Besides giving the basic information on the organizational, operational and financial performance of the Railways, the document incorporates an analysis of the performance, highlighting the achievements and shortcomings. A strengths, weaknesses, opportunities and threats (SWOT) analysis has been drawn upon conceptually, leading to a useful comparison between Railways globally, allowing benchmarks to be identified against which the Indian Railways' performance can be judged.

Intention has been to introspect and analyze. The infirmities that have shown up as a result of the analysis have been outlined in this document.Our biggest concern today is the financial health of the Railways and the need to generate resources for development and growth of capacity in an inclusive manner . Strategies for upgradation and growth of railway infrastructure as well as improvement of service to the customer, especially for the vast mass of common citizens of our nation whose prime mode of transport is the railways, will be formulated based on the findings of this Paper .

In recent times, financial turnaround of the Railways has been a topic of discussion and debate. An attempt has been made in this Paper to take a dispassionate look at the issue.

INTRODUCTION ON INDIAN RAILWAYS

Indian Railways is the state-owned railway company of India, which owns and operates most of the country's rail transport. It is overseen by the Ministry of Railways of the Government of India. However, rampant corruption has spread inside the organization which the Indian Railway department has acknowledged.

Indian Railways has the largest rail network in Asia and the world's second largest under one management, transporting 20 million passengers and more than 2 million tonnes of freight daily. It is one of the world's largest commercial or utility employers, with more than 1.6 million employees. The railways traverse the length and breadth of the country, covering 6,909 stations over a total route length of more than 63,327 kilometres (39,350 mi). As to rolling stock, IR owns over 200,000 (freight) wagons, 50,000 coaches and 8,000 locomotives.

TypeDepartmental Undertaking of The Ministry

of Railways, Government of India

Industry Rail transport

Founded 16 April 1853[1]

Headquarters New Delhi, Delhi, India

Area served India

Key people

Mamata Banerjee

(Ministry of Railways)

E. Ahamed & K.H. Muniyappa (Ministers of

State)

Vivek Sahai

(Chairman, Railway Board)

ProductsRail transport, Cargo transport, Services,

more...

RevenueRs 88,355 crore (US$ 18.82 billion) (2009-

10)

Net incomeRs. 951 crore (US$ 202.56 million) (2009-

10)

Owner(s) Republic of India (100%)

Employees 1,600,000 (2009)

Divisions16 Railway Zones (excluding Konkan

Railway)

Website Indianrailways.gov.in

EVOLUTION

The first railway on Indian sub-continent ran over a stretch of 21 miles from Bombay to Thane. The idea of a railway to connect Bombay with Thane, Kalyan and with the Thal and Bhore Ghats inclines first occurred to Mr. George Clark, the Chief Engineer of the Bombay Government during a visit to Bhandup in 1843.

The formal inauguration ceremony was performed on 16th April 1853, when 14 railway carriages carrying about 400 guests left Bori Bunder at 3.30 pm "amidst the loud applause of a vast multitude and to the salute of 21 guns." The first passenger train steamed out of Howrah station destined for Hooghly, a distance of 24 miles, on 15th August, 1854. Thus the first section of the East Indian Railway was opened to public traffic, inaugurating the beginning of railway transport on the Eastern side of the sub-continent.

In south the first line was opened on Ist July, 1856 by the Madras Railway Company. It ran between Veyasarpandy and Walajah Road (Arcot), a distance of 63 miles. In the North a length of 119 miles of line was laid from Allahabad to Kanpur on 3rd March 1859. The first section from Hathras Road to Mathura Cantonment was opened to traffic on 19th October, 1875.

These were the small beginnings which is due course developed into a network of railway lines all over the country. By 1880 the Indian Railway system had a route mileage of about 9000 miles. INDIAN RAILWAYS, the premier transport organization of the country is the largest rail network in Asia and the world's second largest under one management.

ORGANISATIONAL STRUCTURE

Indian Railways is a department owned and controlled by the Government of India, via the Ministry of Railways. As of May 2010, the Railway Ministry is headed by Mamata Banerjee, the Union Minister for Railways, and assisted by two ministers of State for Railways. Indian Railways is administered by the Railway Board, which has a financial commissioner, five members and a chairman.

RAILWAY ZONES

Indian Railways is divided into zones, which are further sub-divided into divisions. The number of zones in Indian Railways increased from six to eight in 1951, nine in 1952, and finally 16 in 2003. Each zonal railway is made up of a certain number of divisions, each having a divisional headquarters. There are a total of sixty-seven divisions.

The Kolkata Metro is owned and operated by Indian Railways, but is not a part of any of the zones. It is administratively considered to have the status of a zonal railway.

Each of the sixteen zones, as well as the Kolkata Metro, is headed by a General Manager (GM) who reports directly to the Railway Board. The zones are further divided into divisions under the control of Divisional Railway Managers (DRM). The divisional officers of engineering, mechanical, electrical, signal and telecommunication, accounts, personnel, operating, commercial and safety branches report to the respective Divisional Manager and are in charge of operation and maintenance of assets. Further down the hierarchy tree are the Station Masters who control individual stations and the train movement through the track territory under their stations' administration.

Sl. No

NameAbbr. Date

EstablishedHeadquarters

Divisions

1. Central CR1951, November 5

MumbaiMumbai, Bhusawal, Pune, Solapur, Nagpur

2. East Central ECR2002, October 1

HajipurDanapur, Dhanbad, Mughalsarai, Samastipur, Sonpur

3. East Coast ECoR 2003, April 1 BhubaneswarKhurda Road, Sambalpur, Visakhapatnam

4. Eastern ER 1952, April Kolkata Howrah, Sealdah, Asansol, Malda

5.North Central

NCR 2003, April 1 Allahabad Allahabad, Agra, Jhansi

6.North Eastern

NER 1952 Gorakhpur Izzatnagar, Lucknow, Varanasi

7.North Western

NWR2002, October 1

Jaipur Jaipur, Ajmer, Bikaner, Jodhpur

8.Northeast Frontier

NFR 1958 GuwahatiAlipurduar, Katihar, Lumding, Rangia, Tinsukia

9. Northern NR 1952, April 14 DelhiDelhi, Ambala, Firozpur, Lucknow, Moradabad

10.South Central

SCR1966, October 2

SecunderabadSecunderabad, Hyderabad, Guntakal, Guntur, Nanded, Vijayawada

11.South East Central

SECR 2003, April 1 Bilaspur Bilaspur, Raipur, Nagpur

12.South Eastern

SER 1955 KolkataAdra, Chakradharpur, Kharagpur, Ranchi

13.South Western

SWR 2003, April 1 Hubli Hubli, Bangalore, Mysore

14. Southern SR 1951, April 14 ChennaiChennai, Madurai, Palakkad, Salem, Tiruchchirapalli, Thiruvanathapuram

15.West Central

WCR 2003, April 1 Jabalpur Jabalpur, Bhopal, Kota

16. Western WR1951, November 5

MumbaiMumbai Central, Ratlam, Ahmedabad, Rajkot, Bhavnagar, Vadodara

RECRUITMENT AND TRAINING

With approximately 1.6 million employees, Indian Railways is the country's single largest employer. Staff are classified into gazetted (Group A and B) and non-gazetted (Group C and D) employees. The recruitment of Group A gazetted employees is carried out by the Union Public Service Commission through exams conducted by it.The recruitment to Group 'C' and 'D' employees on the Indian Railways is done through 19 Railway Recruitment Boards which are controlled by the Railway Recruitment Control Board (RRCB).

The training of all cadres is entrusted and shared between six centralised training institutes.

SUBSIDIARIES

Indian Railways manufactures much of its rolling stock and heavy engineering components at its six manufacturing plants, called Production Units, which are managed directly by the ministry. As with most developing economies, the main reason for this was the policy of import substitution of expensive technology related products when the general state of the national engineering industry was immature. Each of these six production units is headed by a General Manager, who also reports directly to the Railway Board.

There exist independent organisations under the control of the Railway Board for electrification, modernisation and research and design, each of which is headed by a General Manager. A number of Public Sector Undertakings, which perform railway-related functions ranging from consultancy to ticketing, are also under the administrative control of the Ministry of railways.

TECHNICAL DETAILS

Track

Indian railways uses four gauges, the 1,676mm broad gauge which is wider than the 1,435mm standard gauge; the 1,000mm metre gauge; and two narrow gauge 762 mm (2 ft 6 in) and 610 mm (2 ft) . Track sections are rated for speeds ranging from 75 to 160 km/h.

The total length of track used by Indian Railways was about 111,600 km (69,300 mi) while the total route length of the network was 63,273 km (39,316 mi) on 31 March 2008.About 28% of the route-kilometre and 42% of the total track kilometre was electrified on 31 March 2008.

Broad gauge is the predominant gauge used by Indian Railways. Indian broad gauge—1,676 mm (5 ft 6 in)—is the most widely used gauge in India with 96,851 km of track length (86.8% of entire track length of all the gauges) and 51,082 km of route-kilometre (80.7% of entire route-kilometre of all the gauges) on 31 March 2008.

In some regions with less traffic, the metre gauge (1,000mm) is common, although the Unigauge project is in progress to convert all tracks to broad gauge. The metre gauge had 11,676 km of track length (10.5% of entire track length of all the gauges) and 9,442 km of route-kilometre (14.9% of entire route-kilometre of all the gauges) on 31 March 2008.

The Narrow gauges are present on a few routes, lying in hilly terrains and in some erstwhile private railways (on cost considerations), which are usually difficult to convert to broad gauge. Narrow gauges had a total of 2,749 route-kilometre on 31 March 2008. The Kalka-Shimla Railway, the Nilgiri Mountain Railway and the Darjeeling Himalayan Railway are three notable hill lines that use narrow gauge.

The share of broad gauge in the total route-kilometre has been steadily rising, increasing from 47% (25,258 route-km) in 1951 to more than 83% in 2010 whereas the share of metre gauge has declined from 45% (24,185 route-km) to less than 13% in the same period and the share of narrow gauges has decreased from 8% to 3%. However, the total route-kilometre has increased by only 18% (by just 10,000 km from 53,596 route-km in 1951) in the last 60 years. This compares very poorly with Chinese railways, which increased from about 27,000 route-km at the end of second world war to about 90,000 route-km in 2010, an increase of more than three-fold. More than 28,000 route-km (34% of the total route-km) of Chinese railway is electrified compared to only about 18,000 route-km of Indian railways. This is an indication of the poor state of Indian railways where the funds allocated to new railway lines are meagre, construction of new uneconomic railway lines are taken up due to political interference without ensuring availability of funds and the projects incur huge cost and time overruns due to poor project-management and paucity of funds.

Sleepers (ties) used are made of prestressed concrete, or steel or cast iron posts, though teak sleepers are still in use on few older lines. The prestressed concrete sleeper is in wide use today. Metal sleepers were extensively used before the advent of concrete sleepers. Indian Railways divides the country into four zones on the basis of the range of track temperature. The greatest temperature variations occur in Rajasthan, where the difference may exceed 70°C.

Traction

As of March 2008, 18,274 km of the total 63,273 km route length is electrified.[19] Since 1960, almost all electrified sections on IR use 25,000 V AC traction through overhead catenary delivery.[20][21] A major exception is the entire Mumbai section, which uses 1,500 V DC.[21] and is currently undergoing change to the 25,000 V AC system. Another exception is the Kolkata Metro, which uses 750 V DC delivered through a third rail.

