bankruptcy to billions

7/27/2019 Bankruptcy to Billions

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Submitted To: Dr. Gopal Singh

Submitted By:

Harshith (13024)

Mayank Vyas (13033)

Roshin P (13045)

Tariq Bin Riyaz (13057)

Ashwin V. (13058)

Book Review


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Table of Contents

BANKRUPTCY TO BILLIONS! ......................................................................................................... 3CUTTING THE BIG STORY SHORT .................................................................................................................... 3CHALLENGES FACED BY RAILWAYS .............................................................................................................. 3STRATEGIES ADOPTED TO IMPLEMENT CHANGES ..................................................................................... 4SUSTAINABILITY: .............................................................................................................................................. 4REPLICATION: ................................................................................................................................................... 4

POLITICAL ECONOMY OF REFORMS ........................................................................................... 4INDIAN RAILWAYS AND ITS STRUCTURE...................................................................................................... 4OPERATIONAL CRISIS OF THE 1980S.......................................................................................................... 4FINANCIAL CRISIS IN 2001 ............................................................................................................................ 5WHAT DID MR.LALU PRASAD DO? .............................................................................................................. 5

THE MARKET ...................................................................................................................................... 6

RAILWAYS STRUGGLE.................................................................................................................... 8

STRATEGIES USED ............................................................................................................................ 8RATIONALIZING PRICING ................................................................................................................................. 8RATIONALIZING OF TARIFFS .......................................................................................................................... 8DIFFERENTIAL PRICING POLICY ..................................................................................................................... 9DYNAMIC PRICING ............................................................................................................................................ 9ALLIANCES MADE FOR VALUE CREATION. .................................................................................................... 9INNOVATION................................................................................................................................................... 10

OUTCOMES, SUSTAINABILITY AND REPLICATION .............................................................10

FINANCIAL INDICATORS ............................................................................................................................... 10SUSTAINABILITY ............................................................................................................................................ 12WHAT LIES AHEAD? ...................................................................................................................................... 13REPLICATION STRATEGY: ............................................................................................................................. 14


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Bankruptcy to Billions!

Cutting the big story short

This book is an overview of the Indian Railways, which was transformed in fouryears (2004-2008) under the populist leader Lalu Prasad Yadav, Ex-minister ofrailways.

In the 1990s, the Core profit-making freight segment grew at 2 to 3 percent, andwages grew faster than the growth in labor productivity.

Consequently, in the years that led to the 2001 crisis, the Railways expenses grewmuch faster than its revenues.

However, instead of allowing conventional policing, the Railway Minister broughtabout structural changes resulting in significant gains in operational efficiency.

Hence, In 2006, the Railways earned a cash surplus of Rs15, 000 crore and theminister was keen to translate the financial gain into rewards for the Railwaysemployees and tangible benefits for the poor travelers that rely on the Railwaysfor transportation by reducing the fare price by Rs1 of second class passengers.

The Minister got the second-class passenger reduced by Rs 7 in 2004 to Rs 4 in2008. This was a huge reduction.

However, what is critical is that poor consumers, as well as railway employees,directly benefitted from the Railways financial gains. What makes this surprisingis that while retaining state ownership, the Railways graduated from near

bankruptcy in 2001 to US$ 6 bn annual cash surplus in 2008.

Challenges Faced by Railways The structural shift triggered by the liberalization of the Indian economy happened

in the 1990s.

The Railways Profitable freightand air-conditioned segments became vulnerableto stiff competition from alternate modes.

The shrinking fiscal space resulted in declining support from federal coffers.

To meet the Aspirations of the energetic new India The conflict between the commercial and social objectives aka The Split-

Personality as described by the Mohan Report.

Narrow departmentalism that routinely compromised institutional goals fordepartmental gains.

Monopoly Mindset and lack of customer focus.


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Strategies Adopted to Implement Changes

Unleash the Railways core strengthsits talented staff and robust systemsto initiate change.

Breaking the myths regarding nature of the business, competitive strengths,cost structures, revenue streams etc.

Crafting the Coalition of the willingi.e. to instill confidence within thebureaucracy and to provide a sense of mission to the staff. From Ideas to Actioni.e. Swift execution was central to success.

Sustainability:Whether it can be sustained is a food for thought!

Replication:Whether it can be implemented in other public utilities as well as large corporations.

The Railwaystransformation is an exemplar for how state owned enterprises couldimprove services despite all the challenges of balancing commercial and socialobjectives to fructify inclusive reforms.

