, and Inland
Traffic Management System etc are advised to reduce costs in freight
management. The idea is to improve the utilization of assets through these means.
??Initiatives to improve its Decision Making
o Long Range Decision Support System (LRDSS) is recommended to be
fully embedded in the decision making process of IR. It is also
recommended that the system be expanded to include modules on
passenger traffic, and the terminal simulations.
26
Restructuring of Indian Railway IDF Section A, Group 8
o Building a top down approach to meet the requirements at all senior
levels. Also, appropriate organization has to be built at the necessary
levels for this purpose.
Analysis of Recommendations:
The recommendations that have been made related to the field of IT are with the
objective of trying to better utilize the huge asset base and capital stock of IR.
Freight Revenue Enhancement: The idea to improve the freight revenue accruing to the
government is imperative, given the present situation. Variable pricing based on demand
situation, although economically sound, is going to be a little difficult in terms of
implementation. This would be at two levels. Firstly, it would require a strong
information system (thus this objective can be met only if the other recommendations are
well implemented). Secondly, it might run in to trouble with the political parties, as it is
slightly controversial for obvious reasons.
Passenger Revenue Enhancement:
o Better utilization of MIS Reports: This is definitely going to improve the
quality of decision-making that currently exists at IR. It will also help in
the implementation of the other recommendations, like dynamic demand
pricing as it will provide necessary information for demand prediction.
o Identification of means to increase the coverage of Passenger Reservation
System (PRS) from the present 20% in case of long distance passengers:
there have been no suggestions made in this regard. Hence, it is not clear
as to how it is going to be done. Also, there has been no estimation of the
financial requirements etc. in this regard. Since the cities and large and
medium sized towns are already covered under this system right now,
further additions would involve much higher marginal costs and lower
coverage per new addition. This has not been looked in to here.
o Outsourcing of distribution: This idea can bring in some efficiencies in
distribution system of the Railways. But it is going to be difficult in
implementation. Especially because we are talking about a whole network
over here. The co-ordination might be difficult to achieve between a
27
Restructuring of Indian Railway IDF Section A, Group 8
plethora of private operators. However, one solution can be to operate
only a number (very few) private operators in charge of this function. This
would also result in greater accountability on the part of the private
operator.
o Revenue Management System: The stress here is on the introduction of a
flexible pricing model, dependent on the level of demand. Thus, the prices
would be increased in case of very high demand and reduced in slack
period. But there are quite a few problems in this regards:
??This sort of an advanced system requires very good information
infrastructure in place. This can be done only through the help of a
state of the art software based revenue model, based on accurate
demand estimations. The demand estimation exercises in this case are
going to be very complicated.
??Currently, the problem on many important routes (for example Delhi-
Bombay) is that of perpetual supply shortage. Strict use of a revenue
model would result in a permanent increase in process over here.
??It can be quite a controversial approach and there is ample scope for
making it a political propaganda.
The stress here should be on the more extensive use of limited application of this
policy. For instance, the Tatkal scheme, a form of variable pricing, is presently
available only on a limited routes and trains. The stress should be on expanding
the scope of Tatkal scheme to more number of routes and trains first as the idea of
a full-fledged revenue model seems a little far-fetched at this point in time.
o Operational Cost Reduction: It is very important that IR implement
measures for reducing operational costs and the suggestions in this regard
are very valid. The implementation of the recommendations in this regard
can definitely going to improve the asset utilization of Indian Railways.
o Initiatives to improve the Decision Making Process: These are in the right
direction as it is quite imperative. However, building of a top down
approach is going to require a strong organization structure.
28
Restructuring of Indian Railway IDF Section A, Group 8
Reforming the Remuneration Pattern of Indian Railways
As IR is run as a government department, wage increase are linked to those of
government services as a whole. The wage patterns are dictated by the recommendations
of the successive Pay Commissions. The award of the Fifth Pay Commission however
has caused the deepest dent in the finances of IR. It is not just the wage bills that are
bleeding the railways dry the pension liabilities are also a severe strain on its resources.
