Turnaround Of Indian Railways


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The Turnaround of Indian Railways from Bankcruptcy Scenario to Profit Earning Situation . By Nitish Kumar and Lalu Prasad Yadav the Ex- Railway Ministers

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Turnaround Of Indian Railways

  1. 1. 01.Introduction “Lifeline to the Nation“ Indian Railways (reporting mark- IR) is an Indian state-owned enterprise, owned and operated by the Government of India through the Ministry of Railways. It is one of the world's largest railway networks comprising 115,000 km of track over a route of 65,000 km and 7,500 stations. It is the world's fourth-largest railway network after those of the United States, China and Russia. The railways traverse the length and breadth of the country and carry over 30 million passengers and 2.8 million tons of freight daily. It is also The Country‘s largest employer with over 1.4 million employees. Indian Railways have also been the prime movers and have the distinction of being one of the largest railway systems in the world under a single management. As for rolling stock, IR holds over 239,281 Freight Wagons, 59,713 Passenger Coaches and 9,549 Locomotives (43 steam, 5,197 diesel and 4,309 electric locomotives). The trains have a 5 digit numbering system as the Indian Railways runs about 14,450 trains daily. As of 31 March 2013, 23,541 km (36%) of the total 65,000 km route length was electrified. Indian Railways also successfully completed 160 years of its services to the people of India on the 16th of April, 2013. Indian Railways, which had a modest beginning in 1853, has since then been an integral part of the nation -- a network that has held together a population of one billion. 1 Turnaround of Indian Railways
  2. 2. 02.Products Offered: (A) Passenger Services Indian Railways transports 30 million passengers daily across India. Indian Railways generates 30% of the revenue through passenger services. Sikkim and Meghalaya are the only states not connected by rail. A standard passenger train consists of eighteen coaches, but popular trains can have 26 coaches or even more. Most regular trains have coaches connected through vestibules. Provision for purchasing tickets via online mode (website of Indian Railway) and offline mode- purchasing tickets from the ticket counter at each station is well set up. Reservation against cancellation service is a provision for shared berth in case the travel ticket is not confirmed. All current passenger service is provided using electric or diesel locomotives. Several long trains are composed of two to three classes of travel, such as a 1st and 2nd classes which have different pricing systems for various amenities. The 1st Class refers to coaches with separate cabins, coaches can or cannot be air-conditioned. 3-tier non-AC coaches and 2nd class seating coaches, which are highly popular among passengers going on shorter journeys. In air-conditioned sleeper classes, passengers are provided with sheets, pillows and blankets. Meals and refreshments are provided, to all the passengers of reserved classes, either through the on-board pantry service or through special catering arrangements in trains without pantry car. Unreserved coach passengers have options of purchasing from licensed vendors either on board or on the platform of intermediate tops. The amenities depend on the popularity and length of the route. Lavatories are communal and feature both the Indian style as well as the Western style. (B) Freight Services Indian Railways carries a huge variety of goods such as mineral ores, fertilizers, iron & steel, petrochemicals, agricultural products, etc. 70% of revenue comes from freight services. Freight is a profit making business segment of Indian Railways and is the backbone of railway revenues. But, recently it is seen that the market share of Indian Railways has been consistently shrinking and railways is losing out to road. Achievement of projected freight targets largely depended on the manner in which the Indian Railways reshaped its policies and strategies not only to regain the lost share in freight traffic but also to provide value for money to customers in terms of better facilities and improved services. The recent growth in freight loading due to more intensive asset utilization and adoption of market responsive strategies has brought into focus its long term 2 Turnaround of Indian Railways
  3. 3. sustainability. The average annual growth of 8.1 per cent in freight loading corresponds to the average annual growth of 8-9 per cent in Gross Domestic Product during the last five years, the incentive schemes at best contributed to retention of the market share. The marketing strategy needs to be restructured for improving the market share of Indian Railways. (a) Financial Performance of Indian Railways: (Net Revenue:2004-2011) **The amount presented in the graph is in crores rupees. There was an increase in the net revenue including revenue from passenger as well as freight from 2003-04 to 2007-08. From the low of 4000 cr of net revenue in FY 2004 to as high as 18000 cr in FY 2008.But, after 2008, in the FY 2009 and FY 2010 there was a dip in the revenue collection to a low of Rs 4500 Crores in the FY 2010. The net revenue of the Indian Railways had been decreasing with little improvement in 201011. 3 Turnaround of Indian Railways
  4. 4. 03.Railway History In the year 1846, there was a major failure of cotton crop in America. Following this, textile merchants of Great Britain had to seek alternative markets. It was then that traders in the UK turned their attention on the cotton crop in India, one of British colonies then, rich in cotton crop. However, cotton was produced in various parts of the Indian sub-continent and it took days to bring it to the nearest port to transport it to England through ships, the only major means of international communication then. The British then had to build a link from the hinterland to India‘s major ports for quicker transport of cotton and other goods as demand soared. This expedited matters for the British to introduce a railway in India. As early as 1843, Lord Dalhousie had proposed to link the three ports of Bombay, Calcutta and Madras by a railway. In the same year he sent George T. Clarke, an engineer, to Bombay to assess the possibility. A Couple of years later, a strong lobby in Bombay, supporting railway communication formed a body called the Bombay Great Eastern Railway. The Bombay Great Eastern Railway locally prepared plans for constructing a railway line from Bombay to the Deccan. As the British already had a concrete plan in their minds, things soon started taking a good shape. The bill to incorporate India‘s first railway company, the Great Indian Peninsular Railway Company [G.I.P.R], came up before the British Parliament twice-First in March 1847 and then in 1849. In March 1847, the East Indian Company, which then ruled India, opposed the bill on certain clauses forcing it to be withdrawn. Matters dragged on till 1849 when Lord Dalhousie, who had some experience in railway matters of England, took over as the Governor-General of India. On August 1, 1849, the Act to incorporate the Great Indian Peninsula Railway came into being. The line in Bombay was ready by November 1852. However officially, the first train in India (and in Asia) was flagged off on April 16, 1853, a Saturday, at 3:35 pm between Boree Bunder (Mumbai) and Thane, a distance of 34 kilometers. The train, hauled by three engines -- Sindh, Sahib and Sultan -- carried as many as 400 passengers in its 14 coaches on its debut run. The importance of this day can be gauged from the fact the Bombay government declared the day as a public holiday. 4 Turnaround of Indian Railways
  5. 5. 04.Independence and Indian Railways (A) Pre- Independence By 1895, India had started manufacturing its own locomotives. In no time, different kingdoms assembled their independent rail systems and the network extended to the regions including Assam, Rajasthan and Andhra Pradesh. In 1901, a Railway Board was formed though the administrative power was reserved for the Viceroy, Lord Curzon. The Railway Board worked under the guidance of the Department of Commerce and Industry. It was comprised of three members - a Chairman, a Railway Manager and an Agent respectively. For the very first time in its history, the Railways instigated to draw a neat profit. In 1907, most of the rail companies were came under the government control. Subsequently, the first electric locomotive emerged in the next year. During the First World War, the railways were exclusively used by the British. In view of the War, the condition of railways became miserable. In 1920, the Government captured the administration of the Railways and the linkage between the funding of the Railways and other governmental revenues was detached. With the Second World War, the railways got incapacitated since the trains were diverted to the Middle East. On the occasion of India's Independence in 1947, the maximum share of the railways went under the terrain of Pakistan. On the whole, 42 independent railway systems with thirty-two lines were merged in a single unit and were acknowledged as Indian Railways. (B) Independence & Partition The Partition of India changed everything the subcontinent forever including the Railways. As per the line and map drawn up by Sir Cyril Radcliffe dividing India, 8070 km of line from the erstwhile Northern Frontier Railway went to the newly created state of Pakistan and almost all of the Assam-Bengal Railway went to Bangladesh. The partition cut through many railway lines and as a result the entire North-Eastern part of India was cut off from the rest of the country as all lines leading there passed through the new state of East Pakistan (Present day Bangladesh). Personnel, equipment, assets, rolling stock and such had to be divided between the two dominions, along with transportation of documents, files, personnel and other railway related stuff. Despite the acute shortage of everything, the Railways transported 4.7 million refugees in 1947-1948, something that was never heard of before in history. 5 Turnaround of Indian Railways
