Ur­gent Course Cor­rec­tion Im­per­a­tive for In­dian Rail­ways

NBM&CW - - CONTENTS - Raghu Dayal

IR’s freight and pas­sen­ger busi­ness over 2014-15 to 2018-19

Rail­ways’ freight and pas­sen­ger busi­nesses over the 5-year pe­riod, i.e., 2014-15 to 2018-19 (bud­geted) in­di­cate a flat growth. The num­ber of to­tal pas­sen­ger jour­neys would record a CAGR of 0.22%, pas­sen­ger kilo­me­tres 0.16%, and freight out­put in terms of net tonne kilo­me­tres 0.02%. Whereas, its gross rev­enue re­ceipts over the pe­riod show a CAGR of 4.55%, and its work­ing ex­penses a CAGR of 5.46%.

The broad fi­nan­cials rel­e­vant to IR re­vealed in In­dia’s Union Bud­get for fis­cal 2018-19 help as­sess its strate­gies and plans in the im­me­di­ate phase. A close look at IR’s bud­geted pas­sen­ger and freight traf­fic pro­file in­di­cates that IR would re­main con­tent with minis­cule in­cre­men­tal in­crease in its busi­nesses. The freight traf­fic bud­get en­vis­ages an in­crease of 4.8%, from 652 bil­lion freight tonne kilo­me­tre (NTKM) in 2017-18 to 683 bil­lion in 2018-19 and 3.8% rise in freight rev­enue, from ₹1,17,500 crore in 2017-18 to ₹1,21,950 crore in 2018-19. There is an in­crease bud­geted to the ex­tent of 1.86% in to­tal pas­sen­ger-km, from 1,135b in 2017-18 to 1,157b in 2018-19, and an in­crease of 3.7% in pas­sen­ger rev­enue, from ₹50,125 crore in 201718 to ₹52,000 crore in 2018-19.

In fis­cal 2017-18, IR’s freight lift­ing ag­gre­gated 1,159.57 mil­lion tonne or 5.4% lower than the bud­geted vol­ume of 1,165.00 m.t. The pas­sen­ger traf­fic too re­mained al­most stag­nant, the year end­ing with a to­tal of 8,287 mil­lion jour­neys vis-a-vis the bud­geted 8,260 mil­lion pas­sen­gers, and 8,220 mil­lion in the pre­vi­ous year 2016-17. A sim­i­lar trend is re­flected in the earn­ings: pas­sen­ger busi­ness fetched an amount of ₹48,643 crore in 2017-18 which, in fact, is 3% lower than the bud­geted amount of ₹50,125 crore.

Cap­i­tal ex­pen­di­ture ear­marked for IR

The Union bud­get al­lo­cated a record ₹1,48,000 crore for IR, of which ₹1,46,500 crore is cap­i­tal ex­pen­di­ture, in­clud­ing gross bud­getary sup­port (GBS) of ₹53,060 crore, up from ₹40,000 crore in 2017-18. With the bud­getary sup­port steadily stag­nat­ing, ex­tra-bud­getary re­sources (EBR) have been the main­stay of IR’s cap­i­tal ex­pen­di­ture. EBRs, which are largely loans mo­bilised through In­dian Rail­way Fi­nance Cor­po­ra­tion (IRFC) and from fi­nan­cial in­sti­tu­tions, be­sides multilateral agen­cies such as World Bank, Asian De­vel­op­ment Bank, JICA, in­creased from 47% of capex in 2016-17 to 56% in BE 2018-19. A large part of the cap­i­tal ex­pen­di­ture ear­marked for IR is for ca­pac­ity cre­ation – dou­ble/triple/ quadru­ple-track­ing and gauge con­ver­sion. IR tar­geted to com­mis­sion 4,000 km of elec­tri­fi­ca­tion dur­ing 2017-18. It plans to pro­cure 12,000 wag­ons, 5,160 coaches and ap­prox­i­mately 700 lo­co­mo­tives dur­ing 2018-19. IR’s most im­por­tant ca­pac­ity-en­hanc­ing project, the ded­i­cated freight cor­ri­dors (DFCs) needed to be fu­ri­ously fast­tracked, but the bud­geted al­lo­ca­tion of ₹10,490 crore for 2017-18 has been scaled down to a re­vised es­ti­mate of just ₹3,000 crore, and the 2018-19 al­lo­ca­tion made is for ₹6,277 crore. Ac­tual ex­pen­di­ture on the two on­go­ing DFCs in 2016-17 amounted to ₹6,253 crore.