POLITICAL ECONOMY OF REFORMS

Indian Railways and Its Structure The Indian Railways is a unique state owned enterprise with 1.4 million

employees and 1.1 million pensioners. It has one of the worlds largest networks. It is the office of minister followed by a three level bureaucracy-the railway

board, zones, and divisions. The railway board is led by chairman-better known as CRB or Chairman

Railway Board. Then coming to zones, they are apex bodies in the field.General Manager leads each zone. Then comes divisions, which is the lowestadministrative level in the railway organogram and Divisional managers leadit.

Operational Crisis Of The 1980s After the nationalization of railways, especially in the year 1980 there was a

severe operational crisis.

This was mainly due to old stock, which was less efficient, and required highmaintenance technology .The engines were old and outdated. Also, forminglonger and heavier trains was difficult.

On 17thNovember 1980, M.S.Gujral was appointed as the chairman of therailways board. He transformed the entire picture of Indian Railways throughthe reforms he implemented.


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Financial Crisis In 2001 In 2001,Indian railways faced a severe financial crisis. Its cash balance shrank

to a paltry Rs.359 crore. The profitable freight business was recording a poorgrowth rate of 3 per cent per year. In response to currency crisis in 1991, theGovernment of India initiated liberalization of the command and control

economy. Freight charges were revised and business was lost to other transportation

houses, which led to drastic decline in railway freight growth rate. Range of internal and external factors led to the deteriorating operational and

financial conditions of the railways. While there were significanttechnological and institutional improvements over two decades, it did not leadto tangible improvements in productivity.

What did Mr. Lalu Prasad Do? Bit of a Contradiction: Total Disagreement with the Mohan Committee

proposed reforms and adopted his style of working to churn out profits.

Earning trust:i. By setting aside personal Agendas and keeping his word.

ii. Transparency in the approval of competitive tender bids.iii. Selection of personnel based on meritocracy.

Analyzing The Political Economy:i. Crafting the space for reforms: Market test for commercial viability

and societal value test for political desirability as well as feasibility ofthe initiatives.

ii. Based on the reforms, the core team needed to take decisions based onthe three elements: Political Stance, Incrementalism and Tact.

Media Strategies Implemented

i. Promise less and deliver moreii. Strategically select high impact events like Lectures at IIMs and

Harvard.

iii. Fact Based information sharing with all willing news sources withoutpreferences to any.


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The MarketIts bamboozles a layman when he hears the fact that the Indian Railways generated acash surplus of Rs. 25,000 crores. How did they do it?

If the Railways network were to be rebuilt today, it would need a trillion dollar

investment!

This is how: Once the network is laid, the unit costs are substantially low becausespreading the fixed costs over larger volumes helps doing that.

Thus, it is very important to know the nature of the business.

In the section Puzzling Monopoly, the nature of Indian Railways is discussed in

brief. Again, there are two sides of the coin. If one considers the perspective of theIndian railways as a provider of railway services, then it is a monopoly supplier bydefinition because it is the only provider of rail services in the Indian Market. But if,we consider its freight transport business, it fell form 89% from 1951 to 40% in 2004.

A look at the Indian transportation business shows that the market shares were lost totrucks transporting cement and steel transporting the goods in the coastal areas toshipping lines. Luxury travelers preferred air-conditioned buses and budget airlines toRailways express trains, also considering pipelines, which created a very co mpetitivemarket for transportation services.

It can be clearly observed that the major money milking happens when it comes tofreight transportation. Nearly one third of the 13000 trains operated by the Indianrailways carry freight, they account for two thirds of the total earnings. The rest isfrom passenger trains, majority of which run at loss. Railroads have a competitiveedge in freight due to their ability to efficiently carry large loads over long distances,which can be managed on commercial principles. The miscellaneous amount comesfrom platform fees, catering etc.

64%

31%

5%

Where the rupee comes from

Freight Passenger Miscellaneous


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In terms of freight, during the Gujaral era, 90% of the goods carried by the railwaysconsisted of eight major bulk commodities namelycoal, iron ore, other minerals,foodgrains, petroleum producers, fertilizers, iron and steel and cement.

The declining market share in bulk commodities was attributed by the expert

committee to cross-subsidization of passenger services by frieght, poor quality ofservices and the national highways expansion. Since these factors affected all thecommodities equally, the question arises. Why was there extremely polar opinionswhen it came to the transporation of finished goods versus raw materials, meaning,while the market share of products like steel and cement has been declining since the

beginning of 1990s, the market share of iron ore, coal and other minerals remained

the same.

