Decision Tradeoffs In Privatization Of Indian Railways Commerce Essay

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Indian railways have been struggling to generate significant profits since decades before becoming hugely profitable in 2007 due to business centric decision making and effective management. Since then, the organization has again witnessed fall in profits because of a highly unstable political environment plagued with corruption that is immensely difficult to change. In order to get the organization to sustainable profitability is privatization an alternative? What are the trade-offs of such a decision?

About the Indian Railways

Indian Railways (IR) was just a notion in 1987, a point where India was itself an illusory nation. After Indian political redesign as an independent republic, the railways played an important role of binding the whole country together. Indian Railways is the fourth largest railway network in the world managed and owned by the Indian government. It is an integral and effective network that unites the whole Indian subcontinent on social, economic, cultural and political grounds.

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The first Indian passenger train, covering 20 miles, was opened in 1853 and by 1900s it had the fourth largest rail network with 34,656 miles in 1913 (Government of India, 1955). IR formed the backbone of the public transport in India. IR, today, has 6984 stations spreading from mountainous terrains to Rajasthan's desert and covers almost entire country from north to south, east to west with 62,000 route kilometres of track (Srivastava, 2006). It employs about 1.6 million people, is divided into 16 zones, operates around 13,000 trains daily and carries around 20 million passengers and 2 metric tonnes of freight every day (Srivastava, 2006). The services provided by IR include freight and passenger transport along with allied services such as parcel, catering and production units. 70 percent of the revenue comes from freight. The passenger business constitutes only 30 percent of the revenue however it contributes 60 percent of IR's total transport effort in train kilometre coverage (Indian Railway Network Report, 2011). The railways suburban services account for about 8 percent passenger revenue with is about 57 percent of total passenger carried (Indian Railway Network Report, 2011).

The rail transport comprises of two main services:

Coaching (Passenger and Parcel)

Goods (Freight)

Coaching: this service includes electric multiple unit transport services (computer services) and rail car service. Under this segment we have further sub services that include

Passenger (Terminal Service): The passenger service includes a variety of facilities such as booking, waiting rooms, platform, shunting of trains and maintenance of coaching yards.

Catering Services: Under the catering service IR provides refreshment rooms, restaurants at station, dining / refreshments in the trains for various routes.

Special services: This includes reservation, enquiries, retiring room facilities, and TTE s and catch attendants.

Goods (Freight): The freight service includes the following sub services:

Terminal Service: this is a major service provided by the IR that includes booking, delivery of goods, loading and unloading from wagons and shunting wagons from and to the marshalling yard.

Line Haul: this includes marshalling yard for formation and braking up of trains along with transhipment of all goods from originating to destination station.

The IR being one of the largest rail systems has approximately 34,000 passanger coaches, 7,000 locomotives, and 30,000 wagons has privately operated trains coaches like The Shatabdi, Palace on Wheels, The Royal Orient and the Fairy Queen which are popular among the foreign tourists (Bhattacharya, Smyth, Vicziany, 2004)

Indian Railways turnaround story

Indian railway has been unprofitable for decades before it was revived by Lalu Prasad Yadav who reported a cash surplus of 20,000 crores in 2007 (Gupta & Sathye (2007). To visualize the turnaround story, this case shall consider the timeframe between 2001 and 2007 in which Indian Railways grew from being a national liability to an asset because of good management decisions. Appendix II suggests that, in comparison to previous years, the performance of Indian Railways declined in 2001.

Literature has identified several reasons for the deteriorated performance during the 1990s. Some of the prominent ones include market share loss in freight service business, inflexible pricing, high internal costs, inefficient multiple investment into bad projects, increasing employee costs, decreasing per employee productivity and politically infected decision making process.

In 2001, under the leadership of Mr. Nitish Kumar, Indian railways witnessed a philosophical change of choosing tough business decisions over populist actions which was carried forward by Mr. Lalu Prasad Yadav in his tenure. This change provided positive results in the following year that can be viewed from financial data in Appendix-III.

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As indicated by the data in Appendix-III, there was a jump in the total revenue, dividend payments and net surplus. Operating Ratio saw a favourable decrease along with the number of staff even though the overall wage cost increased over time. Such behaviour is accredited to government pay commissions that led to increased salaries for government employees.

