MISSION IMPOSSIBLE?
Suresh Prabhu is on a mission to make the Indian Railways fast, efficient and profitable. But he faces extraordinary odds in his quest
Every week, without fail, Railways Minister Suresh Prabhu takes stock of the two dedicated freight corridors ( DFCS) that are being constructed – one running from Delhi to Mumbai and the other connecting Ludhiana to Dankuni in West Bengal. He pores over the reports giving details of different segments of the two stretches. And he has also started getting drone footage of various stretches, which will be sent to him quarterly.
Work on the two corridors, which began under the UPA government in 2008, had been slow. Things began to change when Prabhu became minister in November 2014 after the new NDA government took charge. Today, 95 per cent of the land is acquired, and projects worth `48,000 crore allocated. The first stretch of the Eastern DFC connecting Khurja (near Aligarh) to Bhopur (near Kanpur) is expected to be commissioned in December 2017. And both the DFCS are likely be commissioned in full by end-2019.
Prabhu is clear that nothing should hold up work on these projects. After all, the DFCS are crucial to his plan to raise revenues and regain lost freight market share from roads. There are hiccups – 1,042 court cases and 3,391 arbitration cases are being fought between those who lost land for the projects and the DFCCIL. But Prabhu is undeterred – he wants to add three more DFCS connecting Delhi-Chennai (northsouth), Kharagpur-Mumbai (east-west) and Kharagpur- Vijayawada on the east coast. The new DFCS will optimise the existing tracks and will opt for greenfield projects selectively.
However, DFCs are not the only thing occupying the minister’s mind currently. Prabhu is also in the process of restructuring the Railway Board ( See The Restructuring of Railway Board) to change the way decisions are taken in the Indian Railways, improve passenger amenities by upgrading the quality of coaches, adding WI-FI, running special trains like super luxury Tejas and modern Deen Dayalu, etc., while also reducing costs, speeding up project execution, and dreaming up new ways of raising finances.
Fixing the Indian Railways, the fifth biggest rail network in the world with 1.3 million employees, won’t be easy. It connects the entire country through 68,525 km of route track (in 2014), 12,961 passenger trains, and 8,637 freight trains. It also runs 125 hospitals, 586 polyclinics, 102 schools and sundry other initiatives.
Impressive. But it is also archaic with poor facilities and on-time record. It spent 92.5 paisa last year to earn every rupee of revenue, leaving practically nothing to invest in new facilities or improve current ones. Then there are unions to deal with, who dislike all change, small and big. And Prabhu plans to spend `8.56 lakh crore to fix all problems by 2019, assuming he remains the Railways Minister.
It is a Herculean task. What works for the Railways is that it can still count on huge passenger traffic where both road and airlines are unviable for multiple reasons. It also owns thousands of acres of land. Both factors can be leveraged to raise funds as well as recurring revenues. But to understand whether he can make a difference or not, one
needs to look at both the details of the problems he needs to solve, as well as the plan he has worked out.
The Nitty-Gritty
Different Union governments and railway ministers have commissioned multiple studies on what ails the Railways and how to turn it around. Over the past 10 years, at least 12 committees have presented their reports on the sector, the latest being the Bibek Debroy Committee report, which was commissioned in 2014 (two months before Prabhu took charge) and was presented in June 2015. Most reports agree substantially on the basic problems, though they differ in their approaches to solutions.
The first problem is that all governments worry about the Railways becoming a big financial burden on the Union Budget, and want to make it a largely self-sufficient organisation run on the lines of an efficient corporation. But they also want Railways to serve as a transport system for the poor. Result: much of the passenger traffic is cross-subsidised heavily, and some decisions – like new trains and routes – are often decided on non-commercial reasons. Successive railway ministers, for example, have refused to raise passenger fares. Dinesh Trivedi from Trinamool Congress, who was the minister in 2012 in the coalition UPA II government, had to resign because he raised passenger fares without checking with his party leader Mamata Banerjee. As a result, passenger fares, especially at the lower end have remained static for more than a decade.
To keep its finances from going underwater, successive ministers have also raised freight charges, making freight uncompetitive vis-à-vis roads. This strategy worked reasonably well in 2004-2009 when Lalu Prasad was the railway minister. The global and Indian economy were booming and customers did not worry too much about freight costs. But as the economy slowed, Railways’ freight charges became increasingly uncompetitive, though ministers like Mamata Banerjee and Trivedi – who came after Lalu – kept raising them and refrained from touching passenger fares. “Our passenger fare is cheapest in the world and freight is the costliest. This is increasing the inefficiencies, distortion, and the performance of Railways,” says Railway Board Chairman A.K. Mittal. In the last Budget, Prabhu tabled freight earnings of `1,11,853 crore out of the gross traffic receipts of `1,67,834 crore. The rest were from passenger fares and advertisement revenues. That ratio should ideally be 1:1.
The other two reasons for losing freight market share are inefficiency of railway freight and continuous neglect of infrastructure. The days of liberalisation saw subsequent governments increasing investments only in roads.