Fo­cus on im­prov­ing qual­ity and safety

There is con­sid­er­able em­pha­sis laid on im­prov­ing qual­ity of rail pas­sen­ger travel, al­lo­ca­tion for pas­sen­ger ameni­ties hav­ing been more than dou­bled, from ₹2,471 crore in re­vised bud­get for 2017-18 to ₹5,158 crore for 2018-19. It is pro­posed to in­tro­duce mod­ern train-sets in­stead of tra­di­tional in­di­vid­ual coaches, re­de­velop rail­way sta­tions, equip­ping them with Wi-Fi, CCTV cam­eras, in­stal­la­tion of es­ca­la­tors at sta­tions with daily foot­falls of over 25,000.

A ‘Safety First’ pol­icy with al­lo­ca­tion of in­creased funds un­der the Rashtriya Rail San­rak­sha Kosh (Na­tional Rail Safety Fund) is the cor­ner­stone of rail­ways’ fo­cus on safety. The to­tal amount, in­clud­ing RRSK planned on safety-re­lated works for 2018-19 is ₹73,065 crore. The re­vised 201718 bud­get for this ac­tiv­ity is ₹68,725 crore. The RRSK will com­prise ₹5,000 crore from GBS, an­other ₹5,000 crore from rail­ways’ rev­enues, and ₹10,000 crore as IR’s share from Cen­tral Road Fund (levied by gov­ern­ment on sale of POL). Main­te­nance of track in­fra­struc­ture is be­ing given spe­cial at­ten­tion. Over 3,600 km of track re­newal was tar­geted dur­ing 2017-18. IR plans to step up

the use of tech­nol­ogy such as “fog safe” and train pro­tec­tion and warn­ing sys­tem. Pro­vi­sion has also been made for elim­i­nat­ing 4,267 un­manned level cross­ings on broad gauge net­work in the next two years. A ma­jor pro­gramme is claimed to have been ini­ti­ated to strengthen in­fra­struc­ture at the goods sheds and fast track com­mis­sion­ing of pri­vate sid­ings.

Crush­ing load of ris­ing debt

Amidst a flurry of sev­eral schemes and plans that IR has out­lined, in­volv­ing huge in­vest­ment out­lays, there is a pal­pa­ble un­ease in some cir­cles who, al­though con­vinced of the need to sub­stan­tially strengthen and re­struc­ture the net­work and its ser­vices, ap­pre­hend that the al­ready per­ilous state of its fi­nances will be com­pounded with the sharply ris­ing debt bur­den. They cite the ex­am­ple of na­tional flag car­rier Air In­dia, which, laden with heavy debt bur­den, had to be put on the auc­tion block. IR’s steadily di­min­ish­ing share of freight and pas­sen­ger busi­nesses will make it in­creas­ingly dif­fi­cult for it to re­gain its place in the coun­try’s trans­port mar­ket.

Freight de­clin­ing busi­ness lev­els

There has been a steady de­cline in the an­nu­alised growth of IR’s freight busi­ness over the last three five-year plans - Plan X (200207), Plan XI (2007-12), and Plan XII (2012-17), dur­ing which an­nu­alised growth in freight up­lift was 8.12%, 5,89%, and 2.68%, re­spec­tively, and like­wise 7.62%, 6.78%, and (-) 1.46% in NTKM. Com­pe­ti­tion that the rail freight sec­tor faces is for­mi­da­ble. A record 9,000 km length of Na­tional High­ways along In­dia’s ar­te­rial routes is be­ing added in the fis­cal ’18 it­self. The 96,000 km high­ways length that car­ries 40% of coun­try’s road traf­fic is be­ing ex­panded to 200,000 km with ca­pac­ity to carry 80% of goods traf­fic. Trucks will clock much higher mo­bil­ity, fur­ther fa­cil­i­tated by the GST regime.