With an operating ratio of more than 98 per cent, the Railways is trying to cut down on
the expenses. It has been estimated that the pension cost as a percentage of operating
expenses has more than trebled to around 14 per cent in last two decades, eroding the
operational efficiency of the Railways.
While the staff strength of the Railways has remained more or less unchanged at 1.5-1.6
million over the past 25 years, the number of pensioners has risen from one lakh in 1975
to seven lakhs in 1990 and stands at 1.1 million at present. Together with the backlog of
arrear payments as per the Fifth Pay Commission's recommendations, the total pension
outgo rose to Rs 5,167 crore last year from Rs 1,000 crore in 1990.
The number of pensioners is estimated to increase to around 1.4 million by 2015.
Moreover, the pension benefits in the coming decade may constitute 38 per cent of the
wage bill of those employed as against 30 per cent now.
These costs cannot be met out of the Pension Fund, established in 1964, whose reserves
declined to Rs 76 crore last fiscal on account of commitments arising out of
implementing the Fifth Pay Commission's recommendations. The Railways' own
classification of `pay as you go' system (PAYG) has not really worked as current pension
liabilities are being met out of its general revenues.
The major problem facing IR vis-à-vis wage increases is the fact that the productivity has
not kept pace with the increase in real wages. However productivity per employee has
been increasing at a steady rate, which is a positive development. But unfortunately staff
related costs have stripped away at any productivity related gains that have been made.
Whereas there was an increase of 108% from 1981-82 to 1998-99 in real wages,
29
Restructuring of Indian Railway IDF Section A, Group 8
productivity gains were a mere 82%. If pension liabilities were added to this figure it
would be even worse.
The Committee in its report has identified two key areas of reform, one of freezing
recruitment and the other of freezing wage increases. The specific recommendations
made were.
? ? Reduction in employee strength by over 20% over the next seven years. This
would include normal retirement plans and a well designed VRS system.
? ? Spinning off ancillary units to get their employees off the roles of IR.
? ? Segregating liabilities into three categories -- liabilities to past employees, future
liabilities to current employees in respect of their pension entitlements accrued for
past service and liabilities which will accrue in future to employees (current and
future). Since the last category comprises the normal costs of employment, the
panel feels the obligation on this score should be borne by the Railways. The
liabilities in respect of the first two categories -- estimated at over Rs 40,000 crore
-- are of a different nature since they have already been run up, but for which no
cash funds are available.
?? The committee has recommended the creation of a separate fund with
participation of both the Union Government and the Indian Railways. The
proposed fund, to be independent of the Railways, will have an autonomous board
of trustees and a clear set of rules governing investment principles and employee
entitlements. While the Railways would contribute to the fund on an ``ongoing
basis'' to build up the corpus to meet liabilities in the last category, the fund to be
required for meeting liabilities in the first two categories would be provided by
the Government over a limited period of five years. The panel is also in favor of
making the fund sufficiently flexible to allow changes -- transfer of pension rights
-- in the long term.
30
Restructuring of Indian Railway IDF Section A, Group 8
Employee reduction has traditionally been an explosive issue to discuss within the
Railways. The reduction of 20% of employees would be a politically very difficult
decision to take. The right direction in which to proceed would be freeze recruitment for
a the period in question and proceed on the VRS scheme. However there are two
problems with the VRS scheme, firstly with the current financial situation of the railways
gathering the financial resources for such a scheme would be quite difficult and would
result in diversion of investible resources from other profitable ventures. But this is a
bitter pill that the railways would have to swallow. The second problem is inherent to all
VRS schemes that is the people who generally accept the option is the employees who
have the maximum market value. Thus the best employees of the railways would
probably be lost. To stop this from happening, a targeted VRS scheme has to be
implemented. The targeting could be done on basis of number of years served or any
other criteria which ensure that only those employees who have the least productivity
would have the option to apply. Then the option of VRS must be made more valuable for
them than their current remuneration keeping future opportunities in mind.