The successful turnaround is accredited to rigorous commitment to achieve cost effectiveness, increased revenues and efficient organization processes. Three strategies (Gupta & Sathye, 2007) that were followed to turnaround the fate of Indian Railways were:

Retrenchment

Repositioning

Reorganization

Retrenchment is focused on cost control by withdrawing from unprofitable markets, businesses, products and services. It also involves downsizing, increasing efficiency, reducing operational scale, selling bad assets and outsourcing. The repositioning strategy involves product innovation and differentiation with a focus on increasing revenue. Reorganization includes modifying HR systems, organizational culture, planning systems and extent of decentralization.

Mr. Yadav, in his tenure from 2004-2009, increased the load carrying capacity of good wagons to 90 tons from 80 tons resulting in INR 7200 crore additional earnings (Raghuram, 2007). Some of the other key initiatives were upgrading tickets to upper class on real time basis and adding/reducing bogies in accordance with seasonal demands also reaped great benefits for Indian railways. Appendix-IV provides a detailed collection of actions taken under each strategy with their corresponding impact. In 2007-08 IR recorded a profit of 13431.09 crores (Indian railways yearbook, 2007-08). But in the following years, the profits for Indian Railways decreased greatly by 93% from 2007-08 levels to 264 crores in 2009-10 and 401 crores in 2009-10 with a year on year decrease of 79%.

The trend set up by Mr.Yadav has been attempted to be continued by the subsequent ministers. Additional measures have been taken up by the railways to increase revenues and compensate for the hit in bottom-line due to increasing diesel prices. Constant efforts to set up automatic vending machines , fast food units, and "Jan Ahaar" outlets led to vending contractor licensing fee earnings of 231.51 crore and sales turnover of departmental catering unit of 203.98 crore in year 2010-2011 (Indian Railways, yearbook 2010-11)

However, there are certain challenges that still need to be addressed by the organization. Even though Indian railways constituted 90% of freight traffic in1980, the figure has drastically come down to 30% in year 2012. Appendix V shows the fluctuating growth rates of growth in freight traffic (Indian Railways Yearbook , 2010-11).

Indian railways seem to be focussing on only four P's- power, pay, perks, and pension. Safety is the big issue. While an important index of safety-the train accidents per million train kilometres, have come down from 0.14 in 2010-11 from .17 in 2009-10, procurement of critical components still lacks adherence to quality norms (Indian Railways Yearbook , 2010-11).

New coaches added every year lacks maintenance and most of the infrastructure is outdated-ranging from toilets to fire extinguishers to passenger services tools. The senior leadership lacks vision and empowerment and bureaucracy is deep rooted in the system. It is impossible for a government organization to grow in a country where railways minister (Dinesh Trivedi) is forced to resign by its party for proposing increase in passenger fares by max 30 paise (INR) in railway budge 2012-2013 (Sharma, 2012).

In order to solve certain issues, government has understood the importance of privatization and it has started being practised in smaller areas since 2010. Introduction of new schemes such as

Private Freight Terminal(PFT) to provide cost effective warehousing solutions to end users and facilitate traffic handling at the terminals by private investors to increasing IR's market share

Wagon Investment Scheme to accommodate the increasing demand for wagons through investment by producers association, corporate entities or individuals

PIPAVAV Railway Corporation Limited (PRCL) witnessing private sector participation for the first time in a railway infrastructure project seems to give rise to new era of Indian railways.

However, Indian railways need to watch out that can these smaller steps actually protect the fate of such large organization or the bold steps of complete privatization need to be taken in near future. Privatization of a national asset can be seen two ways. It has its own merits and demerits that create a dilemma in analyzing the impact of decision. Some of the major factors that tilt the decision towards privatization can be listed as:

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Increased quality of services.

Focus on sanitation and hygiene in aspects of

Wagons

Catering

Toiletries

Infrastructure.

Addition of latest technology.

Optimization of old infrastructure/Projects.

Increased security/safety measures.

Optimized resource utilization

Can the organization be left totally to the mercy of few industry leaders and should the privatization model of Indian Bus System be replicated? The question does pose a threat for the sustainability of a huge poor class of Indian society that might be the victim of competitive pricing due to privatization. Moreover, in areas where India shares geographical borders with other countries, privatized organization may leave a loophole in national security. Therefore, it is imperative for the government of India to exercise control on the operations of Indian railways.

Is there a middle path available?

Comparative Cases

Indian Bus System

Indian Bus transport system, incepted in 1945, makes up over 90% of public transport in Indian cities. It serve as a convenient and economical mode of transport for almost all sections of the society. The Bus transport system are majorly run by state government. However, in 1992, the adoption of privatization was welcomed in Capital of India, Delhi (Pucher, Korattyswaropam, Mittal & Ittyerah, 2005)

The private buses were under the direct control of the state transport department of the Delhi administration. Availing stage carriage or a contract carriage permit was the only eligibility requirement to start up his own bus operations in the country. The advantages of the private bus firm model over public bus system model on various parameters are highlighted in the world bank report of 2001, listed in table below.