  6. 6. Once the dust settled after the partition, the Railways lay in tatters along with the rest of India. Most of the lines, locomotives and rolling stock were damaged or unusable, much went missing and on the wrong side of the border. There was a severe shortage of fuel and a lot many of the staff had either fled or were missing after the rioting. IR had to start from scratch. They needed new locomotives, new lines, Assam and Kashmir needed to be linked with the rest of the country and they had to overhaul the entire network. But first, they needed a properly organized and centralized authority for that, something that had never existed in India before. All those 52 (42 as per some) companies had to be nationalized, integrated and merged and a central authority had to be created which would run the Railways. Also, new stock had to be procured, lines laid and replaced and coaches had to be made, modernized and standardized. All this must have been a mammoth accounting task and bureaucratic nightmare that took years to complete. But it did complete, and the Indian Railways was born! (C) Post-Independence (upto 2001) As the economy of India improved, almost all railway production units were 'indigenised' (produced in India). By 1985, steam locomotives were phased out in favour of diesel and electric locomotives. The entire railway reservation system was streamlined with computerization between 1987 and 1995. The existing rail networks were forfeited for zones in 1951 and 6 zones were formed in 1952. With 1985, the diesel and electric locomotives took the place of steam locomotives. In 1995, the whole railway reservation system was rationalized with computerization. Statistical Summary of Select Variables – IR (1950-51 through 2000-01) Year Freight NTKM No. of (million) employees 195051 196061 197071 6 37565 914 72333 1157 110696 1374 147652 Turnaround of Indian Railways Passenger Employees Earning PKM Earning Expenditure (Rs crore) (million) (Rs crore) (Rs. Crore) (thousands) 139.3 113.8 280.5 205.2 600.7 459.9 1550.9 66517 77665 98.2 131.6 118120 295.5 208558 827.5
  7. 7. 198081 199091 1572 235785 1652 312371 1545 1316.7 8247.0 5166.3 23045.4 18841.4 295644 457022 3144.7 10483.2 200001 05.Bankruptcy Scenario IR was considered to be heading towards bankruptcy, as per the report of Expert Group on Indian Railways (also called the Rakesh Mohan Committee report), submitted in July 2001 which studied the IR for nearly two years [NCAER, 2001] . They stated, ―Today Indian Railway is on the verge of a financial crisis. To put it bluntly, the ‗business as usual low growth‘ will rapidly drive IR to fatal bankruptcy, and in sixteen years Government of India will be saddled with an additional financial liability of over Rs.61000 crores. On a pure operating level, IR is in a term in terminal debt trap.‖ World Bank said ‗Railways have no future in India unless they downsize, increase passenger fares, divest and introduce a tariff regulator.‘ Indian railways had a market share of nearly 100% in 1947 which declined to 90% in the by the year 1990 further by 2004 the market share of IR dwindled to less than 15% in passenger business and to less than 35% in freight business. Key Recommendations of The Indian Railways Report - 2001 1. If IR is to survive as an ongoing transportation, organization it has to modernize and expand its capacity to serve the emerging needs of a growing economy. This will require substantial investment on a regular basis for the foreseeable future. 2. IR will have to compete even harder with other modes in order to sustain its traffic volumes, let alone accelerate growth. Thus a significant change is needed in IR‘s strategy towards its freight services. 3. IR should take steps to recover its market share through a combination of tariff rebalancing and quality enhancement measures, and to increase its share of the transportation of ―other commodities‖. 7 Turnaround of Indian Railways
  8. 8. 4. The Committee has constructed three possible investment strategies for IR over the next fifteen years. The first two scenarios, ―Low Growth ‖ and ―Medium Growth‖ are constructed in a ―Business as Usual‖ framework, whereas the third scenario, ―Strategic High Growth ‖ will require substantial focused remunerative investment and corresponding organizational restructuring of IR internally and in its relationship with government, including corporatization. 5. For IR to survive over the next 20 years and beyond, it has to adopt a ―strategic perspective‖ where it rekindles high growth in both the passenger and freight segments. 6. IR will have to explore every avenue of cost reduction. reductions to be implemented staff cost reduction will be crucial. Among the cost 7. From the point of view of investment strategy, the most undesirable feature of the annual budget exercise is the very short-term focus it imparts to all investment initiatives. The priority for IR is to invest in debottlenecking points of congestion in the network. 8. The Expert Group‘s focus on root causes has highlighted three priority areas: 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. 9. The current system has two flaws that the Expert Group believes must be corrected: tenure and skills. A system which effectively rewards those on the basis of seniority and age with a position on the Board for a few months prior to retirement is not the mechanism to breed leaders. Skills in the leadership team need to be broadened and deepened. IR urgently requires an injection of fresh ideas and fresh skills to accelerate its development into a commercially savvy market oriented set of businesses. 10. The Expert Group has carefully examined the experience of European and other railways in their restructuring efforts. The focus should be on commercialization rather than privatization. This involves re organizing the rail system into its component parts, spinning off non-core activities, restructuring what remains along business lines and adopting commercial accounting performance management systems. IR‘s management needs to be allowed a degree of autonomy that is comparable to any other commercial organization. 11. IR must eventually be corporatized into the Indian Railways Corporation. The Government of India should be in charge of setting policy direction. It would also 8 Turnaround of Indian Railways
  9. 9. need to set up an Indian Rail Regulatory Authority (IRRA), which would be necessary to regulate IRC‘s activities as a monopoly supplier of rail services, particularly related to tariff setting. The Indian Railways Corporation would be governed by a reconstituted Indian Railways Executive Board (IREB). [NCAER, 2001] 06.The Paradigm Shift Government of India wanted a leader who comes front with the Problem of Indian Railways- Face various challenges and take Indian railways out of the debt trap. At the very time they elected Mr. Lalu Prasad Yadav as the Railway Minister. On the 23rd of May, 2004 Mr. Lalu Prasad Yadav was made the Railway Minister (MR) of Indian Railways. Indian Railways is a function of the general buoyancy in the Indian economy and most of the reforms were initiated by the former Railway Minister Mr. Nitish Kumar. In Indian politics it‘s a rarity that the successor carries forward the initiatives of the predecessor. But, Lalu Prasad Yadav carried on with the foundations laid by Nitish Kumar. In fact, in his first railway budget, Lalu Prasad Yadav implicitly accepts that the foundation for a turnaround has already been laid by Nitish Kumar. It goes to the credit of Mr. Yadav that he not only continued those policies (though initiated by a rival political party member) but importantly ensured that they produced results. This demonstrates that the organization moved away from past malaise of politicization of decision making processes and policies, to a more corporate minded commercial focus. The Style of the Present MR The operationalization of the various strategies depended significantly on the leadership style of Mr Lalu Prasad. It was a common sense based approach, showing an astute understanding of the market reality, the asset base of the IR and the expertise and capability of the IR‘s management and systems. Consequently, he followed this up with the principles of leveraging the assets (―milk the cow fully‖ ) and empowerment and delegation . With whatever has been achieved in the ‗turnaround,‘ Mr Lalu Prasad has demonstrated that good economics is good politics. 9 Turnaround of Indian Railways
  10. 10. Non Interference: Dealing with the RB ―Mr Lalu Prasad is a non-interfering, yet aware MR, who sets the goals and expects results.‖ was stated by most of the ex-Members and people who had worked with Mr. Lalu Prasad during that critical phase. ―This has given him a position of strength to build organizational alignment to see through fundamental initiatives.‖ Mr. Lalu‘s employees are very with his approach towards work and his way of working. The OSD and various others who were working with him, are thankful to him because he gave them opportunity to come ahead and solve problems in their Department. Caring Attitude: Staff and Unions Mr Lalu Prasad had a positive approach in dealing with the staff and unions. Given the financial performance of the IR, the unions wanted a doubling of the contribution to the staff welfare fund. He offered them more. Whenever concerns were raised about downsizing of the IR, he came out with his Hindi one liner which translated to, ―Downsizing may make IR thinner, but not necessarily healthier.‖ On presenting the future, his pitch was, ―regenerate competitiveness and leverage resources rather than restructure and downsize.‖ He believed in instilling hope and excitement rather than fear and anxiety. Image Building: Media Given his penchant for wit and one-liners, Mr Lalu Prasad was sought after by the media. Whenever there was an opportunity to highlight an initiative or an achievement, advertisements were released. Exhibit 14 gives an example of two advertisements of initiatives in the freight and passenger segments respectively. Exhibits provides a comparative brief on ―Sizing up the Railway Ministers‖ [Indian Express, April 2006]. In recognition of his initiatives, Mr Lalu Prasad has also been ranked as the second best minister in the current cabinet [India Today, May 29, 2006] Identifying Right People: Choice of OSD In this tenure, in all the dealings of the MR with the IR, a nodal person has been the OSD, Mr Sudhir Kumar. He was specially chosen by the MR for this position, based on earlier interactions when Mr Sudhir Kumar held different positions in Bihar as an IAS officer. He joined as the OSD on 1st September, 2004. It had been clarified between him and the MR that his role would be to provide the link between the MR and the RB to translate the MR‘s vision for IR into action. 10 Turnaround of Indian Railways