Similarly while spinning off subsidiaries care has to be taken that the profit making
subsidiaries are not spun off unless absolutely necessary. The subsidiaries to be targeted
s
are the one’ with lowest employee productivity and least profitability. Those with
minimum relation to the core business like hospitals etc should be among the first to be
targeted.
The pension fund idea is not really an original one as they have been in place in the west
for at least three decades now. There are many models for public sector institutions to
follow. The major concern here is the correct utilization of the funds. The legislation
which has to be enacted in order to get the fund operationalised has to have watertight
regulations governing the use of the funds as the primary motive is capital protection and
risk minimization in the deployment of the funds. The control measures have to be in
s,
place to ensure that it does not follow the path taken by most private PF’ which have
wasted most of the resources.
A final point that we would like to make is that, one major ingredient that is required for
wage policy reform is the presence of a strong political will. Historically this particular
31
Restructuring of Indian Railway IDF Section A, Group 8
commodity has been famously lacking among the Indian political class and thus the
prospects of the reform going through are very dim indeed. It is here that the divorce o\f
the political establishment from the operational side of the railways is extremely
necessary.
32
Restructuring of Indian Railway IDF Section A, Group 8
Chapter VI - Revamping Railways: the strategy for over all
structure
The previous parts of the report attempt at establishing that immediate and deep changes
are indispensable for the long-term sustainability of the railways. The issues of
impending financial crisis and the accompanying scenario analysis do a very good job of
bringing home the point that without very sincere attempts to stem the rot, the railways
will slowly bleed themselves to sure demise. The evidences given for the urgency of the
changes are clear compelling and overwhelming. The next task is to decide upon the
direction, pace and orientation of the changes.
The report talks about consensus about the symptoms of the rot plaguing the railways and
lack of it when it comes to the reasons behind the disease and possible remedies. Two
broad views are brought about vis-à-vis causes behind the crisis and hence the possible
cures.
The Repairists
One view, supporting conservative, incremental changes, whom the report calls as
“Repairists” revolves round the premise that a model which has worked so well for over a
century should not be tinkered with, especially when no very good alternatives are in
sight. This idea is based on the assumption that nothing is fundamentally wrong with the
railways, and the principal reason behind the bad state of affairs is the unstable political
system and policy initiatives driven by short-term political gains. Thus this ideology
prescribes freedom of the management from political interference as the remedy for the
ills plaguing the railways.
The expert group also reports that “repairists” argue that in the absence of any model,
domestically or internationally, of sweeping changes in the railways establishment being
successful, it wont be advisable to lose whatever good we have in the quest of some
elusive perfect.
They further argue that on several fronts, problems faced by the railways are far less
severe than those faced by several of the “navratnas”.
33
Restructuring of Indian Railway IDF Section A, Group 8
Reinvent
Their basic premise is that parliament should only be limited to providing basic
guidelines to the railways and the organisation should be run by professionals. Their
contention is that reverting back to earlier arrangement will not be very compatible with
the changed situation in the new liberalized Indian economy.
The expert group is quick to point out that the re inventors do not doubt the competency
of those who have so far led the railways – in fact they doubt the whole system of
management and governance of the railways due to which even a decade after the
liberalization started, the railway establishment is untouched by it.
There are several issues on which both the rapairists and re inventors actually converge.
The rapid pace at which the railway is depleting its resource base is a cause of concern
for both. What is painful is that the resources are being wasted in pursuit of the goals,
which are going to have no contribution in making the railways more efficient, and the
customer service better. Laying of new rail lines and gauge conversion were there is no
traffic are such white elephants which are really expediting the demise of the railways.
