19 Feb 2016 22:40 IST

The Railways Case

Turning the Railways around: will it be a bumpy ride ahead?

Analyse the transportation giant’s problems and spell out the strategy and roadmap it should follow

In February 2016, the Indian Railways (IR) appointed Ernst & Young (EY) to carry out a six-month study on how it could tap the advertising potential of stations and trains. EY was expected to develop a pricing strategy after evaluating the Railways’ assets to help it bag advertising contracts worth ₹500 crore. According to a senior railway official, the Railway Minister was not keen on increasing freight tariffs or passenger fares. Instead, he planned to generate revenues from sources such as advertising, export of railway equipment, cutting working expenses, modifying the parcel leasing policy, and monetising land.

 

Commenting on the move, Abhay Krishna Agarwal, Partner Infrastructure & PPP at EY, said: “This is a good move by the Indian Railways; the focus on generating revenue through non-farebox avenues will be the transporter’s thrust area in the future. Land monetisation, advertisements and differentiated services in passenger and freight segments are promising areas for revenue generation.”

Industry-watchers were quick to point out that the Railways’ move had come when revenue growth during financial year 2015-16 had slowed. Revenue growth for fiscal 2016 was expected to be much lower than the budgeted 15 per cent (attributable to sluggish growth in the core industries). Another major concern was decreasing ridership. According to the Ministry of Railways, ridership had decreased by 2 per cent up to December 2015 compared to the same period of 2014. On the other hand, domestic air passenger traffic in India had grown by 20.2 per cent in 2015 compared to 2014, according to the global airlines body, IATA.

 

Economical mode

Trains are the country’s most widely used and economical mode of transportation, and the railways handle 23 million passengers and 3 million tonnes of freight every day. For several decades, the transportation behemoth has been facing several challenges, such as huge under-investment, congestion, lack of modernisation, unhygienic platforms and railway tracks, and frequent accidents. According to PricewaterhouseCoopers Pvt. Ltd. (PwC), more than a quarter of the rail network is being used over capacity. The Railways is also struggling to keep pace with the rising number of passengers and increase in freight demands. Yet, railway infrastructure is crucial for the common man due to its accessibility and affordability.

Over the years, several expert committees had made recommendations to improve the Railways’ working. However, the public utility continued to face problems. In light of these problems, the Government had articulated its vision for improving infrastructure, increasing railway lines, replacing toilets with bio-toilets to ensure hygiene, enhancing safety, developing bullet trains — a network of high-speed metros that connected the major metropolitan cities — and creating dedicated freight corridors. The Rail Ministry also plans to redevelop 400 railway stations through private participation. According to the Ministry, while the consumers would benefit in terms of upgraded facilities, these moves would also help save resources.

Experts have also recommended an increase in train fares. However, Railways Minister Suresh Prabhu has maintained that passenger service had to be improved before fares could be increased.

The problems

One of the most pressing concerns for the Railways is safety. The frequency of train accidents has been increasing, raising doubts in the minds of the public about rail safety and the physical condition of the network — wagons and coaches are known to be over-age and the bridges distressed. Some other problems are late running of trains, lack of passenger facilities including cleanliness at the railway stations, and absence of security arrangements on trains, resulting in thefts.

While aspirational India wants bullet trains, the consumers at the bottom of the pyramid just want to avoid getting crushed to death at railway stations, especially in the crazy rush during festival times. To add to its troubles, the financial crunch has become a major hindrance to turning around the ailing network (See Table 1 for the Railways’ financial summary and Table 2 for the balance-sheet). In 2014, Prabhu stated that to turn the Railways around and complete projects that had already been announced, huge investments of ₹6,00,000 crore to ₹8,00,000 crore were needed.

In 2014, around 94 per cent of IR’s revenues was spent on operating costs, leaving little with which to develop its aging infrastructure.

Railway experts observed that every year, plans were announced in the Rail Budget for the launch of new trains to deal with increasing passenger traffic and freight. However, the slow pace of modernisation and insignificant growth in infrastructure had led to the new trains adding pressure to already constrained capacity. Experts added that though there had been an increase in passenger traffic and the number of routes operated, infrastructure growth had been inadequate. While the Railways had added around 10,000 route km from 1947 to 2012, China had added over 50,000 km during the same period. In May 2015, it was reported that, as a share of gross domestic product (GDP), China had invested three times more than India in its railways.

In 2012, the Rail Ministry appointed an expert group on modernisation under the chairmanship of Sam Pitroda. Its report highlighted that about 40 per cent of the rail network carried around 80 per cent of passenger traffic, leading to large-scale congestion and inability to increase the speed of trains or accommodate more trains. The share of freight traffic had fallen from 88 per cent in 1950-1951 to 36 per cent in 2013-2014. This was attributed to the fact that the Railways had used the increase in freight rates to cross-subsidise passenger fares. And that this resulted in its losing its share of freight transport to other modes of transportation. The committee suggested that the Railways should spend ₹5,603,96 crore by 2022 to modernise.