The answer to that is that, since Iron ore and steel were heavy commodities, therailways provided a door to door service to Tata Steel and the consumption of thesematerials by the company is tremendous. Compared to that, Essar Steel, a private

company does not get the same door to door service by Indian railways, rather, itprovides station to station service, since the steel plant has no rail sidings at thefactory or at the consumption centers.

88% of the total of 5.2 billion rail passengers that travel each year constitute ofordinary passenger segments. This can be split into two. The first is the suburban ruraltransport, essential for daily commuters in big cities. Second are slow and frequentlyhalting ordinary passenger trains often used by migrant labout, the rural poor,vendors, farmers, and office personnel to comute from surrounding districts.

Passengers in mail and express trains constitiute about 12% of the 5.2 billion annualtravellers, but contribute 72% of the total passenger earnings. Of the 603 million mail

and express train travellers (as of 2004)

49%

17%

20%

14%

Composition of operating expenses

Salary and Pension Stores and Others Energy Lease charges and depreciation


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As seen in the pie chart, almost half the chunk of the Indian Railways operating

expenses goes in Salary and Pension and the rest divided almost equally among Stores,Energy and lease charges and depreciation etc.

Railways struggleRailway has made a sincere effort to reinvent itself as a customer-centric organization.It has been struggling to make a shift from a monopolistic organization to a dynamicand customer friendly organization for years.

Strategies usedIn order to respond to customer needs, Railways started making changes in itsstrategies. This section talks about the strategies used by the railway in this direction.

Rationalizing pricing

Railway began simplifying and rationalizing its pricing policy. As a part of therationalizing, Railway took following steps.

1. In steel, freight charges were reduced by about 22% from class 230 to 180.2. Other incentives were introduced.3. Customers were offered loyalty discounts.4. Major customers were also rewarded with quantity based discounts.Despite these efforts, railway kept losing the rail coefficient for steel. It declinedfrom 67% from 1991 to 35% in 2005. What was surprising was, this happeneddespite lowering the prices.

But, the problem lied in the amount of cargo Railway carried. Railway providedstation-to-station service for transportation of steel and incidental costs associatedwith this was very high due to multiple handling, truck transportation at both ends,warehousing and increased inventory. These out rightly outweighed the low pricesthat were offered. Railway started offering half train loads instead of full trainloads and started to provide the service for free, along with unloading services atmultiple locations. Once Railway started to accept the half train loads withunloading at multiple locations, all this for free, it started reversing the railcoefficient for steel. Between 2005 and 2008 rail coefficient for steel trafficincreased from 35 to 45 percent. This reversal was due to a combination of market

driven policies tailored to the customers requirements.Rationalizing of Tariffs

Until 2005, Railways had a multi-volume tariff schedule spread over 500 pages,containing over 4000 entries for different commodities. Tariff schedule containedtraditional Indian sweets, musical instruments, players like tape recorder etc. Thisschedule not only specified the name of the commodities but also subdivided them.For example, it listed 261 sub categories of cotton. The situation was complicatedas various factors and qualities such as weight, state of processing, granular,compact; lose all made the determination of tariff difficult. In other words

permutation and combinations of type of commodity, sub category, weight madethe rate matrix very complex. This led to the ambiguity in pricing and then tocorruption.


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To get rid of this system, tariff revision was made in 2004-05. The importantmeasures taken were as follows.

1. Eight major commodities which accounted for 85% of freight tariff, and 71commodities accounting for over 97% of freight tariff were retained. All

obsolete entries were got rid off.2. All commodities were clubbed under 24 generic group heads.3. In this revised schedule, the minimum weight condition was scrapped.4. Railway decided to charge according to the load it carried.

This helped Railway to make its tariff plan more structured which left no ambiguityand made the pricing very clear. This was one very important step towards becominga dynamic organization.

Differential pricing policy

Railways always did pricing based on the affordability. Low value commodities and

poor passengers were charged less while higher value commodities and higher travelsegments were charged higher. This pricing was unchanged since these fares wereconsidered politically sensitive. So, brunt of this price hikes were borne by high valuefinished goods and air condition travellers. Railwayslost customers in this segment.Railways brought following steps to avoid this.

1. Price hikes which didnt consider Railways competitiveness were scrapped.2. Pricing policy for the freight and air-conditioned business segments was made

completely market driven.