Traction voltages are changed at two places close to Mumbai. Central Railway trains passing through Igatpuri switch from AC to DC using a neutral section that may be switched to either voltage while the locomotives are decoupled and swapped. Western Railway trains switch power on the fly, in a section between Virar (DC) and Vaitarna (AC), where the train continues with its own momentum for about 30 m through an unelectrified section of catenary called a dead zone.[21] All electric engines and EMUs operating in this section are the necessary AC/DC dual system type (classified "WCAM" by Indian Railways).

SERVICES

PASSENGER

Indian Railways operates about 9,000 passenger trains and transports 20 million passengers daily across twenty-eight states and two union territories. Sikkim, Arunachal Pradesh, and Meghalaya are the only states not connected by rail. A standard passenger train consists of eighteen coaches, but popular trains can have up to 26 coaches.

Coaches are designed to accommodate anywhere from 18 to 108 passengers, but during the holiday seasons and/or on busy routes, more passengers may travel in unreserved coaches. Most regular trains have coaches connected through vestibules. However, 'unreserved coaches' are not connected with the rest of the train via any vestibule.

ACCOMMODATION CLASSES

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 be air-conditioned or non air-conditioned.

Further, other AC classes can have 2 or 3 tier berths, with higher prices for the former, 3-tier non-AC coaches or 2nd class seating coaches, which are 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 stops.

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.

At the rear of the train is a special compartment known as the guard's cabin. It is fitted with a transceiver and is where the guard usually gives the all clear signal before the train departs. A standard passenger rake generally has four general compartments, two at the front and two behind, of which one is exclusively for ladies. The exact number varies according to the demand and the route. A luggage compartment can also exist at the front or the back. In some trains a separate mail compartment is present. In long-distance trains a pantry car is usually included in the centre. A new class; Economy AC three tier is introduced in the Sealdah-New Delhi Duronto train.

NOTABLE TRAINS AND ACHIEVEMENTS

There are two UNESCO World Heritage Sites on IR — the Chatrapati Shivaji Terminus and the Mountain railways of India. The latter is not contiguous, but actually consists of three separate railway lines located in different parts of India:

The Darjeeling Himalayan Railway, a narrow gauge railway in West Bengal. The Nilgiri Mountain Railway, a metre gauge railway in the Nilgiri Hills in Tamil

Nadu. The Kalka-Shimla Railway, a narrow gauge railway in the Shivalik mountains in

Himachal Pradesh.

The Palace on Wheels is a specially designed train, frequently hauled by a steam locomotive, for promoting tourism in Rajasthan. On the same lines, the Maharashtra government introduced the Deccan Odyssey covering various tourist destinations in Maharashtra and Goa, and was followed by the Government of Karnataka which introduced the Golden Chariot train connecting popular tourist destinations in Karnataka and Goa. However, neither of them has been able to enjoy the popular success of the Palace on Wheels.

The Samjhauta Express is a train that runs between India and Pakistan. However, hostilities between the two nations in 2001 saw the line being closed. It was reopened when the hostilities subsided in 2004. Another train connecting Khokhrapar (Pakistan) and Munabao (India) is the Thar Express that restarted operations on February 18, 2006; it was earlier closed down after the 1965 Indo-Pak war. The Kalka Shimla Railway till recently featured in the Guinness Book of World Records for offering the steepest rise in altitude in the space of 96 kilometre.

The Lifeline Express is a special train popularly known as the "Hospital-on-Wheels" which provides healthcare to the rural areas. This train has a carriage that serves as an operating room, a second one which serves as a storeroom and an additional two that serve as a patient ward. The train travels around the country, staying at a location for about two months before moving elsewhere.

Among the famous locomotives, the Fairy Queen is the oldest operating locomotive in the world today, though it is operated only for specials between Delhi and Alwar. John Bull, a locomotive older than Fairy Queen, operated in 1981 commemorating its 150 th anniversary. Kharagpur railway station also has the distinction of being the world's longest railway

platform at 1,072 m (3,517 ft). The Ghum station along the Darjeeling Toy Train route is the second highest railway station in the world to be reached by a steam locomotive. The Mumbai–Pune Deccan Queen has the oldest running dining car in IR.

The Himsagar Express, between Kanyakumari and Jammu Tawi, has the longest run in terms of distance and time on Indian Railways network. It covers 3,745 km (2,327 mi) in about 74 hours and 55 minutes. The Bhopal Shatabdi Express is the fastest train in India today having a maximum speed of 150 km/h (93 mph) on the Faridabad–Agra section. The fastest speed attained by any train is 184 km/h (114 mph) in 2000 during test runs.

The Rajdhani Express and Shatabdi Express are the superfast, fully air-conditioned trains that give the unique opportunity of experiencing Indian Railways at its best.

FARES AND TICKETING

Fares on the Indian Railways across categories are among the cheapest in the world. In the past few years, despite a recessionary environment, the Indian Railways have not raised fares on any class of service. On the contrary, there has been a minor dip in fares in some categories.

Ticketing services are available at all major and minor railway stations across India. In 2003, Indian Railways launched online ticketing services through the IRCTC website. Apart from E-tickets, passengers can also book I-tickets that are basically regular printed tickets, except that they are booked online and delivered by post. According to comScore, the Indian Railways website was the top visited Indian travel site in April 2010, with 7.7 million visitors.

TOURISM

IRCTC takes care of the tourism operations of the Indian Railways. The Indian Railways operates several luxury trains such as Palace on Wheels, Golden Chariot, Royal Orient Express and Deccan Odyssey; that cater mostly to foreign tourists. For domestic tourists too, there are several packages available that cover various important tourist and pilgrimage destinations across India.

FREIGHT

IR carries a huge variety of goods ranging from mineral ores, fertilizers and petrochemicals, agricultural produce, iron & steel, multimodal traffic and others. Ports and major urban areas have their own dedicated freight lines and yards. Many important freight stops have dedicated platforms and independent lines.

Indian Railways makes 70% of its revenues and most of its profits from the freight sector, and uses these profits to cross-subsidise the loss-making passenger sector. However, competition from trucks which offer cheaper rates has seen a decrease in freight traffic in recent years. Since the 1990s, Indian Railways has switched from small consignments to larger container movement which has helped speed up its operations. Most of its freight

earnings come from such rakes carrying bulk goods such as coal, cement, food grains and iron ore.

Indian Railways also transports vehicles over long distances. Trucks that carry goods to a particular location are hauled back by trains saving the trucking company on unnecessary fuel expenses. Refrigerated vans are also available in many areas. The "Green Van" is a special type used to transport fresh food and vegetables. Recently Indian Railways introduced the special 'Container Rajdhani' or CONRAJ, for high priority freight. The highest speed notched up for a freight train is 100 kilometres per hour (62 mph) for a 4,700 metric tonne load.

Recent changes have sought to boost the earnings from freight. A privatization scheme was introduced recently to improve the performance of freight trains. Companies are being allowed to run their own container trains. The first length of an 11,000-kilometre (6,800 mi) freight corridor linking India's biggest cities has recently been approved. The railways has increased load limits for the system's 225,000 freight wagons by 11%, legalizing something that was already happening. Due to increase in manufacturing transport in India that was augmented by the increase in fuel cost, transportation by rail became advantageous financially. New measures such as speeding up the turnaround times have added some 24% to freight revenues.

DEDICATED FREIGHT CORRIDOR

Ministry of Railways have planned to construct a new Dedicated Freight Corridor (DFC) covering about 2762 route km on two corridors, Eastern Corridor from Ludhiana to Sone Nagar and Western Corridor from Jawahar Lal Nehru Port Mumbai to Tughlakabad/Dadri along with interlinking of two corridors at Dadri. Upgrading of transportation technology, increase in productivity and reduction in unit transportation cost are the focus areas for the project.

“Dedicated Freight Corridor Corporation of India Limited (DFCC)” is a special purpose vehicle created to undertake planning & development, mobilization of financial resources and construction, maintenance and operation of the Dedicated Freight Corridors. DFCC has been registered as a company under the Companies Act 1956 on 30 October 2006.

RAIL BUDGET AND FINANCES

The Railway Budget deals with planned infrastructure expenditure on the railways as well as with the operating revenue and expenditure for the upcoming fiscal years, the public elements of which are usually the induction and improvement of existing trains and routes, planned investment in new and existing infrastructure elements, and the tariff for freight and passenger travel. The Parliament discusses the policies and allocations proposed in the budget. The budget needs to be passed by a simple majority in the Lok Sabha (Lower House). The comments of the Rajya Sabha (Upper House) are non-binding.

Indian Railways is subject to the same audit control as other government revenue and expenditures. Based on anticipated traffic and the projected tariff, requirement of resources

for capital and revenue expenditure of railways is worked out. While the revenue expenditure is met entirely by railways itself, the shortfall in the capital (plan) expenditure is met partly from borrowings (raised by Indian Railway Finance Corporation) and the rest from Budgetary support from the Central Government. Indian Railways pays dividend to the Central Government for the capital invested by the Central Government.

As per the Separation Convention (on the recommendations of the Acworth Committee), 1924, the Railway Budget is presented to the Parliament by the Union Railway Minister, two days prior to the General Budget, usually around 26 February. Though the Railway Budget is separately presented to the Parliament, the figures relating to the receipt and expenditure of the Railways are also shown in the General Budget, since they are a part and parcel of the total receipts and expenditure of the Government of India. This document serves as a balance sheet of operations of the Railways during the previous year and lists out plans for expansion for the current year.

The formation of policy and overall control of the railways is vested in Railway Board, comprising the Chairman, the Financial Commissioner and other functional members of Traffic, Engineering, Mechanical, Electrical and Staff departments.

Indian Railways, which a few years ago was operating at a loss, has, in recent years, been generating positive cash flows and been meeting its dividend obligations to the government, with (unaudited) operating profits going up substantially.[32] The railway reported a cash surplus of INR 9000 cr in 2005, INR 14000 cr in 2006, INR 20,000 cr in 2007 and INR 25,000 cr for the 2007-2008 fiscal year. Its operating ratio improved to 76% while, in the last four years, its plan size increased from INR 13,000 cr to INR 30,000 cr. The proposed investment for the 2008-2009 fiscal year is INR 37,500 cr, 21% more than for the previous fiscal year.[3] Budget Estimates-2008 for Freight, Passenger, Sundry other Earnings and other Coaching Earnings have been kept at INR 52,700 cr, INR 21,681 cr, INR 5,000 cr and INR 2,420 cr respectively. Maintaining an overall double digit growth, Gross Traffic Earnings have been projected as INR 93,159 crore in 2009-10 (19.1 billion USD at current rate), exceeding the revised estimates for the current fiscal by INR 10,766 crore. [3] Around 20% of the passenger revenue is earned from the upper class segments of the passenger segment (the air-conditioned classes).

PUBLIC EXPENDITURE ACCOUNTABILITY OF THE INDIAN RAILWAYS

In a largely government controlled economy, the Indian Railways (IR) has been used as a tool of dispatch towards government objectives. A separate budget owing to historical circumstances is just one of the features that mark the close bondage between the government and its chief logistics agency. The basic attitude of running IR is that of a bureaucracy. A welfare outlook have burdened IR with many liabilities.

Populist measures leading to an irrational fare structure with a heavy cross subsidy of the passenger sector by freight has corroded its viability as a profit making entity. Its share in the goods transport sector has steadily slipped behind road. An unwieldy workforce means that a greater part of its finances are being diverted towards staff costs and pensions. This is seriously compromising IR’s ability to invest in capital goods like tracks and rolling stock leading to an alarming safety issue and the inability to keep abreast with global technology standards.