In August 2014, PwC pointed out that the higher freight rates had prompted companies to ship cargo by trucks instead of trains. Manish Agarwal, PwC India’s Leader on Capital Projects and Infrastructure, said at the time: “The Railways have been losing freight for years. This mostly comes down to the inability to ensure a time-frame for freight travel, because of the lack of sufficient technology and the size of the network. Passenger and freight lines are shared, and, when there is a delay, passenger trains are always prioritised. This makes it impossible to ensure deliveries within a set time.”

Some experts pointed out that several other areas also required urgent attention. Most trains in India lacked effective systems for detecting smoke and fire, and this has caused several accidents over the years. Moreover, there were no anti-collision technologies installed on trains. These devices automatically brought the train to a halt if it overran a red signal. Another major problem area was unmanned crossings, at which road users took inadequate precautions and failed to observe mandatory signboards, signals, and basic traffic safety rules. Railway experts suggested that the government should provide easy options, such as overpass bridges, flyovers, and improved fencing to prevent people rushing across the tracks.

The Railways also had to tackle competition from several low-cost airlines that were offering competitive prices. For instance, Air India, Indigo Airlines, and Jet Airways had been lowering their fares, with the result that these fares were just ₹550-1,000 more than the two-tier AC fare. The cut in air-fares was attributable to the drop in fuel prices.

Debroy panel report 

In a bid to modernise the Railways and tackle other problems, the Ministry of Railways formed yet another committee in September 2014, under the chairmanship of economist Bibek Debroy. The panel was expected to make recommendations for mobilisation of resources for major projects and restructuring of the Ministry of Railways and the Railway Board.

 

In June 2015, the Debroy Committee submitted its final report, suggesting setting up of an independent regulator, the Railways Regulatory Authority of India (RRAI), to enable competition and protect the interests of the consumers. The committee also suggested (see Graphic) that the RRAI should be made responsible for determining passenger tariffs and not freight tariffs. The Committee favoured privatisation of only rolling stock: wagons and coaches. Citing the UK experience, Debroy pointed out that in 1993, railway privatisation was rolled out in the UK, where railways were separated into 25 train operating companies that were privatised; infrastructure was separated from operation; and a regulator was appointed to grant licences. According to Debroy, “the key lesson from the UK is to retain the rail-track and infrastructure as a publicly-owned monopoly, while opening up rolling stock operations for passengers and freight to the private sector.”

Looking at railway restructuring experiences in several countries including Japan, the UK, Germany, Sweden, Australia, and the US, Debroy concluded that the entry of competition in these countries had lowered prices and led to better services.

Turnaround Plan

In December 2015, Railway Minister Suresh Prabhu announced a five-year plan model to turn the Railways around. Under the plan, the Minister would address key issues plaguing the sector — improving traffic management and upgrading rail roller shops, addressing the quality of railway platforms, cleanliness, and customer satisfaction. To de-congest the network and speed up the trains, substantial amounts would be spent on doubling of tracks and constructing new lines.

Prabhu added that the Ministry was also starting work on the 110 actionable points raised in the 2015-2016 Railway Budget, submitted as a white paper, “Challenges of the Railways”. In addition, the Ministry had created a draft regulatory framework for fixing passenger and freight fares. It also had plans to restructure the railways as an organisation to bring in greater operational efficiency.

To turn the railways around, the Ministry of Railways took a ₹ 1,50,000-crore loan from the country’s largest insurer, Life Insurance Corporation of India, for five years. According to Prabhu, the real problem was under-investment. However, the Ministry of Railways had an advantage over other ministries, that were dependent on the States for implementation of policies. In contrast, the Railways owned the implementing agencies, which were construction organisations and the zonal railways.

According to a November 2015 Morgan Stanley report, though the Railways had suffered in the past due to poor policies and under-investment, plans to ramp up its infrastructure would help boost India’s manufacturing competitiveness. Akshay Soni, Industrial Analyst at Morgan Stanley, added that, going forward, India would spend $95 billion on the Railways by 2019, which would result in a 12 per cent GDP growth between 2014-15 and 2018-19.

Improvements

Some measures included enhancing freight capacity through modern rolling stock, launching the railway mobile app for booking tickets, and improving rail coach interiors.