Need to re­ori­ent and re-di­men­sion freight trans­porta­tion strat­egy

Long dis­tance rail haulage of coal will keep di­min­ish­ing, com­pelling IR to look for life be­yond coal, cur­rently ac­count­ing for half of its to­tal freight busi­ness. With its vi­sion key-holed on bulk com­modi­ties, IR has, for ex­am­ple, less than 2% share in FMCG seg­ment, and 1% in auto and tex­tiles. Rail­ways across the globe are grap­pling with macroe­co­nomic changes – sta­ple flows, for ex­am­ple, of coal, steel, petro­chem­i­cals, etc., can­not be re­lied upon. The pace of in­no­va­tion ap­par­ent in other modes, e.g., in the road haulage in Europe – wide­spread adop­tion of truck pla­toon­ing and the longer and heav­ier lor­ries - has been mak­ing in­roads into rail­ways’ mar­ket share. High ca­pac­ity trucks carry goods door-todoor, time-def­i­nite, con­ve­nient and economical.

For wean­ing away high-value, non-bulk sec­tor from roads, it needs to cre­ate crit­i­cal mass of piece­meal wag­ons/con­tain­ers, in part­ner­ship with other play­ers, for time-tabled mul­ti­modal lo­gis­tics ser­vices end-to-end. The con­tainer rep­re­sents a strate­gic in­no­va­tion for piece­meal ship­ments - rail­ways catch­ing up with con­tainer-ori­ented tools, e.g., ad­vanced track­ing, mon­i­tor­ing and e-way­bill sys­tems, thereby, ne­ces­si­tat­ing au­to­ma­tion, digi­ti­sa­tion and in­ter-modal­ity. It may well op­ti­mise dou­ble stack con­tainer train oper­a­tion con­ducive to economies of scale. IR man­age­ment has of late ini­ti­ated sev­eral mea­sures to en­list in­sti­tu­tional cus­tomers’ co­op­er­a­tion for en­hanc­ing rail freight haulage. There is need to build mu­tual trust, im­ple­ment poli­cies and ini­tia­tives - sin­cerely and speed­ily.

Crush­ing weight of pas­sen­ger cross­sub­sidi­s­a­tion

Rail­ways has for long been travers­ing a facile, though per­ilous, route - of­ten hik­ing freight charges and up­per class, mostly AC, pas­sen­ger fares. By steady cross-sub­si­dis­ing pas­sen­ger busi­ness, the IR has out-priced it­self in the freight sec­tor, thus, tend­ing to kill the goose that lays the golden egg. While haul­ing a pas­sen­ger train for one km cost of ₹1,223.04 in 2016-17, it re­sulted in a net loss of ₹489.01. On the con­trary, haul­ing a freight train per km cost ₹1,661.82, it brought in net earn­ings of ₹1,187.28.

In­creased com­pe­ti­tion for pas­sen­ger traf­fic

Now, IR’s pas­sen­ger busi­ness too is un­der siege. There is this loom­ing shadow of com­pe­ti­tion from bud­get air­lines and from new style, high­ca­pac­ity buses, also per­sonal cars cov­er­ing in­ter-city dis­tances – fast and fre­quent. IR has ex­pe­ri­enced a de­cline in an­nu­alised growth in the num­ber of pas­sen­ger foot­falls since the coun­try’s Plan XII (2012-17) dur­ing which the num­ber of rail trav­ellers fell from 8,420.70 m in 2012-13 to 8,116.10 m in 2016-17, reg­is­ter­ing an an­nu­alised de­cline of 0.26%, al­though there was a 2.18% an­nu­alised growth in pas­sen­ger km from 1,098.10b in 2012-13 to 1,149.84b in 201617. The Eco­nomic Sur­vey ex­plained how rail­way pas­sen­ger busi­ness de­clined by an av­er­age 0.26% ev­ery year in the five years end­ing 2016-17, whereas the num­ber of do­mes­tic air pas­sen­gers in­creased 10% an­nu­ally.

