Turn Around Of Indian Railways

Indian Railways (IR) that in 2001 was in course to be declared bankrupt according to the Expert Group on Indian Railways is today India’s second largest profit making Public Sector Undertaking, only next to ONGC.

Indian Railways (IR) has itself proved as the nation’s prime mover. It boasts of the largest railway network in Asia. Besides, under single management, it has the second largest rail network in the World. More than 11,000 trains per day is operational of which 7000 are passenger ones. IR continues to be an integral part of the growth engine of the country. They play a decisive role in catalyzing the economic development pace.

The success story of IR was never consistent. Its growth rate was hindered in 1990s when it had its share of financial difficulties. Concerns over its ability to provide competitive transport services in the future were raised. This was because Railways was seen as an essential public service, used even by the lower class. With IR losing traffic to the roads gradually, along with a tariff regime, where-in passenger services were continually subsidized by freight services, the Railways faced an impending financial crisis.

Some of the salient features of Indian Railways overall development are:

Modernization including Track renewal

Passenger Security and safety

Asset Replacement and renewal

Reduced expenditure

Improvement in passenger amenities

Reduction in operating ratio and Increase in productivity

Computerization of railway systems

New technologies Induction for signaling and telecom

Prevention of revenue leakages

Some of the components that railways focused upon are:

Capacity augmentation of dedicated freight corridors especially Delhi-Mumbai & Delhi-Howrah

Establishment of logistic parks and terminals

Rationalization of freight structures

Increased use of IT enabled services

World class quality passenger amenities

PPP for building and operation of the rail infrastructure

Design of high capacity wagons

IR Restructuring to focus on core activities

Establishing a Rail Tariff Regulatory Authority

Literature on turnaround of public sector companies

Turnaround has been defined as ‘performance decline followed by performance improvement’ (Schendel et al., 1976; Robbins and Pearce, 1992). Brandes and Brege (1993, p. 92) define it as ‘a process that takes a company from a situation of poor performance to a situation of good sustained performance’. Some of the recent studies that have found a significant positive relationship between retrenchment strategy and organisational turnaround include those by Bruton et al., (2003); Dawley et al. (2002); and Morrow et al., (2004). The central element of retrenchment strategy is ‘an emphasis on cutting costs and raising efficiency’ (Boyne and Meier, 2006:23) .Some propositions those can be derived are:

Retrenchment strategy has a positive relationship with organizational turnaround.

Repositioning strategy has a positive relationship with organizational turnaround

Reorganization strategy has a positive relationship with organizational turnaround

Favorable environmental factors would positively impact organizational turnaround.

Retrenchment (cost cutting initiatives)

This principal strategy consists of several sub-strategies including reviewing parts of businesses that are not value adding, retreating from markets where the firm is underperforming , selling assets, reducing scale of operations, improving efficiency, downsizing, outsourcing and such other strategies. The emphasis is on control of costs. In the Railway Budget speech on 6 July 2004, the Minister outlined his strategy: ‘operating expenses will in no way be allowed to exceed the barest minimum require and cost effective use of assets will be ensured’.

Reviewing parts of business that are not value adding: The IR reviewed its catering and parcel service business and decided to lease it out. This freed up resources for utilization in more remunerative activities.

Efficiency improvements. The efficiency improvement brought by the IR can be evidenced from the diminishing operating ratio (ratio of total working expenses to gross revenue receipts), which was 98.8 percent in the year ending March 2001 and was brought down to 83.2 percent in 2006 and further to 78.7 percent by 2007.

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The IR took several initiatives at technology up-gradation and modernisation. These include (a) introduction of modern signalling and telecommunications technology in order to enhance safety, and enhancing line capacity (b) improving operating efficiency of freight transportation through the introduction of Freight Operating Information System (c) Computerization of control office with Coaching Operation IS & interfacing of both with NTSE(National Train Enquiry System) for direct benefit of passengers and other railway users

Downsizing. The employee strength, which in 1991 stood at 1.652 million, was reduced gradually to 1.472 mn by 2003 & 1.412 mn by 2006. One of the key elements of retrenchment strategy is trimming off excess staff. Approach adopted was not to fill in vacancies arising due to retirement or other reasons.