 

In November 2015, the first model of the railway coach made in India as part of the ‘Make in India’ initiative made a trial run between Bhopal and Bina railway stations. The coach was equipped with many useful features and facilities. Since the biggest challenge had been hygiene, it replaced the old toilets with environment-friendly bio-toilets. The coach had plush interiors and an aesthetically designed colour pattern, in addition to enhanced safety and speed. According to railway officials, 111 such luxury coaches, including air-conditioned and general coaches, would be ready by June 2016. In another development, the Ministry also approved ‘Anubhooti’ coaches, the ultra-modern coaches for the Shatabdi Express trains across the country. According to a Railway official: “The Railway Board has given its nod for manufacture of ‘Anubhooti’ coaches, keeping in view the comfort of upper-class passengers. Construction of the coaches will begin soon.”

The Railways has always been grappling with the issue of train speeds. The average speed of a train in India is 54 km per hour. Though the trains are equipped to travel at 160 km per hour, the weak infrastructure, heavy track congestion, and speed restrictions curbed their maximum speed to 110 km per hour (See Table 3 for India’s top ten fastest trains). This speed is very low compared to train speeds in other counties. As of December 2012, China had the longest high-speed rail network in the world, with 9,300 km of routes in service with an average speed of 200 km per hour. The 2,298 km Beijing Guangzhou High-Speed Railway was the longest railway line in the world (See Table 4 for train speeds in other countries).

 

Even as the Railways makes efforts to develop infrastructure to increase train speeds, it is planning to launch bullet trains in the country. In December 2015, India entered into a $12-billion agreement with Japan to develop India’s bullet train network. Commenting on the deal, Prabhu, said: “The loan comes with a repayment period of 50 years, with an interest rate of as low as 0.1 per cent. We have created history. This has never happened anywhere in the world.” He added: “In 50 years, India’s economy would be $20 trillion with organic growth of 7.5 per cent. We have to create awareness among the people that you can’t reach that level unless you invest in infrastructure.”



The bullet trains were expected to zip along at a speed of 320 km per hour from Mumbai to Ahmedabad, shortening the travel time from eight hours to two hours. The train’s construction was expected to start in 2017 and is slated to be completed by 2023.

In February 2016, Prabhu suggested that, going forward, some structural changes would be made within the Railways. The three pillars of those changes included:

Delegation of authority (a difficult thing to implement, considering Indian Railways is “the most centralised organisation in India”)

Transparency of decision-making

Embracing technology for enhancing service standards

To tackle the challenge of falling freight and passenger traffic, Prabhu said he was pushing the Railway authorities to expand its array of freight commodities. To improve safety, the Railways has tied up with Indian Space Research Organisation (ISRO) to use ISRO’s geo-spatial technology and set up warning systems for unmanned level crossings.

The Challenge

Amid the Railway Minister’s efforts to revive the Railways, reports for the nine months ended December 2015 show that revenue growth has fallen to 5.9 per cent (11 per cent and 13 per cent in fiscal years 2013 and 2014). The decrease was attributable to lower freight and a drop in freight volumes by 0.9 per cent in December. The slowdown in revenue puts the Railways in a tight spot. In addition to this, in December 2015 it was reported that from April-December 2015, freight traffic had increased by just 1 per cent to 816.7 million tonnes (over April-December 2014). Railway officials attributed this to the lack of development in basic infrastructure and the freight sector.

According to Railway Board chairman AK Mittal: “The Railways is the most economical mode of transportation. Even then, rail traffic is falling compared to other modes of transport. The reason for this is that the Railways has not spent enough on developing basic infrastructure for the freight sector.” Mittal added that the Railways had come out with several policies and initiatives to attract investors to develop basic infrastructure and the freight sector, and to improve freight terminals, as 90 per cent of the loading was carried out from there. Economist Partha Mukhopadhyay says: “If India is to grow at 8-10 per cent, or even a slower 6-8 per cent, railways will need to carry a lot more freight. And right now it doesn’t. It’s almost bursting at the seams.”

Experts point out that the Railways’ budget plan to carry 85 million tonnes more freight by March 31, 2016 seems like an uphill task, for several reasons —economic conditions affect freight traffic, besides which to carry another 85 million tonnes would require more line capacity and more wagons, which were not ready. Another immediate challenge, as Prabhu pointed out, was: “First, the significant burden expected from the new Pay Commission going ahead would be the most difficult to handle. Second, revenue from freight and bulk cargo is going down due to weak demand from the steel and cement sectors.” He added that the cost of energy was another major concern as the Railways is one of the largest consumers of power.

Now, imagine you are part of an expert committee that has to prepare a strategy and roadmap to turn the Railways around and make it a world-class rail service. Prepare a brief report analysing the transport giant’s problems and challenges and give your recommendations on the kind of strategy and roadmap the Railways should follow.

You may gather additional information on the challenges faced by the Railways through secondary research.

(This case study was developed at ICFAI Business School (IBS) by Hadiya Faheem (freelance case writer) and GV Muralidhara (Dean-Case Research Centre. )

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