The second challenge: Indian Railways has bloated into a mammoth, centralised organisation with hierarchical decision-making and a culture of operating in silos. As a result, even simple decisions take years to resolve. Debroy talks about one decision on hot cases to keep food warm for passengers, which was kept pending for 25 years. “The member (electrical) had one view, while the member (traffic) had another,” he says.
The third problem lies with finances and accounting. Indian Railways spends heavily on revenue expenditure – there is little left for capital expenditure. As a result, that
money comes mostly from the Union Budget. But for real change, IR needs to generate enough funds on its own for capital expenditure and also find new, non-government sources of funding. But that can only happen if Railways is run as an efficient corporation with a healthy balance sheet that can be leveraged to raise debt. Currently, it doesn’t even maintain accounts on commercial lines. So, when a new train is introduced, it cannot tell whether the line is profitable or lossmaking. No return on expenditure is calculated on any expansion or any new project currently, points out the Debroy Committee report.
The fourth big problem is general inefficiencies that have been built in over the years. On almost all parameters, Railways lags behind. Its projects are both commissioned late and end up with cost and time overruns in execution. In the previous fiscal, it missed most of its targets, including of electrification, track renewals, bridge works, and doubling of tracks. In fact, out of the capital outlay of `1,00,010.62 crore, it could spend only `82,192.11 crore. In 2014/15, projects worth `6.5 lakh crore were stuck, including works related to doubling, new lines, gauge conversion, traffic facilities, and electrification. Today Railways faces a burden of `4,83,511 crore for the execution of 458 unfinished projects.
More worrying, operating ratios (what Railways spends to earn each rupee) are likely to get worse as costs pile up, including money for the 7th Pay Commission recommendations – nearly `28,000 crore this year to retirees and serving employees. Prabhu’s request for additional budgetary support of `32,000 crore from the finance ministry was rejected. The Railways is expected to save `5,000 crore in fuel costs (diesel, thanks to global slowdown and electricity because of innovations), but Prabhu needs to do more to reach the
“The assured offtake (of locomotives) gives us comfort of designing the whole project” BHARAT SALHOTRA, President and CEO, Alstom Transport ( now Alstom India)
targeted operating ratio of 92 this year.
“If Railways has to perform like a corporate house, rationalisation needs to come,” says Vijay Kumar Dutt, former additional member of the Railway Board. But Sudhir Kumar, who was OSD to Lalu Prasad when the latter was Railway minister, believes it is impossible to implement because no minister wants to start increasing fares rapidly. One reason for that, says a person working with Prabhu closely, is that over the years passenger amenities have deteriorated, which makes passengers disinclined to pay extra. Prabhu is working to rapidly improve passenger amenities so that charges can slowly be increased.
Stitching the Plan
Prabhu has started on the recovery process by implementing a recommendation of the Debroy Committee – commercial auditing. An audit has started in Ajmer division, which will cover the country in the next two years. Prabhu says that he has asked his PSU, Centre for Railway Information Systems ( CRIS), to do an analysis of potential earning and actual earning of every train. “This exercise will give us enough data to understand which train makes how much money, and what more alterations can be made to make more money and expand operations,” he says.
Next up, Prabhu is unlocking stranded projects. He has appointed seven mission directors to ensure smooth and efficient execution of the projects, who report directly to him and to Mittal. Along with this, he has started very few new trains in the past two years. In his two budgets, Prabhu has taken the outlay to `1.21 lakh crore. He has come up with a five-year plan, and is committed to take the investments in Railways to `8.56 lakh crore by 2019. Since this is beyond the budgetary support he can get from the finance ministry, Prabhu is looking at other ways of financing, including SPVS with states and PSUS for projects that are specific to them, and raising money via debt – LIC has committed to a loan of `1.5 lakh crore.
He is also trying to rope in private investments, such as for the redevelopment of 412 stations. The first station – Habibganj in Madhya Pradesh – is already undergoing redevelopment; next in line are Bijwasan and Anand Vihar in Delhi, and Chandigarh. “Private players are negotiating that the age of lease must be extended from 55 to 99 years; Railways is working out the modalities,” says Shashanka Shekhar Panda, CEO of Blue Earth Enterprise, a public policy strategy consulting firm. Prabhu told BT he is reworking the entire plan to make it more lucrative for investors.
Prabhu is moving on other fronts as well. To cut the
“Today capital is no issue for us; we need to make our projects bankable and make them earn good IRRs” A. K. MITTAL, Chairman, Railway Board
inefficiency in track electrification, he roped in Power Minister Piyush Goyal. Last fiscal, Railways met its target of 1,600 km of electrification. Goyal is bringing in the expertise of power ministry’s PSUS EESL and Power Grid Corp to execute electrification of 35,000 km in the next seven years. Apart from speeding up execution, this will also cut diesel consumption. Last year, Railways consumed diesel worth `16,000 crore. Railways is also complementing Goyal’s endeavour of pushing renewable energy by adding 1,000 MW by 2020. This includes turning several stations completely on solar. “We are working on the modalities,” says Goyal. “The nation would save a lot once this is executed.”