  11. 11. The first task that the OSD took upon himself was to understand the functioning of the IR and what has been said about the IR in a studied manner. In his own words, ―I read whatever reports on IR that I could lay my hands on, and there were plenty. I read various correspondence to understand the decision making processes. I soon realized that the IR had tremendous strengths in its systems that ensured robust decision making.‖ This understanding that he developed gained him acceptance in the RB. The OSD understood that the IR officers themselves were a source of ideas for innovation that would be in line with the MR‘s thinking. He made it a point to be open to ideas from within the IR, so that they could be examined by the concerned functional departments and appropriate action finalized and implemented quickly. Given his unique position, he could cut across the hierarchy of the IR. Whenever initiatives were taken up, he was relentless in follow up. The initiatives related to axle load increase, market oriented tariffs, reducing wagon turnaround, innumerable freight incentive schemes, passenger profile management, upgradation of passengers, zero based time tabling, leasing of parcel capacity, catering, are among the many which have been followed up for execution. This is even more significant, given that all this has happened through the existing systems and culture of the IR. Table 1: Paradigm Shift-IR Past Approach Present Approach Nothing can Change IR is in the Business Railways.(i.e. A monopoly) Passion and Integrity to Change of Tariff focused IR is in the business of transportation. A highly competitive market. Unit-Cost focused Restructuring and Rightsizing Regeneration and Competitiveness The Railway Minister had that passion to bring the Indian railways out of the debt trap. He broke the shackles of the restrictive thinking that nothing can possibly change the ill conditioned Indian Railways. With the new flow of thinking he led the Railways, always from the front and he emerged as a great leader for the Railway Board. He initiated the thinking that Indian Railways is in the business of Transportation rather than the General monopolist thinking that IR was in the business of Railways. By bringing in this change he brought himself and IR into a scenario of Perfect competition from a Monopolist scenario. 11 Turnaround of Indian Railways
  12. 12. With bringing in such changes he also changed certain policies of Indian Railways and also choose to continue the policies adopted by the Mr Nitish Kumar and brought glory, in the way of profits to the Indian Railways. 07.Policy Changes I - Strategic Changes A) Downsizing Exhibit 15.The Number of employees which peaked at 1.65 million in the year 199091 was brought down to 1.47 million by the year 2003 and further these numbers fell to 1.41 million by the end of 2006. One of the elements of the Retrenchment strategy is to trim off excess staff. The approach that Indian Railways adopted was of not filling vacancies created due to retirement or any other reasons. Outsourcing B) Besides the catering and parcel service activity, the Indian Railways also outsourced advertising activity. In this area of parcel, catering and advertisements the strategy of outsourcing through Public-Private Partnership and wholesaling rather than retailing was adopted. C) Product Innovation The Indian railways introduced ‗Double stack container trains‘ on some diesel routes. These increased their carrying capacity of each trains to 2500 tonnes against 1500 tonnes and they also reduced line capacity constraint by nearly half. This led to savings of about 7% on Capital cost and about 25% in the operating expenses. In the same way, newly designed wagons were of higher pay load but lower tare weight which improved the safety feature of the wagons. The effect of these measured can be seen in the higher freight revenue.(As Shown in Exhibit-18) 12 Turnaround of Indian Railways
  13. 13. Rise in Demand D) In the year 2004, Mr. Lalu Prasad decided to reduce Passenger fares by 45%. Indian railway earns about 70% of the revenue from freight traffic (i.e. 686.2 billion against 304.6 billion from passenger). Hence it deliberately keeps passenger fares low and cross subsidises the loss making passenger traffic with profit making freight traffic. The rise in freight revenue -the main plank of the Indian Railway turnaround -was facilitated by the increased domestic demand for coal (for electricity generation), for cement (for construction) and pig iron (for steel plants) due to economic growth. (Rise in freight revenue was as much as 500%) There was also an increase in the iron ore for exports (mainly to the Chinese market). In 2006, China bought more than 74 million tonnes, accounting for about 84 percent of India‘s total iron ore exports. The IR used the favorable international demand reflected in substantial increase in iron ore price by raising the freight on iron ore. (Indian railway raised the freight on iron ore by 17%) E) Asset Utilization a) Enhancement of carrying capacity of wagons The Indian railways introduced ‗Double stack container trains‘ where they increased their carrying capacity from 1500 tonnes to 2500 tonnes. By doing this, they carried double the quantities they used to carry earlier. This also reduced the per unit cost, ultimately increasing profits for the Indian Railways. (i) BOX-N increased from 60 tonnes to 70 tonnes (ii) BCN increased from 58 tonnes to 63 tonnes Capacities b) Faster Recycling time Faster here means Faster Recycling time or Faster Turnaround time of trains. IR currently holds 4000 goods trains, if they turnaround these trains every 7 days they have 570 trains/day. While, if they turnaround the same 4000 trains in every 5 days they will have 800 trains/day. For Faster Turnaround of trains the following things were very essential: Full rake placements ,Round the clock working, Electrification of diesel sidings on electrified routes, Amendment in Preferential Tariff Schedule (PTS),Faster train examination. This faster turnaround time of trains accounts to 3 billion USD profit per annum to IR. c) 13 Enhancing Passenger Volumes Turnaround of Indian Railways
  14. 14. IR was thinking to reduce per unit cost of its products so that the people at large could gain benefits from the services that they offer. Earlier the Unit Cost of a Rajdhani Express was about Rs.1200 and the carrying capacity of these trains was about 800 People. Later, in the same trains they accommodated about 2000 people which by itself reduced the unit cost to around Rs.500 As more people could more people could afford the services offered by IR, more people started demanding to travel through Indian Railways. F) Dynamic Pricing Earlier IR had a uniform pricing strategy for all – Lean season/Peak season, Congested route/Light route. There was only one Price. Now IR has placed in a new Dynamic Pricing Policy, in which, they give discounts of 30-40% during lean seasons and levy surcharge of 10-15% during the peak season. In loaded direction they levy surcharges and in empty direction they give huge discounts of up to 50%. G) Length Expansion IR introduced many new products like Garibrath express in which they made the Trains longer. While other trains used to have 17 coaches, the new trains now have 24 coaches. Other trains have a pantry car, a Luggage van, a Power van but these new trains had no frills in them. These new products were Commercial Products designed to make profits. II – Developmental/ Infrastructure Changes A) Electrification of routes Electric traction reduces nation‘s dependence on largely imported diesel oil as it is capable of using indigenously available alternative sources of energy, like coal of any grade, hydel-power, surplus liquified petroleum gas, nuclear power etc. and provides a pollution-free and energy efficient mode of transport. Electrification was first introduced on IR in 1925 with 1500 Volts DC and subsequently extended by installing 3000 Volts DC system. In 1957, IR introduced electrification on single phase 25 KV AC system for all future schemes and thus 14 Turnaround of Indian Railways
  15. 15. selected main lines and high-density routes were taken up for energisation in a planned manner. At present, out of the seven major trunk routes connecting Mumbai, Kolkata, New Delhi and Chennai, five are fully electrified and work is in progress on the other two routes viz. Kolkata-Chennai and Mumbai-Chennai. During 2004-05, 320 route kilometers were electrified. Over the years, progress of electrification on IR has been as under: Thus about 27.33% of the total route kms. on IR is electrified. Of the total 17,280 electrified route kms., 1,379 route kms. are on the suburban sections and the balance 15,901 on heavy density freight routes. During 2004-05, 47.5% of passenger train kms. and 62.9% of the BG freight gross tonne kms, were operated on electric traction.In the following 2 year of the X five year plan after 2004-05, total route kilometeres electrified were 170 kms. and 361 kms. Respectivelyand it was also seen in the Xth Plan period that 1,810 route kms had been electrified against the Plan target of 1,800 route kms. B) Meter gauge to Broad gauge conversion Indian Railways currently has significant lengths of four different gauges: the 1,676 mm (5 ft 6 in) broad gauge, the 1,000 mm (3 ft 3 3⁄8 in) meter gauge, and two narrow gauges 762 mm (2 ft 6 in) and 610 mm (2 ft). Project Unigauge is an ongoing exercise by Indian Railways to standardize most of the rail gauges in India to 1,676 mm (5 ft 6 in) broad gauge because it was observed for a long time that towns and cities on the meter gauge (MG) and narrow gauge (NG) lines had a poorer service than equivalent towns on the broad gauge system, the speed of trains was slower and the freight traffic (ton per kilometer) on meter gauge tracks was only a small fraction of the freight traffic on broad gauge tracks. It was decided that conversion of meter and narrow gauge railway lines to broad gauge would make Indian Railways more efficient, avoid the current break of gauges, increase the freight-carrying capacity and shorten the routes with many re-gauged links. (Exhibit 21) C) Replacing diesel engines with Electric engines One advantage of electrification is the lack of pollution from the locomotives. Electrification results in higher performance, lower maintenance costs and lower energy costs. Power plants, even if they burn fossil fuels, are far cleaner than mobile sources such as locomotive engines. The power can come from clean or renewable sources, including geothermal power, hydroelectric power, nuclear power, solar power and wind turbines. Electric locomotives are quiet compared to diesel locomotives since there is no engine and exhaust noise and less mechanical noise. The lack of reciprocating parts means electric locomotives are easier on the track, reducing track maintenance. 15 Turnaround of Indian Railways