Commercialization or Privatization
The report examines the question of whether to focus on privatization or
commercialization, and comes up with the conclusion that commercialization should be
the focus area right now. A major reason is that privatization of such a huge and complex
organisation like railway is going to be a really complex and controversial exercise and
the international experience in this regard has not really been very encouraging. The
process is going to take a long time and its effectiveness in rejuvenation the railways is
not established. On the other hand, commercialization involving breaking the rail system
into its componenet parts, spinning off non core activities , restructuring what remains
along business line sabd adopting commercial accounting managemenbt systems is
recommended as the right strategy by the expert group.
Key Recommendations
The expert group has focused on the causes of problems rather than the actual details of
the issues. The report states that Indian Railways is one of the most studied organizations
34
Restructuring of Indian Railway IDF Section A, Group 8
of the world with one expert report or the other available for the every conceivable aspect
of it. The striking fact is that very little action has been taken on any of these and this is
the precise area of focus of this expert group.
The expert group identifies three core areas on which immediate action is imperative:
institutional separation of roles, clear differentiation between social obligations and
performance imperatives and the need to create a leadership team committed to and
capable of redefining the status quo.
Institutional separation of roles refers to policy regulation and management functions.
This would imply that policy makers are limited to setting policy; regulators fix
competition rules in general and pricing in particular; management actually manages the
operations.
Separation of social obligations from performance initiatives underlines the significance
of social obligations in a democracy like India with immense diversity. An institution like
railways cannot afford to overlook its social obligations and it is not desirable. The issue
is how best to manage these social concerns without jeopardizing the economic viability
of the institution. The crux of the problem is that the increased pressure to carry social
obligations has not been backed by an increase in funding. Calculations show that annual
social obligations cost is Rs 4000 crores for which it gets only Rs 800 crores from the
government. The situation is wholly unsustainable and risks draining the livelihood from
the heart of the business.
Third is the need to create a leadership team committed to and capable of redefining
status quo. For this, the current flaws in the system should be worked upon. Tenure based
promotions and current bias towards homegrown technocrats starves the system of
refreshing the mindsets.
The expert group suggests that the leadership be separate from management. The
leadership team be selected from the best, rewarded for success, measured against
performance targets and be in place long enough to do the job properly.
Principal recommendations of the expert group are as follows:
35
Restructuring of Indian Railway IDF Section A, Group 8
1. Develop a shared vision for modern railway system
The balance between commercial discipline and social obligations need immediate
clarification and effective resolution in the context of rapidly declining financial health.
The expert groups stresses on the need for a clearly articulated forward-looking vision.
The central idea embedded in the purpose and strategy statement is that railways is
fundamentally a commercial entity that needs to achieve independent self sustaining
financial viability. The corollary of this central idea is that railways cannot be expected to
make unremunerative business decisions unless it is directly and fully compensated.
2. Focus on the Core Area: Spin off the Rest
Railways needs to critically examine its business portfolio and decide which of its many
businesses are core and which should be spun off. Railways should engage only in those
businesses directly related to its core activity of rail-based logistics and passenger
transport. The expert group anticipates those priority candidates for accelerated spin off
would be all manufacturing units followed by units related to construction (IRCON,
RITEs) etc. Few suggested candidates for spin off are: production units, residential
colonies, catering, security, hotels etc.
Proposed Restructuring Plan
Since the restructuring is quite a long process, often taking 8 to 12 years going by the
international experience, the expert group has therefore defined a broad vision for the
medium term and detailed the near to medium term actions necessary to kick start and
sustain the restructuring process. The proposed restructuring plan covers the first five
years of the process. Going in for a detailed step by step enumeration would have served
little purpose owing to fast changing conditions and long time frame.
3. Separate Institutions for Separate Roles
If railways is expected to function on commercial principles, its management needs to be
allowed a degree of autonomy that is comparable to any other commercial organization.
To grant the railways autonomy by creating an arms length relationship with government
is one of the salient features of the railway restructuring across the world.