Railway Government Interface.

While considering the IR government interface, it is necessary to understand certain roles and define some terms. IR is under the Ministry of Railways, which is referred to as the central government in the Indian Railways Act. The word government in this paper refers to the Government of India (GOI) which consists of all the other government agencies (including the Finance Ministry) other than IR. The Railway Minister (who heads the Ministry of Railways) acts as a link between the GOI and IR. The Railway Board heads the executive arm of IR and is also the secretariat to advise the Railway Minister on all matters concerning railway management. This section begins with an examination of the Indian Railways Act, 1989. This is followed by an analysis of the financial interface of IR and GOI. The special railway budget is considered next followed by an overview of the different issues related with political interference in the working of IR. IR’s interactions with state governments form the last part of this section.

The Indian Railways Act - 1989.

The Indian Railways Act enacted by Parliament vests the central Government (Ministry of Railways) with powers over the functioning of IR. There are chapters dealing with railway administrations, Commissioners of Railway Safety, construction and maintenance of works, opening of railways, fixation of rates, carriage of passengers and goods etc. The act provides for operational independence of IR. There are only few instances when there is need for direct interaction with Parliament. They are related to safety, and exemptions and amendments with respect to the Act. The Chief Commissioner of Railway Safety is required to lay down an annual report of the activities of the Commissioners of Railway Safety before Parliament. Exemptions from the rules or inclusion of new rules into the Act also require the approval of Parliament.

The separate Railway budget (discussed later), that is presented annually in the Parliament, is more a matter of convention and is not required by the Act.

Financial Interface between GOI and IR

The financial interface between GOI and IR has three dimensions: budgetary support, IRFC and dividends. The budgetary support is a direct fund input by the GOI into IR for plan investments. The borrowings of IRFC warrant mention in this section as they involve an indirect funding support to IR - The GOI eventually guarantees all IRFC borrowings. The dividend is a ‘return’ on investment that IR pays annually to GOI.

It is to its credit that IR, unlike its counterparts even in many developed countries, has been able to maintain an operating profit and has been sourcing funds for investments through internal resources. Even so, there is not enough funding. Part of this shortfall has been met by the government’s budgetary support. The share of budgetary inputs in the investment plans has been varying, with IR having to look for other strategies like market borrowings through the Indian Railways Financial Corporation (IRFC) and schemes like Build Operate Lease Transfer (BOLT) and Own Your Wagon (OYW).

Table shows IR’s sources of funds for the 5 year plans.

The budgetary support of Central Government for IR plan investment has been gradually falling from the peak of 75% during 5th five year plan period to about 25% during 9th and 10th five year plan periods, as can be seen from the chart below :-

Due to constraints of support from General Exchequer, IR has been forced to increase reliance on internal resource generation and market borrowings. The year wise break up of resources raised is given here under:

Source: Planning Commission Website

11 th FIVE YEAR PLAN (2007–2012)

Heavy investments will have to be made for enhancing capacity of rolling stock, technical up gradation and advancement in technology to achieve the ambitious targets set for passenger and freight business segments, in the 11th Five Year Plan. It has been planned that Railways will invest Rs.2,30,000 crores (46.84 billion USD) in the 11th Five Year Plan, which is almost three times the amount allocated in the 10th Five Year Plan..

The plan expenditure of 46.84 billion USD is proposed to be financed by internal generation of 18.01 billion USD, market borrowings of 10 billion USD, budgetary support of 10.83 billion USD and 8 billion USD through the PPP route. It may be added that while the contribution of budgetary support and PPP projects to the 10th plan was 44. 73% and 0.72%, the targeted figures for the 11thPlan are 23.12% and17.1% respectively.

As per the Economic Survey 0f 2008 – 2009 , the plan outlay in FY08 on Railways was Rs 29,983 cr while the budget estimate for FY -09 is placed at Rs 36,726 cr

Alternative Financing Initiatives of IR –

FIRST STEP IN MARKET BORROWINGS

IR realized the resource gap between the requirement and funds available as long back as in 1984, when it started market borrowings through its first special purpose vehicle (SPV), Indian Railway Finance Corporation (IRFC). Money raised by IRFC through issue of bonds was used for acquiring rolling stock like locomotives and wagons, which were then leased to IR against committed lease charges. IR in turn distributed these assets to Zonal Railways, who were then paying lease charges to IR as a part of their revenue expenditure. This arrangement continues even today.

SECOND STEP OF CUSTOMER OWNED ASSETS

The second initiative taken in 1980’s was to encourage big institutional customers to own their wagons through ‘Own Your Wagon Scheme’ (OYWS). The wagons so procured were operated on predetermined routes as decided by the company owning the wagons. The Company was given guaranteed supply of wagons by IR and also predetermined discount in freight rate as lease charges. This policy did not survive for long as it suited only few cash rich industrial units with consistent source of supply and regular need of rail transport.

CONTAINER MARKETING & PRIVATISING PARCELS

By mid 1990s, IR revolutionized their loading performance by introducing speedier bulk movement with only end to end train examination. During the same time, IR established Container Corporation of India Ltd. (CONCOR) to cater to smalls and piecemeal traffic through containerized service. Both these initiatives led to higher growth and better services in cargo and piecemeal traffic. CONCOR remains under IR’s control but has since outsourced lot of its activities to private sector during its expansion.

CATERING & TOURISM SERVICES

IR was providing catering and tourism services on its own. It was felt that a professional body should take over these activities relieving Railways of this ancillary Industry. This resulted in creation of Indian Railway Catering & Tourism Corporation Ltd. (IRCTC) in 1999. The Corporation was given the mandate to stimulate PPP in hospitality industry which they have successfully done in food plazas, internet ticketing etc., details of which are given later.

PROJECT COST SHARING WITH STATE GOVERNMENT

With a view to meet aspirations of various State Governments, the concept of cost sharing with State Government was first initiated on Mumbai Suburban System for linking Mumbai with Navi Mumbai through Thane Creak Bridge. Maharashtra Government through its PSU, CIDCO contributed 2/3rd of the cost of this project. The cost was proposed to be recovered through surcharge on all tickets issued to stations in Navi Mumbai. The model and its variants have been subsequently tried out for projects in the states of Karnataka. Andhra Pradesh, Jharkhand. Tamil Nadu & West Bengal There are a large number of other states which have also signed agreements with IR. The improvement in infrastructure helps the State Government ultimately and Railways get the advantage of having to do only part funding of the projects.

PORT LINKING PROJECTS

IR has launched several schemes to supplement investment in partnership with private players for specific projects to develop port linkages. These include setting up of private terminals and public private partnership to provide rail connectivity to new upcoming ports. Rail linkages to Gujarat Pipavav Port Ltd and Adani Port Ltd. were the earliest projects to be done under the scheme.. Similar efforts are on for developing other port linkages with private participation.

OTHER EFFORTS

Apart from construction/ gauge conversion of railway lines through private participation, Railways have also privatized tourist trains. Palace on Wheels has been operating for over a decade now. Another tourist train Deccan Odyssey is being run by Maharashtra State Tourist Corporation. Privatisation of some more tourist trains including the Kisan Tourist Train to cater to common people is on the anvil.

As can be seen from above, though some progress has been made since last over a decade to bring in alternative financing, it has not been enough for meeting the investment requirement of IR; both in capacity augmentation and revenue generating projects. There is a growing realization that the solution lies in Government sharing the cost and the risks with private sector through fair and appropriate risk sharing mechanisms embedded in well designed concession agreements for PPP projects.

PPP Initiatives

Several models of Private - Public Partnership are now being used in various infrastructure projects in the Transport Sector including Railways. The spectrum of projects varies from leasing out of Government owned facilities to BOO (Build, Own, Operate) and BOT (Build, Operate and Transfer).

While it is possible for other infrastructure projects in ports, highways & airports to be an independent system which could be operated and maintained independently of the existing system, the same is not possible for Railways. Here any project has to be supplementary or an extension to an existing larger railway network. Due to this historical perspective, railway activities are not readily available to private sector which poses a new challenge of building capacity with private sector through PPP. Following are some PPP project initiatives undertaken by Railways. Detailed write ups on these projects, their efficacy and lessons learnt from them are as follows:

CONTAINER CORPORATION OF INDIA LIMITED (CONCOR)

CONCOR was set up in March, 1998 as a public sector enterprise under the Ministry of Railways. The prime objective was to develop multi modal transport logistics infrastructure to support domestic container traffic, for ISO containers as also the country’s growing international trade. The Corporation started with an equity capital of Rs.64.99 crores and now has a net worth of Rs. 3183 crores in 2008 with Rs. 2244 crores of gross block. It recorded a top line Rs 3413 crores and a Net Profit of Rs 820 crores in FY 09. CONCOR has a consistent record of paying dividend to its shareholders. Being a consistently profit earning company, Government of India has divested its equity holding through three disinvestment exercises in 1994-95, 1995-96 and in 1998-99. Currently, Government holds 63% of the equity and balance is held by FIIs / MFs /individual shareholders.

CONCOR’s business is threefold i.e. as a carrier, a terminal operator and as a container freight station operator. The inland container depots (ICDs) are freight terminals solely owned by CONCOR. As a carrier, CONCOR transports domestic cargo in containers and International cargo from ports to its terminals situated in the hinterland. As a container freight station (CFS) operator, it provides value added services by offering warehousing to store as well as help in import / export of cargo.

Since CONCOR’s terminal business depends on International Shipping lines bringing their containers to ICDs, CONCOR as a business strategy is going in for joint venture CFSs at the ICDs. At Dadri ICD, CONCOR has gone in for partnership with four private companies to develop 4 separate CFSs, the cost being funded through a DER of 2:1. In these companies, while the private partner has 51% equity, the balance 49% is being held by CONCOR. The other major CONCOR terminal is at JNPT in Mumbai, jointly ownedby Maersk and CONCOR with former being the majority partner and 26% stake with CONCOR. Another upcoming Container Transhipment Terminal is coming up at

Vallarpadam promoted by Dubai Port International with CONCOR having 15% equity partnership.

As on date, CONCOR has a network of 58 Container terminals across the country. Each terminal is a custom bonded dry port with all the facilities like warehousing, container parking, repair and even customs clearance. CONCOR now owns 7200 high speed container flats (BLC wagons), and 20,000 different types of containers either owned or leased. During the year 2007-08, it handled 2.45 million Twenty feet Equivalent Units (TEUs).

So far, CONCOR was practically enjoying monopoly with captive traffic and strategic long term advantage, but recently Ministry of Railways have decided to open up container business to other private players. Fourteen offers have been received and terms and conditions are being worked out by Ministry of Railways. In a competitive environment, CONCOR will lose its monopoly and will have to strive hard to maintain its financial standing in the market.

LESSONS LEARNT

The basic proposal to create a separate company to deal with container traffic has helped in improving the overall load ability of Railways.

CONCOR has so far enjoyed IR’s infrastructure network and captive market which have driven its profitability. The impact of opening up of this sector on the fortunes of CONCOR is yet to be known.

Majority ownership in a Joint Venture Company with private partner is a less attractive proposal.It is better to have Joint Venture management under private control for improved efficiency.

B. INDIA RAILWAY CATERING & TOURISM CORPORATION LIMITED

(IRCTC)

Indian Railway Catering and Tourism Corporation Ltd. has been set up by the Ministry of Railways with the basic purpose of hiving off entire catering and tourism activity of the railways to the new Corporation so as to professionalise and upgrade these services with public-private participation.