  16. 16. D) Doubling of Railway routes Capacity improvement through doubling has been steady ( Figure B), in the range of about 5 percent with the initial priority being on the Golden Quadrilateral and the Diagonals. The Golden Quadrilateral is a route Connecting the four metro cities of New Delhi, Mumbai, Chennai, and Kolkata . These routes generating most revenue for Indian Railway have dedicated tracks to passenger & freight trains. In terms of total route length which is 15% of network, they carry 65% of the Goods traffic and 55% of the passenger traffic. E) Accounting Practice Only one accounting change for capitalization of capital repayment component of lease charges payable to Indian Railways Finance Corporation was made with the approval of Comptroller & Auditor General of India during 2005-06. Rs.1615 crores of lease charges to IRFC towards Principle account for wagon procurement had been shifted from Working expenses to Miscellaneous expenditure. As regards to the Accounting of reimbursement of loss on Strategic Lines received from General Revenues as reduction in working expenses, Audit has suggested to account for the amount as sundry other earnings instead of reduction in working expenses as proposed by Railways. The contention of Audit for accounting of interest earned on Railway Fund Balances as Railway Revenues is that this would lead to accounting of interest on fund balance as expenditure by both Ministry of Finance as well as Ministry of Railways. 16 Turnaround of Indian Railways
  17. 17. During 2006-07, following two accounting changes have been carried out in consultation with Ministry of Finance, in accordance with the generally accepted accounting practices and to reflect correct picture of financial status in the financial statements of railways with due disclosure in the budget documents: i) Accountable of reimbursement of loss on Strategic lines received from General Revenues as reduction in working expenses of concerned Railways. Previously, this amount was deducted from dividend payable by Indian Railways to General Revenues. ii) Accountable of interest earned on Railway Fund balances to Railway Revenues as Miscellaneous Receipt. Previously, this amount was credited to fund balances directly without routing through railway revenues. The matter is under reference with Comptroller & Auditor General of India for their approval. However, the accounting changes would increase the cash surplus by Rs. 2,183.47 crore in 2006-07, whereas these had no effect on the cash surplus of 2005-06. The fund balances of Indian Railways available for investment remains unaffected. III -Other Changes 1) Cluster ticket Earlier, if you wanted to travel from Mumbai to Guwahati, you could buy a reserved ticket on the ‗Gitanjali Express‘ that terminates at Howrah and a second ticket from Howrah to Guwahati all at a cost of Rs.557. This was called a cluster ticket. Such cluster tickets have now been discontinued. For the same journey, you now have to buy a reserved ticket for Howrah at Rs.517 and then buy another ticket to travel between Howrah and Guwahati at Rs.369. The total charges now add up to Rs.886 - a full Rs.329 extra. 2) Cancellation charges People purchase reservation tickets much in advance but for various reasons they fail to turn up and decide to cancel such ticket. Sometimes people terminate their journey midway for some unforeseen reasons. Obviously, they ask for refund on such unused or partially used tickets. Railway has got a set of rules regarding refund.Railway deducts either clerkage charge or cancellation charges on such tickets. The amount of refund also is determined according to the time of cancellation. Unused unreserved ticket when presented at the booking office within three hours of purchase is refunded deducting a cancellation charge of Rs 10 per passenger not per ticket. In reserved a different set of rules are applied. 17 Turnaround of Indian Railways
  18. 18. If someone approaches the booking office more than 24 hours before the scheduled departure of the train on which reservation is made refund is granted after granting a specified amount as cancellation charge that varies according to the class of reservation. The Cancellation charge happens to be in the following way. Rs. 70 for Ac First class/ Executive class, Rs. 60 for ticket of 2nd Ac/ 3rd Ac/ First class/ Ac Chair Car, Rs 40 for sleeper class and Rs 20 for Second class sitting tickets. If a ticket is presented within 24 hours and upto four hours before the scheduled departure of the train, a flat 25 per cent is deducted. When a train leaves a station and a reserved ticket is presented for refund a flat 50 per cent is deducted and rest is refunded. Unused Rac or Waitlisted ticket is granted full refund is granted instantly. But there is a time limit as per kilometers of such ticket which is as follow. 3 hours for ticket of 200 kilometres. 6 hours for ticket of 200 to 500 kilometres and 12 hours when a ticket happens to be of more than 500 kilometres. After this period refund is granted when a TDR (Ticket Deposit Receipt) is presented to the Head office of the issuing station of such ticket. Ticket issued on Credit Card or Electronic Ticket is refunded by the issuing authority that is the IRCTC. IRCTC takes the ticket and verifies with the original ticket and grants refund accordingly. Unused confirmed Tatkal ticket is not refunded when the same is presented when it is not presented 24 hours before the scheduled departure of a train. Unused wait listed Tatkal ticket is refunded usually About 27% of all tickets sold are cancelled. So what Lalu Prasad did was simply double the charges on all tickets cancelled. While the older charges for cancellation were Rs 20 for second class and Rs.30 for AC class, the new charges are Rs.40 and Rs.60 respectively. 3) The ‘superfast’ Several trains have been upgraded to ‗super-fast‘ status by Mr.Lalu Prasad. For every ticket you purchase for these trains you pay Rs.20 extra under the ‗super-fast‘ train charge. Several of these trains have only 20 minutes to one hour shaved off their old the running time. So these trains may have minor delays and end up reaching their destination on the original arrival time anyway. Among the trains that have been given super-fast status in Mumbai are Kurla - Bhubaneshwar, Kurla-Howrah Samratan Express, CST-Manmad Panchvati Express, Bandra-Surat, Surat Flying Ranee, 18 Turnaround of Indian Railways
  19. 19. Bandra-Bhavnagar and Mumbai Central-Bhuj. All these trains are heavily patronised by the people of Mumbai. 4) The return ticket hidden charge Say you buy a second class ticket from Mumbai to New Delhi on the Paschim Express. You will pay Rs.421 for it. However, if you also book a return ticket (New Delhi-Mumbai) you will pay Rs.431 for this ticket- Rs.10 extra. This is because an enhanced reservation fee has been introduced as Passenger Reservation System charges. Earlier, you paid the same amount for tickets booked from anywhere in India. Now if you buy a ticket at a Mumbai counter for a journey originating from New Delhi, you have to pay Rs.10 extra for second class tickets and Rs.15 extra for AC tickets. This is unfair to the vast majority that buys return tickets to avoid standing in a crowded queue a second time. 5) Chargeable distance IR's fares are generally computed on the basis of the official distance between the end points for a particular route. The fares for some routes, however, are different than the fare expected based on looking up the fares for the actual route-km in a fare table. These are lines with very sparse traffic, tourist lines or lines with other special conditions. In such cases, there is a chargeable distance associated with the route, which is the distance to be used when looking up fares in a fare table, regardless of the actual route length. For instance, the Neral-Matheran NG route is only about 21km long, however the ticket fare for the journey is based on a chargeable distance of 126km (and in fact, the distance markers along the way show the chargeable distances, not the physical distance!). Other routes for which chargeable distances differ from the actual distance are Kalka-Shimla, Pathankot - Joginder Nagar, Purna-Khandwa (MG, in the 1980s), etc. Konkan Railway also charges fares based on a chargeable distance being 40% higher than the actual distance, a measure intended to recover some of the construction costs for the lines. In some rare cases the chargeable distance is lower than the route length -- for instance, at one time trains on the Grand Chord and the Main Line between Howrah and Mughalsarai had tickets with the same chargeable distance (660km), even though the Main Line route came to 757km. 19 Turnaround of Indian Railways
  20. 20. IV -Other proposed initiatives Continuing and building on the strategies adopted, the focus for the future is on capacity enhancement, reduction in unit cost , reducing transit times and having world class terminals. Freight The MR, with inputs from the RB, has proposed various initiatives towards (i) improving the wagon productivity (ii) improving the mobility of wagons (iii) running of higher axle load trains (iv) improvements in asset liability and (v) infrastructure development for reducing transit times. Exhibit 9 provides a perspective on the freight traffic trends in IR. Over a thirty year horizon, coal has become the most important commodity for IR. Other commodities had reduced in significance, but have the potential for the future, especially due to growth in container traffic and other customer oriented schemes. The wagon turn around has been reducing consistently from a peak of 15.2 days in 1980-81 to just over 6 days in 2005-06. Passenger A recent initiative has been providing automatic upgrades to passengers in case of vacancy in a higher class, while there is a waiting list in a lower class and increasing the number of superfast trains. The MR has suggested a range of initiatives focused on (i) reducing passenger losses by increasing volumes by increasing the length and occupancy of trains (ii) modifying train length and composition based on passenger profile management (analysis of the passenger reservation system data to understand class wise and season wise occupancy of trains) (iii) increasing average speeds of trains (iv) providing affordable air-conditioned travel for the poor and (v) improved design of coaches. Related ‗touch and feel‘ initiatives at stations and on board trains focused on the passenger would be stepped up, driven by the zonal GMs and executed through 20 Turnaround of Indian Railways