Attribute

Private Model vs Public

No. of passengers per bus per day

1,584 vs. 751

revenue per bus per day

INR 2700 vs 1321

staffing per bus

4.6 vs. 9.6 employees

cost per bus km

7.7 vs. 17.2 Rupees

Overall profit

3.2 Rupees per bus km vs -11.0 Rupees loss per bus km

(Marwah, Sibal and Sawant, 2001)

 However, the plans to forge a public-private partnership reaped benefits on account of the threat to public safety. It gave the rise of the "Red Bus" era in Delhi, comprising of reckless driving, exceeding speed limits and increasing death tolls of pedestrians and cyclists. Since then, many failed attempts have been done to refine this privatized model  including  "DTC kilometre scheme'  to ensure operational discipline among Blue line entrepreneurs and mandate requirement of the private buses to follow DTC timetable and employ a DTC ticket collector.

In the original Road Transport Corporation Act 1950, the underlying principle behind mass public transport in India was to enable social and economic development by offering cheap travel, connecting the sub-urban areas with urban centres, offer subsidized service to the students, improve passenger amenities and provide effective maintenance services. The privatization and commercialization of Delhi's bus service did not only defeat the basic idea but raise apprehensions on privatization system as a whole in order to realize goals such as transport efficiency, passenger safety and common man's affordability.

British & Japanese Railways

There has been an increasing need to create a better managed, commercially responsive and a market led railways in various economies of the world. Many countries have implemented reform designs to improve operational and financial performance of the national railways. They done this by "railway restructuring" by various methods like regulatory reforms, new organizations, revised accounting methods, privatization and de- monopolization. The railway is a technologically advanced mode of transportation that was traditionally vertically integrated in which most of the facilities, operations and functions are controlled. Many countries widely assumed railways as a public enterprise and with ever challenging financial, operational and growth restrains have forced governments to adopt restructuring of the railways.

One of the successful privatization of railways has been The Japanese National Railway (JNR). JNR was privatized in the year 1987 into six regional passenger companies and nationwide freight company (Mizutani & Uranishi, 2003). According to the report "Privatization of the National Railways: an overview of performance changes", the Japanese railway was privatized on six features (Mizutani & Nakamura, 2004)

Vertical integration

Functional distinction

Horizontal separation

Allowance of non rail service

Establishment of intermediary institution

Lump-sum subsidies for low density Japanese Railway

JNR was undergoing a loss of $50 million a day before getting privatized and now is making profits between $600 million to $2 billion. Moreover, the no. of accidents have also reduced by 50 per cent (Kumar, 2010)

One of the unsuccessful stories of privatization has been that of The British railways. It underwent privatization in the year 1995 to enable railways to exploit the opportunities to the fullest. British Railways involved large number of companies which were further subcontracted, making the process complex and thus leading to confusion in responsibilities. Some of the problems faced were the decline in punctuality -from 92.7 % in May 1997 to 91.5 % in August 2000. There was an increase in overcrowding problems along with enquiry problems (Crozier, 2001). The other problem faced was the huge cost involved that led to GNER (Great North Eastern Railways) bankruptcy (Crozier, 2001).

Australia and New Zealand are some of the other countries which were able to successfully implement privatization on their railway system.

Conclusion

In order to get Indian railways back to sustainable profitability, one option is the privatization of India railways. However, following questions need to be addressed before taking any decision:-

Should Indian railways be completely privatized or government subsidized?

What are the trade-offs of privatization? Which partners be chosen and will it be wise to give it away in hands of multinationals/global firms

Can privatization be able to maintain a balance between 150 years of rich Indian railway culture and modern practices to generate revenue and optimize processes?

What parallels can be drawn from the privatization models of other countries and other Indian industries and how effectively can they be replicated?