IRCTC was incorporated in 1999 as a marketing arm of IR with an authorized capital of Rs.50 crores and a paid up capital of Rs 20 crores to hive off the entire catering and internet booking activity of Railways. It started its operations from 1stAugust, 2001.

In all the above mentioned missions, IRCTC has adopted PPP as a primary strategy. The Company’s operations have been profitable and it earned a net profit of Rs 20.75 crores in FY -08 and paid a dividend of Rs 4.15 crores.

PPP IN FOOD PLAZAS

IRCTC has tied up with well known entities in hospitality industry such as McDonalds, Subway, Amul, Haldiram etc to open food plazas at major stations. Till March 2008, 53 food plazas had become operational and licences for 10 more had been issued. The partnership is fully market driven and entire investment is through private partner on long term basis with a concession of at least ten years. The payment is in two parts, one time upfront fee and then an annual fee based on land use charges and business license fee. The annual fee is then shared with IR to the extent of 40%. This arrangement is working well as can be seen from example of Bombay Central Station. A McDonalds / R.K. hospitality food plaza opened at that station has given an upfront concession fee of Rs. 2crores, an annual land use charge of Rs.3 lakhs plus an annual license fee of Rs.2.5 lakhs to the Railways.

PPP IN RAIL NEER PROJECT

IRCTC has launched packaged drinking water under brand name of “Rail Neer” in Northern India in May, 2003 and Eastern India in March 2004 with its plants located at Delhi and at Patna. These plants are being operated and maintained on Public – Private Partnership by Ion Exchange Ltd. as its O & M Contractor with initial investment and

ownership by IRCTC.The contract for transportation and distribution is with Transportation Corporation of India and the model is working very well

PPP IN INTERNET TICKETING

The Internet Rail reservation was launched in August 2002 with Railway booking through the internet with ticket delivery to the customer. During 2007-08, a total of 1.89 crores e tickets valued at over Rs 1705 crores were booked through the IRCTC web site. IRCTC has also launched Rail Reservation through Mobile phones of HUTCH, RELIANCE and IDEA CELLULAR. This service is available in all circles of these operators. IRCTC is now tying up with mobile companies for reservation through SMS. IRCTC earns revenue out of payments made to them by IR for each such ticket out of service charges levied by them on the customers

RAIL SAMPARK 139

IRCTC had taken up the project for launch of Integrated Train Enquiry System- Rail Sampark 139 with the objective of providing State of the Art enquiry services to Railway Passengers all over the country. This was a pioneering PPP project where the call centre was taken on a revenue model rather than on a cost model. This project has brought about a sea change in the quality of enquiry services available to Rail Passenger across the country. Work is on for launch of various value added & premium services

PPP IN BUDGET HOTELS & YATRI NIWAS

IRCTC has taken over Yatri Niwas at New Delhi, Howrah and BNR hotels at Puri. In addition, IRCTC proposes to establish Rail Yatri Niwas on surplus unused Railway land for passengers at Bangalore, Secunderabad, Bhopal, Chandigarh, Madurai and Sealdah in the first phase. In all these PPP initiatives, IRCTC will act as an interface between IR and the private investor

DEPARTMENTAL CATERING BUSINESS

IRCTC has from 1st January, 2004 onwards taken over 18 departmental catering units, 659 commission vendor and almost 3125 staff. The departmental staff will be phased out gradually and business would be gradually outsourced.

FUTURE OUTLOOK

Complete takeover of departmental catering activity and licensee management from IR along with the departmental staff. Consolidate Railway catering services through public –

private partnership. Enhance tourism business by utilizing Rail passenger services on major routes and hill Railways. Promote multiple distribution channels for Rail tickets through state of art technologies Establish Rail Yatri Niwas / Budget hotels on surplus unused Railway land.

SUCCESS / FAILURES

It has been a success story all the way. IR and IRCTC have hugely benefited from PPP in food plazas.IRCTC has helped IR in reducing its workforce in this loss making peripheral activity and has hugely succeeded in improved ticketing, enabling business tie ups with Banks, mobile phone service provider, credit card and cash card companies etc.

LESSONS LEARNT

IRCTC model as an intermediate PSU for privatization and outsourcing has proved to be a success. This is more so because IR provides a captive market for peripheral services. There is an untapped huge opportunity in licensing of commercial space for which, another Corporation is being proposed. The success of IRCTC has reinforced the perception that Railways should concentrate on what it does best- manage the railway operations and exit all the peripheral activities.

C. PIPVAV RAILWAY CORPORATION LIMITED (PRCL)

While Konkan Railway Corporation was the first public – public partnership project, Pipavav Railway Corporation Ltd. also nicknamed PRCL was the first special purpose vehicle under public – private partnership. PRCL was constituted to provide B.G. rail link to Port of Pipavav in the State of Gujarat. The SPV was to undertake execution of gauge conversion and new line extension from Surendranagar – Rajula City – Pipavav Port (270 kms.). While the gauge conversion project was already sanctioned, the work was moving very slowly due to paucity of funds. Since Gujarat Pipavav Port Ltd. (GPPL) wanted an urgent connectivity to the port, they approached Railway Ministry for a joint venture with 50:50 partnerships. Both the partners to SPV i.e. Ministry of Railways and GPPL contributed Rs. 100 crores each towards equity and balance Rs.173 crores was raised by PRCL through a non-recourse debt. The SPV not only constructed the line but was given mandate to operate and maintain the line like a Non-Government Railway for the concession period of 33 years. While the Port guaranteed minimumaggregate quantity of traffic, Railways also committed sufficient number of rakes for cargo evacuation from the port.

The initiative of this SPV resulted in advantages to both Railways and GPPL such as:

FOR RAILWAYS

Implementation of uni-gauge project of sanctioned work through PPP. Railways saved capital expenditure of Rs.233 crores (Project cost of Rs.333

crores less equity participation by Railways Rs.100 crores). Project completed within 18 months as against anticipated completion of similar

project of 6 – 7 years due to paucity of funds. Saving on cost of staff as against 1900 existing staff, SPV deployed only 667 staff for

O & M. With full marketing efforts of GPPL, IR got incremental inward and outward

traffic. The annual losses of Rs.22 crores per annum for operating the erstwhile uneconomic branch line were fully wiped off.

Railways earned from passenger services on this section without passing on any share to GPPL.

FOR GPPL

The port connectivity through Rail provided another cost effective transportation option.

PRCL became the catalyst for growth of the port with containerization as a major activity.

GPPL may, in the long run, with substantial container traffic at its command begin CONCOR like operations.

As regards the risk profile of the SPV, there was hardly any construction risk as Western Railway did work at its own pre-estimated cost. The project company was guaranteed 1 million tonne from first year, 2 million tonne from second year and 3 million tonne from their year of operation onwards. PRCL procured all material required for construction and handed it over to Western Railway and the Railway is carrying out O & M of this line at mutually agreed cost on fully recoverable basis. Thus the project line became fully dependent on the port for freight traffic. While MOR regulates tariff fixing, the same is collected by Railways and apportioned to the project company on standard apportionment rules.

SUCCESS/ FAILURES

While the project was completed and commissioned in time, the port development got delayed by almost three years with the result that committed minimum traffic could not be achieved. During the first year, company could generate less than half a million tonne and it almost doubled in the second year to 1 million tonne. Against Rs.22 crores required for debt servicing and Rs.12 crores for O & M, Project Company could generate Rs.5 crores

in the first year and Rs.9 crores in the second year. Company defaulted on its debt servicing due from April, 2005. Traffic guarantee of GPPL was not encashed by the Railways due to “future potential of traffic expected after modernization”.

LESSONS LEARNT FROM PRCL EXPERIENCE

For port linking project, there is a need to coordinate port development with the rail link.

Debt servicing of almost Rs. 29 crores by PRCL in the very first year was over ambitious.

There is thus a need to provide a minimum gestation period of four to five years without any debt servicing liability, for such developing projects. Alternately a ballooning of repayments should be considered.

Traffic forecasting needs to be more realistic with greater accountability of the agency doing the forecasting.

There is a need to review the traffic guarantee clause in such agreements as the guarantor being a major shareholder leads to a conflict of interests

D. RAIL VIKAS NIGAM LIMITED (RVNL)

With a view to cope with the increasing demand of traffic, the Government of India framed and approved National Rail Vikas Yojana (NRVY) on 15th August, 2002 with an estimated investment of Rs.15, 000 crores. The investment was proposed for Port connectivity works and improvement of the Golden Quadrilateral (GQ) for meeting future transportation needs. For this purpose, Ministry of Railways created a Special Purpose Vehicle (SPV), the Rail Vikas Nigam Limited (RVNL) to undertake project development, mobilization of financial resources and implementation of selected Railway Projects on fast track basis.

RVNL’s vision has been to make Indian Railway network free of capacity constraints and to generate transport capacity ahead of demand. RVNL has an Authorised capital of Rs.3, 000 crores and paid up capital of Rs.950 crores. The broad identification of financial models for implementing the projects are as follows:-

For the Golden Quadrilateral project, out of required investment of approx. Rs.8,000 crores, Government of India will provide budgetary support of Rs.1,500 crores, another Rs.1,500 crores through Railway Sector loan from ADB and balance Rs.5,000 crores to be mobilized from the market. Port connectivity projects are being implemented in PPP format by setting up of project specific SPVs in which RVNL will hold a minimum of 26% of the

equity. The financial resources from the market are planned by implementing the projects through Build,

Own, Transfer (BOT) route, which means that the entire capital expenditure on the project would be arranged by the BOT concessionaire. The Company is also planning to have rail linkages to private ports on the lines of Kutch Railway Company Ltd with entire capital investment made by the Ports.

Some of project specific SPVs for which Memorandum of Understanding (MOUs) have been executed with the strategic partners are listed below:-

Surat – Hazira New Line (RVNL, Government of Gujarat, Hazira Port Pvt. Ltd. & Essar Steel Limited).

Bharuch – Dahej Gauge Conversion Project (RVNL, Government of Gujarat, Gujarat Adani Port Ltd., Welspun Ltd.)

Bhildi – Samadari Gauge Conversion (RVNL, Government of Gujarat, Gujarat Adani Port Ltd., Kandla Port Trust)

Haridaspur – Paradip New Line (RVNL, Government of Orissa, Paradip Port, Jindal Steel & Power, ESSEL Mining Industries & Rungta Mines Ltd.)

RVNL is presently having 55 projects broadly classified under two heads as under:

Strengthening of Golden Quadrilateral and Diagonals - 29 projects Provision of Port connectivity and corridors to hinterland - 26 projects

The locations of these projects have been distributed throughout the country and hence RVNL has established Project Implementation Units (PIUs) in various state capitals / important cities viz. Secunderabad, Bhubaneswar, Bilaspur, Bhopal and Jaipur.

During the financial year, 74.28 Km of Doubling, 103 Km of Gauge Conversion & 53 Km of Railway Electrification, have been completed. RVNL has till now completed 155 Kms. of new lines, 898 Kms. of gauge conversion 350 Kms. of doubling and 1007NKms. of Railway Electrification, Thus as on 31.03.08, approx 36% of the total length (6686 km) of 55 projects assigned to RVNL, have been completed.

The status of 55 projects is as under:

Projects completed upto March 31, 2008 -- 16

Projects under implementation -- 31

Projects under sanction -- 8

WORKING:

RVNL had a paid up equity capital of Rs 2015 crores and Net Worth of Rs 2119 crores as on March 31, 2008. The entire equity is held by GOI. It earned EBIDT of Rs 47 crores and PBT of Rs 34 crores for FY -08. It paid a nominal dividend in FY -08

SUCCESS/ FAILURE

One conclusion that can be drawn is that the system of umbrella SPV is an efficient and faster mode of executing PPP projects in the context of IR.