3. Employed Empty flow direction scheme, which made a clear distinctionbetween the prices in loaded and empty flow directions. This allowed railway

budget to line out empty-flow direction freight discount scheme.4. Extended Tatkal service to 30% of the total seats in a train. Service has

differential prices for higher and lower travel classes. Tatkal earns railway a

sum of 300 Crs.

Dynamic pricingAfter the initial success of the Railways reforms with the rationalization of tariff

structure, the reformers turned towards market oriented freight rates and passengerfares. The Dynamic pricing was introduced by the reformers on peak and lean season.In lean season, railways reduced the charges to cope with the fare of other transportmodes. Conversely, in the peak season, when the demand exceeds supply, they

increased the fare.

Alliances made for value creation.

3 steps were followed in alliances:

1. Co-optation for competition was sought in sectors where Railways was a minorityor declining transporter.

2. Long term interests of existing customers with Railways were focused.

3. Alliances emphasized on improving the quality of service.


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InnovationTo complement the tariff rationalization, rejigging of the product mix, and efforts toimprove the quality of service, the Railways introduced several innovative products

and services. Mini-rakes, two-point unloading, Tatkal Seva, and automatic upgradingof passengers are some examples of recent innovation. But the most popular productis Garib Rath, the poor peoples chariot. It provides air-conditioned travel ataffordable prices- about half the passenger fare on ordinary train. Thus it meets theaspirations of the common people of India who could not, until now, afford air-conditioned travel.

Improving Quality of Service through:

1. Upgradation of technology for improving reliability, safety, and operatingefficiency.

2. Improvements in passenger convenience through investing in amenities.

Ex: Modified platforms, rest rooms etc. better improvements in illumination anddrinking water system

3. Improvement in customer interface.

Ex: Internet ticket service, nationwide railway enquiry system, SMS alert system,Train location system etc.

4. Partnerships from private and public enterprises for improving quality of service

Ex: Introduction of Catering kiosks and food plazas, Contracting Yatri Nivas to TajGroup and other players, improved ambience and cleanliness of toilets under theresponsibility of private firms like Airtel etc.

In conclusion, the entire inclusive reform strategy and efforts to transform the IndianRailways was tested in the market place as customer satisfaction was the finalmeasure of total value of the Railways service. As long as Railways continues to

innovate and add value to their result in customer satisfaction, this transformation willsustain.

In conclusion, the entire inclusive reform strategy and efforts to transform the IndianRailways was tested in the market place, as customer satisfaction was the finalmeasure of total value of the Railways service. As long as Railways continues to

innovate and add value to their result in customer satisfaction, this transformation willsustain.

Outcomes, Sustainability and Replication

Financial Indicators


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2001 2008 Change

Cash Surplus

before dividend

4790 25,0006 5- fold increase

Investible surplus 4204 19,972 Over 4-foldincrease

CapitalExpenditure

9395 26,860 3-fold increase

Fund balance

(Bank Balance)

359 22,279 62-fold increase

Operating ratio 98.3% 75.9% 22% improvement

Ration of net

revenue capital at-

charge and

investment from

capital fund

(return on net

worth)

2.5% 20.7% 18% improvement

Debt servicecash

coverage ratio

1.74 6.53 Over 3-foldincrease

From the above financial indicators is clear that before and after the plan for revivingthe railways was implemented, there is a marked increase in all the financialindicators of the railways.

This was reflected by increased confidence in the railways as an institution by severalforeign institutions.

Some facts:

In 1990s the railways expenses grew 1 percent faster than its earnings, leading it

towards bankruptcy. However between 2001 and 2008 the railways have becomesuper solvent by inverting this relationship-now earnings grew 4 percent faster thanthe expenses. This was due to:

Growth in freight volumes, selective fare hikes in previously underpricedfreight business segments. Gain in the freight earnings was due to increasing

the capacity of the freight trains by increasing the axle loading capacity and

longer freight trains. Change in the product mix by concentrating on high-value, high-margin

segments such as the Ac- passenger segment long-range trains. While being

able to maintain a subsidized rate for the regular passengers.

Railways to recover from the brink of bankruptcy did not resort the traditional way ofcost cutting that is reducing the denominator in the profitability factor. Instead itfocused on increasing the numerator being the productivity. This reflected in increasein the earnings and expenses.