36
Restructuring of Indian Railway IDF Section A, Group 8
It should also be kept in mind that mere corporatization would not accomplish anything.
For any reorganization to be successful there has to be an ex ante acceptance and
commitment by the government and railways alike that railways would operate on
commercial lines.
The expert group recommends that IR must aim to be corporatised into the “Indian
Railways Corporation” (IRC). The GoI should be in charge of policy setting. It would
also need to set up an Indian Rail Regulatory Authority which would be necessary to
s
regulate IRC’ activities as a monopoly supplier of rail services to begin with,
particularly related to tariff setting. IRC should be governed by a reconstituted Indian
Railways Executive Board (IREB).
The GoI needs to take following actions:
? ? Implement changes into the structure, constitute IRRA and IREB by introducing
legislative packages.
? ? Define the extent and nature of social obligations to be fulfilled by railways and
provide adequate funding. The depth, width and limits of these social obligations are
a political issue left to the government that will be stated, differentiated and funded
fully by the government.
? ? Appoint people holding key responsibilities at both IRRA and IREB as ultimately
responsible for their performance.
The expert group also underlines a thorough review of the Indian Railways Act and the
Indian Railway Board Act. New legislation would need to be drafted that:
? ? Mandates corporatization of Indian Railways into Indian Railway Corporation IRC
after initial restructuring has been done.
? ? Permits a revamp of the Railway Board.
? ? Redefines the relationship between govt. and a revamped Indian Railways Executive
Board (IREB).
? ? Provides for exemption of taxation – excise, sales etc, for the period of transition say
5 to 7 years.
? ? Permits potential private participation in Railway operations.
? ? Facilitates the induction of personnel from outside the railways.
37
Restructuring of Indian Railway IDF Section A, Group 8
? ? Mandates the subsidization in social areas to extent funds provided by the
government.
? ? Set up a social safety net to take care of surplus labor.
Organizational Restructuring:
It is recommended that the IR should be reorganized based on the principle of a
corporation – the Indian Railways Corporation. It will be an independent, corporatised,
customer focussed and financially viable railway, run along commercial principles and
subject to generally accepted corporate accounting principles and reporting. It will be
managed by the Indian Railway Executive Board which will be responsible for the
complete restructuring process.
The focus of the new Railway would be on core activities like provision of infrastructure
and the operation of freight and passenger services. To this effect, all the non-core
activities are proposed to be fully divested within a period of 5 years. The idea is to
combine a central organization structure with a regional decentralisation structure. In the
new scheme:
?? Passenger, Freight and Suburban would operate as Profit Centres
?? Infrastructure and Services would operate as Cost Centres.
It is recommended that the actual corporatisation be made a step-by-step process.
Recasting of accounts, setting up of IRRA, restructuring of business units etc. will have
to precede corporatisation.
The leaders of each of the business units will be held accountable for their unit’s
performance to a newly constituted Indian Railway Executive Board. The role of the
IREB would be to define strategy, allocate resources and ensure effective performance
management. It is expected that each of the business units would operate with a large
degree of operational freedom but would be responsible for the balanced scorecard at the
end of the accounting period.
The recommendations in this area are almost revolutionary in nature but are definitely
important given the present state of things at the IR. However, the ability of the
government to generate such political will is not very clear. The reason being that such
38
Restructuring of Indian Railway IDF Section A, Group 8
restructuring would result in wide spread retrenchments and can run in to trouble with
labour unions.
Adoption of Commercial Systems: It is important that the financial accounts etc
of the new found Indian Railways are maintained on the lines of a corporate. Such
facilities would go a long way in making the restructuring efforts at the Indian Railways a
success.
39
Restructuring of Indian Railway IDF Section A, Group 8
Chapter VII - Conclusion
The privatization of rail networks, infrastructure and services has been a controversial
issue throughout the world. For instance, in the UK, serious objections were raised
against the privatization of British Rail in the 1990s. Moreover, Railtrack, the private
infrastructure company, was recently indicted by the Cullen Committee, which inquired
into the train accident at Paddington in 1999 in which 31 people died.