E HASSAN MANGLORE RAIL DEVELOPMENT COMPANY Ltd.

This Public – Private Partnership was developed with State of Karnataka with setting up of a new company named K – RIDE (Karnataka – Rail Infrastructure Development Ltd.). MOU was signed between Government of Karnataka and Ministry of Railways in September 2000 to develop and finance four specific rail projects, one of which was Hassan – Kankanadi 183 km. gauge conversion project. This was developed through another SPV named Hassan Mangalore Rail Development Company Ltd. (HMRDC) promoted by MOR, GOK and K – RIDE in July, 2003. HMRDC was granted a concession for 32 years on BOT basis, to develop; finance, design and construct, as well as O&M of the project. Out of the estimated cost of Rs.291 crores, the expenditure of Rs.141 crores which had already been incurred by MOR till 31.3.2002, was converted into unsecured debt, repayable by the project company out of loans to be raised by the SPV from banks and financial institutions. The shareholding of the SPV was equal stakes of 40.95% for MOR and GOK, 16.36% for K – RIDE and balance 1.82% with strategic investors, including New Mangalore Port Trust having strategic business interest in the project.

HMRDC in turn entered into agreement with South Western Railway, for construction, operation and maintenance of the facility separately through various agreements.

The salient feature of these agreements, were -

While the target of completion was 12 months, there was no penalty for any delay and thus the project company had to bear the entire implementation risk.

The entire operations to remain with SWR and the project company to pay for all operating activities on actual cost basis. The operating risk however would lie completely with Project Company. .

Like in case of operation, entire maintenance to be with SWR but entire maintenance risk lies with Project Company

The concession agreement entitles the project company to only the freight operating rights while the passenger service operations remain with the Railways.

Like in case of PRCL, tariff fixing remains with Railways and Project Company will get proportionate revenue sharing on standard apportionment formula adopted between Zonal Railways.

The financial appraisal of the project is based on expected 6 million tonne annual freight traffic over the project line. Almost 55% of traffic of iron ore expected through New Mangalore Post Trust (NMPT) and balance 45% mainly of coal, edible oil, LPG, fertilizers and other. Since traffic other than iron ore will depend on transfer traffic sent by SWR to the project Railway, the market risks are higher. There is no commitment from SWR for any minimum guaranteed transfer traffic.

LESSONS LEARNT

In terms of expediting the construction of this strategically important Railway project, HMRDC is a successful model of partnership with State Government. It also provides private partnership equity upto 16.36% through investment by strategic partners. This can also increase in future, with more private players. Due to committed fund to the project, construction cost overruns have been avoided. Also the model premises improved operating efficiency by following efficient O&M on the pattern of KRCL. Thus K–RIDE being an umbrella organization promises a good future for more similar partnership projects.

F. KUTCH RAILWAY COMPANY Ltd. (KRC)

Ministry of Railways under Prime Minister’s Rail Vikas Yojana launched another SPV (Special Purpose Vehicle) in the State of Gujarat by the name of Kutch Railway Company (KRC). This Company is a joint venture of IR, Kandla Port, Gujarat Adani Port and Government of Gujarat to undertake construction and operation of 314 km. broad gauge line connecting Palanpur and Kandla Port via Bhildi. With direct BG link between Gandhidham and Palanpur, the distance will reduce by 120 km. thus giving shorter connectivity of ports of Gujarat to North India.

KRC was formed as a company under The Companies Act, 1956 in March 2004 to implement the project mentioned above. The equity capital of Rs.200 crores has been subscribed to by IR (50 percent), Kandla Port (26 percent), Adani Port (20 percent) and Government of Gujarat (4 percent). The project cost was estimated to be Rs.550 crores and

it was proposed to raise non-recourse debt of Rs 300 crores from Banks/ financial institutions to part finance the project.

KRC is an ambitious project of Gujarat Government because the direct link between Kandla and Palanpur shall reduce the distance between the two stations by more than 25percent. This will not only result in reducing the transportation cost for the exporters but will also provide faster connectivity from Northern hinterland leading to shift of cargo from Mumbai / JNPT to the ports in Gujarat. A number of industries are already lined up in Kutch area and more are expected to follow with KRC opening up fresh opportunities to them, Apart from Kandla & Adani Port, Company is also in touch with major power houses in Rajasthan and Punjab and it is expected that significant quantity of imported coal shall move on KRC. Through the reduced distance, Railways will be more competitive to road, resulting in cargo shift and incremental traffic to IR as well. Further the Company, in order to reduce cost of transportation of EXIM traffic, shall run double stack container trains and work to clear all identified overhead structural obstructions on this Section has been undertaken.

Seeing growth in Kandla Area, Government of Gujarat has further decided to fund broad gauge conversion of 223 km. line from Bhildi to Samdhari. This will provide direct rail connectivity to Punjab which will reduce the distance by another 350 km. With the above connectivity, it is expected that Gandhidham area will handle additional traffic of 15 to 20 million tonne traffic by rail, after it becomes operational.

LESSON’S LEARNT

As in case of PRCL, two experiences have been important - -

For Port connectivity project, there is a need to coordinate port development with the rail link.

A minimum gestation period of four to five years is required without any debt servicing liability as it takes time for traffic.

INDIAN RAILWAYS - A REAL TURNROUND

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 he 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, having moved into his position on 23rd May, 2004.

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

(of which the author was a member) which studied the IR for nearly two years [NCAER, 2001]. They had stated,

“Today IR 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.”

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 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 a recognition of this ‘turnaround,’ some of the world’s biggest asset managers, investment bankers and consultants including Goldman Sachs, Deutsche Bank, HSBC, Mckinsey etc had shown interest in working with IR.

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. This 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.

Total Earnings and Total Working Expenses

Growth Rate for Total Earnings and Total Working Expenses

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 is targeting an improved 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].

Operating Ratio

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 paid out of the net revenues, including when the payment 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. This amount is expected to be cleared by 2006-07.

Net Revenue Receipts

CAUSES OF FAILURE

The Indian Railways have played an integrating role in the social and economic development of the country. Railways also have an advantage of being less energy intensive and more environments friendly. However, Indian Railways have experienced a continuous decline in market share in the transport sector. The economic recovery experienced in 1999-2000 continued until the first half of 2000-01, before a slowdown again set in. Mainly as a result of the same, against the target of 475 million tonnes of revenue earning goods traffic (originating), the Railways’ freight traffic aggregated to 473.5 million tonnes during 2000-01. This was 3.7 per cent higher than the performance in 1999-2000.

Several parts of the country faced natural calamities, such as, the earthquake in Gujarat and drought in parts of Rajasthan, Gujarat, Maharashtra, Madhya Pradesh, Bihar, etc. The Railways organized massive movement of relief materials including fodder and water to the affected areas, free of charge. 9.67 A target of 500 million tonnes of revenue earning freight traffic was set for 2001-02. However, owing to the continuation and, indeed, deepening of the economic slowdown, freight traffic during the first five months of the financial year stagnated at last years level. The performance in this respect during April- December 2001-02 registered an increase of only 2.7 per cent over the corresponding period of 2000-01. While there was an increment of 9.4 million tonnes of freight traffic over April-December 2000. An increase in the quantity of freight traffic moved was recorded in respect of coal, raw materials to steel plants, iron ore for export, pig iron and finished steel, cement and food grains. The quantity of freight traffic was lower in respect of Fertilizers, and Petroleum Products (Table 9.6). In terms of Net Tonne Kilometre (NTKM), the increase in revenue earning goods traffic was 4.4 per cent during April-December 2001. 9.68 The administrative costs of the Indian Railways have been increasing rapidly. With about 1.55 million employees, the Indian Railways are the largest employer among public sector undertakings in the country. There is also a substantial burden of pension liabilities. The

Railways have, therefore, drawn out an elaborate plan for right-sizing the manpower. A norm of restricting the intake to a maximum of one per cent of the strength on rolls in certain Departments is being kept, while only 0.5 per cent intake is being allowed for the Production Units. Simultaneously, measures have been taken to raise manpower productivity. A concept of bench marking has been introduced to measure and compare the manpower productivity in the various facets. Increased emphasis is also being laid on re-training of staff rendered surplus and its re-deployment elsewhere in expanding areas of activity. 9.69 The Railways have been performing the dual role of functioning as a commercial undertaking and a provider of public utility service. ‘Social Service Obligation’, involves a measure of cross-subsidization of passenger services by freight revenues, as also subsidization within passenger and freight segment. Operation of certain uneconomic services, like those in suburban sections and branch lines, is also undertaken on social considerations. The total loss on such public service obligations (PSOs) performed by Indian Railways during 2000-01 is estimated at Rs.4,000 crore.

Like most of the other railways in the world, IR faced a very challenging environment towards the closing years of the 20 th century characterized by severe competition from road in freight and airlines, luxury buses and personal vehicles in the passenger segments. A period of continuous and precipitous erosion in the share of railways in traffic followed. IR responded with a carefully crafted strategy of reform; built around its core strengths – unique amenability of railway operations to achieving substantial reduction in unit cost by carrying ever larger volumes of traffic. Marking a radical departure from the tariff-focused policy of revenue generation, the new strategy stressed on capturing largevolumes for the Railways. On the freight side, this meant quick generation of capacity, not through investment but through optimization of the existing infrastructure and efficient asset use.

Key Components of the turnaround strategy of IR:

For Passenger Traffic:

Fares for premium classes where the competition from airlines, luxury buses and personal transport vehicles was the most severe were reduced.

The length of the popular trains on densely trafficked routes was increased to 24-26 coaches from the existing length of 16-18 coaches.

Speed of the trains was reviewed and upgraded within the constraints of the infrastructure.

Participation of private operators in passenger related non-core areas such as parcel and catering was encouraged.

Information Technology was used to make ticketing and reservation easily accessible not only at stations but from the convenience of homes and offices.

An airline-style up gradation for passengers in the lower classes to higher classes was introduced

For Freight Traffic:

Axle load was increased from20.3 tonnes to 22.9 tonnes and later to 25 tonnes on select routes.

Wagon turnaround time was brought down from 7 days to 5 days Tariff was rationalised around the principle of elasticity of demand. Tariff for cement & steel which faced threat from road sector was reduced. Freight discounts were allowed for loading in empty flow direction & in lean seasons

for customers offering incremental traffic

STRATEGIES

Major strategies followed by the Indian Railways which led to the complete turnaround are as follows:

CAPACITY ENHANCEMENT

The Indian Railways has a massive infrastructure in place and the costs incurred are predominantly fixed and independent of the operations. The challenge was therefore to achieve enhanced capacity while not incurring additional capital expenditure. Following are some key innovative and e ective measures that led to this:ff

• Productivity Improvement - By increasing wagon loading capacity and significantly reducing wagon turnaround time. This is seen from data in Figure:

• In the past, loading/unloading was done only during day time (10 hours a day on an average) and trains used to lie idle at customer sites overnight. The Indian Railways provided incentives to customers to undertake loading/unloading 24 hours a day. Consequently, the average time taken for loading came down from 30hrs to 16hrs and for unloading from 34hrs to 18hrs, reducing the turnaround time by over a day.