In the last three years, the do­mes­tic air pas­sen­ger traf­fic grew at 18% per an­num and the air­lines placed or­ders for more than 900 air­crafts. Do­mes­tic air­lines in­creased their avail­able seat kilo­me­tres (ASK) by 8% each year be­tween FY 2012-17 to 116.94 m. Re­gional con­nec­tiv­ity scheme, UDAN (Ude Desh ka Aam Na­grik) aim­ing to con­nect 56 un-served air­ports and 31 un-served he­li­pads across the coun­try, ex­pand­ing air­port ca­pac­ity more than five times to han­dle a bil­lion trips a year, is poised to sur­pass the to­tal num­ber of up­per class rail trav­ellers sooner than 2020.

Low cost air­lines have been in­creas­ingly en­tic­ing pas­sen­gers, most of whom, as a rule, con­sti­tute IR’s “up­per class” busi­ness seg­ment, that is, AC 2-tier Sleeper and AC III rail trav­ellers. Nar­row­ing fare gap be­tween air­lines and rail­ways has been a cat­a­lyst for the switch from trains to air­lines. For ex­am­ple, the ticket price of IndiGo (In­dia’s largest air­line by mar­ket share) dropped 1% an­nu­ally dur­ing this 5-year pe­riod. On the other hand, ac­cord­ing to Credit Suisse Re­search, AC rail travel fares in­creased over 60% dur­ing FY2011-17.

Need for IR to ra­tio­nalise its fare/freight struc­ture

With low cost air car­ri­ers loom­ing large, it must re­frain from rais­ing AC train fares. As it is, IR’s ‘up­per class’ travel con­sti­tutes a minis­cule seg­ment in its to­tal pas­sen­ger busi­ness: only 1.85% of all its pas­sen­ger jour­neys (in 201617), and 9.60% of to­tal pkm, but con­trib­utes as much as 32.33% of the to­tal pas­sen­ger earn­ings. The sec­ond-class or­di­nary train jour­neys in both sub­ur­ban and non-sub­ur­ban ser­vices are the ma­jor cul­prits, con­sti­tut­ing 78.6% of IR’s to­tal pas­sen­ger traf­fic (in 2016-17) but yield­ing a pal­try 16.7% of the to­tal pas­sen­ger earn­ings. Non­sub­ur­ban com­muters avail­ing of sea­son ticket con­ces­sions for up to 150 km travel, con­sti­tute 22.8% of to­tal non-sub­ur­ban pas­sen­ger traf­fic, but yield only 1.2% of earn­ings!

Pat­terns of pas­sen­ger de­mand

IR op­er­ates a daily av­er­age of over 13,300 pas­sen­ger trains – in­clud­ing about 3,500 long dis­tance in­ter-city mail and ex­press ser­vices, 4,700 short dis­tance stop­ping “re­gional” trains, in­clud­ing those serv­ing towns by fer­ry­ing com­muters to/from ex­pand­ing cities and met­ros, be­sides around 5,100 sub-ur­ban ‘lo­cals’, mostly in Mum­bai and Kolkata. The “re­gional” ser­vices con­trib­ute the max­i­mum loss in pas­sen­ger busi­ness and con­sume a sub­stan­tial por­tion of scarce move­ment ca­pac­ity, in­clud­ing on high den­sity routes. An au­ton­o­mous cor­po­rate en­tity, say, like CON­COR, un­der the IR um­brella, will be well placed to deal in this seg­ment of rail busi­ness with a clear fo­cus, co­or­di­nate bet­ter with re­spec­tive state gov­ern­ment au­thor­i­ties and pro­vide for multi-modal trans­port, in­volv­ing road

ser­vices, es­pe­cially where rail ser­vices make no sense, eco­nom­i­cally and ra­tio­nally. China stoutly dis­cour­aged short dis­tance rail travel.

