Introduction - a reservoir of Indian theses @...
Transcript of Introduction - a reservoir of Indian theses @...
Introduction
IR, the world’s third largest network and one among the largest
employers, has been contributing to the industrial, economic and social
development of the country. It faced a severe financial crisis in 2001 which
resulted in abnormal hike in freight rate. This coupled with lack of customer
oriented services, led to giving up of its market share to roadways. However,
certain measures taken to control cost and increase revenue brought IR from the
acute financial crisis to a noticeable success in 2005-06, which is technically
known as ‘turnaround’. It had great relevance because the Railway was on the
verge of bankruptcy in 2001 and the turnaround was achieved without pinching
the rail users by increasing fares and at the same time upholding its social
obligations by offering concessions to the privileged classes.
The then Minister in the Budget speech 2001-02 stated that ‘Railways
need to develop market oriented and customer friendly outlook due to emerging
Chapter 3
70 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
competition within the transport sector.’ The subsequent Railway Minister also
underscored this policy in his first Railway budget speech in 2004. The Minister
stated: “with a commercial orientation, aggressive marketing and economy
measures, the Railways would be continuously working towards further
improving its financial performance. Railways have initiated many policy
changes to meet the requirements of its customers, be it freight or passenger
services. While continuing the process of reforms, other priority areas will be:
improvement in passenger amenities, control over expenditure and stepping up
of measures to prevent leakages of revenue” (Budget speech 2004). From these,
it can be observed that railways have been developing and continuing strategies
for improving their financial performance after 2001. All these culminated in
the financial turnaround in 2005-06.
3.1 Turnaround - The Concept
A venture is said to be turned around when it has recovered from a
decline that threatened its existence to resume normal operations and achieve
performance acceptable to stakeholders, through reorientation of positioning,
strategy, structure, control system and power distribution (Pradeep
Khandwala 2000). This definition implies that a declining firm can be
rescued, while a firm that has failed cannot be.
Nursing a sick company back to health requires a highly effective
turnaround plan involving three steps viz; (Dr. Mike Teng 2008)
Surgery- improves cash flow by restructuring the organization and
putting a full stop to the unnecessary expenses.
Resuscitation- injects new business income streams and boost existing
sales to increase profit.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 71
Nursing: - strengthen corporate structure and team to build a strong
and healthy corporate immune system to sustain long term growth.
There are so many symptoms for the turnaround. Once it is diagnosed,
the turnaround measures are to be taken with immediate effect to rescue it.
3.2 Turnaround Strategy
The specific path of action chosen by the firm to achieve its objectives is
referred to as its strategy. Strategy of an enterprise consists of what management
decides about future direction and scope of business. A turnaround strategy
requires four guiding Cs, namely, Communication, Concentration, Cost Control
and Cash flow. It is a river in which large number of currents, some horizontal,
some sideways, some vertical, some diagonal are interacting with and influencing
one another. (Pradeep Khandwala 2000)
The turnaround strategy is called for, when there is a substantial and
sustaining downtrend in the indicators of business performance. In specific
terms, turnaround strategy means those strategies through which a firm remains
competitive in the market. Enfield India emerged a transformational turnaround
through staff participation and benchmarking studies with excellent competitors,
analysis of past information etc. ( Pradeep Khandwala 2000). The symptoms of
IR’s declining trend were diagnosed as high operating ratio due to increased
operating expenses, lack of co-ordination between various departments, under-
utilization of assets, lack of strategic thinking by top management, unsuccessful
Research and Development (R&D) department and the like. In this context, the
researcher attempts to find out:
What was the position of IR before the turnaround?
Whether a turnaround has really occurred in IR in 2005-06 and if so, what
resulted in turnaround?
Chapter 3
72 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
3.3 Scenario before Turnaround in IR
In the early days of company owned railways, profit making was the
ultimate aim. However, after independence, profit making was done along
with social obligation. To look into the scenario before the turnaround and
after nationalization, the efficiency indices of operation of all tractions from
the plan period till the operational crisis in 1980 are given in table 3.1.
Table 3.1: Efficiency Indices of Operation from 1951 to 1981(` in millions)
Efficiency Index 1950-51 1960-61 1970-71 1980-81 Passenger earnings 978 1316 2955 8275
Goods earnings 1430 2861 6182 15509
Working expenses 2157 3726 8622 25760
Net revenue receipts 476 879 1447 1275
Operating ratio (%) 80.0 78.8 84.1 96.1
Net tonne km per wagon day(thousands) B.G M.G B.G M.G B.G M.G B.G M.G 710 304 998 405 908 524 986 522
Wagon turnaround (days) 11.0 6.7 11.2 8.8 13.3 10.1 15.2 15.3
Source: Annual Reports of IR for various years.
Both Goods earnings (from ` 1430 to 15509 millions) and Passenger
earnings (from ` 978 to 8275 millions) multiplied manifold during the
period. During the period, the working expenses increased from 2157 million
to 25760 million. This indicates the necessity for cost reduction/
improvements in revenue for its survival. Operating ratio of 80 per cent in
1950 peaked to 96.1 per cent in 1980 shows a negative growth when
compared with revenues and expenses. Net ton km/wagon day for both BG
and MG lines increased considerably during the period. Wagon turnaround
increased from 11 days in 1950 to 15.2 days in 1980, which indicates that
wagons were not properly and efficiently utilized. All these resulted in
operational crisis of 1980.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 73
3.3.1 Operational Crisis During 1980s
The study reveals that after nationalization, the following
technological imbalances existed in goods train operations:-
The old wagons were fitted with failure prone and inefficient vacuum
brake system.
Goods were accepted in both wagon and train loads. Frequent
shunting was required because of piecemeal movement of wagons.
This created operational inefficiencies.
Frequent examination of trains at an interval of every 400 km resulted
in undue delay.
Steam engines required repeated halts for operational needs like coal
and water refills and change of crew.
Many of the lines were M G and some were uneconomic branch lines.
All these caused delay in freight operation and reduction in revenue,
which eventually resulted in the operational crisis in 1980.
Sri. M. S. Gujral, the then Railway Board Chairman, initiated new
measures to increase operating efficiency by separating old & new type
wagons and production of higher capacity air brake wagons and engines,
avoiding the practice of accepting less than train load, introducing the
concept of point-to-point examination of trains, producing high power diesel
and electric locomotives by phasing out steam locomotives and prioritizing
electrification of railway routes (Sudhir Kumar 2009).
These reforms resulted in a four-time increase in operational
performance, especially in freight earnings. He also explored the need to
increase axle load by utilizing the existing assets. However, no follow up
Chapter 3
74 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
action was taken for the next two decades due to lack of synergy between the
departments.
3.3.2 Impact of Liberalization on IR in 1990
Liberalization policy of 1991 resulted in removing trade barriers,
reducing tariffs on imports of raw materials and finished goods. However, it did
not result in increase in freight earnings due to insufficient infrastructure
facilities, the conventional approach (low rate for low-priced goods and vice-
versa) of the Railways, competition from roadways, international logistic firms,
shipping industry, low-priced air lines and oil pipelines. Inadequate budgetary
support also aggravated the situation. In order to regain the lost traffic and to
grab the opportunities of liberalization, the Railways planned for expansion of
network by gauge conversion, doubling and construction of new lines.
3.3.2.1. Gauge Conversion
Gauge conversion aims at integrating the remote and far-flung areas of
the country with the national network. In the 1990s, IR was on an expansion
plan of converting Metre Gauge (MG) lines to Broad Gauge (BG). Though the
strategy helped the Railways on a long term basis, the immediate results were
detrimental to the system. Newly converted lines could not handle additional
traffic due to scarcity of BG wagons and coaches. Traffic on these routes was
permitted with several safety restrictions as these lines were constructed hastily
to meet targets, diluting safety rules. The obsession on gauge conversion, which
peaked during 1992-1996, sidelined track renewal of over-aged BG trunk routes.
This affected safety which resulted in increased accidents, compensation and
adverse impact on the financial position of IR.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 75
Figure 3.1: Gauge Conversion during 1990-2000.
3.3.2.2 Doubling
While new lines bring in additional traffic, doubling of tracks eases
bottlenecks in the existing single line route. IR’ growth in doubling of track
was steady over the period of 1990-2000 on an average of 150 km per year.
Figure 3.2: Doubling during 1990-2000
223135
1351
16191805
758
1364
847693
260
0200400600800
100012001400160018002000
kms
year
Gauge Conversion
Kms
209 213 185295
142200
125 160260 220
Doubling
Kms
Chapter 3
76 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
3.3.2.3 New lines
It is alleged that the majority of new lines were added not on the basis
of cost-benefit analysis, but on political considerations. The addition of new
lines was comparatively lower in years of 1994, 1996 and 1997 with 18, 54
and 26 km respectively.