  21. 21. IRCTC. Exhibit 10 provides a perspective on the passenger traffic trends in IR. In terms of passenger earnings, the long term trend in earnings shows a growth in second class mail/express and upper class and a reduction in second class ordinary. The trends in number of passengers are similar. This reflects an increasing focus on the long distance reserved passenger rather than the short distance unreserved passengers. Between suburban and non-suburban, the originating passengers are more for suburban, while it is the reverse in earnings. Others Parcel, catering and advertising are expected to witness more aggressive efforts. In his budget speech in February 2006, he described the outcomes and process as, ―Present capacity utilization in parcel is less than 25% which is causing a loss in the parcel business. Certain measures were employed in parcel business in the current year which has registered a growth of 30% in parcel earnings. Open tenders were invited with reserve prices set at the initial rates and if inadequate response was obtained, the prices were reduced to 50% in 2nd round and then to 25% in 3rd round.‖ Initiatives focused on the passenger being implemented by the IRCTC are (i) improving the quality of the ticketing transaction, (ii) improving value added and basic services at stations, (iii) passenger amenities on board trains, especially as an integrated service, (iv)low cost hotels and (v) leveraging tourism business. Investment To support the above, appropriate investments are being considered. The focus has been on low cost, short gestation and high return projects. Route based throughput enhancement works are being aggressively pursued by relaxing any cap on resource availability. The other thrust areas are gauge conversions to improve the BG network flexibility, sidings and the dedicated freight corridor. Exhibit 3 provides a perspective on the investment trends in IR. These changes all together helped IR to come out of the debt trap and register itself as an profit making asset to the Government of India. ____________________________________________________________________ 21 Turnaround of Indian Railways
  22. 22. 08.Achievements The total investment being planned for the eight year time frame (2007-2015) was tentatively in the order of Rs 350,000 crores. This was a significant increase from the planned Rs 60,000 crores (actual expected to cross Rs 80,000 crores) in the X Plan period of 2002-07. This confidence was a result of what the Indian Railways (IR) achieved, not only due to the rising trend of performance, but also due to the significant growth in the past two years (2004-06) (Exhibit 1) The fund balances had crossed Rs 12,000 crores. These two years coincided with Mr Lalu Prasad being at the helm of affairs of the IR. Mr. Lalu Prasad, in his opening remarks of the budget speech of 2006-07 on 24th February 2006 had said, ―Mr. Speaker Sir, I rise to present the Budget Estimates 2006-07 for the Indian Railways at a point in time when, there has seen a historical ‗turnaround‘ in the financial situation of the Indian Railways.‖ The fund balance at the end of 1999-00 had reached a low of Rs 149 crores, improving to Rs 5228 crores by the end of 2003-04 and over Rs 12,000 crores by the end of 2005-06. A 20 year perspective since 1987-88 gives a bird‘s eye view of the performance of IR, in terms of total earnings, total working expenses, operating ratio and net revenues (Exhibit 2). The operating ratio (ratio of total working expenses (including depreciation and pension, but exclude dividend to GOI) to total earnings) and net revenues (total earnings less total working expenses, adjusted with miscellaneous transactions) had reached low levels of performance in 2000-01 (98.3%) and then had consistently improved till 2005-06 (83.7%).The figures were however not strictly comparable. There had been a decrease in allocations to the depreciation reserve fund during the late 1990s from over Rs 2000 crores to a low of Rs 1155 crores in 1998-99. This was followed by a gradual increase until 2004-05 to Rs 2700 crores. In 2005-06, the allocation jumped to Rs 3600 crores (Exhibit 3). Further, there was a change in accounting practice in 2005-06 when Rs 1615 crores of lease charges to IRFC towards the principal amount for wagon procurement had been shifted from working expenses to miscellaneous expenditure. The operating ratio, for 22 Turnaround of Indian Railways
  23. 23. the sake of comparability with earlier years, would be 86.6%. Exhibit 4 gives the key statistics of IR as on 31st March, 2005. As recognition to this ‗turnaround,‘ some of the world‘s biggest asset managers, investment bankers and consultants including Goldman Sachs, Deutsche Bank, HSBC, etc had shown interest in working with IR. 09.Turnaround Diagnosis A) To diagnose the ‗turnaround,‘ the first question would be whether it really was a turnaround.‘? 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 10.37% 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 cr ores in 200405. This was a record increase of Rs 2731 crores, reflecting a 52% increase in the net revenues. Earlier, until 2004-05, there had been a steady climb from the low of Rs 1071 crores in 2000-01. The internal generation of cash surplus including provision for depreciation and Special Railway Safety Fund (SRSF) reached an historic level of Rs.13,068 crores for 2005-06, following the Rs 7603 crores in 2004-05. This justified the principles that ―freight business is a play on volumes,‖ and that ―passenger business is a play on volumes and quality‖ which were behind various focused initiatives undertaken by the MR, and driven by the RB. Further, the initiatives were pursued in a manner that results could be obtained as quickly as possible, yet laying the foundation for continued performance improvements. An interesting aspect was that the total earnings in 2005-06 had gone up by a record Rs 3523 crores with respect to the budget estimates (BE) for the year. While this could 23 Turnaround of Indian Railways
  24. 24. raise questions about the budgeting process, for the year 2005-06 it is more of a consequence of initiatives that were put in place during the year, with results coming in the same year. The essence of the ‗turnaround‘ was in the fact that: (i) Total revenues increased by a significant percentage in the last two years and (ii) The net revenues continued a robust upward trend. 10.Determinants of the Turnaround : B) The next question would be The Determinants of the ' Turnaround ' . The increase in total earnings of Rs 7121 crores could be attributed to: (i)Goods earnings of Rs 5509 crores (17.9% increase on a base of Rs 30,778 crores), (ii)Passenger earnings of Rs 1013 crores (7.2% increase on a base of Rs 14,113 crores) and (iii) Other earnings including parcel, catering, advertising etc of Rs 599 crores (24.2% increase on a base of Rs 2479 crores) in 2005-06, out of the total earnings, goods constituted 67%, passenger constituted 28% and others 6%. Goods Earnings: The increase in goods earnings for 2005-06 over 2004-05 was Rs 5509 crores, including miscellaneous earnings due to wharfage and demurrage. Excluding the miscellaneous, the increase was Rs 5482 crores. Exhibit 5 provides an analysis of the commodities through which the increased goods earnings were obtained. Coal (Rs 1365 crores), other goods including raw material (iron ore, limestone and dolomite) for other than major steel plants, and other stones, sugar, salt, non-bulk goods and containers (Rs 1121 crores), iron ore for exports (Rs 733 crores), cement (Rs 550crores), raw material for steel plants (Rs 475 crores), fertilizers (Rs. 449 crores) and pig iron and finished steel (Rs 373 crores) accounted for 92% of the increase in earnings, in that order. The increase in earnings from coal and other goods were largely due to the increased loadings. The increase in earnings from iron ore for exports was both due to increase in loading and increase in rates by change of classification. The increase in earnings from cement was due to increase in loading. The increase in earnings from raw material for steel plants was due to the increased loading and increase in rates by 24 Turnaround of Indian Railways
  25. 25. change of classification. The increase in earnings from fertilizers was due to the increased loading and higher lead. The increase in earnings from pig iron and finished steel was primarily due to higher lead. Exhibit 6gives the change in freight classification and rates since 2000-01. A comparison of the loading figures between FY 2005 and FY 2006 shows that increased loadings have been achieved in coal, other goods, raw material for steel plants, and iron ore for exports. The percentage increase with respect to 2004-05 was most significant for other goods (25%) followed by raw material for steel plants (19%), cement (14%), and iron ore for exports (13%). The increase in coal was 8%. The increased axle load would account for a maximum of 14%. The rest would be due to increased rake availability as a consequence of improvements in wagon turnaround, and reduced train examination. A whole host of schemes have been put in place to attract the freight customer, since July 2005 [MOR, 2006-b] . These include mini rakes for the small customer, volume discounts for the large customer, lean season discount scheme, long term freight incentive scheme, loyalty discount scheme, discounts for providing traffic in the empty direction, incentives at terminals like engine on load and construction of sidings, wagon investment scheme etc. Passenger Earnings: The passenger earnings in 2005-06 had gone up by Rs 1013 crores (7.2%) over 200405. The possible reasons for the earnings in 2005- 06 being higher were due to initiatives in running 24 coach trains , deploying additional coaches in well patronized trains and even running of additional trains. These initiatives were made possible by ensuring analysis of demand based on the passenger reservation system data and requiring the field level officers to respond to it by additional supply where possible. In the passenger segment, a reduction of one rupee was offered in the second class ordinary fare, 10% in ACII and 18% in ACI. The Tatkal scheme, targeted at the ‗last minute‘ passenger was extended first from one day to three days and then to five days. This offered a window of opportunity to increase earnings through differential pricing, based on the time of booking. Emphasis has been laid on what has been called ‗touch and feel‘ initiatives to improve the service quality for the passenger. 25 Turnaround of Indian Railways
