CASE STUDY

The New Face of Indian Railways

Today, Indian Railways 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 61,000 crores On a pure operating level, IR is in a terminal debt trap.

- Rakesh Mohan Committee , 2001

Indian Railways is a Government Department. However, we take pride in the fact that our achievement, on the benchmark of net surplus before dividend, makes us better than most of the Fortune 500 companies in the world.

- Mr. Lalu Prasad Yadav , Budget Speech, 2007-2008

The most remarkable thing about the Indian Railways is the financial turnaround it has achieved over the past few years. Given the size of the IR operations, this is amazing.

- Tom Harris, UK Railways Minister

Introduction

The case elaborates the journey of Indian Railways during the past seven years, focuses on the strategies adopted by it for managing the changes and ultimately for generating profits of Rs. 25,000 cr, and the challenges it has still to overcome to become world class.

Seven years ago, Indian Railways was considered as being on the way to deterioration. One of the government case studies concluded that "Indian Railways is on the verge of a financial crisis", which meant that low growth of Indian Railways `as usual' would drive it towards bankruptcy. Table 1 shows the declining performance of Indian Railways. Major cost incurred by Railways was in terms of staff maintenance (44%). But later, it gave a new direction to its strategic affairs in order to turn around the business; initiatives were started by Nitish Yadav and later continued by Lalu Prasad Yadav.

Background

The Indian Railways is one of the largest national transport networks in the world, carrying approximately 18 million passengers and 2 million tonnes of freight daily. It operates more than 11,000 trains per day, of which 7,000 are passenger trains. In the era of postliberalization, when the performance of many service sectors such as IT and Telecoms increased, Indian Railways was hard hit, and by 2001, it was on the verge of loss to the extent that it did not have money to pay its dividends to the government. In terms of operating ratio (which is one of the key performance indicators in the railway

industry), Railways concurred maximum loss in 2001, when it reached 98.3%. With various processes and strategies, it was brought down to 84.3% in 2007-08 (Figure 1).

Turnaround Initiatives Under the Leadership of Lalu Prasad Yadav

Lalu Prasad Yadav had a different leadership style. His way of execution of strategies was also different. Initiatives that directly benefited the passenger segment have been a mainstay of most of the railway ministers. As stated by most of the ex-members and the current members of the Railway Board, "Lalu Prasad is a non-interfering, yet an aware railway minister, who sets the goals and expects results. This has given him a position of strength to build organizational alignment to see through fundamental initiatives."

Some of the initiatives taken by him include proper utilization of assets; focus on customer service and appropriate use of human resources. This was accompanied by his astute business sense which was reflected in differential price, tatkal services and various kinds of policies which we would discuss in detail later. We first begin with the outsourcing strategy, and then, move on to other strategies.

Outsourcing and Public Private Partnership

Though the core activity of Railways is to move passengers and freight, before and even after independence, reliance was on maintaining indigenous technology because of two

reasons: (1) private sector was not willing to make requisite capital investment in the field, and (2) declining foreign exchange reserves forced the Railways to keep the vertical integration with itself, and hence, facilities like production of coaches and catering services were kept with the Railways itself. However, in 2001, Indian Railways was incurring loss of more than Rs. 100 cr. Moreover customer complaints against departmental catering units rose by 58% from 1999-2000 to 2000-2001. For example, service quality in terms of provision of bedding in premium class, maintenance of lavatories, etc., were not up to the standard. Indian Railways reviewed their catering and parcel service businesses and decided to lease it out. Not only this, those areas where catering business was not generating much revenue, Railways converted pantry cars into 2nd Class AC coaches (Table 2). Yadav said that " by leasing out catering and parcel services, we have reduced our catering and parcel losses of more than a thousand crores". Under the `Wagon Investment Scheme', Indain Railways encouraged private sector participation. In the budget speech of 2007-08, Yadav said "I am not in favor of blind privatization of the Railways nor is Public-Private Partnership (PPP) a compulsion or fashion for us". The other areas where Railways is exploring private participation includes modernization of metro and mini-metro stations, development of agro-retail outlet, construction of multi-modal logistic parks, etc.

Focus on Growth

Railway customers are of two types: Freight services availing and passenger services availing customers. Railways get 66% of their revenue from freight services.

Freight Services

Rate of growth in the transportation of freight was declining continuously. Average growth rate (net tonne kilometers) in the 1980s was approximately 5%, whereas in the 1990s, it shifted to approximately 2% growth rate. Also freight rates were high and the Indian domestic companies were becoming more and more cost conscious in the era of postliberalization as they were facing competition from multinationals. Thus, they shifted from railways to other modes of transport like roadways for freight services. As a result of which, Railways started losing business. In order to improve the situation, Railways

took many steps. Earlier, axle load (maximum weight of a train per pair of wheels allowable for a given section of track) permissible limit was 20.3 tonnes per wagon. Lalu Prasad Yadav proposed that this needed to be exceeded by 8 tonnes per wagon. In the three years from 2004, the incremental loading achieved was about 170 million tonnes, which exceeded the total incremental loading of the 1990s by 120%.