Outsourcing. In addition to catering and parcel service activities, IR also outsourced advertising activity. As per Raghuram, 2007:10; ‘In the other business areas of parcel, catering and advertising, the strategy of outsourcing through public private partnership and wholesaling rather than retailing was adopted’.

Repositioning (revenue raising initiatives)

This strategy includes several sub-strategies like focus on growth, product innovation, product differentiation, re-branding, and all these ultimately leading to capturing market

share. As already stated in the literature review section, the focus of this strategy is on revenue generation as opposed to cost control. Various measures taken by the IR are outlined below.

Focus on growth. As stated above, the focus of policy change effected by the IR was on meeting the requirement of its customers. Railway customers are primarily of two types – those availing freight services and those availing passenger services. The two major sources of revenue for the railways are then goods (freight) revenue and passenger revenue which respectively form about two-third and one-third of total railway revenue. The IR showed slow real growth under Mr Nitish Kumar and an impressive growth in freight revenue under Mr Yadav as can be seen from the rising growth rate after 2004. The turnaround of the IR was mainly freight revenue driven (though it was substantially helped by an improvement in external environment as disussed later). ‘The quintessence of the turnaround was in reality that

(i) Total revenues were increased by significant percentage in two years

(ii) The net revenues sustained a robust upward trend’ (Raghuram, 2007:7)

The increase in the freight revenue can be traced to three factors (i) increased axle load (ii) reduced wagon turnaround and (iii) market oriented tariffs and schemes.

The major reason for rise in freight revenue was higher loading volume (axle load) through existing wagons given that augmentation in the number of wagons takes time. In three years from 2004, the incremental loading achieved was about 170 million tonnes, which exceeded total incremental loading of 1990’s by 120 percent. To reduce wagon turnaround days, cash incentives were offered to freight customers to free up the wagons faster. Handling capacity of freight terminals was increased; strict control was maintained over idle wagon capacity through the use of Freight Operations Information System. To free up wagons users were encouraged to adopt round the clock loading and unloading of rakes at terminals. Through these measures, the IR was successful in reducing the wagon turnaround from seven to five days.

The IR adopted several market oriented tariff levying strategies. The tariff schedule for wagon use by customers was simplified and rationalised. Items in the schedule were reduced from some 8000 to less than 100. Classification of certain commodities from lower tariff to higher tariff band resulted in the increase in freight earnings. In addition, the upward revision in freight rates (shown in parenthesis) was as follows: coal (8 percent), iron ore (17 percent), cement (4 percent), limestone and dolomite (17 percent), and food grains (33 percent).

The IR adopted two pronged strategy to improve passenger revenue: (a) competitive pricing

and (b) substantial increase in passenger comfort and amenities. To arrest the dwindling market share in passenger market segment, the IR decided to maintain the level of nominal passenger tariff

A major concern of the railway passengers was about their safety. The IR took several measures as follows to address this issue. They created a Rs. 170 billion Special Railway Safety Fund to improve safety environment. This was achieved through replacement of over aged railway assets, including bridges, tracks, rolling stock, signaling gears. From 473 in 2001 to 200 in 2007, the number of accidents has more than halved. One of the hallmarks of IR success is the use of high technology for passenger safety. Train safety devices like Anti-Collision Devices, Train Protection & Warning System were introduced. In security sensitive areas, Railway Protection Force was strengthened to escort passenger trains.

Product innovation. Double stack container trains on the diesel route were introduced between Pipavav port and Jaipur. Thus, the carrying capacity of each train increased from 1500 tonnes to 2,500 tonnes, the line capacity constraint was halved and ‘led to saving of about seven percent on capital cost and 25 percent in operating expense’ (Das, 2006:1). Similarly, as stated by the Railway Minister in his budget speech 2007-08, the IR enhanced the capacity of existing lines and made available wagons designed to suit the specific need of new cement, steel, and power plants. The IR also developed freight terminals with more than 15 wagons per month handling capacity which enabled the IR to expand its freight traffic. New wagon designs with higher pay load i.e carrying capacity but lower tare weight i.e empty wagon weight were introduced that improved safety features. The end result of these measures was observed in higher freight revenue.