Compounded annual growth rate of expenses and earnings

1991 2001 2008 1991-2001 2001-08


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Rs. crore Rs. Crore Rs. Crore CAGR % CAGR %

Total

working

Expenses

11,154 34,667 54,462 12.01 6.67

Gross

trafficreceipts

12,096 34,880 71,720 11.17 10.45

Passenger

earnings

3148 10,515 19,844 12.82 9.50

Goods

Earnings

8408 23,305 47,434 10.73 10.69

Other

coaching

earnings

336 764 1800 8.56 13.02

Sundry

earnings

242 703 2565 11.25 20.31

One of the major factors for increase in the productivity other than what is mentionedin the previous chapters was a strong customer orientation. The railways increased thequality service for passengers and freight customers by introducing systemic changessuch as e-ticketing, complementary upgrading of passengers if seats are vacant inupper class coaches, contracting out cleaning services on trains, improving ambienceof railway stations through private participation, e-billing for freight customers.

What did it to for the image of Railways and the minister?

Railways transformation increased its standing in India as a public sectororganization; Railways stood second next only to Indian army. The improvement inthe position of the railways has boosted the morale of the employees.

Lalu Prasad Yadav who was considered as a joker of Indian politics, known for theadministrative failure of Bihar, now is known as professor Lalu , delivering lectures inIIM and Wharton. His ranking as a politician from 33 moved up to 2nd(A survey

conducted in India Today 2006).

SustainabilityThe critics argue that the growth of the railways is not sustainable due to variousreasons,

Railway improved performance by creative accounting Financial gains are at the cost of the safety Growth in the revenues was due to rapidly growing economy


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Transformation of the railways is a result of easy fixes and thus is short lived,particularly when it faces severe capacity constraints-super saturated high

density networks, terminal constraints, energy shortage, lack of wagons and

coaches.

The fate of transformation, after the present political leadership departs is

bleak.

Creative accounting:

This was due to the pace and the scale of the financial gains the railways made frombankruptcy to an annual cash surplus of over $ 5 billion in a few years.

The authors response,

The railways accounts are open from public scrutiny like any other publicorganization.

One prominent change that Railways made in accounting earlier was that allleasing charges were recorded in accounts as revenue expenditure. But in the

revised procedure, the interest component of the leasing charges is recorded in

operating expenses while principal as the capital expenditure. This accounting

change amounts to a difference of Rs. 1677 crore in 2008. These changes are

in sync with the corporate accounting standards.

Safety accountability trade off:

Safety, productivity and profitability are interdependent more than it is perceived to

be. Earlier the railways had a cash crunch and hence couldnt afford replacement ofover aged assets placing the commuters at greater risk this is substantiated by the factthat the accident rate has declined from 473 m in 2001 to 194 in 2008 while therailways profitability soared. Also major operational changes having safetyimplications are strictly scrutinized by the railways research designs, and standards

organization (RDSO).

The quick fix argument:

Comparing Indian railways with the Chinese and American rail roads provide aglimpse into how underutilized the railways existing assets are. The Chinese railway

which is an equally large state-owned organization, has the same number of passengerkilometers, but transports four times more freight. Similarly the American rail roadhas one tenth the employee strength of Indian railways but transports three times morefreight.

What lies ahead?The chief challenges for railways would be in terms of attracting and maintainingtalent. Indian railways aims at recruiting talent from IIMs and IITs but face a stiffcompetition from the corporate sector. However the Railways have been training itsemployees in the best institutions in India and abroad is a positive step towards it.

Decentralized decision making to railway zones and within zones to divisions so as

to increase the level of accountability of field units but there is a lot more to bedesired on this front as well. There needs to be institutional changes like reorganizing


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the railway board based on the railways business segments, as opposed to the present

functional silos, hold the potential to break departmental divisions and bring acohesive business orientation to the organization as a whole. To sustain thesefinancial gains the railways needs to foster innovation in commercial, operational, and

pricing policies.

On the business front, it is essential to continue the focus on market and businesssegmentation and respond to firms supply chains as well as distribution networks andclient needs through tailor made strategies.

Replication strategy:

The author suggests a few pointers that can be applied to several PSUs:

Inclusive reforms require a productive politico-bureaucratic interface Commercial objectives and social obligations can be reconciled Efficiency must be improved by optimizing an underutilized system There is need to think a new. Big seven approach- Setting stretched goals, cross-functional and spatial

coordination, strategic investments, fostering alliances, deploying a

deliberative and calibrated approach and aggressively chasing for results.

Political economy should be navigated with tact to achieve the desired motives.

bankruptcy to billions

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