To reduce wagon turnaround time, Railways started giving incentives to carry out loading and unloading 24 hours a day. Earlier loading/unloading was allowed only during day time. For this purpose, connectivity to port was also increased so that goods can be easily exported and imported through ports. Earlier train examination was carried out whenever train completed its route and came back to its original station. This checking used to consume 16 hours. Railways did away with this system and carried out checking only after 15 days or after having traveled 7,500 km, whichever is earlier. As a result of these initiatives, turnaround time was reduced from seven days to five days. In 2005, freight operations information system was implemented in order to keep strict control over idle wagon capacity. More refrigerated parcel vans were introduced to transport perishable goods like milk, etc.

Railways adopted differential pricing policy for peak and non-peak seasons, busy and non-busy routes, and premium and non-premium services for both freight and passenger segments.

During monsoon, more than 100 goods train remain idle. Hence, in order to provoke demand in this season, Railways started giving 15% discount for freight goods worth Rs. 5 cr and 10% discount was allowed for revenue below Rs. 5 cr. Not only this loyalty discounts to loyal customers were introduced, but also freight's tariff schedule was rationalized and made more customer friendly. Tariff schedule for wagon used by customers was simplified. Items in the schedule were reduced from some 8,000 to less than 100. On the other hand, there was upward revision for freight rates on certain commodities like coal (8%), iron ore (17%), cement (4%), food grains (33%). Table 3 shows the rate per net tonne/km, which declined continuously in real terms from 63.12 paise per net tonne/km in 1998 to 49.08 (2004), but increasing to 51.35 in 2006. All these measures resulted in increasing the percentage of average annual growth rate in freight volume from 2.34 (2001) to 7.90 (2006) and freight revenue from - 2.65 (2001) to 12.89 (2006) and to 9.10 (2007) (for details, refer Figure 2).

The Passenger Segment

In the passenger segment, Railways carry 13 million passengers in 8,250 passenger trains daily. Railways adopted two pronged strategies to improve passenger revenue: Competitive pricing and enhancement of amenities. In order to arrest the market share, unlike other railway ministers, Yadav decided to maintain the average rate per passenger/km in nominal terms at around 24.50 paise. Along with this, differential pricing scheme was also introduced based on busy and non-busy routes, peak and non-peak seasons. More trains were made superfast. Tatkal scheme targeted at `last minute passenger' was extended from one to three to ultimately five days. Many normal trains

were converted into superfast trains. Railways was facing tough competition from low cost airlines like Air Deccan whose charges were equivalent to 2 tier AC charges. In response to this, Railways further slashed down fares for air-conditioned coaches. Not only this, many Garib Raths (fully air-conditioned trains) were also introduced. Due to increase in usage of mobile phones and laptops, AC coaches were provided with electric points for easy recharge. Many platforms were renovated in major way. Railways took full advantage of appropriate technology. Railway reservation system was computerized with online booking being made possible. Other measures by techno savvy Railways to enhance customer comfort includes mobile ticketing, web ticketing, kiosk-based ticketing etc. Most recently, Indian Railways have decided to name the trains on the basis of certain brands and they expect revenue of Rs. 800 cr. Some of the trains (summer specials) like Kurkure express are already doing well. Consequent to the initiatives mentioned above, growth in number of passengers has been 7.1% in 2004-05 over 2003-04 and 7.5% in 2005-06 over 2004-05.

In future, Railways also plans to install ATMs in trains.

Safety and Security of Railways

Indian Railways carry passenger volumes which is equivalent to combined population of 40 countries. Indian trains cover the round trip distance between earth and moon, four times a day. For operational efficiency, which is a key parameter of financial performance for railways, safety is a vital aspect. Figure 3 gives details of kinds of accident Railways incur. Keeping in view the accident details, Rs. 15,300 mn was generated by Railway Safety Fund for repair of bridges, tracks, and signaling systems. Railway is also in the final stages of testing anti-collision devices, implementation of which will further reduce chances of accidents. In view of series of bomb blasts, passenger trains were escorted by police protection force in sensitive areas. For security measures, besides increasing the number of trained dogs in the existing dog squads, in many sensitive divisions of the country, explosive detection devices, door frames and hand held metal detectors were installed to provide better security for trains and passengers. Also, equipments like CCTV and smart video cameras were installed at sensitive stations.

As a result of all these initiatives at the customer-end, during the last five-six years, significant growth has been reported in the passenger segment (Figure 4).

Human Resource Initiatives

Human resource is the major cost center for Railways, hence, utilizing them efficiently was of utmost importance (Figure 5). Traditional methods of improving efficiency calls for downsizing, but instead of downsizing, the preferred method was to stop recruitments. As a result, by 2006, reduction in cost was approximately 10% from the period of 1999.