Restructuring the Organisation
Prabhu wants to create a holding company for Indian Railways, and bring all its PSUS as subsidiaries. This holding company can take financial leverage and access bond or debt markets, and may also help in improving execution. The flip side: faulty execution of projects could land Railways in a debt trap. “You have Air India run as a ‘corporate’ entity, and its finances are a complete mess,” says a former Railway Minister on condition of anonymity. “You have to delink politics from the economy of Railways to make it run like a business house.”
Prabhu also took Cabinet approval for his ambitious plan to form JVS with states. Time for Reforms But critics say it is not an original idea. “The MOU with states is only repackaging, with some changes, of earlier participative models and practice to provide connectivity to ports, miners and industrial hubs, besides building new railway overbridges and underbridges and for new manufacturing facilities,” says former Railway Minister Pawan Kumar Bansal.
Prabhu’s plan, though, is more integrated. He wants these JVS to also take up projects of station redevelopment, construction of new lines, formulation of new suburban railway networks, etc. The JVS will be allowed to form project-specific SPVS with equity holding from other stakeholders such as banks, ports, PSUS, mining companies and others. “These JVS not only give you managerial support from state governments, they also increase the efficiency and ensure early completion of projects,” says an official from the Railway ministry.
But a BJP chief minister questions this. “Most state governments don’t have enough funds to finance their own schemes; how do you expect projects of Railways to get fund from state budgets?”
Road Vs Rail
It’s a battle that successive Railway ministers have lost. The contribution of railway transport has shrunk to 0.8 per cent of GDP; for roads, it is 5 per cent. What worries
` 8.56 lakh crore The amount Prabhu wants to spend to fix all problems by 2019 and bring Indian Railways back on track
many is that Railways’ freight output is stagnant at 660 billion tonne km. And there is increasing competition for passengers from low-cost airlines for traffic in AC-1 and AC-2 category. The draft civil aviation policy recommends easing air connectivity of smaller cities, a Railways stronghold.
One of the solutions on offer is a regulator to rationalise tariffs. In January, Prabhu floated a consultation paper to set up a regulator to determine tariff (passenger and freight), to ensure fair play for private investors, and to maintain efficiency and performance standards. The Cabinet note to formulate this is ready, and might come up as an executive order, which would later be followed by the legislature. Currently, Parliament has the authority to fix tariff and fares, and it would require approval from both Houses to delegate the powers to a regulator.
There are critics to introducing a regulator such as Bansal, Kumar and Lalu Prasad. “The regulator will work on cost-plus model. This will not allow Railways to reap the benefits of a free market, or to work like a corporate entity,” argues another former Railways minister. Prabhu sees this as a reform that would give stakeholders, including private investors, a level playing field.
Prabhu is also pushing his men to look for ways to increase the freight basket from 10 commodities to over 40. Initially, they looked for an answer in TransLoc. Starting with a paid-up capital of `500 crore, this new enterprise was to have 10 existing goods sheds and develop 30 small multimodal logistic parks. The ministry was also to develop its air cargo infrastructure to integrate the movement of air cargo between inland container depots ( ICDS) and the gateway airports. This could have been the first serious move by Indian Railways to move away from the traditional 10 commodities, like iron ore, aluminium, coal, and grains, which bring in 90 per cent of its freight earnings. But the Prime Minister’s Office ( PMO) did not want a new PSU to be created. In June, Prabhu initiated a JV with Delhi Mumbai Industrial Corridor – an SPV under Nirmala Sitharaman’s DIPP. “This will speed up things, as DMIC already has land, and are anyway developing their projects adjacent to DFCS,” says a senior official from the PMO.
This new logistics JV, along with Prabhu’s pet project of setting up an auto hub in Walajabad near Chennai, could help Railways reclaim lost market share. Last fiscal, Railways reported earnings of roughly `100 crore by moving 4 per cent of India’s automobile deliveries. Prabhu wants to take this to over 20 per cent by 2026. One rake can take 300 cars, in comparison to 20 cars in a container truck. On March 1, the first phase of the Walajabad facility was inaugurated, which can park 5,000 cars. The first train moved in July, and covers Delhi to Chennai in 72 hours against 14 days earlier. The adjoining areas such as Oragadam, Sriperumbudur and Singaperumal Kovil have capacities of Hyundai, Nissan, Ford, Daimler, etc., and can manufacture a million cars annually.
But while it is cheaper for companies to move freight on trains, they prefer roads. “I am ready to move my products on Railways, but Prabhu needs to convince me his trains will not get late, and I will be able to track where my goods are,” says an official at a top automobile manufacturer. The Delhi-Chennai freight train, in fact, is the first to run on time. If this continues, the Walajabad hub can easily save 20-25 per cent of logistics cost of original equipment makers ( OEMS) on movement of their products. But if it doesn’t, Prabhu’s calculations will remain only on paper.
Prabhu is also busy improving last-mile connectivity and building infrastructure to increase traffic from ports and bigger industrial projects. Last fiscal, Railways commissioned connectivity with Tuna port, and work is on to reach Jaigarh, Dighi, Rewas and Paradip.
` 6.5 lakh crore worth of projects were stuck in 2014/15, including works related to doubling, new lines, etc.