  26. 26. Consequent to the above initiatives, the growth in number of passengers has been 7.5% in 2005-06 over 2004-05 and 7.1% in 2004-05 over 2003-04. The growth in the earlier three years had ranged between -2.4% to 5.4% (Exhibit 1). Other Earnings: The increase in other earnings of Rs 599 crores (24.2% over 2004-05) came through parcel, catering, advertising, dividends from the public sector units under the ministry etc (Exhibit 7). The increase of 24.2% in 2005-06 over 2004-05 followed a similar growth of 24.7% in 2004-05 over 2003-04. In the earlier year‘s, the growth in this segment had been marginal this source of revenue had not received as much focus as in the past two years A slew of initiatives on these areas had been implemented over the past two years, m a king it attractive for private parties to take advantage of the market opportunity that IR could offer. Parcel For the parcel business, even though the leasing concept had been in place earlier, the implementation had been slow due to poor market response. In a correspondence to the GMs in July 2005, the MR urged, ―The GMs should ensure that all tender notices concerning parcel contracts are issued within 15 days and tenders are finalized within 2 months from the date of receipt of this letter.‖ The zones were empowered to fix up leases if they could get a bid at 20% more than the previous year‘s earnings. Catering Catering was an essential service to IR passengers, both on the trains (mobile) and at the stations (static). Outsourcing in catering through the IRCTC was a major initiative, which received increased attention during the previous few years. Like parcel, in the MR‘s correspondence to GMs, a sense of urgency was communicated focusing on the need to quickly finalize the catering contracts within three months of issuing the tender. Open competitive bidding, many times having to deal with pressures (including court litigation) brought by incumbents, had been a strategy to unlock the potential of this business activity. The political stature of Mr Lalu Prasad and his ability to deal with such pressures had enabled the GMs and IRCTC to move forward. Even then, at the end of the year, there were pending cases in courts. Advertising As stated by CCM, NR, ―easy processing of innovative ideas for advertising was put in place.‖ This enabled zonal railways to be more proactive on this front. As an 26 Turnaround of Indian Railways
  27. 27. example, the NR doubled its advertising income from the three major terminal stations: Delhi, New Delhi and Hazrat Nizamuddin in two years. The increase in earnings from advertising had been even more significant in the CR and WR, leveraging the Mumbai area. The overall IR earnings had gone up from Rs 50.2 crores in 2004-05 to Rs 78.1 crores in 2005-06. 11. Overall Strategy The country‘s economy was growing faster than before, moving from the 4% to 6% GDP growth rates (from 1996-97 until 2002-03 ) to the 8.5%, 7.5% and 8.4% achieved in 2003-04, 2004-05 and 2005-06 respectively. This growth environment offered an opportunity for IR and had a significant impact on the turnaround. In the freight business, there was focus on higher volumes, on the premise that marginal revenues were significantly higher than marginal costs (Exhibit 8). This was done with the objective of lowering the unit costs, resulting in the record surplus. The strategy for freight rates made a clean departure from the past by (i)Freezing freight rate increases and (ii) rationalizing the commodity classification to benefit the high value goods and charge more from the low rated commodities ( Exhibit 6). The strategy of higher volumes was also carried through in the passenger business. The concept of revenue management, wherein differential prices could be charged for differential services like tatkal and superfast were leveraged. In the other business areas of parcel, catering and advertising, the strategy of outsourcing through public private partnership (PPP) and wholesaling rather than retailing was adopted. Underlying all this was mainly the strategy of Asset utilization which goes to the credit of Lalu Prasad Yadav. 27 Turnaround of Indian Railways
  28. 28. Exhibits 1-21 28 Turnaround of Indian Railways
  29. 29. Exhibit 1: Performance of Indian Railway 29 Turnaround of Indian Railways
  30. 30. Exhibit 2: Performance Review (1987-88 to 2006-07) The trend of IR‘s total earnings and total working expenses are shown in Figure A and Figure B. The good years were between 1993-94 to 1995- 96, after which the expenses caught up with the revenues until 2000-01, when the net revenue shrunk to a little over Rs 1000 crores. The situation started improving steadily to reach an actual net revenue of just over Rs 8000 crores in 2005-06, for a total earnings of Rs 54,404 crores. Th is figure, collated after the financial year ended 2005-06, has been a significant increased achievement over and above the budgeted and revised estimates for the same year. The increase in net revenue is attributed significantly due to better utilization of freight rolling stock. The budgeted estimate for the year 2006- 07, before the actuals for 2005-06 were collated, is total earnings of nearly Rs 60,000 crores with a surplus of about Rs 7500 crores. The actuals are expected to be at least 10% higher on earnings and 50% higher on the net revenue. 30 Turnaround of Indian Railways
  31. 31. Based on the ratio of total working expenses to total earnings, a parameter called the operating ratio is assessed as a percentage. Figure C presents the operating ratio since 1987-88. The operating ratio had reached a peak of 98.3 in 2000- 01, reflecting a relatively poor performance. After that, it had reduced year on year till 91.0 in 2004-05. It dropped sharply to 83.8 in 2005-06. (As stated above, this was both due to better utilization of rolling stock and changes in accounting practice.) The IR was targeting an improvement in the operating ratio of 77% for 2006- 07. This means that it aims to earn Re 1 by spending 77 paise in 2006-07, against 83.8 paise in the last financial year [Business Line, May 6, 2006]. Which in the Same year was achieved, and in the next year i.e,2007-08 they managed to further reduce it to 74.9% which was appreciable . The net revenue receipts are then appropriated for dividends payable to the government of India and into various capital funds. Figure D gives the dividends p aid out of the net revenues including when the pay ment was due to deferred dividends. As can be seen, the deferred dividend payments have happened in the ―good‖ years, which have followed the ―bad‖ years when the IR would have sought deferment of the dividend. The deferred dividend liability from 1978-79 onwards aggregated to Rs 428.43 crore by end of March, 1990. The amount was cleared by 1992-93. The dividend payable in 2000-01 and 2001-02 worked out to be Rs 2,131 crore and 2,337 crore respectively, out of which Rs 1823 crore and Rs 1000 crore respectively have been transferred to a deferred dividend liability account. 31 Turnaround of Indian Railways
  32. 32. 32 Turnaround of Indian Railways
  33. 33. Exhibit 3: Analysis of Past Investment Strategies A review of the investment record of the past would be in order, not only to assess the shortcomings in the existing planning process but also to identify the changes that are required. There has been an effort on continuity of investment on three items, namely on gauge conversion/doubling, asset replacements, new lines and rolling stock . The focus no wis more on through put enhancement works, terminal infrastructure works, user amenities, and information technology. Gauge Conversion While earlier, the policy of gauge conversion had been one of selectivity on high density ―bridging ‖ routes, in the early 90s, the IR launched the project ―unigauge‖, in an attempt to standardize in most of the networks. The gauge conversion project, which peaked between 1992- 93 to 1998 -99 ( F igure A ), had a severe impact on track renewals and to an extent on safety. Both these had a consequent impact on the finances of IR, with the operating ratio peaking to 98.3 in 2000-01. With the safety related investments on IR and a better balance on gauge conversion, the IR recovered fr om 2002-03 onwards. Doubling Capacity improvement through doubling has been steady ( Figure B), in the range of about 5 percent with the initial priority being on the Golden Quadrilateral and the Diagonals. 33 Turnaround of Indian Railways
  34. 34. Track Renewal The average spends on track replacements has been 16 percent to 23 percent of the Plan Outlay over a period of 20 years. Despite this, resource constraint has had a pronounced impact as, unlike rolling stock , the leasing route is not followed and the funding is only through DRF. Priority accorded to other investments, also funded from revenue surplus (i.e, gauge conversions funded from Railway Capital Fund ) is one reason . Figure C gives the appropriation to DRF. Another reason is IR not adhering to a systematic method of accounting for depreciation and the allocations to DRF tend to be adhoc. A third reason is premature renewal of assets, needing extra money. And lastly, as appropriation made to DRF reflects on the operating ratio and the size of net surplus, there is a perverse incentive in the financial structure now to under provide for replacements. This has been 34 Turnaround of Indian Railways
  35. 35. corrected for the last three years and the provision for DRF has steadily gone up from Rs 2692 crores in 2003-04 , Rs 3704 crores in 2005-06 and BE of Rs 4407 crores for 2006-07. The net result has been a build up of arrears that are now being liquidated through SRSF. One outcome of setting up of this Fund has been decrease in IR‘s allocation to/spend from DRF, leading to apprehensions of a future re -occurrence of the problem. Figure D gives the trend of track renewals. This shows a clear reduction during the 90s, consequent built of arrears attempt to liqu idate the same after 2001 02 . Rolling Stock The emphasis has been on both replacements and additions. Investments have averaged about 40 percent of the Plan Outlay, over the period of past 20 years. In fact, the expenditure has had a steady relationship with earnings, the average coming to around 15 percent. This has been made possible by the IR adopting a combination of measures, such as using DRF and Budgetary Support, leasing via IRFC and deploying various schemes such as Own Your Wagon. Yet another reason to ensure this ‗investment stability‘ has been to ensure work load to manufacturing units. Despite this emphasis, IR was hampered by shor tage of rolling stock , contributing to a decline in the share of the transport output. 35 Turnaround of Indian Railways
  36. 36. 36 Turnaround of Indian Railways
  37. 37. Exhibit 5: Commodity-wise Analysis 37 Turnaround of Indian Railways
  38. 38. Exhibit 6 : Change in Frieght class and rates 38 Turnaround of Indian Railways
  39. 39. 39 Turnaround of Indian Railways