• IR did away with the system of train examination, which consumes about 16 hrs on an average. Earlier, train examination was done every time a train came back to its base station, irrespective of the distance traveled in the interim. In recent times, examination is being conducted only after 4,500 kms. or 15days (whichever is later). This strategy was very successful and has been later extended to 7,500 kms.

CAPACITY UTILIZATION

• Dynamic Pricing Policy

Till recently, IR had a fixed price policy, irrespective of demand scenario and competition. In order to be able to e ectively face the challenges posed by sti competition, a Dynamic ff ffPricing Policy was introduced for freight as well as passenger, for peak and non-peak seasons, premium and non-premium services, and for busy and non-busy routes. As per this policy the rates for non-peak season,non-premium service and empty flow directions would

be less than the general rates and the rates for peak season and premium services could be higher than normal.

• Tari Rationalizationff

To simplify and rationalize goods tari , the classification of items was reduced from over ff4000 to a mere 28 groups of commodities. In 2005-06, the total number of classes in the freight tari schedule was reduced from 27 to 19. The highest class - 250 for charging freightff was lowered to 220 in 2006-07.This was a very clever policy as more classes were put in the higher price category. Thus even though the maximum cost was lower in new tari rates, the ffnett revenue weighted over the tra c in all the classes was larger.ffi

• Non-peak Season Incremental Freight Discount Scheme

The demand for freight transportation typically dips from 1 July to 31 October on account of monsoon. It was estimated that over 400 trains remain idle in this period due to lack of demand. Hence, during this period, freight rebate of 15% was o ered for incremental freight ffrevenues of over Rs. 5Crore in a month and 10% for incremental earning of less than Rs. 5 Crore.

• Long term freight discount scheme

Merchants want to make transportation arrangement for goods on a long-term basis. Hence, long-term freight discounts were o ered to attract new customers and new freight tra c. ff ffiUnder this scheme, zonal railway administrations were able to o er a discount of up to 20% ffduring non-peak season and up to 10% in the peak season for a period of three years. For loading in empty flow direction, the discount was up to 20% and 30% during peak season and non-peak season respectively.

REVENUE ENHANCEMENT

The incentives to ramp up volume were complemented by a two-pronged revenue enhancement strategy, which capitalized on opportunities and reduced losses by exiting non-core operations.

The strategy in freight operations was to recognize low-cost high-volume operations where the Railways enjoyed significant comparative advantage vis-a-vis road and air transport and achieve higher realizations on these operations. For example, the tari on ore has been ffincreased by 70% (virtually no competition) at a time when rate on iron and steel has been reduced 30%. The strategy to focus on capacity utilization resulted in high volumes and compensated for the discounts and the lowered tari s.ff

Some of the innovative measures adopted in the passenger segment included increasing the number of coaches in popular trains and encouraging occupancy in the profitable upper classes. The passenger tari was rationalized such that the fares of AC First and AC Second ffClass were 11.5 times and 6.5 times the Second Class fare respectively. This, coupled with the innovative automatic upgradation scheme, enabled higher occupancy in the profitable upper classes.

The Railways also exited from the loss-making parcel and catering services and o ered it to ffprivate players on a bidding basis. There was also a significant thrust on non-fare income streams such as advertising and allied services including land-use rights at railway stations.

Retrenchment (cost cutting initiatives)

This principal strategy consists of several sub-strategies including reviewing parts of

businesses that are not value adding, withdrawing from markets where the firm is performing

poorly, selling assets, reducing scale of operations, improving efficiency, downsizing,

outsourcing and such other strategies. The emphasis is on control of costs.

- Reviewing parts of business that are not value adding. The IR reviewed its

catering and parcel service business and decided to lease it out. The Railway Minister

stated that by leasing out catering and parcel services IR have reduced catering and

parcel losses of more than a thousand crores. Similarly, the IR attracted private

investments under the wagon investment schemes and siding liberalisation scheme.

This freed up resources for utilisation in more remunerative activities.

- Efficiency improvements. The efficiency improvement brought by the IR can be

evidenced from the diminishing operating ratio (ratio of total working expenses to

gross revenue receipts), which was 98.8 percent in the year ending March 2001 and

was brought down to 83.2 percent in 2006 and further to 78.7 percent by 2007.

Operating ratio is a key indicator of railway financial performance. ‘China Rail’s

2006 operating ratio was 60.7 percent, compared with Canadian Pacific Railway’s

75.4 percent. A lower operating ratio is better. Thus, the IR’s operating ratio is now

comparable with that of other large rail networks in the world. The IR has a plan to

bring it down further to 65 percent by 2010.

Table below shows the decline in operating ratio achieved over the years.

The strategies used to improve gross revenue receipts - As for the bringing down of

working expenses — the numerator — it was achieved through measures such as the freeze

on filling up vacancies, improving technical efficiency etc. To improve efficiency the IR

adopted following strategies:

The IR took several initiatives at technology up-gradation and modernisation. These

include (a) introduction of modern signalling and telecommunications technology in order to

enhance safety, and enhancing line capacity (b) improving operating efficiency of freight

transportation through the introduction of Freight Operating Information System (c) the

complete computerisation of control office, Coaching Operations Information Systems and

interfacing of both these systems with the National Train Enquiry System so as to directly

benefit passengers and other rail users. Increased use of technology resulted in improving

technical efficiency in provision of services. In addition, the IR also focused on the sub-

strategy capacity enhancement and ensured better capacity utilization. Through enhanced

axle load and reduction in turnaround time of wagons by 14 percent, the IR increased wagon

capacity available per day by 36 percent. Due to the rapid uptake of technology the IR

bagged IT Transformation Award 2006 of NASSCOM — India’s peak IT industry

association.

- Downsizing - The number of employees, which peaked at 1.652 million in 1991, was

brought down progressively to 1.472 million by 2003, and to 1.412 million by 2006.

One of the elements of retrenchment strategy is to trim off excess staff. The approach

that the IR adopted was not to fill in vacancies created due to retirement or other

reasons. This approach commenced during the term of Mr Nitish Kumar as the

Railway Minister and has been continued by Mr Yadav. Again, downsizing as a

strategy for reducing costs was initiated when Mr Nitish Kumar was the Railway

Minister. Over the years the IR reduced the staff on payroll from about 1.58 million in

1999 to about 1.41 million by 2006, down 0.17 million or 10 percent. This resulted in

the decline of overall expenditure by at least Rs 2,000 crores in 2006 (see Table 4),

compared to what it would have been had the staffing levels been comparable to those

in 1999. s

In 1998, due to the impact of the Fifth Pay Commission the expenditure on staff and pension

payments increased by almost 35 percent in just one year. It will be seen from above that

growth rate in wage bill was contained (brought down to single digit growth rate from double

digit growth rate) during the period of Mr Nitish Kumar who was the Railway Minister in

1998-1999 and again in 2001-2004.

- Outsourcing: Besides the catering and parcel service activity, the IR also outsourced

advertising activity. In the other business areas of parcel, catering and advertising, the

strategy of outsourcing through public private partnership and wholesaling rather than

retailing was adopted.

The evidence presented above in respect of sub-strategies such as the review of

businesses that are not value adding, efficiency improvements, downsizing and outsourcing

appears to provide support that retrenchment strategy helped the IR to contain costs which

ultimately helped its turnaround.

Strategy 2 : Repositioning (revenue raising initiatives)

This strategy includes several sub-strategies like focus on growth, product innovation,

product differentiation, re-branding, and all these ultimately leading to capturing market

share. The focus of this strategy is on revenue generation as opposed to cost control. Various

measures taken by the IR are outlined below.

- Focus on growth. As stated above, the focus of policy change effected by the IR was

on meeting the requirement of its customers. Railway customers are primarily of two

types — those availing freight services and those availing passenger services. The two

major sources of revenue for the railways are then goods (freight) revenue and

passenger revenue which respectively form about two-third and one-third of total

railway revenue. The IR has shown an impressive growth in both freight and

passenger revenue as can be seen from the rising growth rate after 2004.

There was a steep growth in freight revenue after 2004. The turnaround of the IR was mainly

freight revenue driven. The increase in the freight revenue can be traced to three factors (i)

increased axle load (ii) reduced wagon turnaround and (iii) market oriented tariffs and

schemes. The first two managerial actions increased the IR’s capacity to move higher volume

of goods while the third action — market oriented tariffs and schemes - helped raise the per

unit revenue from freight.

The major reason for rise in freight revenue was higher loading volume (axle load)

through existing wagons given that augmentation in the number of wagons takes time. In

three years from 2004, the incremental loading achieved was about 170 million tonnes, which

exceeded the total incremental loading of the 1990s by 120 percent. Freight earnings were

increased through carrying increased tonnage by enhancement of loading limits from six

tonnes to ten tonnes.

To reduce wagon turnaround days, cash incentives were offered to freight customers

to free up the wagons faster. Handling capacity of freight terminals was increased; strict

control was maintained over idle wagon capacity through the use of Freight Operations

Information System. To free up wagons users were encouraged to adopt round the clock

loading and unloading of rakes at terminals. Through these measures, the IR was successful

in reducing the wagon turnaround from seven to five days. Simultaneously, the connectivity

to ports was increased to facilitate quick clearance of imported goods arrived at the ports and

similarly to facilitate speedy export of goods. For effective transportation of perishable goods

like milk and vegetables more refrigerated parcel vans were introduced. All these measures

put together resulted in raising the percentage of average annual growth rate in freight

volume from 2.34 (2001) to 7.90 (2006) and freight revenue from 6.31 (2001) to 17.90

(2006) and to 14.96 (2007) as can be seen from the Table above. In volume terms there was

some but not a substantial change in the rate of growth of goods traffic. This shows that the

revenue generation was achieved mainly by appropriate pricing of freight on goods.

The IR also adopted several market oriented tariff levying strategies. The tariff

schedule for wagon use by customers was simplified and rationalised. Items in the schedule

were reduced from some 8000 to less than 100. Classification of certain commodities from

lower tariff to higher tariff band resulted in the increase in freight earnings. In addition, the

upward revision in freight rates (shown in parenthesis) was as follows: coal (8 percent), iron

ore (17 percent), cement (4 percent), limestone and dolomite (17 percent), and food grains

(33 percent). As the above table shows the rate per net tonne km, which declined to 72.44

(2004) was increased to 82.55 by end of 2006. However, this reflects monopoly elements

some of which may not be sustained as competition from the road hauliers increases with

improvement in the quality of roads and in the purchase of vehicles with very large carrying

capacity. However, the use of its competitive advantage in certain areas (monopoly power in

some cases) demonstrates the change in strategic thinking of the IR management.

The IR adopted two pronged strategy to improve passenger revenue: (a) competitive

pricing and (b) substantial increase in passenger comfort and amenities. To arrest the

dwindling market share in passenger market segment, the IR decided to maintain the present

level of passenger tariff as is reflected in Table below. The average rate per passenger km has

remained around 24.50 paise3 only. The IR, however, improved various passenger amenities

and introduced additional coaches in areas of high demand. Further, in response to

burgeoning competition from new low cost aviation sector, the IR reduced fares for air-

conditioned coaches.

A major concern of the railway passengers was about their safety. The IR took several

measures as follows to address this issue. Yadav (2006) states that the IR created a Special

Railway Safety Fund of Rs. 170 billion to improve safety environment, through replacement

of over aged railway assets, that is, tracks, bridges, rolling stock, signalling gears etc. The

number of accidents have been more than halved from 473 (2001) to 200 (2007). Use of high

technology for passenger safety is also a hallmark of the IR success. In the area of train safety

devices like Train Protection and Warning System and Anti-Collision Devices were

introduced. Railway Protection Force was strengthened to escort passenger trains in security

sensitive areas. Single window service to the customers for providing value added service

was introduced. The combined effect of these measures was an increase in the volume of

passengers by approx 29 percent over the period 2001 to 2007 (see Table 6A). As Table 5

shows, the IR recorded significant increase in absolute amount of passenger revenue receipts.