To ex­pand and ac­cel­er­ate pas­sen­ger ser­vices

It is ax­iomatic that IR needs to aim at high ca­pac­ity speedy in­ter-city pas­sen­ger trains for pos­si­ble per­cep­ti­ble dif­fer­ence also in pre-board fa­cil­i­ties – has­sle-free book­ing and reser­va­tion on de­mand, clean sta­tion plat­forms, also clean coaches and toi­lets, stan­dard­ised pack­aged food, and trains run­ning on time. Some trains can run end-to-end with min­i­mum intermediate halts. Lately, IR has talked of Te­jas, Hum­sa­far, An­ty­o­daya, Uday, et al. as its new pan­theon of pas­sen­ger ser­vices. Some of them in the species such as Uday (Utkr­isht Dou­ble Decker Air con­di­tioned Ya­tri ex­press) may be pur­sued on pri­or­ity for pop­u­lar and dense routes to over­come ca­pac­ity crunch. As a per­cep­ti­ble con­fi­dence­build­ing mea­sure within the or­gan­i­sa­tion and among peo­ple at large, IR may well take a bold ini­tia­tive to run some ad­di­tional through trains, as­sur­ing re­served ac­com­mo­da­tion on de­mand, to be­gin with, on one or two un­der-served pop­u­lar routes such as Delhi-Darb­hanga. It will mean good eco­nom­ics for IR and good pol­i­tics for the gov­ern­ment.

IR needs a quick course-cor­rec­tion to re­dis­cover its po­ten­tial

In­dia’s most im­por­tant en­ter­prise, IR for long is stuck at 1% of na­tional GDP; its po­ten­tial and econ­omy’s ex­pec­ta­tions re­quire it to aim at 2% of GDP, a tough call in a grow­ing econ­omy. True, there is no magic bul­let. IR has been di­ag­nosed and scanned ex­ten­sively as no other or­gan­i­sa­tion has been, and cures have been pre­scribed. It needs to heed how some of the most suc­cess­ful com­pa­nies faded into irrelevance be­cause they re­mained com­pla­cent, fail­ing to adapt their busi­nesses and struc­tures to brew­ing mar­ket dis­rup­tions, trends and tech­nolo­gies.

Au­ton­o­mous cor­po­rate en­tity - strate­gic clar­ity and or­ga­ni­za­tional fo­cus

A rigid bu­reau­cratic struc­ture is an­ti­thet­i­cal to busi­ness ethos. Rail­ways must first shed its widely (and mis­tak­enly) per­ceived role of a de­part­men­tal un­der­tak­ing with pub­lic ser­vice obli­ga­tion and, in­stead, per­form as a cor­po­rate en­tity with in­alien­able re­spon­si­bil­ity to carry nation’s freight and pas­sen­gers ad­e­quately, ef­fi­ciently and eco­nom­i­cally. There are min­istries and pro­grammes to look after so­cial obli­ga­tions, for which they have their own bud­gets.

Cut­ting costs, stream­lin­ing the sys­tem

The big­ger the or­gan­i­sa­tion grows, the more it tends to grow. Even a re­lent­less pur­suit to im­prove the bal­ance sheet top-line must not let the guard be low­ered to cut costs, ef­fect economies and elim­i­nate flab and waste. IR in­vests in new tech­nolo­gies but per­sists with old staffing pat­terns. Sev­eral ser­vices and ac­tiv­i­ties are out­sourced, but per­ma­nent cadres show lit­tle shrink­ing. Multi-skilling re­mains just a slo­gan. Soon salaries and pen­sions will swal­low three­fourths of its work­ing ex­penses bud­get.

Spi­ralling wage bills raise alarm

Amidst its lack­lus­tre busi­ness turnover and rev­enue stream, its ex­pen­di­ture keeps in­creas­ing. The wage bill keeps bal­loon­ing: IR’s wage bill in just ten years dou­bled in re­la­tion to its rev­enue. While its wage bill jumped at 16.11% CAGR in these ten years, its rev­enue in­creased at a CAGR of 8.48%. In­stead of the num­ber of em­ploy­ees be­ing dras­ti­cally pruned, es­pe­cially in the con­text of sub­stan­tial in­duc­tion of newer tech­nolo­gies at high cost and out­sourc­ing of myr­iad ac­tiv­i­ties and ser­vices, IR has been splash­ing its “big­gest re­cruit­ment ex­er­cise” to hire ad­di­tional 1,10,000 em­ploy­ees, a large num­ber of them in cat­e­gory ‘D’.