  40. 40. Exhibit 7: Other Source of Earnings Parcel: A passenger train has 16 tons of capacity for carrying parcel. The IR has an annual parcel carrying capacity of around 35mt, of which the utilization in 2005-6 and 200607 was 5mt (14%). This generates revenue of about Rs 500 crore (Table A). The cost of haulage and parcel office staff is Rs 1800 crore. Thus, the parcel segment i s making a loss of Rs 1300 crore per annum In the recent past, IR has taken several initiatives to improve the performance of the parcel segment. Following is a study done by CRI SIL [CRISIL, 2005 ]: 1. Introduction of Millennium Parcel Express: Operation of express parcel trains, termed as ‗Millennium Parcel Express‘. The scheme was introduced in March 2001 whereby a parcel train, consisting of a minimum of 10 parcel vans, was leased out to private service providers by inviting bids through open tenders. To start with, two such trains were introduced between Mumbai and Kolkatta/Delhi .These were ‗timetabled‘ trains with guaranteed lease earnings ranging between Rs.7 to 9 lakhs. The scheme was later extended to six other pairs of stations. As a concept, this was not new, a similar scheme had been tried in the past too. However, these parcel express trains lost their popularity due to non-adherence of scheduled running time. 2. Introduction of refrigerated vans: In 2003-2004, IR introduced refrigerated vans on popular long distance trains for perishable commodities. This Concept too has not been a success. 3. Rationalization of the rate structure: With the objective of simplifying the booking procedures and optimize capacity utilization, IR undertook the rationalization of the rate structure. This exercise commenced in the Budget of 2003 -2004 and was carried forward in the ‗next years‘ budget. 4. Additional leasing of parcel space: This scheme was introduced by IR from 01-042003, whereby additional leasing of parcel space in luggage vans of certain nominated Mail and Express trains was allowed. IR has been leasing parcel space in the front luggage vans of passenger trains since the early 1990 s and this was basically a further enhancement of the scheme. Similarly, leasing of the vacant compartment of guard in 40 Turnaround of Indian Railways
  41. 41. the front luggage vans to courier services, lowering of reserve price, permitting short term lease of one year etc., were other initiatives introduced from 01 -04 -2003 . 5. Computerization of parcel traffic: Computerization of parcel traffic for improved results has been initiated by IR. A pilot project, linking Howrah and Delhi area was included in the budget of 2004 -2005. The above initiatives have reduced the direct marketing and operations efforts for IR, while increasing the revenues. The past year has witnessed continuous follow up from the OSD. Innovations like leasing of parcel vans for a round trip have also yielded results. The increased leasing of SLR space through bidding is expected to increase the parcel revenues in the coming years. While the figures for 2005-06 have yet to be consolidated , significant increase in earnings is expected due to open competitive bidding, where in flexibility has been given in 2006-07 to reduce the reserve price for leasing from 100% to 50% to 25% for successive rounds of bidding, if required. During 2005-06, the reserve price for leasing was set at the previous year‘s earnings plus 20%. Catering: IR has formulated a new catering policy in order to improve the standards of food being served in the trains and in the stationary units to generate more revenue. Under this policy, the catering contracts will now be given through an annual open tendering system, under the ownership of IRCTC. Previously, catering contracts were based on an application-based system. Often, an administrative extension would be granted to the incumbent. The rates used were not commercially contested. With the new policy, as an example, an annual catering contract for an important train like Howrah-Kalka mail was awarded for Rs 83.6 lakhs, when earlier it fetched Rs 5 lakhs. After open competitive bidding, earnings have increased from Rs 13 crore to over Rs 100 crore due to mobile catering. On stationary catering, due to the open competitive bidding, as an example, the license fee at Bandra and Nagpur went up from Rs 78,000 and Rs 32,000 to Rs 16 lakhs and Rs 34 lakhs respectively. The pace of open bidding for stationary units has been slowed down since some of the incumbents have gone to courts to contest IR‘s move Table B gives key statistics, including earnings from catering. As is evident an increasing share of private participation and the consequent earnings from license fees. 41 Turnaround of Indian Railways
  42. 42. Other initiatives through IRCTC are public-private partnerships for: (i) automatic vending machines (ii) base kitchens (iii) launderettes for bed rolls etc (iv)combined catering and hygiene on trains (v) food plazas and (vi) budget hotels. Efforts are on to ensure national brands for food related products. The potential earning from catering is assessed at over Rs 600 crore per annum, given the annual passenger journeys of 5480 million, an average spend of Rs 10 per journey on catering and license fees at 12% Advertising The various strategies on advertising currently being leveraged are: (i) wholesale leasing rather than retail leasing (ii) leasing for a division as a whole (iii) open competitive bidding and (iv) trains and wagons. This earning option is expected to yield significantly higher returns in the future. 42 Turnaround of Indian Railways
  43. 43. 43 Turnaround of Indian Railways
  44. 44. 44 Turnaround of Indian Railways
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  46. 46. 46 Turnaround of Indian Railways
  47. 47. Exhibit 11: Sample of Superfast Trains having common Route and Timings with Non-Superfast Trains 47 Turnaround of Indian Railways
  48. 48. Exhibit 12: Organizational Structure 48 Turnaround of Indian Railways
  49. 49. Exhibit 13 : Zonal Railways (A) 49 Zonal Railways and their Divisions Turnaround of Indian Railways
  50. 50. (B) 50 Zonal Division of IR and their Headquaters: Turnaround of Indian Railways
  51. 51. Exhibit 14: Sample Advertisements These Advertisements were in all the leading national Newspapers and Hoardings. 51 Turnaround of Indian Railways
  52. 52. Exhibit 15 : Downsizing The number of regular employees as on 31.3.2011 stood at 13,28,199. The table below shows, the strength of railway employees under various groups, together with total expenditure on them, for some selected years: Management personnel (Groups A&B) constitute up 1.3% of the total strength, while Group C and D account for 81.1% and 17.6% respectively. Of the employees in Group C and D, 3.85 lakhs (29.3%) are workshop employees and artisans and 9.27 lakhs (70.66%) from other categories including running staff. Railway Protection Force/RPSF personnel totaled 61,949.In the non-gazetted cadres, the ratio of Group C to D changed from 25:75 in 1950-51 to 82:18 in 201011,indicating a shift towards induction of skilled manpower. 52 Turnaround of Indian Railways
  53. 53. Exhibit 16: Railways-Facts First Passenger Train Ran On 16th April 1853 (between Bombay to Thane) First Railway Bridge Dapoorie Viaduct on the Mumbai-Thane route First Rail Tunnel Parsik Tunnel First Ghats Covered by the Rail lines Thal and Bhore Ghats First Underground Railway Calcutta METRO First Computerized Reservation System started in New Delhi (1986) First Electric Train ran on 3rd Feb' 1925 (between Bombay VT and Kurla) Toilets on Trains were introduced in 1891 (1st Class) & 1907 (lower classes) Shortest Station Ib (Orissa) Longest Station Name Sri Venkatanarasimharajuvariapeta Busiest Railway Station Lucknow (64 trains everyday) Longest Run for Daily Train Kerala Express (3054 km in 42.5 hrs) Longest Railway Platform in the World Kharagpur (2,733 ft in length) Indian Railway's Fastest Train Bhopal-Shatabdi (speed of 140 Km/per h) Train with Maximum Number of Halts Howrah-Amritsar Express (115 halts) Oldest Preserved Locomotive Fairy Queen (1855), still in working order Longest Railway Bridge Nehru Setu on Sone River (10044ft in length) 53 Turnaround of Indian Railways
  54. 54. Exhibit 17: Railway Network 54 Turnaround of Indian Railways
  55. 55. Exhibit 18: Product Innovation : Double Stack Containers Mundra Port operates double stack diesel trains on 1,676 mm (5 ft 6 in)gauge using flatcars It is one of only 3 countries to commercially double stack 9 ft 6 in (2,896 mm) tall containers on a train. Because of the broad gauge used in India and Pakistan, trains can carry standard shipping containers double-stacked on standard flatcars, which is more economical than single containers, but standard gauge railways in North American and elsewhere must use special double stack cars to lower the center of gravity and reduce the loading gauge. 55 Turnaround of Indian Railways
  56. 56. Indian Railways is able to carry containers double-stacked on standard flatcars at 100 km/h (62 mph). (Triple-stacked operation with lower, 6-foot-6-inch (1,981 mm) containers, is planned). Flatcars, in addition to being much less expensive than well cars, can carry more containers in a given length of train. Experiments for double stacking under 25kV overhead line have begun because of funds given by Japan. Weights Containers have weight limits designed to fit road trucks, which have clearly smaller weight limits than trains. A common limit for railways is 8 tonnes (7.9 long tons; 8.8 short tons) per meter train length and 22.5 tonnes (22.1 long tons; 24.8 short tons) per axle. A four axle container car can take 90 tonnes (99.2 short tons; 88.6 long tons). Since a container is limited to 30.5 tonnes (33.6 short tons; 30.0 long tons) (plus a rail car), single stacking clearly does not use the load capacity of the railway. A 20-foot (6.1 m) container is limited to 24 tonnes (26.5 short tons; 23.6 long tons) and two such can fit into a car for a 40-foot (12.2 m) container, or even three if double-stacking, but not four unless very high axle load is permitted. The North American railways permit two 53-foot (16.15 m) or four 20-foot (6.1 m) containers as shown in the images on this page. Another consideration is the maximum weight of a train. A maximum length train in Europe, 750 m (2,461 ft) long can have 50 container cars with a total weight of 2,250 tonnes (2,480 short tons; 2,210 long tons), and more if 20 ft containers are included. This is not so far from the limit using standard European couplers. Double-stacking requires allowing higher train weight to be meaningful, since it is higher train weights that saves costs. In the US, the AAR coupler used allows much higher train weight. Sizes and Clearances Double-stack cars come in a number of sizes, related to the standard sizes of the containers they are designed to carry. Well lengths of 40 ft (12.19 m), 48 ft (14.63 m) and 53 ft (16.15 m) are most common.[1] Heights range from 8 ft (2.44 m) to 9 ft 6 in (2.9 m) ("high cube"). CSX lists three clearance heights above top of rail for double stack service:[2] Doublestack 1 — 18 ft 2 in (5.54 m) Doublestack 2 — 19 ft 2 in (5.84 m) Doublestack 3 — 20 ft 2 in (6.15 m) The last clearance offers the most flexibility, allowing two high cube containers to be stacked 56 Turnaround of Indian Railways