Figure 3.3: New Lines during 1990-2000
Analysis of past investments reveals that Railways concentrated on
gauge conversion, doubling, asset replacement and new lines. However, all
these improvements in infrastructure did not reflect much in productivity. It
is alleged that investments were made in politically motivated non-
remunerative projects. The unfavourable political intervention and policy
initiatives for short-term political gains also made the situation worse. The
decrease in the percentage of freight revenue is evident from table 3.2.
107
193
241211
18
145
5426
224
167
0
50
100
150
200
250
300
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000
Kms
Year
New lines
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 77
Table 3.2: Freight Revenue for the Period 1996 to 2000 (`. in crores)
Years Actual Increase % increase
1996 15290 1620 11.85
1997 16668 1378 9.01
1998 19866 3198 19.19
1999 19960 94 0.47
2000 22341 2381 11.93 Source: Annual Reports of IR for various years.
The freight revenue witnessed lowest growth in the year 1999 with
0.47 per cent and it was at the maximum of 19.19 per cent in the year 1998.
The reduction in the marginal increase of freight revenue may be due to the
relative disadvantage of higher freight rate, competition from other modes of
transport and railway’s inability to provide wagons, as and when required.
The reduction was found mainly in respect of the transport of cement,
petroleum, and iron & steel. A perusal into the financial indicators will reveal
the intensity of the crisis. The important financial indicators for the period
from 1996 to 2001 are analysed in table 3.3.
Table 3.3: Key Financial Indicators for the Period 1996 to 2001
Year ending March 1996 1997 1998 1999 2000 2001 Surplus (` in crores) 2870 2117 1535 1399 846 763
Operating ratio* (%) 82.5 86.2 90.9 93.3 93.3 98.3
Net revenue to capital ratio* (%) 14.9 11.7 8.9 5.8 6.9 2.5
Source: IR’s Annual report for various years. * These two ratios are often used for financial performance assessment of the railway sector.
There is a reduction in surplus amount from ` 2870 crores to ` 763
crores in the relevant period due to the steep escalation in working expenses
and reduction in earnings. The Operating ratio increased from 82.5 per cent
to 98.3 per cent and the ratio of Net revenue to capital steeply declined from
14.9 to 2.5 per cent from 1996 to 2001. It is mainly because of the increase in
Chapter 3
78 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
working expenses, particularly the increasing burden of non-plan
expenditures like, interest payments and salaries due to the implementation of
V Pay Commission. There was also loss of revenue due to irrational
decisions relating to tariff fixing and investments. Moreover, the budgetary
support from the Central Government has been slashed down from 75 per
cent in the Fifth Five-Year Plan to 23 per cent during the Eighth Plan (Sudhir
kumar et.al). Poor or under investments by the Railways in the past have been
the major constraining factors in improving the physical or financial
performance.(Sudhir kumar et.al) The figures from1950 to 2000 clearly states
that the system faced a very tough situation and was on the verge of
bankruptcy in 2000-01. All these indicate that a crisis was brewing up,
threatening the very existence and survival of IR warranting immediate
initiatives to overcome the crisis.
3.3.3 Handling of the Financial Crisis in 2001
In the Budget 2001-2002, the then Railway Minister commented that
despite a decade of reforms, IR is standing at a junction station; one track
takes them to reforms, revival and rejuvenation. The other track will lead
them to a nowhere- land of crisis and chaos. The Minister decided to take the
right path sooner, rather than later (Sriram, 2009).
During the period, Mr. Nithish Kumar was the Railway Minister and his
tenure was creative, but his ideas were not carried out effectively. Lack of an
effective tariff strategy led to the decline of revenue. To overcome the disastrous
situation, the Government of India appointed an Expert Committee with Rakesh
Mohan, a noted economist and former Deputy Governor of RBI, as the
Chairman. They recommended reduction in the number of employees,
privatizing non-core activities like healthcare, education, production units and
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 79
maintenance of trains, corporatizing Railways and establishing independent
regulator for tariff fixing. As a reaction to these reforms, the Railways responded
with a Status Paper (2001) which proposed to corporatize non-core activities,
reduce the staff strength through natural attrition and to consider loans from
World Bank and Asian Development Bank.
To withstand this critical position, IR resorted to myriad steps, with
the following initiatives to start with:-
Unsustainable level of market borrowings to supplement the
reduction in budgetary support.
Under provision towards Depreciation Reserve Fund, Pension Fund,
Capital Fund and Development Fund.(Sriram et.al)
Formation of Rail Vikas Nigam Ltd (RVNL) to carry out the
development process of survey, tendering and construction of new lines.
This was followed by formulating and implementing a number of
strategies aimed at a turnaround in IR.
3.4 Turnaround- A Myth or Fact
IR, from the verge of bankruptcy in 2001, has made a U-turn to
produce a cash surplus of ` 25, 000 crores in a very short period of four years
under the leadership of Mr. Lalu Prasad as Railway Minister.(Sudhir kumar
et.al). Before going in detail regarding the turnaround strategies, the
researcher attempts to look into whether a turnaround happened in IR or not?
A study on the financial indicators after the crisis in 2000-01 shows
symptoms of a turnaround in IR. The important financial indicators are
analyzed from 2000-01 to 2007-08. Though the period of study is from 2000-
Chapter 3
80 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
01 to 2009-10, for the purpose of analysis to identify the turnaround, the
years 2008-09 and 2009-10 are excluded because the financial indicators
during these two years show a reversal of turnaround. This may be due to
change in the political leadership and resulted change in policies coupled
with the steep escalation of fuel cost and staff cost (Mathur 2008).
The scale of financial transformation of IR measured on key financial
indicators is exhibited in table 3.4. Table 3.4: Financial Indicators for the Period 2000 to 2008
Financial Indicators 2000-01 2007-08 Change Cash surplus before dividend (` in crores) 4790 25006 5 times increase
Operating ratio (%) 98.3 75.8 22% decrease
Ratio of Net Revenue to Capital (%) 2.5 20.7 18% increase
Source: Finance (Budget) Directorate, Ministry of Railways.
During the eight year period under computation, a considerable
improvement is seen in Cash surplus, Operating ratio and Ratio of net
Revenue to capital. A five time’s increase in Surplus and 18 per cent increase
in Net Revenue with a 22 per cent reduction in Operating ratio are the
manifestation of turnaround in IR revealed by Table 3.4. However, to
pinpoint the period at which it has taken place, year-wise analysis is required.
In this regard, the performance indicators are analysed from 2001 to 2008,
segregating into two period’s viz. 2001-04 and 2005-08. This segregation is
done as major policy changes were initiated under the leadership of Mr. Lalu
Prasad in 2004-05 and financial improvement coincided with the change for a
significant turnaround in IR. Table 3.5 shows the comparative performance
during the said two periods.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 81
Table 3.5: Performance Indicators of IR from 2000 to 2008 (`in crores)
Pre- period Post-period
Item
2000
-01
2001
-02-
2002
-03
2003
-04
% ch
ange
2004
-05
2005
-06
2006
-07
2007
-08
%ch
ange
Goods Revenue 23305 24845 26505 27618 18.51 30778 36287 41716 47435 54.12
Passenger Revenue 10515 11196 12575 13298 26.47 14113 15126 17225 19844 40.61
Total Revenue 35288 37858 41148 42842 21.41 47038 54404 62371 71645 52.31
Total Working
Expenses 34667 36293 38026 39483 13.89 42759 45574 49047 54462 27.37
Operating Ratio
(%) 98.3 96.0 92.3 92.1 ----- 91.0 83.2 78.8 75.8 -------
Source: Statistics and Economics Directorate, Ministry of Railways, 2001-2008
From the year 2001 to 2004, Goods revenue registered a growth of
18.51 per cent and Passenger revenue with a growth rate of 26.47 per cent.
However, during the period 2005 to 2008, Goods revenue rose to 54.12 per
cent and Passenger revenue to 40.61 per cent. These changes resulted in an
increase of total revenue from 21.41 per cent to 52.31 per cent during the
relevant period. When Total Revenue in 2005-06 registered an increase of
7344 crores (15.66%) compared to 2004-05, the Total Working expenses
increased only by 2815 crores (6.58%). With the result, Net Revenue
increased and the Operating ratio declined from 91 per cent to 83.2 per cent.
The efficiency improvement is evident from the diminishing operating
ratio, which was 98.3 per cent in 2000-01, improved to 92.1 per cent in 2004-
05 and reached 75.8 per cent in 2007-08. Operating ratio shows the
relationship between total revenue and total working expenses or it indicates
the cost incurred to earn one rupee of revenue. Hence, the performance
indicators also indicate that a turnaround has taken place during 2005-08.