Passenger revenue receipts that were Rs. 105 billion (2001) rose to Rs. 172 billion (2007) —

a rise of 64 percent.

Product innovation. The IR introduced double stack container trains on diesel route between

Pipavav port and Jaipur. These containers increased the carrying capacity of each train to

2,500 tonnes against 1,500 tonnes, and also reduced line capacity constraint by nearly half

and ‘led to saving of about seven percent on capital cost and 25 percent in operating expense’

(Das, 2006:1). Similarly, as stated by the Railway Minister in his budget speech 2007-08, the

IR enhanced the capacity of existing lines and made available wagons designed to suit the

specific need of new cement, steel, and power plants. The IR also developed freight terminals

with more than 15 wagons per month handling capacity which enabled the IR to expand its

freight traffic. Further, it introduced new design of wagons with higher pay load (carrying

capacity) but lower tare weight (weight of the empty wagon) that improved safety features.

The effect of these measures can be seen in higher freight revenue.

Product differentiation. Product differentiation can take many forms. These include

differentiating in quality and price of the product from that of rival firms, differences in

product design and features, differences in availability of product in terms of time and

location etc. In order to compete in the passenger market segment, with other modes of

transport viz., road, aviation, coastal shipping, the IR embarked on a program of improving

passenger amenities (discussed earlier). To win over passengers the IR introduced e-ticketing

through Internet from home which became very popular. Further, it introduced passenger

coaches with new layouts that have significantly high capacity than previous coaches. It also

brought about perceptible improvement in the passenger amenities. While the IR improved

passenger amenities as stated by the RBI after March 2003 ‘passenger fares had remained

unchanged’ (RBI, 2005: 464).

Improving market share. The share of the IR in freight market was progressively declining

for several years in a row. For the first time, the IR reversed this trend. The annual freight

growth rate which was 1.4 percent (2001) increased five fold in 2005. The IR ‘achieved a

growth rate of 7.67 percent in one year in freight loading… and regained some market share’

(Yadav, 2005:4). The IR adopted several marketed oriented and customer friendly policies to

attract business as detailed earlier. The IR adopted two pronged strategy to regain market

share. Where it had competitive advantage it used economic principles by charging higher

prices and where it faced tough competition, it lowered prices to regain market share.

The above evidence suggests that the IR pursued sub-strategies of focus on growth,

product innovation and product differentiation for revenue rising. There is no evidence to

suggest that the IR used other sub-strategies to boost revenue. The sub-strategy of focus on

growth consisted principally of raising revenue through dynamic pricing approach for freight

and passenger traffic. Efforts were also made for raising volume of freight and passenger

traffic. Based on above evidence we are inclined to accept proposition 2 above that the

repositioning strategy had positive impact on the IR turnaround. The success in significant

revenue increase was achieved not only through managerial actions but environmental factors

also contributed to this as discussed below under the relevant sub-head.

Reorganisation. This turnaround strategy consists of all strategies that are supporting the

above two principal strategies for turnaround, that is, retrenchment and repositioning. This

involves sub-strategies such as changes in planning systems, decentralising, human resources

planning, organisational culture and such other related issues. In the Railway Budget speech

on 6 July 2004, the Minister stated ‘Indian Railways is committed to … optimum utilisation

of human resources …’ (Yadav, 2004:12). The IR took several steps in the direction.

Changes in planning systems. The IR introduced improved accounting and management

information systems to provide financial, operating and management information needed to

increase efficiency, meet emerging business needs and improve commercial orientation. It

introduced Long-Range Decision-Support System and related systems for investment

selection on the basis of expected returns (ADB, 2002:37). To cater to the rising passenger

numbers which run into millions each day, the IR introduced state-of-art passenger

reservation system. Similarly, the freight business was streamlined through the Freight

Operating Information System and Enterprise Resource Planning (ERP) packages were

implemented in workshops, production units and selected zonal railways.

Decentralising. The IR decentralised its organisational operations by creating more zonal

centres. The number of zones was raised from nine in 2003 to 16 in 2005 which helped faster

decision making and provided better customer service. The CAGI (2006) states the IR

decentralised procurement through the introduction of Vendor Management System which

considerably raised vendor satisfaction due to the transparency, fair play and equal

opportunity it provided –something that was missing in the earlier system.

Human resources initiatives. As fatigue enhances probability of accidents, several measures

were initiated by the IR to improve working conditions of drivers and guards. Crew friendly

driver’s cabins and brake vans were designed. Another initiative was the establishment of

International Railway Strategic Management Institute in 2005 under the aegis of International

Union of Railways. It is a premier institute to serve the training needs of managerial staff. To

increase participation of railway employees in management, regular dialogue with the

officers and the staff federations through a specially constituted forum called ‘Participation of

Railway Employees in Management (PREM)’ was established. The IR was also in the

forefront of taking affirmative action. It ensured that adequate representation is given to

disadvantaged sections of the society and to physically challenged people as required under

the relevant legislations. Suitable sports facilities were also made available to the employees

and the IR sports team won several laurels at national and international level. ‘More effective

use of manpower led to improvement in staff productivity. Multi-skilling of staff was

emphasized. These strategies resulted in doubling of the staff productivity compared to the

productivity in the 1990s’ (Yadav, 2006:7). Revenue per staff witnessed a rise by 68 percent

(2001–2006) as against 49 percent (1996–2001).

Changes in organisational culture. Probably the most significant cultural change witnessed

by the IR in recent years is the philosophical change — from politicised decision making to

commercial, business oriented decision making. As already stated above, Mr Nitish Kumar

while presenting his 2001-02-budget stated ‘Railways need to develop market oriented and

customer friendly outlook due to emerging competition within the transport sector’ (Nitish

Kumar, 2001:8). The transformation of the IR to a customer-focussed organisation is

remarkable. For example, the IR has responded to the enhanced competition from the

aviation sector, with improved information for passengers through the creation of enquiry call

centres and regular updating of current vacancy positions. Several customer friendly actions

taken by the IR have been discussed earlier.

The above evidence appears to support proposition 3 that the reorganisation strategy

helped the IR improve it’s overall organisational culture and employee participation leading

to positive impact on turnaround. It is obvious from the above discussion that the managerial

strategies for turnaround (retrenchment, repositioning and reorganisation) did help the IR

turnaround. In addition, several macro-economic environmental changes also contributed to

its turnaround, principally among these was the general growth of the Indian economy. In

paragraphs that follow, we describe how these factors impacted on the IR turnaround.

Environmental factors

Change in the macro-economic conditions. The general improvement in Indian macro-

economic conditions helped the IR turnaround. ‘This growth environment offered an

opportunity for the IR and had a significant impact on the turnaround’ (Raghuram, 2007: 10).

As can be seen from Table 7, the average growth rate of the Indian economy in the years

since Mr Yadav took over as Railway Minister was 8.5 percent — more than that recorded

for the preceding four years. This heightened growth in the economy raised the demand for

freight and passenger services which is reflected in the higher revenue earned by the IR as

already indicated above.

Rise in demand. The rise in freight revenue — the main plank of the IR 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. 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 favourable international demand reflected in substantial increase in iron ore

price by raising the freight on iron ore. As stated earlier freight on iron ore was raised by 17

percent.

Change in the legal position. One of the major changes that have impacted positively for the

IR was the Supreme Court Ruling in November 2005 which banned overloading of road

transport vehicles. According to the KPMG (2007:7) this was a ‘shot in the arm for the

Railways as the road transporters traditionally over loaded 1.5 - 2 times the rated capacity on

trucks’. The average road freight rate for transportation ‘shot up by about 25 to 30 percent in

the short run increasing the difference between road and rail freight cost’ (Mathur, 2006:1). It

shifted the freight business –more specifically of cement and steel — to the IR and is

reflected in the sharp rise in freight revenue of the IR in the years 2006 and 2007. This played

a part in the turnaround of the IR.

Changes in the accounting practice. The IR made an important change to the accounting

practice following from the international push for uniform accounting standards. Yadav

(2005) states the IR have ‘accordingly set in motion an accounting reforms process ...’. Under

the Government accounting system, the total amount of lease charges paid to the Indian

Railway Finance Corporation (IRFC) for rolling stock leases by the IR was treated as

operating expenditure. However, the charge consists of payments towards both interest and

principal repayment components, which are in the nature of revenue and capital expenditure,

respectively. To bring the IR accounting practice in line with Generally Accepted Accounting

Principles for lease finance and to ensure that the true nature of the transaction is reflected in

the accounts and the asset is recognised appropriately, from 2004, only the interest portion

was debited to operating statement, the principal portion was capitalised. These changes in

the accounting system have effected a reduction of Rs. 1,616 crores in the operating

expenses. This accounting change raised the surplus and lowered the operating ratio. For

example, the above change alone amounted to 26 percent of the surplus in 2006.

Impact of the Pay Commission. The major changes in the salary scales of Indian public

service employees (including Railways) are determined by the Pay Commissions that are

appointed by the GOI. The implementation of the Fifth Pay Commission in 1997, increased

the total wage bill of the IR by 34 percent during 1997–98. This wage rise does not include

the increase in pension costs. The share of pensions in working expenses rose from around

4.5 percent in 1980-81 to nearly 14 percent in 2003-04. By the time the present Railway

Minister took over, the impact of this pay rise and pension liabilities had been absorbed by

the system through increased redundancies.

Decline in the financial cost. The decline in overall interest rates and liberalisation and

expansion of financial markets helped the IR to raise external resources with ease. Also the

IR is required to pay only 6.5 percent dividend on the GOI investment in it, which naturally

reduces the overall financial cost to the IR and puts it at an unfair advantage vis-à-vis the

road sector which is required to borrow at commercial rates. Similarly, the finance that is

raised from the market by the IRFC is available at a lower rate as compared to the prime

lending rate of State Bank of India (see below); because of GOI guarantee for such finance.

Further, the bonds of IRFC are tax free so these can be offered at lowering interest rate which

reduces the borrowing cost. The softening of interest rates in international markets also

helped in lower interest cost. A combination of such favourable factors led to lower overall

borrowing cost. ‘Taking advantage of the soft interest rates during 2003–04 judiciously, …

an overall weighted average cost of incremental borrowing at 5.59% for the year 2003-2004

and … the previous year weighted average cost of 7.00%, the overall weighted average cost

of funds for the year worked out to 5.70% p.a’ (IRFC, 2004: 3). As against this, the prime

lending rate of State Bank of India was 10.25 percent in 2004. The softening of the

international interest rate environment helped IRFC to raise larger amount of debt at lower

cost.

It can be seen from the above discussion that several macro-economic factors have made

significant contribution to the turnaround of the IR. It will be incorrect, therefore, to ascribe

the IR success to managerial leadership alone. The exact impact of contribution of some of

these strategies to revenue or cost, however, could not be determined in the absence of data

availability. The favourable impact of macro-economic factors supports the argument that

‘good luck’ also helped the IR turnaround.

ANALYSIS OF THE CASE

SWOT Analysis:

Strengths:

Financial back up from government. Biggest company in the world in terms of Employee Strength. Large Infrastructure. Large Network across the country. Luxurious and also affordable to common man.