  57. 57. Exhibit 19: Indian Railways: Revenue Chart 2002-2011 The growth in India railway revenues has also been declining since its peak during the fiscal year ending March 2007. Although India Railway revenues grew at 7.5% and improved to INR 864.8 billion in 2010-2011 from INR 804.3 billion the previous year, this growth rate was barely half of its peak growth of 15.1% in 2006-2007. The sluggish growth rate in total railway revenues is attributable to slower growth in revenues from goods transportation, accounting for about 70% of total railway revenues. Although growth in passenger revenue – constituting 30% of total railway revenues – increased by 9.8% in 2010-2011, compared to 7.1% in the previous year, these growth rates were insufficient to compensate for the sharper decline in revenues from goods transportation. Source:CEIC 57 Turnaround of Indian Railways
  58. 58. Exhibit 20:Railways & IT (a) Websites & Online Bookings While IR was among the earliest Indian organizations to bring in computers in the early 70s , there was a lull for over a decade. In the mid 80s, the passenger reservation system(PRS) made its appearance through development support from a public sector software company. In July 1987, MOR established the Centre for Railway Information systems (CRIS) to be an umbrella organization for all computer activities on IR. After taking on the PRS, CRIS played the driving role in the Freight Operations Information System (FOIS) , which really established only in the recent few years. CRIS is engaged in the development and maintenance of major computer systems on the IR . Apar t from the PRS and FOIS, the following are some of the projects that are handle d by CRIS [IRRE, 2006 ]: 1National Train Enquiry System (NTES) 1. - Alpha Migration of the PRS 2. - PRS enquiry through ‗Internet,‘ front ended by IRCTC 3. - Booking of tickets on ‗ Internet,‘ f ront ended by IRCTC 4. - Unreserved ticketing system (UTS ) (b) Mobile Applications There are various applications available on iOS and Android (m-Indicator & Indian Railways App). These applications help to track the ticket confirmation with the help of PNR status given to the customer by the Railways. IRCTC has also come up with environment free idea of saving Paper usage, a person booking tickets through Online can just save a picture and keep it with him, instead of Printing the ticket. These various application and ideas are really Customer friendly and customer centric. (c) Mobile Ticketing (Reaching the Customer) Steps for booking Railway Reserved Ticket on IRCTC website from a browser enabled mobile Phone (i) Login to URL https://www.irctc.co.in/mobile with your existing IRCTC user id and password. (ii) Click on Book Ticket and fill in details for plan my travel. (iii) Use existing passenger list or add passengers (iv) Confirm booking details and pay through Credit/debit card to get successful booking. (v) To save paper they have come with SMS services, and all Railway centers approve Mobile Tickets instead of Print outs. 58 Turnaround of Indian Railways
  59. 59. Picture: IRCTC-Homepage Source: IRCTC website One can just log on to the Webpage and book the tickets personally, without any help from an agent. This enables IRCTC to reach the customers directly. You can also check the fares, alternate journey plans and various other things available on the website. 59 Turnaround of Indian Railways
  60. 60. Mobile Softwares: Indian Railways & m-indicator In these mobile application you can check the availability of the tickets and also you can Check the PNR status , the Railway Map, Ticket Fares, Times of Various trains etc. (M-Indicator iOS Screenshot) 60 Turnaround of Indian Railways
  61. 61. Exhibit 21 : Project Unigauge- Sprecification Source : Wikipedia It was observed for a long time that towns and cities on the meter gauge (MG) and narrow gauge (NG) lines had a poorer service than equivalent towns on the broad gauge system, the speed of trains was slower and the freight traffic (ton per kilometer) on metre gauge tracks was only a small fraction of the freight traffic on broad gauge tracks. It was decided that conversion of meter and narrow gauge railway lines to broad gauge would make Indian Railways more efficient. As of 2012, 107,500 km of track length (93% of entire track length of all the gauges) and 58,300 km of route-kilometer (90% of entire route-kilometer of all the gauges) was broad gauge; 6,000 km of track length (5% of entire track length of all the gauges) and 5,210 km of route-kilometer (8% of entire route-kilometer of all the gauges) was meter gauge and 1,500 route-kilometer (2% of entire route-kilometer of all the gauges) was of the narrow gauges. As a result of Project Uni-gauge, the share of broad gauge in the total route-kilometer has been steadily rising, increasing from 47% (25,258 route-km) in 1951 to 89% (58,300 route-km) in 2012 whereas the share of meter gauge has declined from 45% (24,185 route-km) to 8% (5,210 route-km) in the same period. The share of narrow gauges has decreased from 8% in 1951 to 2% (1,500 route-km) in 2012. India has converted its meter gauge lines into broad gauge up to its border with Nepal. Narrow gauge railway lines that extend for a short length from India into Nepal (Raxaul-Amlekhagunj and Jayanagar-Janakpuur-Bijalpura) need conversion by Nepal Railways to avoid trans-shipment. 61 Turnaround of Indian Railways
  62. 62. Conclusion Indian Railways from its inception until now, has evolved into a massive organization. Indian Railway has seen a stagnant growth, but after the policy changes done by the Ministry of Railways in the last decade, Indian Railways has seen an impressive boom. This performance of Indian Railways has been recognized by Harvard University, which led to a detailed study of the same. The SWOT analysis of the Industry reveals the position of the Indian Railways with respect to its internal and external environment. Strength 1. Availability of abundant low cost land near country stations provides possibility for development 2. Less damage of goods compared to other modes of transport 3. Better connectivity across the length and breadth of India 4. More carrying capacity of goods. 5. Largest commercial employer with almost 1.5 million staff. 6. It transports over six billion passengers and almost 750 million tons of freight annually 7. Approx 120,000 km of tracks and nearly 8000 stations Weakness 1. Passenger sector is loss making 2. Accidents and delays cause a dent to the image 3. Facilities not comparable to international standards still Opportunity 1.It can capture large chunk of container traffic by introducing block container trains operating at passenger speeds 2.It‘s 70% of revenue and most of its profits comes from freight sector and there is a tremendous growth in emerging companies, hence has a great future for freight sector 3.Operating ratio has been decreasing drastically in last 10 years Threats 1.Increase in allowable gross weight of road vehicles 2.Possible introduction of double road trailers 3.High accident rates 62 Turnaround of Indian Railways
  63. 63. 13. Bibliography (A) Videos: Youtube: www.youtube .com - Lalu at his best @ Rail Budget 08 OSD-Sudhir Mishra‘s and MR‘s (Lalu) Lecture at Lee Kuan yew School of Public Policy. https://www.youtube.com/watch?v=4wvoO5phs-8 (B) Websites: IR Website: http://www.indianrailways.gov.in Indian railway fan clubhttp://www.irfca.org/faq/faq-hist.html www.irfca.org/faq/faq-history4.html http://www.irfca.org/faq/faq-name.html Counterview of Turnaround: http://www.creative.sulekha.com/turnaround-of-indian-railways-undermr-lalu-prasad-yadav-a-counterview_325027.blog Indian Railways-Wikipedia: http://www.en.wikipedia.org/wiki/indian_railways India Data Talk: http://blog.securities.com/2012/06/will-indian-railways-meet-its-visiom2020 Financial Performance of IR: http://indiabudget.nic.in IR-Largest employer in India: www.rediff.com/worlds-17-biggest-employers www.railwayrecruitment.co.in FIMI (2006). ‗Indian Iron-ore,‘ Federation of Industrial Mineral Industries: http://www.fedmin.com IRRE ( 2006) . Indian Railways Reservation Enquiry: http://www.indianrail.gov.in Project Uni-gauge: http://en.wikipedia.org/wiki/Project_Unigauge 63 Turnaround of Indian Railways
  64. 64. History of Indian Railways http://en.wikipedia.org/wiki/History_of_rail_transport_in_India Electrification of Routes: http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_ econ/2004_05/YB_04_05/Electrification.pdf Electrification: http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_ econ/annual-rep-0607/electrification.pdf Electric Locomotives: Http://en.wikipedia.org/wiki/Electric_locomotive Change in accounting policy : http://pib.nic.in/newsite/erelease.aspx?relid=33060 Product innovation: Double stack Containers http://en.wikipedia.org/wiki/Double-stack_rail_transport Cancellation Charges : http://ekikrat.in/Ticket-Cancellation-and-Refund-Rules-Indian-Railways http://www.irfca.org/faq/faq-jargon.html Top Railway Network across the globe – http://en.wikipedia.org/wiki/List_of_countries_by_rail_transport_networ k_size Wikipedia -‗Indian Railways: Railway Zones: http://en .wikipedia.org (C) Reports: Whitepaper submitted to parliament (soft copy) Vision 2020_Indian Railways Strategic Changes: Turnaround Semester 3_Strategic Management Book_Mumbai University Statistical Summary on Page 11 : Indian Railways-Annual report and accounts.Ministry of Railways,Government of India, Various Issues 64 Turnaround of Indian Railways
  65. 65. Information of Other Changes Mumbai Mirror April 20,2006 Key strategies to IR: NCAER(National Council of applied economic research),2001 Status of Electrification: Rail business report, 1999 Study of the turnaround by OSD, Sudhir Kumar (D) Images: m-indicator: Screenshot from iOS application IRCTC-Homepage www.irctc.com Double Stack Containers: http://en.wikipedia.org/wiki/File:DTTX_724681_20050529_IL_Rochelle.jpg Sample Advertisements: https://www.google.cm/search?q=advertisement+in+indian+railways&tb m=isch&tbo=u&source=univ&sa=X&ei=rN1gUqe_M8nriAf7hoGQDA &sqi=2&ved=0CDwQsAQ&biw=1024&bih=67 Indian Railways Logo: http://agnesbpl.com/images/rail.jpg Double stack-Rail transport: http://en.wikipedia.org/wiki/Double-stack_rail_transport --THE END-65 Turnaround of Indian Railways