The total Working expenses also increased from 13.89 per cent to
27.37 per cent during the period. However, the increase in working expenses
is relatively less than the increase in revenue compared to the previous
Chapter 3
82 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
period. Along with financial and performance indicators, different elements
of working expenses are also to be analysed to find out the extent of cost
control. Hence the same is attempted.
3.4.1 Analysis of Working Expenses
Working expenses are directly related to the running of railways and
represent mainly the expenditure on operating expenses, repairs and
maintenance of railway infrastructure, staff welfare and expenses relating to
security and payment of interest component of lease charges. Other
miscellaneous expenditure like expenditure on audit, surveys and
appropriation to Depreciation Reserve Fund, Pension Fund and dividend
payment to General Revenue are included in total expenditure.
Majority of the costs in IR is not fixed by themselves. Employee
salary and benefits are determined by Central Government’s Pay Commission
and diesel prices by a combination of international crude prices, government
subsidies and general inflation. However, by increasing efficiency in
operation of trains and reducing idle time of employees, these two costs can
be controlled to a certain extent. It has been estimated that the pension cost as
a percentage of operating expenses has increased to around 14 per cent in the
last two decades, eroding the operational efficiency of the Railways (Sriram
et.al). However, the new Pension policy has eased the situation.
Railways have low variable cost and high fixed costs. Cost is
insensitive to the load hauled by trains or to the length of trains. The
incremental cost in increasing the length of train is less compared to
incremental revenue from it, as longer trains continued to use the same
engine, track, driver and the crew. Therefore, unit cost per passenger
declines. Hence, Railways could increase its profitability by carrying more
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 83
volume. To achieve the turnaround, IR concentrated on increasing revenue by
expanding volume along with reduction in cost through the effective
utilisation of assets.
Figure 3.4: Composition of Working Expenses
Source: Annual Report of IR, 2010.
Figure 3.4 shows that 49 per cent of the total expenses represent
expenditure on staff, followed by fuel expenses constituting 20 per cent.
Table 3.6 shows year-wise growth in Working Expenses.
Table 3.6: Increase in Ordinary Working Expenses from 2000-01 to 2007-08
Years Ordinary Working Expenses* % increase
2000-01 34939.72 100
2001-02 37020.28 105.95
2002-03 38911.24 111.37
2003-04 40432.13 115.72
2004-05 43773.03 125.28
2005-06 48309.63 138.27
2006-07 50332.71 144.06
2007-08 54942.55 157.25 Source: Statistical Summary of IR. *Working expenses exclude depreciation and miscellaneous expenses.
Composition of Working Expenses
49%
20%
17%
14% Staff costs
Fuel
Stores and others
Lease charge&depreciation
Chapter 3
84 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
Working Expenses during the period 2000-2004 showed an increase of
25.28 per cent, (125.28-100) which has been further increased to 57.25 per cent
(157.25-100) during the period 2004-08. To understand the component-wise
expenditure variation during the turnaround period from 2004-05 to 2008-09,
growth in components of working expenses is examined in table 3.7.
Table 3.7: Growth in Components of Working Expenses (`. in Crores)
Item 2004-05 2005-06
2006-07
2007-08
2008-09
2004-09 CAGR%
00-04 CAGR%
Staff cost 14667 15630 16557 18108 28029 15.6 3.1 Fuel cost 8763 10201 11258 12122 13847 11.9 10.2 Material cost 2317 2676 2892 2978 3449 10.1 0.8 Lease charges 3592 1979 2099 2366 3168 -0.5 7.2 Other cost 4050 4544 4627 5459 5856 9.1 9.1 Total 33389 35030 37433 41033 54349 12.1 5.7
Source: White Paper, IR, 2009 p.40
The staff costs increased considerably in the year 2008-09 due to the
implementation of VI Pay Commission. Fuel bill increased with the increase
in traffic output and with revision of fuel price. Lease charges during the
period shows a decline as principal component of lease charges was separated
and taken out of working expenses in 2005-06. However, the CAG of other
costs remains at same rate in the two periods.
Staff cost is the major expense as far as IR are concerned and its share of
staff cost to Working Expenses and Gross Traffic Receipts is exhibited in table 3.8.
Table 3.8: Proportion of Staff Cost to Traffic receipts and Working Expenses (` in crores)
2001 2008 Staff costs 17861 28029
Gross Traffic Receipts (GTR) 34880 71280
Staff cost as % of GTR 51.2 36.55
Ordinary Working expenses (OWE) 33161 49224
Staff costs as % of OWE 53.86 50.20 Source: Bankruptcy to Billions p.94
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 85
The share of Staff costs to Gross Traffic Receipt decreased from 51.2
percent in 2001 to 36.55 per cent in 2008 and the proportion of Staff cost to
Ordinary Working Expenses reduced from 53.86 percent in 2001 to 50.20
percent in 2008. This is primarily on account of increasing volume and
earnings together with reduction in unit cost. The proportion of Staff costs to
expenses remains stable, their share as a percentage of revenue has declined
sharply from 51.2 per cent to 36.55 per cent. There was 140 per cent increase
in wages and pension liabilities, from ` 19,595 crores in 2003-04 to
` 47,168 crores in 2009-10 (Sriram 2009).
As Government accounts are not maintained on accrual basis, provision
for enhanced salaries and pension as a result of VI CPC though applicable
from 1.1.2006, were not made in the accounts of 2005-06 to 2007-08. The
implementation of the recommendations for the VI CPC began from 1st
September 2008 and the impact of enhanced payment of salaries and pensions
along with arrears had to be absorbed in the years 2008-09 and 2009-10.
In this context, the employee productivity is also to be analysed by
taking NTKM and PKM during the period under study. Table shows that
man-power productivity has steadily improved over the years.
Table 3.9: Employee Productivity
Employee Productivity
(NTKM+PKM/employee)
2004-05 2005-06 2006-07 2007-08 2008-09
0.69 0.75 0.84 0.93 1.01
Source: White Paper, IR 2009.
The Compounded Annual Growth (CAG) table compares the growth
in earnings and expenses over the nineties that led to the financial crisis in
2001 and the transformation after 2001.
Chapter 3
86 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
Table 3.10: Compounded Annual Growth Rate of Expenses and Earnings (` in Crores)
Expenses/ Earnings 1991 2001 2008 1991-2001 CAGR (%)
2001-2008 CAGR (%)
Total working expenses 11,554 34,667 54,462 12. 01 6.67 Gross traffic receipts 12,096 34,880 71,280 11.17 10.85 Passenger earnings 3148 10,481 19,784 12.82 9.50 Goods earnings 8408 23,045 46,429 10.70 10.69 Other coaching earnings 336 764 1800 8.56 13.02 Sundry earnings 242 703 2565 11.25 20.31
Source: Statistics and Economics Directorate, Ministry of Railways.
After 1991, the Railway’s expenses (12.01%) grew one percent faster
than its earnings (11.17) leading it towards bankruptcy. However, between
2001 and 2008, the Railways have become solvent by inverting this
relationship i.e., earnings (10.85%) grow four percent faster than expenses
(6.67%). Earnings have grown on account growth in freight volume,
differential price hikes etc. and working expenses grew at a lower rate due to
low inflation and relatively inelastic cost structure in relation to volume
transported.
To evaluate the efficiency of improvement in operating performance,
Operating ratio and net revenue to capital was analyzed and is shown in table 3.11.
Table 3.11: Operating Ratio and Ratio of Net Revenue to Capital
Year Operating Ratio (%) Ratio of Net Revenue to Capital (%) 2000-01 98.28 2.5 2001-02 96.01 5.0 2002-03 92.31 7.5 2003-04 92.16 8.0 2004-05 91.02 8.9 2005-06 83.72 15.4 2006-07 78.68 19.0 2007-08 75.94 20.7 2008-09 90.46 8.8 2009-10 95.28 5.3
Source: Explanatory Memorandum of Railway budget, 2009-10
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 87
The efficiency improvement can be evidenced from the diminishing
Operating ratio, which was 98.28 per cent in 2000-01, brought down to 75.94
per cent by 2007-08. Change in Operating ratio is also influenced by change
in accounting practice. The reduction in operating ratio is achieved through
reduction in operating expenses and improvement in gross revenue receipts.
Expenditure reduction is achieved through improvement in technical
efficiency, better labour productivity, vacancy freezing and better utilization
of existing capacity. Obviously, there occurred a turnaround and had a
dominant role in the effective utilisation of assets. In 2005-06, the
momentum of turnaround was noticed in railways. All these indicate that a
turnaround in IR started taking place during 2005-06 and lasted till 2007-08.
Therefore, turnaround was a fact and not a myth. However, there has been a
reversal of the performance from the year 2008-09.