Weakness:

Assets are not properly utilized Government protocols, lot of negligence. Lack of safety measures in all trains. Delay in train timings.

Opportunities:

Use of Latest Technology. Better customer service. Metro trains in cosmopolitans cities.

Threats:

Heavy vehicles with two trailers may replace freights carriage. Low cost airlines. Development of roadways.

PESTLE Analysis:

Political:

The Indian Railways is owned and run by the government of India. As a resultThere was lot of policy changes which resulted in increase in efficiency of the railwaysDuring the period 2004-05.

Economic:

IR is a Public Sector Undertaking so fund flows were taken care of by the Government and Revenue generated helped in economic prosperity of the country.

Social:

As there was no further hike in the travel fare, so travel was made affordable for common man at the same time the additional services were also provided. This led to considerable increase in revenues and tourism.

Technological:

Introduction of Diesel engines, Electric super fast trains, redesigning of coaches and improved safety measures were undertaken which earned more revenues to the railways.

Legal:

The contracts undertaken by the railways for freight carriages and insurance are major of Legal aspects.

Environmental:

Introduction of electric engine helped in decreasing the pollution. Also Introduction of Kulhars (cups made of mud) and ban on use of plastic cups in train also led to decrease in pollution and gave financial help to potters.

FUTURE SCENERIO OF INDIAN RAILWAY INDUSTRY

Challenges:

Increasing number of trains requires sufficient number of tracks and setting up of Tracks requires huge amount of time and expenditure.

Over use of old tracks can lead to accidents.

Prospects:

High way Golden Quadrilateral Plan should be complemented. Implementation of freight and high speed corridors in southern region should be Done, so as to balance Northern Rail freight corridors railway. Private sector investments should be allowed so that financial and operational

Burden is met. Increase in financial and commercial investment to attract FDI. PPT frame work should be developed for the manufacture of state-of-art rolling

Stock, locomotives, track equipment and signaling infrastructure coupled with Technology transfer arrangements.

Development of infrastructure for Inter Modal connectivity. Rationalization of freight tariffs to simplify freight tariff slabs. Railways should resort to progressive suppression of railway

Infrastructure and operation and maintenance. Independent and transparent rail tariff authority should be created.

Recommendations:

Special teams should be appointed to check ticket less traveling. Censor monitoring system should be implemented to check extra luggage

Carriage. Customer services should be taken care of by improvement of resting rooms on

Stations. Third track should be made for better freight transport. Safety measures of the railway should be checked at regular intervals and should

Be updated with the latest technology.

CONCLUSION

Indian railways should aim at performance enhancement keeping in mind performance maintenance. Increasing customer expectations and rapid technological advances with considering customer focus should be the main motto of the Indian Railways, thus adding support to the economic development of the country.

HIGHLIGHTS OF VISION 2020 INDIAN RAILWAYS

Presented to the Parliament by Railway Minister Km. Mamata Banerji, on 20.12.09

(AN IRTSA COMPILATION)

VISION 2020 will address four strategic national goals:

Inclusive development, both geographically and socially;

Strengthening national integration;

Large-scale generation of productive employment; and

Environmental sustainability.

Basic Approach

1. Growth with Jobs and not Jobless Growth. Productive employment opportunities must be created for all able-bodied Indians, especially for our youth and preferably in their own habitats.

2. Reducing hazardous carbon emissions that have triggered climate change.

3. Gross Revenue of the Indian Railways has remained at a level of around 1.2% of India's GDP over the last 10 years. Our Vision is to take it to 3% in the next 10 years.

4. Segregation of freight and passenger services, creation of adequate capacity and raising of speeds of both services would be a key challenge if Indian Railways are to retain their market share and improve upon it.

5. To realize this potential, the Indian Railways must achieve annual growth of 10% over the next 10 years. Vision proposes to add 25,000 kms of New Lines by 2020, supported by government funding and a major increase in Public Private Partnerships (PPPs). This includes the completion of the backlog of 11,985 kms of lines already sanctioned.

Capacity Augmentation

6. Major augmentation of capacity through doubling and quadrupling of lines, complete segregation of passenger and freight lines on High Density Network (HDN) routes, substantial segregation on other routes, and electrification on busy trunk routes.

7. More than 30,000 kms of route would be of double/multiple lines.

8. More than 6,000 kms would be quadrupled lines with segregation of passenger and freight services into separate double-line corridors.

9. Maximum speed of passenger trains would be raised from 110 or 130 kmph at present to 160- 200 kmph.

10. Maximum speed of freight trains would be raised from 60-70 kmph to over 100 kmph.

11. Gauge conversion programme would be completed.

12. 33,000 kms of routes would be electrified.

13. At least 4 high-speed rail projects to provide bullet train services at 250-350 kmph.

14. India's National Highway network comprising 2% of the country's road system carries 40% of the traffic and is already under strain. Finding land to meet the ever-rising requirements of road expansion and resources to meet the rising cost of fossil fuels will impose prohibitive costs on the economy.

Safety

15. At level crossings which account nearly 70% of fatalities in Railway accidents, advanced technologies will be used.

16. Road transport accounts for a significant share of the emission of greenhouse gas (CO2) and other pollutants. In the year 2007, more than 1,13,000 people were killed and 5,13,000 were injured in road accidents in the country.

17. In contrast, Indian Railway's safety record has been very impressive, and improving. In the year 2008-09, there were 177 accidents (down steadily from 320 in 2003-04) and 207 persons were killed. With well-planned and directed investments, Railways can be made virtually accident-free.

Passenger Service

18. By 2020, Railway's passenger services would be transformed from a supply- constrained business to a state of availability on demand. Quality of services in terms of punctuality, safety, security, sanitation, cleanliness and amenities at stations and onboard, catering and other value- added services (pre-boarding and post -disembarkation) would be upgraded to match the best in the world.

19. Number of passengers carried by IR will grow from 8200 million in the year 2011-12 to 15180 million in the year 2019-20 and Passenger KM in billion will grow from 1100 to 2360 during the same period.

20. The trunk routes of the railways comprising merely 16% of the network carry more than 50% of the traffic.

21. Improvement of speed to 160-200 kmph on segregated passenger corridors would be necessary.

22. Introduction of new suburban trains in Mumbai with regenerative braking features saving up to 35-40% of the energy.

23. For the development of Metro rail service a separate Indian Railways Metro Development Authority could be formed for this purpose.

24. Production of passenger coaches must go up from the present level of 2500 per annum to at least 5000 per annum within the next 3 years to begin with and further to 10,000 per annum. It will not only satisfy the demand for rail travel fully in the country but also make India an export hub for modern passenger coaches.

25. Delhi-Mumbai and Delhi-Kolkata will become an overnight service.

26. Induction of light-weight stainless steel coaches, Double-decker coaches and longer trains, Increased production of high-horse power, fuel-efficient diesel locomotives and Induction of new-generation locomotives and rolling stock

27. Saving up to 15% of energy through a improved energy efficiency in both traction.

28. Annual reduction of 0.14 million tonnes of CO emissions.

29. Journey on Indian Railways pleasant- fast, punctual, comfortable, clean, and, indeed, memorable.

30. It will be our endeavour to see that no train traveller has to wait for more than 5 minutes for getting a ticket even in the unreserved category.

31. For the year 2008-09, estimated losses on passenger business amounted to roughly Rs.14,000 crore, a loss of 18 paise per each passenger kilometer run (more than 40% of the cost) is not sustainable.

Freight Traffic

32. Freight services would be transformed by segregation of freight and passenger corridors, construction of dedicated freight corridors, improving the speed of transit, cost-efficiencies in bulk transport and meeting the needs of customers in terms of service delivery, logistics services, transit time and tariff.

33. Originating fright loading will increase from 1010 MT from the year 2011-12 to 2165 MT in the year 2019-20 and Net Tonne KMs in billions will increase from 656 to 1407 during the same period.

34. The Vision targets a significant reversal of the erosion of market share, lost to the road sector in the past, and will take Railway's share in the freight movement from 35% at present to at least 50%.

35. Annual procurement of wagons would go up from the level less than 25,000 wagons now to a level of round 75,000 wagons in four wheeler units.

36. Two Dedicated Freight Corridors on the Eastern (Ludhiana-Dankuni) and Western (Mumbai-Delhi) routes would be operational well before 2020.

37. Plan to start work on four more DFCs, namely North-South (Delhi to Chennai) and East-West (Howrah to Mumbai Southern (Chennai to Goa) and East-Coast (Kharagpur to Vijaywada).

38. In Parcel service five fold increase in ten years from the present level of around Rs. 1600 crore per annum.

39. Heavy-haul freight operations are common in USA, China and Russia with trains carrying in excess of 20,000 tonnes each compared to 5000 tonnes in India.

Telecom & IT

40. Railways can also think of launching a separate TV channel to disseminate information and earn revenues through advertisement.

41. Tap revenue generation potential in the telecom and IT sector, using the 64,000-kmlong 'right of way' for laying optic fibres, signaling towers and other infrastructure assets that Indian Railways owns.

TECHNOLOGICAL EXCELLENCE

42. Design of modern coaches including Double Decker coaches.

43. Re-design of second class coaches to make them more comfortable.

44. Design of high-capacity wagons.

45. Reduction in cost of operations by enhancing productivity and asset life.

46. Track, signaling and rolling stock including predictive and diagnostic tools, anti-collision devices and protection of level crossings for improvement in safety and reliability of operations to achieve zero accidents and zero failure in equipments.

47. Raising the speed of trains.

48. Improvement of the interface with passengers and freight customers.

49. Ticketing through mobile phones.

50. Improvement of control and voice/video communication to aid IT applications across the Indian Railways.

51. A satellite-based train tracking system to provide real-time information on train location and other train related information to passengers through a variety of devices including mobile phones.

52. Green toilets in all coaches

53. Mechanical cleaning of trains, stations and platforms with requisite training to railway employees to use technology for maximum recycling of water.

54. Waste management, with the aim of achieving "near-zero waste", by adopting the principle of 3-Rs - Reduction, Recycle and Reuse.

ORGANIZATIONAL REFORMS

55. Railway research centres should attract hundreds of young and talented persons with fresh minds, ready to tackle the most difficult challenges

56. Our Vision is not to privatize but to enhance the effectiveness and accountability of the Railway organization through necessary reforms at all levels of Indian Railways within the Government framework.

57. As a Government organization, we are proud of the 1.4 million committed and dedicated employees of Railways.

58. As a corporate policy, Indian Railways has set itself a goal of 1% reduction in the sanctioned strength per annum, assuming a 3% annual natural attrition, to reach an equilibrium level of right-sized staff-strength

Investment

59. It has been tentatively assessed that 64% of the investment of roughly Rs.14,00,000 crore needed for augmentation of capacity, upgradation and modernization of Railways in the next 10 years could be mobilized by Railways through surpluses from high growth in freight and passenger traffic, supported by prudent borrowing and use of PPP initiatives.

60. Need for Government to set up an Accelerated Rail Development Fund (ARDF) to finance the remaining 36% to the tune of Rs. 5 lakh crore to be spent over the next 10 years.

61. The shelf of ongoing projects is huge and Railways would require resources of the order of more than 1,43,000 crore to merely complete the projects on hand.

Public Private Partnership

62. To achieve the mammoth task Railway has set itself, it has to concentrate on its core activity of creation of railway infrastructure and operations and forge partnerships with private sector to do the rest. The challenge of project execution and efficient provision of service can not be accomplished without involving private sector in a big way.