Product differentiation. Product differentiation can take many forms. These include differentiating in quality and price of the product from that of rival firms, differences in product design and features, differences in availability of product in terms of time and location etc. In order to compete in the passenger market segment, with other modes of transport viz., road, aviation, coastal shipping, the IR embarked on a program of improving passenger amenities (discussed earlier). To win over passengers the IR introduced e-ticketing through Internet from home which became very popular.

Reorganisation. This turnaround strategy consists of all strategies that are supporting the above two principal strategies for turnaround, that is, retrenchment and repositioning. This involves sub-strategies such as changes in planning systems, decentralising, human resources planning, organisational culture and such other related issues. The IR took several steps in the direction.

Changes in planning systems. The IR introduced improved accounting and management information systems to provide financial, operating and management information needed to increase efficiency, meet emerging business needs and improve commercial orientation. It introduced Long-Range Decision-Support System and related systems for investment selection on the basis of expected returns (ADB, 2002:37). To cater to the rising passenger numbers which run into millions each day, the IR introduced state-of-art passenger reservation system. Similarly, the freight business was streamlined through the Freight Operating Information System and Enterprise Resource Planning (ERP) packages were implemented in workshops, production units & selected zonal railways.

Decentralising. The IR decentralised its organisational operations by creating more zonal centres. The number of zones was raised from nine in 2003 to 16 in 2005 which helped faster decision making and provided better customer service

Human resources initiatives. As fatigue enhances probability of accidents, several measures were initiated by the IR to improve working conditions of drivers and guards. Crew friendly brake vans and driver’s cabins were designed. Another initiative was the establishment of IRSM(International Railway Strategic Management Institute) in 2005 under the aegis of International Union of Railways. It is a premier institute to serve the training needs of managerial staff. To increase participation of railway employees in management, regular dialogue with the officers and the staff federations through a specially constituted forum called ‘Participation of Railway Employees in Management (PREM)’ was established. The IR was also in the forefront of taking affirmative action. It ensured that adequate representation is given to disadvantaged sections of the society and to physically challenged people as required under the relevant legislations.

Changes in organisational culture. Probably the most significant cultural change witnessed by the IR in recent years is the philosophical change from politicised decision making to commercial decision making. As already stated above, Mr Nitish Kumar while presenting his 2001-02-budget stated ‘Railways need to develop market oriented and customer friendly outlook due to emerging competition within the transport sector’ (Nitish Kumar, 2001: 8). The transformation of the IR to a customer-focussed organisation is remarkable. For example, the IR has responded to the enhanced competition from the aviation sector, with improved information for passengers through the creation of enquiry call centres and regular updating of current vacancy positions.

ENVIRONMENTAL FACTORS

Improvement in the macro-economic conditions. The IR turnaround was assisted by the general enhancement in Indian macroeconomic conditions. This growth environment was a chance for IR and made significant impact on turnaround’ (Raghuram, 2007: 10). The demand for freight and passenger services due to the heightened economic growth resulted in higher revenue for IR.

Rise in demand. The rise in freight revenue, which is the main board of the IR turn-around was facilitated by the increased demand for domestic cement, coal & pig iron for construction purpose, electricity generation & steel plants, respectively. Besides, there was an increase in the iron ore demand for exports primarily to the Chinese market. In 2006, China bought more than 74 million tones, which accounted for around 84 percent of India’s total iron ore exports (Sanyal, 2007: 1).There was substantial increase in iron ore price due to favorable international demand as IR raised the freight on iron ore. As stated earlier freight on iron ore was raised by 17%.

Change in the legal position. The November 2005 Supreme Court Ruling that banned overloading of road transport vehicles was one of the major impetus that had positive impact on IR revenues. The average road freight rate ‘increased by about 25 to 30 percent in the short run increasing the difference between road and rail freight cost’ (Mathur, 2006:1). The freight business led to the sharp rise in the freight revenue of IR in the years 2006 & 2007. This, however, is a temporary advantage as road hauliers gear up with more efficient trucks in an era of improved roads.