3.5 What Caused the Turnaround?
IR could make a dramatic turnaround with the same employees and
assets. The turnaround strategy has been based on simple principles to have
higher freight volumes, improve occupancy in passenger trains, control costs
and at the same time maintaining low tariffs. Applying these principles,
Railways have improved their market share and operating margins. The
Government was praised for improving customer services and reducing
passenger fares, particularly for poorer sections of society. Railway reforms
have been introduced without losing sight of our social obligation. This is
what we call “inclusive growth.”(Budget speech, 2005-06).
Turnaround means sudden or surprise change and is not only due to
significant growth in economy but it coincides with Mr. Lalu Prasad’s
presence and railway officials called it as ‘turn around’(R.N. Misra 2009).
Chapter 3
88 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
Three accounting policy changes made by IR increased its surplus by
` 2689.97 crores in 2006-07. (‘Organiser’ 2010)
A case study by two scholars at Australia’s Canberra University
pointed out that certain changes in accounting of lease charges for
locomotives and wagons reduced operating expenses and increased surplus to
26 per cent in 2006 (Desh Gupta 2007). It is felt that railway accounts are
non-transparent and non-comparable with any standard corporate profit and
loss account. There is no transparency in accounting of cost and revenue for
each and every activity.
All these reports point out that turnaround in Railways was due to
many factors viz. marketing strategies for inclusive growth along with
increase in revenue and reduction of cost, boom in economy, change in
accounting policies and the leadership qualities of the then Railway Minister.
The Minister for Railways during the turnaround period took many pragmatic
decisions for revival of Railways, consistency in direction and ensured timely
and effective follow-up till the desired results were obtained. The Minister
always refer IR as ‘sone ki chidiya’ or a ‘golden bird with great potential’
and this was the first step in reinstating confidence among employees.(Sudhir
kumar et.al).
During his tenure, each and every aspect of revenue and costs was
analysed to study what is lacking, where and how the costs can be reduced as is
evident in turnaround strategies. He adopted the policy of outsourcing of non-
core activities, (retrenchment), differential pricing for value added services
(repositioning) and decentralisation (reorganization) (Desh gupta et.al)
The effectiveness of each strategy in the passenger and freight segment is
analysed to see that whether it increased the revenue and/or reduced the cost
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 89
and has it contributed to the turnaround. The strategies identified mainly
focused on:-
3.5.1 Effective Utilization of Assets
The main assets of IR consist of track, bridges and rolling stock. The
effective utilization of assets is made to enhance the revenue and also to
minimize cost, which is within the control of the system. Revenue
enhancement is done by effective utilisation of available assets like,
locomotives, wagons, coaches, brake van, parcel vans and railway land. Asset
utilisation indices are wagon utilisation, track utilisation and engine
utilisation indices. Wagon utilisation is measured in terms of Net Ton
Kilometre (NTKM) / Wagon/day, Wagon km/wagon/day and wagon
turnaround. Track utilisation is measured in terms of NTKM/ route km,
Passenger Kilometre (PKM)/ route km. Engine utilisation measures are
NTKM/engine Hr and PKM /Engine Hr.
Table 3.12: Asset utilization indices from 2000-2010 (BG only)
Year Wagon utilisation Track utilisation
(in millions) Engine
utilisation NTKM /
Wagon/day Wagon turnaround
(in days) NTKM/
route km PKM/ route
km NTKM/engine Hr
2000-01 2042 7.5 6.96 9.49 12850
2001-02 2223 7.2 7.38 10.13 13842
2002-03 2468 7.0 7.74 10.52 14086
2003-04 2567 6.7 8.14 10.76 16776
2004-05 2677 6.4 8.57 11.51 16995
2005-06 2723 6.08 9.05 12.16 18830
2006-07 2960 5.49 9.64 13.47 18691
2007-08 3238 5.23 10.19 14.63 19021
2008-09 3539 5.19 10.43 15.53 19342
2009-10 3762 4.98 11.07 16.35 19086
Source: Annual Year Book of IR for various years
Chapter 3
90 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
Table shows that NTKM/Wagon/day was on a steady increase
particularly after the turnaround period. Wagon turnaround decreased from 7.5
to 6.4 days during the period 2000 to 2004 and again decreased to 4.98 days in
the year 2009-10. This indicates that wagons are effectively utilised. The density
of traffic keeps on increasing as NTKM/route km and PKM/route km was on the
rising trend. Engine utilisation also shows an increasing trend throughout the
study period. All these reveal that assets were efficiently utilised.
Effective utilisation of assets directly affects revenue from goods and
passenger traffic. Total revenue comes from goods traffic, passenger traffic, other
coaching (which include parcel and luggage), sundry, and miscellaneous.
Goods, passenger and other coaching earnings are generated from
day-to-day operations. Sundry earnings include rent, catering receipts,
interest and maintenance charges from outside bodies, commercial utilisation
of land and air space and commercial publicity on rolling stock and station
buildings. Other miscellaneous receipts include receipts of the Railway
Recruitment Boards from sale of application forms and examination fees,
Government’s share of surplus profits, subsidy from general revenues in
respect of dividend relief and contribution from Central Road Fund for
financing safety works. Out of the total receipts, 64 per cent constitute
freight, 31 per cent from passenger traffic and the remaining 5 per cent from
sundry and other coaching earnings.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 91
Figure 3.5: Composition of earnings
Source: Annual Report, 2010, Ministry of Railways
3.5.1. A) Goods traffic Earnings
Freight business can be segmented into bulk commodities and other
cargo. IR have become the dominant carrier of bulk commodities especially,
coal and iron ore. The majority of freight comes from mines to industries (51
per cent of total traffic) and from industries to distribution centres. (28 per
cent of total traffic)
The growth of freight earnings in absolute and relative terms during
the decade 2001-2010 is analysed in the table 3.13.
Table 3.13: Growth of Freight Earnings
YEARS 200-01
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
*Earnings (`in crores)
23045 24845 26505 27618 30778 36287 41073 46426 51749 56912
Growth (%) 6.60 6.70 4.20 11.40 17.90 13.10 13.03 12.95 9.98
Tons (m) 474 493 519 557 602 667 728 794 833 892
Growth (%) 4.00 6.20 7.30 8.10 10.80 9.10 9.05 4.91 7.08
NTKM (m) 312 333 353 381 407 441 481 523 552 601
Growth (%) 6.70 6.00 7.90 6.80 8.40 9.00 8.70 5.54 8.88
*Earnings include wharfage and demurrage. Source: Annual Reports Ministry of Railways.
Freight64%
Passenger31%
Miscellaneous5%
Chapter 3
92 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
Table 3.13 shows that growth per cent in freight earnings gradually
improved from 4.2 per cent in 2003-04 and reached at 17.9 per cent in 2005-
06. Despite an increase in freight earnings gradually over the years, the rate
of growth fell off from 17.9 per cent in 2005-06 to 9.98 per cent in 2009-10.
Similar is the case with tons carried. In case of tons carried, there was a
sudden decrease in the growth rate in 2008-09. Between 2005-06 and 2009-
10, there was a sudden increase in rate of earnings, (56.8%) tons carried
(33.7%) and in NTKM (36.28%). Freight traffic in IR has grown in the last
five years. Therefore, it is clear that the increase in the volume of freight
traffic is a symptom of turnaround in IR. The major strategies which resulted
in increased freight revenue are:-
a) Increased axle load
b) Reduced wagon turnaround, and
c) Market oriented tariffs and schemes.
Railways have a competitive edge in freight, because of their ability to
carry large loads over long distances. Moreover, freight is non-political in
nature, which can be managed on commercial principles. In Railways, costs
are sensitive to train kilometre rather than passenger kilometre or ton
kilometre. (Business Line 2009) Therefore, to increase the efficiency, there is
a dire need to increase the yield per train in terms of train km. To increase the
yield per train, the strategy adopted was to make the goods trains run heavier
and faster.
a) Heavier- Increasing the axle load
The strategy is otherwise called ‘overloading of wagons’ has
contributed significantly to the turnaround of IR as the then Minister of
Railways stated ‘One ton extra loading per wagon implied additional revenue
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 93
of ` 500 crores per annum (Budget speech 2006). Axle load is the maximum
weight of an axle permitted on a given track and is a governing parameter for
rolling stock and track design.
An increase in the permitted axle load has direct impact on the inner
strength of tracks and sleepers, stress on bridges, strength of wagons, hauling
capacity of engines on freight train loads and gradient of tracks. However, for
implementing the decision of overloading, the co-ordination of three
branches of train operation is required viz. Mechanical branch - that looks
into the safety and maintenance of wagons, Engineering branch - that ensures
the fitness of tracks and bridges and the Operating branch - that decides the
path and running priorities of trains.