Re­struc­ture top man­age­ment regime

IR’s man­age­ment struc­ture has, in­ter alia, been com­part­men­talised, lead­ing to de­part­men­tal em­pire-build­ing, ren­der­ing it per­ilously obese and ex­tor­tion­ist. Sev­eral de­bil­i­tat­ing anom­alies and dis­tor­tions have sneaked into the sys­tem – much to the detri­ment of its ef­fi­ciency and pro­duc­tiv­ity. IR has made a wel­come, though yet a half­hearted be­gin­ning, to­wards func­tional in­te­gra­tion by des­ig­nat­ing three Mem­bers of the Board – for Trac­tion, Rolling Stock and In­fra­struc­ture. Func­tional re­quire­ment must per­force be an over­rid­ing con­sid­er­a­tion in de­ter­min­ing the apex man­age­ment pyra­mid con­sis­tent with the rail­ways’ pri­mary func­tion be­ing pro­duc­tion, mar­ket­ing and oper­a­tion of trans­port ser­vices. With­out in any way laps­ing into a de­part­men­tal de­bate, how has the gov­ern­ment been ma­noeu­vred to let se­nior most po­si­tions in di­vi­sions and zones be manned by man­agers from ‘non-op­er­a­tional’ dis­ci­plines such as Stores and Fi­nance, who for best part of their ca­reer have no ex­po­sure to real-life rail­way ex­pe­ri­ence, nor to its cus­tomers?

De­cen­tralised man­age­ment of large work cen­tres

A small be­gin­ning has been made for post­ing ju­nior mid­dle level man­agers for se­nior level over­sight at some ma­jor sta­tions. All large sta­tion com­plexes, ma­jor freight de­pots and cen­tres, main­te­nance work­shops may be en­dowed with lo­cal Area Man­agers se­lected by a spe­cial body, if not Union Pub­lic Ser­vice Com­mis­sion, from the gen­eral ad­min­is­tra­tive pool with del­e­gated au­thor­ity over all func­tionar­ies and dis­ci­plines in their ju­ris­dic­tion. In due course, these man­agers may well con­sti­tute the bul­wark of ad­min­is­tra­tive re­source for the or­gan­i­sa­tion, from amongst whom to choose for fur­ther ex­po­sure and train­ing to fill higher ad­min­is­tra­tive po­si­tions.

Not even a big com­pany can any longer get from its own re­search lab­o­ra­to­ries all, or even most, of the tech­nol­ogy it needs. Again, like in China, IR may fa­cil­i­tate and en­cour­age in­duc­tion of sta­teof-the-art tech­nolo­gies for myr­iad rail equip­ments, de­vel­op­ment and pro­duc­tion of which be left to pub­lic/pri­vate sec­tor en­ter­prises. So also for con­struc­tion of new rail in­fra­struc­ture. IR would do well to move out of in-house pro­duc­tion of equip­ment as it has done for man­u­fac­ture of diesel and elec­tric lo­co­mo­tives at green­field plants to be man­aged by Gen­eral Elec­tric and Al­stom, re­spec­tively.

A key chal­lenge – and op­por­tu­nity – for busi­ness lead­ers to­day is to cre­ate a sense of ur­gency in their or­gan­i­sa­tions, by think­ing through the con­se­quences of high im­pact com­pet­i­tive and en­vi­ron­men­tal sce­nar­ios. A fine body of men, much like those in the coun­try’s armed forces, the spirit and sym­bol of an in­clu­sive In­dia, known for their dili­gence and de­vo­tion, rail­way­men only need lead­er­ship to seize the fu­ture to­gether. If duly nur­tured and wisely led, IR will bounce back, like China Rail has done so splen­didly.

Raghu Dayal, for­mer Chair­man & Man­ag­ing Di­rec­tor of CON­COR and Se­nior Fel­low, Asian In­sƟ­tute of Trans­port De­vel­op­ment, delves into what ails the In­dian Rail­ways and sug­gests ways of bring­ing it on track.

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