Changes in the accounting practice. The IR made an important change to the accounting practice following from the international push for uniform accounting standards. Under the Government accounting system, the total amount of lease charges for rolling stock leases paid to the IRFC (Indian Railway Finance Corporation) by the IR was treated as operating expenditure. However, the charge consists of both principal repayment and interest components, which represent capital and revenue expenditure, respectively. To bring the IR accounting practice in line with Generally Accepted Accounting Principles for lease finance and to ensure that the true nature of the transaction is reflected in the accounts and the asset is recognised appropriately, from 2004, only the interest portion was debited to operating statement, the principal portion was capitalised. ‘These changes have resulted in a net decrease of Rs. 1,616 crores in the operating expenses . This accounting change raised the surplus and lowered the operating ratio. For example, the above change alone amounted to 26 percent of the surplus in 2006.

Impact of the Pay Commission. The major changes in the salary scales of Indian public service employees (including Railways) are determined by the Pay Commissions that are appointed by the GOI. The implementation of the Fifth Pay Commission in 1997, increased the total wage bill of the IR by 34 percent during 1997-98. This wage rise does not include the increase in pension costs. ‘The share of pensions in working expenses rose from around 4.5 percent in 1980-81 to nearly 14 percent in 2003-04′ (Malik, 2005: 2). By the time the present Railway Minister took over, the impact of this pay rise and pension liabilities had been absorbed by the system through increased redundancies. The adverse impact of Sixth Pay Commission will hit the IR in a couple of years’ time.

Decline in the financial cost. The decline in overall interest rates and liberalisation and expansion of financial markets helped the IR to raise external resources with ease. Also the IR is required to pay only 6.5 percent dividend on the GOI investment in it, which naturally reduces the overall financial cost to the IR and puts it at an unfair advantage vis-à-vis the road sector which is required to borrow at commercial rates.

The Turnaround Story

Some turnaround facts:

The total earnings in 2005-06 increased by Rs 7121 crores, a 15.0% growth with respect to 2004-05. The total earnings in 2004-05 increased by Rs 4465 crores, a 10.4% growth with respect to 2003-04. Similar figures for the earlier years since 2001-02 ranged between 4.5% and 8.5% with respect to the previous year. The total working expenses plus the lease charges towards principal payments in 2005-06 increased by Rs 4431 crores, a 10.4% rise with respect to 2004-05. The total working expenses in 2004-05 increased by Rs 3277 crores, a 8.3% rise with respect to 2003-04. Similar figures for the earlier years since 2001-02 ranged between 3.8% and 4.8% with respect to the previous year. As a consequence of the total earnings and total working expenses, the net revenue reached a record of Rs 8005 crores in 2005-06, following the Rs 5274 crores in 2004-05. This was a record increase of Rs 2731 crores, reflecting a 52% increase in net revenues

The fundamental nature of the ‘turnaround’ was

Significant percentage increase in total revenues in last two years

A robust upward trend in net revenues

Capacity Enhancement, Capacity Utilization and Revenue enhancement are the three primary factors responsible for the turnaround of Indian railways. The Indian Railways has a massive infrastructure in place and the costs incurred are predominantly fixed and independent of the operations. The challenge was therefore to achieve enhanced capacity while not incurring additional capital expenditure.

Productivity Improvement – By increasing wagon loading capacity and significantly reducing wagon turnaround time.

In the past, loading/unloading was done only during day time (10 hours a day on an average) and trains used to lie idle at customer sites overnight. The Indian Railways provided incentives to customers to undertake loading/unloading 24 hours a day. Consequently, the average time taken for loading came down from 30hrs to 16hrs and for unloading from 34hrs to 18hrs, reducing the turnaround time by over a day.

IR did away with the system of train examination, which consumes about 16 hrs on an average. Earlier, train was examined each time it came back to its base station and was independent of distance traveled in the interim. In recent times, examination is being conducted only after 4,500 kms. or 15days (whichever is later). This strategy was very successful and has been later extended to 7,500 kms.