Prior to the action of the three branches of execution, the concerned
authorities viz. Railway Board, Railway Minister, RDSO and the
Commissioner of Railway Safety have to consent the operation with regard to
the increased axle loading. Sri. M.S. Gujral, the dynamic Chairman of
Railway Board in 1980, proposed an increase in axle load for better
throughput. After his tenure, the initiative taken by him was dropped on the
ground of safety.
Before putting the order for increasing the axle load during the
turnaround period, the then Railway Minister visited the coal and iron ore
loading points in South Eastern Railway and detected unauthorized overloaded
wagons (R.N. Misra 2009). The wagons that were expected to carry 58 tons
were overloaded by 2 to 15 tons. To arrest leakage of revenue to IR, the
Minister ordered to install more number of weigh bridges at these loading
points. Moreover, the incident was an eye-opener to all those who were
doubtful of the safety aspects affected by authorizing increased axle loads. The
Chapter 3
94 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
axle load initiative has increased the Carrying Capacity (CC) of wagons by 7 to
12 percent without any investments in rolling stock, tracks etc.
IR achieved a landmark in crossing 600 million tons of loading for the
year 2005, a 7 per cent growth over the previous year and 20 million tons
over the budgeted expectations. This was partly attributed to the extra loading
that was permitted since September 2004. The strategy helped to carry more
loads per train with the available rolling stock resulted in increase in revenue
and reduction in cost.
The efficiency improvement in freight loading due to increase in axle
load is given in table 3.14.
Table 3.14: Efficiency Improvement in Freight Loading ( in tons)
Item Earlier New Proposed Axle Load 20 23 25
Tare weight 22 22 22
Pay load 58 68 78
Total Weight/ Wagon 80 90 100
Wagon per trains 58 58 58
Total pay load 3364 3944 4524
Source: Bankruptcy to billions 2008, p. 64
Table 3.14 shows that with an increase in axle load from 20 tons to 23
tons, payload increased from 58 to 68 tons and the total pay load increased
from 3364 tons to 3944 tons. All these happened due to the strategy of
making wagons heavier by increasing the axle load.
To reduce the ill effects due to increased axle loading, the Railway
Board issued special instructions to run the heavy haul trains. These trains are
given priority over other trains and keeping them at signals and receiving on
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 95
loop lines were avoided (Raghuram.G 2008). The weight of empty wagon
(tare weight) is 25 ton and which is being reduced by introducing lighter
wagons to increase the load bearing capacity of wagons.
The turnaround strategy on running lengthy freight trains has
benefited the IR in some routes only due to the operating restrictions and
technical difficulties. Double Stack Containers (DSC), i.e. placing one more
container atop another container was introduced in 2006 to justify the need
for carrying more containers per train by using the vertical space.
b) Faster (Reducing the wagon turnaround time)
Wagon turnaround means the average time taken for a wagon to
complete one cycle of loading, or interval in days between two successive
loadings. The strategy of making it faster is aimed at effectively utilising
wagons to increase freight earnings by reducing the wagon turnaround time.
For this purpose, platforms are being lengthened to reduce the detention time
for loading and unloading, handling time of materials is extended to round
the clock to reduce the detention time and extension of the time for issuing of
Break Power Certificate (BPC). Examination of freight trains was usually
conducted after every 4500 km of travel or 15 days whichever is earlier. The
validity for BCN (closed) wagons has been increased from 4500 to 7500 km
or 35 days, whichever is earlier, for tank wagons from 4500 km to 6000 km
and for BOXN (open) wagons, the period increased from 3000 to 4500 km
(Raghuram.G2008). These initiatives have enhanced efficiency and reduced
wagon turnaround time from 7.5 days to 4.98 days during the study period,
which is given in table 3.15.
Chapter 3
96 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
Table 3.15: Wagon Turnaround (BG only) Pre-period
YEARS No .of Days 2000-01 7.5
2001-02 7.30
2002-03 7.00
2003-04 6.70
2004-05 6.40
Post-period 2005-06 6.08
2006-07 5.49
2007-08 5.23
2008-09 5.19
2009-10 4.98
Source: IR Year Book of various years.
Table shows that wagon turnaround reduced from 7.5 days in 2000-01 to
6.08 days in 2005-06. The strategic measures taken during the turnaround period
resulted in a further reduction of turnaround period to 4.98 days by 2009-10.
However, the effect of increase in axle load and improving the wagon
turnaround need to be studied scientifically. The ban on overloading in trucks
on roads by Supreme Court in November 2005 also enabled to increase the
rail share of transport. All these strategies, policies and decisions resulted in
an increase in goods revenue and reduction in unit cost. The reduction in cost
and increase in revenue in respect of freight earnings before the turnaround
and after the turnaround is shown in the table 3.16.
Table 3.16: Freight Unit Cost and Revenue (in paisa)
Year Cost per ton km Revenue per ton km 2001 61 74
2004 57 72
2008 54 93
Source: Bankruptcy to Billions p.141.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 97
Table indicates that the freight unit revenue reduced from 74 paisa in
2001 to 72 paisa in 2004. This was due to the reduction in freight rates for
petroleum products and steel, which was inevitable to retain the market share
preventing a shift in mode to pipelines for petroleum products and roadways
for steel. Despite a reduction in unit cost from 61 p in 2001 to 57 p in 2004,
the revenue has declined from 74 p to 72 p. This indicates that the strategy of
reduction in freight rate at that juncture was futile as the demand did not
respond to the reduction in freight. The turnaround strategies taken after 2004
have resulted in growth in freight volume, which, in turn, reduced the unit
costs from 57 paisa in 2004 to 54 paisa in 2008 and there is significant
increase in revenue from 72 paisa to 93 paisa in the corresponding period.
Certain marketing strategies have also supplemented and complimented to
boost the freight revenue.
c) Marketing strategies
A number of incentives and value added services were provided to
include more customers to freight traffic and also to retain the existing
customers. They are as follows:-
a. Long term freight discount- A discount up to 20 per cent during
non-peak season and up to 10 per cent during peak season for a period
of three years is offered to attract new freight customers.
b. Empty flow direction discount- Around 40 per cent of trains return
empty. To ensure better utilization of empty wagons in the return
direction, freight discount of 30 per cent during non-peak season and 20
per cent during peak season is given to ensure better utilization of assets.
c. Loyalty discount- To encourage transportation of finished products like
cement and iron and steel by rail, a loyalty discount of 1 per cent was
Chapter 3
98 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
announced during non-peak season, if over 90 per cent of the steel or
cement factory production was transported by rail. If it is more than 50
per cent and less than 90 per cent, 0.5 per cent discount is allowed.
d. Non-peak season incremental freight discount - The demand for
freight transportation is normally less during the period from 1 July to
31 October on account of monsoon. Therefore, a discount of 15 per
cent over ` 5 crores in a month and 10 per cent for incremental
earning of less than ` 5 crores is offered to freight customers as more
than 400 trains remained idle due to lack of demand.
e. Multi rake and Mini rake loading- Cement Companies are allowed
to unload at multiple locations and also offered mini rake loading.
f. Freight Forwarder scheme- Freight forwarder scheme was
announced to increase Railways’ share in the piecemeal traffic
segment, which authorizes a consignor to canvass goods from
different parties and load it to goods train to a specific destination.
g. Dynamic and differential pricing policy - This is based on
affordability principle. Low value commodities like iron ore and
minerals were charged much less than expensive commodities like
steel. Due to the classification and increase in the rate for iron ore, the
earnings have boosted up.
h. Wagon Leasing scheme (WLS) – The scheme aims at introduction
of rakes with the participation of private sector. High capacity
wagons, special purpose wagons and wagons for container movement
are permitted for leasing under this scheme.
i. Liberalised Wagon Investment Scheme (LWIS) - In order to cater
to the increased demand for wagons, IR introduced LWIS on PPP
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 99
model. LWIS allows investment by private investors in Special
Purpose Wagons (SPW) and High Capacity Wagons (HCW) to
operate on specific routes or close circuit routes approved by IR.
These wagons are not merged with wagon pool of IR.
j. Terminal Development Scheme. (TDS) – The scheme aims at
developing new railway terminals through investment from private
sector. PSUs, other agencies and end users are permitted to develop
terminals under TDS to address capacity constraints due to
unprecedented growth of freight traffic.
k. Two-leg freight discount scheme- If train load traffic is offered in
covered wagons for both up and down directions, then a discount of
20 per cent in lean season and 15 per cent in peak season is given for
traffic in both the directions.
l. Terminal incentive cum Engine on-Load scheme (EOL) - Engine-
on-load scheme is in the form of a concession given to those who can
load or unload when engine remains to be connected to the wagons.