It is in this perspective that we must examine the enormity of the task confronting the
Rakesh Mohan Committee. Alongside this we must also keep in mind that IR has
traditionally been looked upon as a public institution which exists to serve the people,
therefore the very mention of the word market orientation with respect to the railways is
anathema to many of the participants of the Indian political scene. Thus we do not see
any far reaching changes coming out of the panels recommendations and thaty are most
likely to have the same fate as most of such other committees.
However broadly looking at the report, The Rakesh Mohan Committee's prescriptions are
similar to those advocated and implemented in the controversial restructuring of the
power and telecom sectors. It suggests the formation of the Indian Railway Regulatory
Authority, similar to the Telecom Regulatory Authority of India (TRAI). The Authority
will not only play the role of a neutral regulator and arbitrator in a field which will be
opened up for new private players, but will also ensure the non-intervention of the
Government in decision making, that is suggested by the Committee. The Committee
advocates sweeping legislative changes to prepare the ground for it and to reflect the
separation of the commercial and social objectives of the Railways. Such changes are
envisaged within a year of the restructuring exercise. Although the Committee does not
actually suggest an abridgement of parliamentary control over the Railways, it goes
without saying that such controls would be incompatible in a situation in which
commercial considerations hold full sway over operations. Moreover, the space for such
control would be restricted as the Railways itself is shrinking its scale of operations in a
restructured environment. The annual presentation of the Union Railway Budget in
Parliament would no longer be necessary if the suggested reforms are implemented
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Restructuring of Indian Railway IDF Section A, Group 8
In the first three years, the Committee would also like to start the restructuring of non-
s
core activities and to revamp the Railway Board to reflect the organization’ status as a
commercial entity. In five years, the Committee envisages the introduction of
competition in the sector by allowing the large-scale entry of private entities in railway
operations.
Broadly the major points that the committee puts across are the following
? ? Separation of the policy-making functions from the operational function.
? ? Increasing market focus and keeping subsidies down to the barest possible
minimum.
? ? Achieving clarity of purpose within both the political establishment and the
railways itself as to whether it exists to perform a market function or a social one.
Then the performance evaluation parameters should be formulated accordingly.
? ? Getting rid of political interference.
? ? Stopping cross-subsidization of various services. A related point is that of
concentrating on improving the freight services which provide the largest chunk
of revenues and also the best margins
? ? Spinning off non-core activities
? ? Taking an increasingly corporate point of view to issues like investment, pricing,
financing etc.
However as we had stated many times before the major issue is not one of theoretical
soundness where the committee does a commendable job, but implementation given the
current political situation. However the fact remains that if India needs to progress
smoothly into the 21st century it needs a well functioning transport sector and the
railways are an integral and crucial part of this sector. Hence some steps in the direction
of implementing the recommendations needs to be taken with immediate effect. Probably
the way forward is to implement the least controversial measures initially like induction
of professionals on the board etc and keeping the more contentious issues like salary
freezes and spinning off the ancillaries until the correct political and social atmosphere
has been created.
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Restructuring of Indian Railway IDF Section A, Group 8
Bibliography
1) Marketing Strategies Of Indian Railways Dr. P. K. Goel Marketing Myopia
http://www.rscbrc.ac.in/abh-arch/jan-mar-97/CHAPTER11-ABHI.htm
2) Indian Railways: Towards Derailment? S Sriraman http://www.epw.org.in/36-
10/comm1.htm
3) Railway Budget http://www.economictimes.com/budget2000/railbud/mics2.htm
4) http://www.geocities.com/raildwar/othtrnresinst.htm
5) Executive summary of Interim Report of the Rakesh Mohan Committee
6) http://www.blonnet.com/businessline/2001/06/25/stories/14257104.htm
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