Dynamic Pricing Policy(DPP): Till recently, IR had a fixed price policy, irrespective of demand scenario and competition. To be able to face the challenges caused by stiff competition effectively, DPP for freight and passenger, for both type of services (premium and non- premium), for all seasons(peak and non-peak) and for all routes(busy and non-busy) was introduced.

Tariff Rationalization: To simplify and rationalize goods tariff, the classification of items was reduced groups of commodities from over 4000. The total number of classes(2005-06) in freight tariff schedule was reduced to 19 from 27. The highest class – 250 for charging freight was lowered to 220 in 2006-07. This was a very clever policy as more classes were put in the higher price category. Thus, even though the maximum cost was lower in new tariff rates, the net revenue weighted over the traffic in all the classes was larger.

Non-peak Season Incremental Freight Discount Scheme: The demand for freight transportation typically dips from start of July(1st) to end of October(31st) on account of monsoon. It was estimated that over 400 trains remain idle in this period due to lack of demand. Hence, during this period, freight rebate of upto 15% was offered based on incremental freight revenues. For e.g., for over Rs. 5 Crores in a month, 15% and for less than 5 crores, it is 10%.

Long term freight discount scheme: Long term freight discounts were offered to attract new freight traffic and also the new customers. In lieu of this, zonal railway administrations offered a disc. up to 20% during non-peak season & in the peak season for a span of 3 years; the figure is up to 10%. For loading in empty flow direction, it was up to 30% during the non-peak season and upto 20% during the peak season.

The incentives to ramp up volume were complemented by a two-pronged revenue enhancement strategy, which capitalized on opportunities and reduced losses by exiting non-core operations.

The strategy in freight operations was to recognize low-cost high-volume operations where the Railways enjoyed significant comparative advantage vis-a-vis road and air transport and achieve higher realizations on these operations. For example, the tariff on ore has been increased by 70% (virtually no competition) at a time when rate on iron and steel has been reduced 30%. The strategy to focus on capacity utilization resulted in high volumes and compensated for the discounts and the lowered tariffs.

Some of the innovative measures adopted in the passenger segment included

increasing the number of coaches in popular trains

encouraging occupancy in the profitable upper classes.

The passenger tariff was rationalized such that the fares of AC 1st and AC 2nd Class were 11.5 times and 6.5 times the 2nd Class fare, respectively. This, coupled with the innovative automatic up gradation scheme, enabled higher occupancy in the profitable upper classes.

The Railways also exited from the loss-making parcel and catering services and offered it to private players on a bidding basis. There was also a significant thrust on non-fare income streams such as advertising and allied services including land-use rights at railway stations

Strategy Analysis

IR as an e-Business

The following are some aspects of Indian Railways from an e-business perspective.

• Passenger reservation system (PRS)

This is successful as a transaction management system, and is one of the largest such systems worldwide. One challenge is to use it as a revenue management tool and for market research.

• Freight Operations Information System (FOIS)

The main contribution of this system is in accurate and timely data capture. Some of these procedures are still getting systematized. FOIS has a very big potential for decision-making.

• Coaching Operations Information System (COIS)

This is still at a rudimentary stage and includes monitoring of train running for punctuality and coaching stock utilization modules.

• Long Range Decision Support System

This has a number of modules to do with strategic marketing and planning.

PRIORITIES FOR IT

ERP for Railways

Commercial Portal for Railways

Throughput optimization and reduction in cost of operations.

MIS and LRDSS for investment optimization

Ticketing and other passenger revenue enhancement applications – integrated passenger information, reservation and distribution system

Integration of different softwares including PRS, FOIS etc.

A challenge for operations management – a three level perspective: The whole of operations management on IR is an enormous task. A major challenge in modeling is to fix on quantifiable and meaningful performance measures that can be linked to various business processes. Even though supply chain management principles can be usefully applied to many sub-processes on IR, we look at a very specific issue, that of monitoring wagon holding and performance of a key asset, while meeting customer requirements in an aggregate sense. This is analogous to a corresponding principle in lean manufacturing, where inventory holding and inventory turns are taken as surrogate measures of performance. The relevant time-based measure is Wagon Turn aRound (WTR) which measures the time between successive loadings of a wagon.