In addition to better utilization of rolling stock, this strategy helps to
save fuel and manpower cost. This scheme was applicable only in
terminals with mechanical loading facility and was subsequently
withdrawn in January 2009.
m. Liberalised siding scheme. Under the scheme, the cost of removable
superstructure including tracks, sleepers, fastening etc and the
overhead electric equipments shall be borne by the Railways, if the
industry comes up with long term traffic terms for 10 years or more.
The siding owners will be required to bear the cost of land, earthwork
Chapter 3
100 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
and the substructure of the work. The freight discount will remain at
10 per cent for a maximum period of 10 years.
n. Freight Operation Information System (FOIS) - Through FOIS,
monitoring the terminal detention of rake and movement of the engine
can be tracked. It facilitates effective utilization of rolling stock and
better wagon turnaround time. With advanced computer technology,
the rake movements are monitored and customers can track their
trains in real time, resulting in efficient management of wagons.
o. Dedicated Freight Corridors (DFC). It is done along the Golden
quadrilateral linking the four metros to reduce the capacity constraints
of the existing Railway network. The project covers 2739 kms
through seven states. The construction work of eastern corridor
started in 2009. It is funded by multi-lateral agencies like Japan
International Cooperation Agency (JICA), ADB and World Bank.
p. Port connectivity projects- New lines were constructed under Public
Private Partnership (PPP) to link ports handling bulk containers, to
major rail junctions.
q. Tariff rationalization- Classification of items reduced from 4000 to
a mere group of 28 items to simplify the procedures and to attract
more customers.
r. Revision of Demurrage and wharfage charges - Detaining of goods
unnecessarily in platforms and sidings is prevented by increasing the
demurrage and wharfage charges. This enables to reduce the dumping
of items on platforms and facilitates free movement of goods and
passengers along the platform. To remove the traffic bottlenecks at
loop lines, half rake to full rake siding facility is provided.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 101
s. Development of Rail side warehouses - With a view to provide
door-to-door transportation, IR and Central Warehousing Corporation
(CWC) initiated a pilot project at White field goods shed at Bangalore
in February, 2002. Under this scheme, CWC built warehouses along
the railway track in goods yards. Rail side warehouses have since
become functional at 11 locations and are under construction at four
locations (IR Annual report 2010).
From the analysis, it is found that most of the strategies had impact on
increase in the freight earnings. Freight earnings increased by busy season
and busy route surcharge and priority mini rakes for small customers, volume
discount for large and long-term freight, loyalty incentive and empty flow
discount. Commodity-wise classification reveals that the increase in earnings
from iron ore loading for export is due to increase in loading and increase in
rate by reclassification. The increase in earnings from cement, raw material
for steel plants and coal was due to increased loading. All these altogether
had a considerable contribution in the turnaround of IR.
3.5.1. B) Passenger Earnings
IR is the largest passenger carrier in the world (Indian Infrastructure
2009). Passenger services are segmented into suburban and non-suburban.
53.49 per cent of passengers are suburban in origin and consists of
commuters in metros like Mumbai, Calcutta, Delhi and Chennai. Non-sub-
urban passengers constitute 46.51 per cent (IR Annual statement 2010).
Out of the total number of passengers, 88 per cent constitute suburban
and ordinary passengers and they contribute only 28 per cent of earnings. The
rest of the passengers constituting 12 per cent are from sleeper and A/C
coaches, which contribute 72 per cent of earnings.
Chapter 3
102 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
Suburban passenger earnings of 12.75 p per pkm in 2009-10 is said to
be the lowest amongst other modes of transport (IR Year Book 2010).
Suburban passenger fares were fixed at a very low level in 1950-51 and the
practice has been following till now. However, this can be justified on the
ground that suburban trains in India are the most overcrowded, especially in
cities like Mumbai, Chennai and Kolkata, which is more than four-times of the
coaches’ capacity during peak hours in second classes.
In 2004, IR incurred a total loss of ` 5780 crores in its Passenger
earnings (IR Annual report 2004). As the loss was over forty per cent of the
revenue, the reformers thought for a turnaround in passenger earnings.
Turnaround in passenger segment was more challenging in IR because of
three factors, viz. competition from low cost airlines, higher fare structure in
higher classes and more time of travel. However, it is observed that
upholding social obligations for political reasons seems to be more
dominating in fare fixing, which poses the greatest challenge in turnaround of
passenger segment. In this context, the strategies taken to boost passenger
revenue are analysed.
Strategies to Increase Revenue and Reduce Cost
a. Introduction of longer and additional trains.
b. Adding more coaches responding to the demand.
c. Increase in the charges for cancellation of tickets, tatkal scheme, E-
ticketing and extra charges for tickets booked other than the
originating station.
d. Converting Mail and Express trains into Super fast and imposing a
super fast surcharge on fare.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 103
e. Automatic up gradation- Automatic up gradation is a new scheme
introduced by the Railways in 2007 for the up gradation of full fare
paying passengers (for both Tatkal and General) to the next higher
class against vacant accommodation. It is done randomly by the
computer at the time of release of final charts. Passengers need not
have to pay any extra amount for availing this facility.
The growth in passenger earnings and number of passengers in both
sub-urban and non-suburban is shown in table 3.17.
Table 3.17: Distribution of Sub-urban and Non-suburban Passengers, PKM and Passenger
Earnings
Years
Sub Urban Non-suburban
Pass
enge
r Or
igin
atin
g (m
illio
ns)
Pass
enge
r km
Earn
ings
(in
cror
es)
Grow
th in
ea
rnin
gs
Pass
enge
r or
igin
atin
g (m
illio
ns)
Pass
enge
r km
Earn
ings
(in
cror
es)
Grow
th in
ea
rnin
gs
Tota
l ea
rnin
gs
Grow
th in
to
tal
earn
ings
Pre-period 2000-01 2861 88,872 1091 100 1972 3,68,150 9390 100 10,481 100
2001-02 2998 92,860 1150 105 2094 3,96,040 10,010 106 11,160 107
2002-03 2930 90,260 1230 113 2037 4,24,778 11,310 120 12,540 120
2003-04 2984 95,983 1253 115 2122 4,45,223 12,000 126 13,253 128
2004-05 3147 1,02,759 1341 123 2200 4,71,862 12,731 134 14,072 136
Post-period 2005-06 3310 1,05,218 1371 126 2369 5,09,512 13,709 144 15,080 146
2006-07 3514 1,10,987 1472 135 2750 5,82,867 15,749 164 17,221 168
2007-08 3689 1,19,842 1570 144 2835 6,50,114 18214 189 19,784 194
2008-09 3802 1,24,836 1615 149 3118 7,13,196 20252 209 21,867 216
2009-10 3876 1,30,917 1669 153 3370 7,72,548 21745 223 23,414 232
Source: Annual reports of various years, Ministry of Railway.
Sub-urban earnings grew from 23 per cent (123-100) and Non-sub-
urban earnings grew from 34 per cent (134-100) in the pre-turnaround period
to 27 per cent (153-126) and to 79 per cent (223-144) respectively in the
post-turnaround period.
Chapter 3
104 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
For further analysis, passenger revenue in terms of earnings per passenger
km for different classes from 2005-06 to 2009-10 is given in table 3.18.
Table 3.18: Passenger Revenue in Terms of Earnings per Passenger km ( in paisa)
Segment 2005-06 2006-07 2007-08 2008-09 2009-10 Non-suburban: Upper class 102.66 100.97 105.22 106.25 102.72
Second class Mail/Express 27.35 27.09 27.15 27.09 26.19
Second class ordinary 15.22 15.28 15.42 14.86 15.52
Average(all classes) 26.92 27.02 28.02 28.40 28.15
Suburban: (all classes) 12.89 12.76 13.10 12.94 12.75
Overall average 24.50 24.72 25.69 26.09 25.92
Source: Year Book of IR from 2005-2010
It is evident from the table that average earnings of all classes in Non-
Suburban, has shown an increasing trend in the earnings per PKM from
2005-06 to 2008-09, which dropped in 2009-10. Similar trend is found in
Sub-urban segment also. Overall average of these two segments increased
from 24.50 in 2005-06 to 26.09 in 2008-09, which dropped to 25.92 in
2009-10, despite increase in the number of passengers. This drop in revenue
in 2009-10 may be due to further reduction in fare, increased concessions and
with the misuse of Izzat scheme. Hence, boost in passenger revenue is a
manifestation of turnaround occurred in IR.
The loss on passenger segment is reduced by increasing volumes by
increasing the length and occupancy of trains, increasing the number of
coaches, improved design of coaches, and by increasing the speed of trains.
Many committees recommended increase in passenger fares considering the
wide gap between cost of providing service and the return from the same. But
social and political compulsion kept the rate at the low level and the rate was
further reduced by ` 1 each year. It is more prudent that instead of reducing
the fare, the resources mopped up could be used for delivery of better
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 105
services to the Sub-urban and ordinary passengers. Passenger unit cost and
revenue is given in table 3.19.