Since fatigue is sometimes responsible for railway accidents, Railways took many initiatives in this direction by providing good working conditions to Railway crews (e.g., Driver Cabins and break vans were crew friendly). Apart from this, in association with the international union of Railways, International Railway Strategic Management Institute was established, whose main objective was to provide managerial training to railway staff as per the requirement. In order to increase employee involvement in decision making, a forum known as "Participation of Railway Employees in Management (PREM)" was established. Multi-skilling was also emphasized. As a result of all these initiatives, revenue per staff increased by 68% (2002-2006) as against 49% (1996-2001) (Table 4).

Leadership Style of Yadav

Non-Interference: Dealing with the Railway Board

Ex-members and current members of the board commented that "Lalu Prasad is a non-interfering, yet aware Minister of Railways (MR), who sets the goals and expects results. This has given him a position of strength to build organizational alignment to see through

fundamental initiatives." "It appears that the current members of the board function as a cohesive entity, due to the force of expectation on legitimate initiatives."

Direct Approach: Communication to General Managers

Through constant and reinforcing communication, Yadav built alignment for effective execution. Exhibit 1 presents the sample letter that was forwarded to general managers through which the railway minister clearly explains actionable statements in the areas of parcel, catering, and freight and passenger segments.

Caring Attitude: Staff and Unions

Yadav had capability to think out of box. When it comes to excess manpower, downsizing is the only policy adopted by giant corporates. But he was different in his approach. He said, "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." Not only this, when union demanded doubling the contribution to staff welfare fund (after Railways performance started improving) he offered them more than double. When he saw gang men walking on stone ballast without footwear, he ensured the supply of same.

Image Building: Media

Being an astute leader, Yadav was always sought by Media. He used media in most purposeful manner as and when required. Exhibit 2 gives two sample advertisements for the initiatives taken in freight and passenger segments.

External Environment and Its Impact

Changing in external environment had its moderating effect in terms of impacting the performance of Railways. Below are mentioned some of the variables which affected the performance of Indian Railways to a certain extent.

Economy Boom

As mentioned earlier, postliberalization economy was booming to the extent that in year 2000-01, GDP growth was 8.5%, just double of what it was previous year. As economy boomed, demand for various raw materials like coal (for electricity generation), cement (for construction), and steel (for industrial purposes) increased and also with more money circulating in hands of people, traveling and touring also increased.

Judgment by the Supreme Court

The Supreme Court in November 2005 passed the rule against overloading of trucks. These trucks use to carry 1.5-2 times more loads then it was permitted. As a result, in order to maintain revenue transport, companies dashed up their prices with the effect that road transport price was almost double the rail prices especially for cement and steel. As a result, much of the business was given to Railways.

What Do Critiques Say?

The Freight Segment

Increased axle load has generated revenues for Railways but simultaneously created problems as well. For example, zonal railways have complained about instances of wheel slipping and stalling, increase in number of wagons requiring repairs, increase in spring failure and brake beam defects.

While increase in freight volumes and tariff rationalization has led to increase in revenue, customer centrism seems to be still lacking. Concerns like demurrage free hours and load ability of wagon are consistently raised. Propensity to spend, reduced time factor and better customer centric model followed. Exhibit 1 gives a sample complaint letter.

The Customer Segment

Similarly, under the passenger segment, passengers are charged higher prices for traveling in superfast trains, but these trains are usually late as the normal trains have been converted to superfast trains by superficial manipulation of timings. E-ticketing facility was launched with the objective of comfortable and fast ticket booking by customers. But the sample complaint letter shows that web technology has deteriorated the comfort level of customers (Exhibit 3).

Competition from Other Sectors

Amongst the competitive factors, road transport in the freight sector is posing major threat to railways. With completion of golden quadrilateral project and Volvo setting up production plant in India (annual production capacity being 4,000 18 wheels lorries), competition will further intensify. It is also predicted that with this 70% of freight business will move to road transport because of speed and safety aspects. Gradually, with this by the year 2014, Indian Railways would be incurring loss of 6.5% per year. For the passenger segment, airline is a major threat though the fares fluctuate but overall they remain a threat in long run because of the comparable prices of AC I and II tier and low cost domestic airlines.

Indian Railways Versus Other Important Railways

Trains like Rajdhani Express (running at 140 kmph to slow moving freight trains at 75 kmph) are considered high speed trains in India. High Speed in international parlance refers to speed over 200 kmph.

Critics also claim that the freight rate charged by Indian Railways is among the highest in the world. "China Railways' cargo27 tariff is 30% lower than the rates charged by Indian Railways. In the US, it takes the equivalent of 24 paise to move 1 tonne of steel per 1 km. In India, it costs 79 paise."

Conclusion

Railways have no doubt generated higher revenues in the past seven years. Yadav has been rewarded by the media in terms of heaped appreciation. But, with the given challenges and critiques, to what extent the Railways has been able to turn around remains questionable, as also its sustainability.