From an e-business standpoint, an important aspect is that these parameters (WTR and wagon holding can be monitored, interpreted, and most importantly, acted upon, at various levels in the IR hierarchy.

• Divisional level: asset utilization, productivity and cost control – while meeting specific customer centric goals

• Zonal level: facilitate investment proposals within budgets and prioritization parameters for operations – while maximizing revenues

• Corporate level: long term investments, product/service definition and organizational structures to achieve corporate goals

At another level of hierarchical planning is the following time-based planning scheme for the same set of measures.

• Operational model: Single period transhipment (allocation model) which balances spatial demands

• Tactical model: Multi period (finite horizon) model which balances empty running vis-à-vis waiting costs, with known demands and (stochastic) imminent demands

• Strategic model: Long run fractions of empty running, demand rates and revenues from loaded movements, viewed as a queueing network

Privatization of Indian Railways

Even though several projects are not being implemented for lack of funds, the Indian government is not allowing privatization of Indian railways.

In this new age of disinvestment, the big question now is that if the largest government undertaking, the Indian Railways, be privatised and if yes, then based on what model.Selling IR to a private house is not favored because of the following reasons:

Railways were built in India for national integration, economic development and exploitation of resources, and above all for military purposes. Railways have continued to be a highly visible national symbol, and the role played by them in times of crises like the Gujarat quake, Orissa cyclone and military operations like Kargil is something that cannot be replicated by any corporation. Nor can a corporate structure contribute to economic development and national integration as the Railways have done.

Defence services have built up alternative arrangements in all fields including postal service and com munications network, but are completely dependent on Railways for transport. All the strategic rail lines are owned and operated by the Railways. There is no comparison between other infrastructure facilities and railway facilities as far as transport by rail is concerned. This fact needs to be kept in view while coming to any conclusion on the suggestion about corporatization of IR.

Railway operations require constant co-ordination with state governments and other wings of the Centre. If only for these reasons, it is necessary that the government exercises direct control over their operations, which is possible only when they are run as a departmental undertaking.

The other model of privatization is to break down the whole organization into various chunks where each chunk represents a very specific task. Also, for each task have multiple competing companies and all these companies coordinate with each other for the smooth functioning of Railways. This model was followed in case of British Railways.

The dismemberment of BR created a large and complex jumble of interlocking firms. The atomization of BR created administrative chaos. When BR was dismantled, a unified, military-

style command structure was replaced by a heinously complex web of contractual relationships between almost a hundred pieces of the old BR plus numerous subcontractors. Because of the uncertainty of the relationships, contracts attempted to account for all possible future situations with an elaborate system of payments and penalties. This led to an adversarial system.

Commercialization model adopted by IR

IR has awarded licenses for container operations to 14 private sector companies ending the monopoly of Container Corporation of India (CCI) in this area.

Recognizing the superiority of the private sector in providing and maintaining passenger amenities and services, the Railways is encouraging private players in the field of marketing and Operation & Maintenance (O&M) of luxury tourist trains.

Handling of the catering, luggage, and parcel services by private sector parties significantly reduced the losses incurred by the Railways in this area while increasing operating efficiency and quality of service.

Scope of public private partnership

Private parties to run container trains

Modernisation of metro stations

Construction of agro outlets and logistics parks

Construction of ICDs and warehouses

Setting up of new rolling stock units

Wagon investment scheme

Port connectivity works

Outsourcing non-core activities like catering and parcel

Computerized train enquiry call centres

The Road Ahead

MISSION 2012

Double rail transport capacity

Freight traffic from 728 to 1150 MT

Passenger traffic from 6000 to 9000 million passengers

Increase speed of trains

Passenger trains from 55 to 100 KMPH

Goods train from 24 to 60 KMPH

Reduce unit cost

1.06 cent to 0.76 cent per PKM

1.38 cent to 0.88 cent per NTKM

Deliver world class services and amenities

Focus needs to be commercialization and not privatization where various small tasks are outsourced to private hands or through public-private partnerships.