Table 3.19: Passenger Unit Cost and Revenue (in paisa)
Years Cost per PKM Revenue per PKM Revenue deficit 2001 38 23 15
2004 41 25 16
2008 39 26 13
Source: Bankruptcy to billions P.142
Table clearly shows that passenger cost always exceeds the revenue.
During the period, 2001 to 2004, an increase of 3 p in cost resulted in an
increase of 2 p in revenue. This was achieved due to an increase in fare.
However, during the turnaround period (2004-2008), the strategies resulted in
decrease of cost from 41 p to 39 p with a slight improvement in revenue from
25 p to 26 p. The revenue deficit of 15 p in 2001 rose to 16 p in 2004, which
came down to 13 p during the post-turnaround period. This reduction in the
deficit is also a sign of turnaround. Hence, boost in the number of passengers
and earnings with a reduction in cost are a manifestation of turnaround in IR.
3.5.2 Strategy of Outsourcing of Non-Core Activities
In a competitive environment, every organisation tries to concentrate
on their core competency and outsource the non-core activities for cost
reduction and revenue enhancement. As part of turnaround strategy, IR also
adopted the strategy of outsourcing non-core activities, which include service
from brake vans and parcel vans, which are provided in trains for the carriage
of luggage and parcels. Earnings from non-core activities are grouped as
other coaching earnings.
Before the turnaround period, other coaching earnings showed a
declining trend due to non-revision of licensing fees for many years, focus on
Chapter 3
106 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
retailing rather than wholesale outsourcing of catering, parcel and luggage
services and uniform pricing for all trains and for all seasons.
The following steps were taken to remove the ill-effects of the state of
affairs:-
a) Leasing of Parcel Services
Under this scheme, parcel space is leased out to private players by
inviting bids through open tenders. Parcel express trains with 15 parcel vans
and a brake van is leased to private operators. In the parcel segment, speed
and reliability have greater effect rather than price. IR have about 800 parcel
vans that are attached to passenger trains and the rates are set in three
categories - highest for Rajadhani and Shatabdi followed by Mail and
Express and ordinary passenger trains.
However, in the parcel business, IR is a station-to-station transporter
and it is not competitive in short distance carriage. On the return trip, the
parcel vans are empty as they are going from production to consumption
centres, which lead to underutilization of capacity. Handling of the catering,
luggage, and parcel services by private parties significantly reduced the
losses incurred by IR in this area, while increasing operating efficiency and
quality of service.
b) Revision in parking fees. It is outsourced to private contractors and there
is revision in parking fees for vehicles parked in railway land which
resulted in huge hike in license fee as a strategy to boost revenue.
c) Improved Catering- Provision of catering in trains has resulted in
providing good meal at reasonable rates in trains, irrespective of the class
in which they travel. Railways have set up IRCTC to provide better
catering to passengers.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 107
In this context, other coaching earnings are analysed after 2004.
Table 3.20: Other Coaching Earnings from 2004-2010
Years Other coaching (in Crores) % growth 2004-05 990.28 100
2005-06 1152.56 116.39
2006-07 1717.73 173.46
2007-08 1800.30 181.80
2008-09 1971.67 199.10
2009-10 2235.72 225.77
Source: Annual Year Book, IR for various years.
Table shows that Other coaching earnings increased from `990.28
crores to ` 2235.72 crores in the turnaround period. (125.77 % increase).
Though the share of earnings from other coaching segment is comparatively
lower, it has greater potential to mobilise revenue. Earlier, it was totally
neglected and during the turnaround period, special efforts were taken to
generate more revenue.
3.5.3 Strategy of Discovering New Source of Revenue
IR has started undertaking new opportunities for increasing revenue.
They include license fee for renting out advertisement space on the interior
and exterior of trains and in the station premises, leasing of land, commercial
publicity at stations through hoardings, glow signboards and other media of
publicity like plasma screens, computerized systems etc. PRS/UTS tickets are
also used for commercial publicity. The Rail Land Development Authority
(RLDA) has been set up for commercial utilization of railway land for
developing railway assets for revenue generation. The Sundry earnings
during the period 2004-10 are briefed in table 3.21.
Chapter 3
108 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
Table 3.21: Sundry Earnings for the Period from 2004 to 2010 (` in Crores)
Years Sundry earnings % growth 2004-05 1157.03 100
2005-06 1839.03 158.94
2006-07 1711.70 147.94
2007-08 2565.29 221.71
2008-09 2500.69 216.13
2009-10 2879.68 248.89
Source: IR’s Year Book of various years
The growth of Sundry earnings in the year 2005-06 was significantly
higher at 58.94 per cent because ` 500 crores were realized through a one-
time receipt of registration fees for container routes from private firms. The
Sundry earnings grew from `1157.03 crores to `2879.68 crores during 2004-
05 to 2009-10. The annual growth in 2007-08 had also been high at 74 per
cent as reimbursement of losses on strategic lines was made a part of Sundry
earnings from this year as per the direction of Comptroller and Auditor
General (CAG) adding an amount of ` 637 crores to the year's earnings. The
advertisement and sponsorship revenue from suburban traffic which accounts
for crores of rupees, subsidize the passenger revenue. Out-sourcing of
cleaning toilets to Eureka Forbes and outsourcing of other non-core activities
also boosted the sundry earnings from ` 1157 crores to 2879 crores in the last
four years (White paper 2009).
Though Sundry earnings constitute only an insignificant portion of the total
revenue, improvement in Sundry earnings also contributed to turnaround.
3.5.4 Strategy of Plugging Leakage of Revenue
Loss of revenue occurs due to ticket less travel, fake refunding,
unauthorized wagon loading and inefficient sale of scrap. During the
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 109
turnaround period, effective measures were taken to prevent ticketless travel
by preventive checks, minimize unauthorized wagon loading by legalizing
the axle load increase and sale of scrap through an efficient Scrap
Management Cell. All these increased the total earnings to a certain extent
and hence contributed to turnaround.
a) Ticketless Travelling
Ticketless travel results in loss of revenue. Lesser the ticket counters and
TTEs, greater the chances for ticketless travel. Every year, ticket less travel
increases either due to the reduction in the number of ticket counters or on
account of inefficient ticket checking system. Overcrowding in unreserved
coaches tempt passengers to travel by reserved coaches, which may be construed
as ticketless travel. In some cases, the expense incurred on conducting checks
would be more than the revenue earned from it. The revenue has doubled despite
the decrease in number of cases detected. This is due to the increase in the
penalty amount for irregular travel from ` 50 to ` 250.
b) Sale of scrap
Sale of scrap is to be properly scrutinized to prevent the leakage of
revenue. It has got much importance at the wake of the uni-gauge policy
undertaken in the last two decades, which generate huge volume of scrap.
Scrap includes melting scrap, released track, condemned rolling stock,
released materials from redundant sidings etc.
3.5.5 Strategy of Balancing Social Obligation and Commercial
Consideration
Upholding social obligation and aiming at inclusive growth, fares
were reduced and a number of concessions were allowed to the different
Chapter 3
110 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
categories of passengers. Fares were consecutively reduced over the years
which affected the passenger revenue. In order to attract more number of
passengers to AC classes and also to regain the lost traffic, the rates in AC
classes were reduced by adopting dynamic pricing policy. Differential
discounts on peak and off peak seasons and superfast charges on second class
tickets were reduced by 20 per cent, i.e., from ` 10 to ` 8. However, on
commercial consideration, to offset this loss, other charges, which do not
affect the common man, were increased over the years.
A number of concessions were allowed to all the travelling classes and
people belonging to different sections of the society. More than 100 types of
concessions are given to passengers of various categories under different
rates. Concessions are granted to 48 categories of people on the basis of class
of travel, age, type of train, social concessions like concessions to cancer
patients, unemployed youth, tourists and differently abled persons and
institutional concessions to students, social organizations and educational
institutions, professional and amateur artists. The concessional group
includes students, senior citizens, patients suffering from major diseases,
persons belonging to unorganized sector, monthly concession on season
tickets for Madrassa students, physically handicapped, freedom fighters,
widows of defense personnel killed in action, distinguished sports and highly
intellectual people honoured with national awards etc. A separate quota has
been defined for cancer patients and their attendants travelling on concession
in more than 200 trains in IR.
Concessions on IR are admissible irrespective of nationality of the person
w. e. f November 17, 1999. All concessions, excepting the concessions for senior
citizens are to be granted across the counters at stations and reservation/booking
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 111
offices only. On an average, from an E category station, around 10 per cent of
the monthly earnings are given out by way of different concessions.
Izzat is a concession allowed in the 2008 Railway Budget for people
in the unorganized sector with a season ticket of ` 25 with a monthly income
below ` 1500 for travel up to 100 km. They were allowed to travel only in
passenger trains. However, in the 2009 Railway Budget, it has been
liberalized and the passengers are allowed to travel in all trains including
superfast.