Appendix-I

The organizational Division of the Indian Railways

(Source: "Turnaround " of Indian Railways: A critical appraisal of strategies and processes,2007)

Appendix - II

Year

1998

1999

2000

2001

Operating surplus (In Crores)

1535

1399

846

763

Operating Ratio

90.9

93.3

93.3

98.3

Net Revenue to Capital Ratio

8.9

5.8

6.9

2.5

Divident Payment (In Crores)

1489

1742

1890

308

Source: Gupta & Sathye (2007), RBI Bulletin

Table1: Financial performance of Indian Railways from 1998-2001

Appendix - III

2001

2002

2003

2004

2005

2006

2007

Net Surplus (In Crores, After dividend, Real)

596

754

813

755

1347

3852

6274

Operating Ratio

98.3

96.02

92.3

92.1

91

83.2

78.7

Net Revenue to Capital %

2.5

4.96

7.5

8

8.9

15.4

19.6

Dividend Payment in Crores

308

1337

2715

3087

3199

3287

3579

Staff # (In thousands)

1545

1511

1472

1442

1424

1412

NA

Kms covered

63028

63140

63122

63122

63465

63332

NA

Total Revenue (In Crores)

36011

39358

41856

43961

47320

54491

63220

Total Wage Cost (in Crores)

18841

19214

19915

20929

22553

23954

NA

Source: Gupta & Sathye (2007), RBI Bulletin

Table 2: Financial Performance of Indian Railways from 2001-2007

Appendix - IV

Retrenchment

Strategy

Action

Impact

Review of Unprofitable business aspects

Leased out parcel and catering services

Cost saving of more than thousand crores.

Outsourcing

Outsourced advertising, parcel and catering service.

Increased efficiencies

Reducing costs

Improvement in technological space and automation. Increased efficiency in service delivery.

Decreased wagon turnaround time by 14%

Increase in capacity of wagon by 36%

Downsizing

Decreased staff

Cost savings of more than two thousand crores.

Repositioning

Strategy

Action

Impact

New product development

Introduces double stack containers for freight trains.

Increased cargo handling capacity. Cost savings 25% of operational expenses.

Product differentiation

On demand passenger coaches, e-ticketing

Increased revenue growth

Loading process innovations, connectivity to ports, revision of tariffs , competitive pricing, passenger centric services etc.

Increased freight revenues.

Increased passenger trains revenues.

Reorganization

Strategy

Action

Impact

HR management systems

Establishment of International Railway Strategic Management Institute, Participation of Railway Employees in Management etc

Improved productivity.

Change in organizational culture

Customer and market centric

Improved Business decisions.

Decentralization

Zonal control centres increased from 9 to 16.

Increased vendor satisfaction.

Modifications in planning systems.

Implementation of systems such as Freight operating information systems, enterprise resource planning systems etc

Increased system efficiency

Appendix V

Teaching Note

Synopsis

Indian Railways is the fourth largest railway network in the world managed and owned by the Indian government. Incepted in 1987, Indian railways play an important role of binding the whole country together. The rail transport comprises of two main services: Coaching (Passenger and Parcel) and Goods (Freight).

Indian railways had been struggling to generate significant profits since decades till 2001 after which the railways started showing revenue growth and became hugely profitable in 2007. This was attributed to the business centric decision making and effective management especially that of the railways minister at that time-Mr. Lalu Prasad Yadav.

After 2007, the organization has again witnessed fall in profits because of a highly unstable political environment plagued with corruption that is immensely difficult to change. In order to get the organization to sustainable profitability, one option is privatization of India railways. However, following questions need to be addressed before taking any decision:-

Should Indian railways be completely privatized or government subsidized?

What are the trade-offs of privatization? Which partners be chosen and will it be wise to give it away in hands of multinationals/global firms

Can privatization be able to maintain a balance between 150 years of rich Indian railway culture and modern practices to generate revenue and optimize processes?

What parallels can be drawn from the privatization models of other countries and other Indian industries and how effectively can they be replicated?EDUCATIONAL OBJECTIVES

Educational objectives

This case study focuses largely on strategy and business issues, such as the privatization of Indian railways as a whole or in parts. However, it is really more a political and management problem.

The case can be useful for but not limited to business, management, consulting and civil services students. It can be presented in various ways for discussion depending upon the discretion of the instructor/facilitator:-

On the spot discussion reflecting a real-life situation or as practice work in advance of discussion

As a role play wherein the students are assigned some 'parts' of the case and asked to present the people's 'character's' concerns from that part.

As interviews wherein the students are presented with part of the information and be required to ask specific questions to extract the rest of the data needed.

At the end of the exercise, students should have a clearer understanding of the following issues:

• The fluctuation in growth of Indian railways and the major factors behind the same in different time periods.

• The different strategy and leadership style adopted by different railway ministers and the effects of the same.

• The current privatization steps taken by the government and the long term sustainability of those steps.