All these reveal that a balancing of social obligations and commercial
considerations was practiced successfully during the turnaround period.
3.5.6 Strategy of Modernisation of Railway Infrastructure
As a part of its capacity enhancement and safety measures, significant
improvements have been made in the infrastructure. IR makes huge
investments to upgrade its technology and modernize the rolling stock,
signalling and telecommunications, tracks and other assets for improving
reliability, safety and operating efficiency. Improvement in safety not only
reduces the damage to assets but limits the disruption of Railway’s
operations, thus increasing punctuality, which in turn improves productivity
and profitability. Public Private Partnership (PPP) is resorted to in the
attainment of the strategic goals in addition to the budgetary and internally
generated resources to cater to the huge investment needed.
Track renewals, gauge conversion and new lines were made annually
and launched Dedicated Freight Corridor in February 2009 (IR Magazine,
January, 2010). Modernization requires the introduction of new technology in
track laying and maintenance, design and maintenance of wagons, production
and maintenance of coaches, construction and strengthening of bridges,
Chapter 3
112 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
stations and freight terminals and signalling and telecommunication works
and also certain human resource initiatives. 20,227 route kilometres had been
electrified till March 2010 and 127 sites have been entrusted to the RLDA for
commercial development till February 2009 (IR Annual Report 2010).
Several measures are taken to improve the working conditions of
guards and drivers. Crew-friendly cabins and brake vans are designed, as
fatigue enhances accidents and reduces productivity. Through modernisation,
IR has transformed into value creation and customer satisfaction and in turn,
contributed to turnaround.
3.5.7 Strategy for Improvement in Passenger Amenities
Modernization of infrastructure contributed much to the improvement
in passenger amenities mainly in trains and at stations. However, certain
strategies, exclusively aiming at improvement in passenger amenities were
implemented during the turnaround period. The strategies for increasing
revenue and provision of amenities depend on the market segmentation. The
important strategies to improve passenger amenities are briefly outlined as
follows:-
a) Expansion of computerised PRS and UTS - Both PRS and UTS
help Railways to bring transparency in the accounting pattern and to
generate statistical data with ease. As on 31-3-2010, PRS is available
at 2061 locations; Computerised UTS is available at 3614 stations
with more than 6000 counters (IR Year book 2010). Among these,
some are serving dual purpose of PRS and UTS.
b) Improvement in ticketing service- Though e-ticketing had been
introduced by IRCTC in 2003; it has been popularized during post-
turnaround period. This has reduced the queue at stations and
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 113
provided much convenience to the passengers. Janasadharan Ticket
Booking Sevaks (JTBS) provides another easy source of ticketing. In
addition, ATVMs have been installed at 565 locations.
c) Ensuring cleanliness and hygiene- All coaches of Mail or Express
trains inclusive of all pantry cars have to ensure cleanliness and
hygiene. IRCTC have undertaken cleaning of all coaches including
pantry cars during maintenance and off-loading all equipments of
pantry cars once a month to maintain required hygiene. Moreover,
sale of quality food items is made mandatory in all Mail/Express
trains. Improved flooring was provided in all Mail/Express coaches.
Better catering, cleanliness and improved ambience in stations and
trains are provided to all classes of passengers.
d) Improvement in safety measures - Several measures such as
technological up gradation, modern signalling system, reducing
human intervention in operation, better training to improve skills in
operation and maintenance of assets have been undertaken to prevent
collision, derailment, accidents at level crossings and fire in trains
over the years. Periodical safety audits of different divisions by multi-
disciplinary teams of Zonal Railways as well as inter-railway safety
audits are conducted on regular basis. On the employees’ side, Safety
Action Plans to reduce accidents caused by human errors and training
facilities for drivers, guards and other operating staff have been
upgraded.
e) Improvement in Security measures- Railway Protection Force
(RPF), empowered under Railways Act, 1989, has been entrusted with
the tasks of protection and security of railway property, passenger
Chapter 3
114 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
areas and passengers, particularly in extremist areas. The Force is to
deal with offences such as alarm chain pulling, roof travelling,
touting, and ticketless travel, unauthorized entry into ladies coaches,
unauthorized vending, and trespass and also with unlawful possession
of railway property. IR has introduced a mobile helpline for
registering complaints of bribery, corruption against railway men.
This facility is available round- the-clock.
f) Other measures for improvement in passenger amenities
i. Modern, cost-effective lighting arrangements for platforms,
booking offices, renovated platforms and pay and use toilets.
ii. Passenger Guidance System including signage and coach
indication boards and installation of 100 escalators at fifty major
stations in a phased manner.
iii. Introduction of Garib Rath and Duranto trains and many pairs of
new trains.
iv. Cyber cafes and ATMs were opened at important stations.
v. Re-designing AC coaches to increase the capacity from 64 to 81.
vi. With the Ministry of Tourism and State Tourism Department, trips
to major tourist destinations through travel packages were made.
vii. Audio-visual passenger communication system like nation-wide
call centres for train enquiry.
After a thorough analysis of various strategies for revenue enhancement and cost reduction, which resulted in turnaround, it is pertinent to examine the changes made in the accounting practices and policies.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 115
3.5.8 Strategy of Change in Accounting Practices
During the turnaround period, some changes were made in the
accounting methods and practices already followed in IR. The major changes
made were:-
Capitalization of the principal component of lease charges paid to
IRFC- Instead of debiting the full amount of lease payment (both
principal and interest) to revenue account, only interest on lease is
debited to revenue account. The principal component of lease charges
paid to IRFC for the purchase of rolling stock is added to the capital
component of lease charges to the Block Account of IR. This change
was carried out with the approval of C&AG, Ministry of Finance and
Railway Convention Committee (Fifth & sixth report of RCC).
Presentation of Financial Performance – During the period, it was
decided to introduce a new format of presentation of railway finances
indicating the cash surplus before dividend and investible surplus in
the Explanatory Memorandum at the time of presentation of the
budget from 2007-08 onwards. International consultants appointed for
ADB financing project pointed out that the Railways' accounts lacked
transparency and readability from commercial point of view.
Accounts maintained as per the requirement of Government
accounting do not reflect the Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA), interest earned on Fund
balances, subsidy from general exchequer etc. in a clearly
understandable format.
Accounting of re-imbursement of Operating losses on Strategic
lines- Prior to 2006-07, losses incurred by IR on the working of
strategic lines were being deducted from dividend payable to general
Chapter 3
116 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
exchequer (Audit Report 2008). Revenue from operating uneconomic
strategic lines located on the borders of our country is treated as ‘other
income’ and the reimbursement amount for these losses is now
included as a part of the sundry earnings and dividend is shown on a
gross basis. It helps to show actual expenses and income against
specific lines.
All these accounting changes resulted in transparency of accounting
information to exhibit the actual results of business.
3.5.9 Environmental Factors
In addition to the innovative strategies, several macro-economic
environmental changes also favoured the situation. The boom in economy
contributed much to the development of the entire service sector including
railways, also played a role in IR’ turnaround. Indian economy’s annual
growth rate of real GDP during 2005-06 to 2007-08 was around 9 per cent
(Economic survey 2010). The boom in economy raised the demand for
freight and passenger services, which is reflected in higher revenue. With the
economy boom, there existed greater demand for coal for electricity
generation, cement for construction and pig iron for steel plants.
Moreover, the Supreme Court ruling in November 2005 which banned
overloading of road transport vehicles, shifted freight business, specifically
cement and steel, to the railways. This shift was echoed in the sharp rise in
freight revenue.
Major strategies, their application and effectiveness are enumerated in
table 3.22.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 117
Table 3.22: Strategies, their Application and Impact on Revenue and Cost Strategies Application Impact on cost and revenue
Freight segment:
1. Effective utilisation of Assets
a) Increased axle load a) One ton extra loading per wagon implied additional
revenue of 500 crores per annum.
b) Reduced wagon turnaround b) Resulted in reduction of cost due to reduced wagon
turnaround time to 4.95 days from 7.5 days.
c) Introduced Market oriented tariffs.
c) Dynamic and differential pricing boosted the freight earnings of low value commodities like iron ore and minerals and some schemes attracted piecemeal transportation.
Passenger segment: d) Longer and additional trains.
e) Adding more coaches responding to demand
f) Increase in other charges like cancellation,
g) Automatic up gradation. h) Dynamic and differential pricing
with substantial increase in passenger comfort.
d) Yield per train increased. e) Exploitation of seasonal demand resulted in increased
revenue f) Helped in balancing social obligation with commercial
considerations. g) Eliminates idle capacity. h) Popularizing Tatkal scheme, Garib rath trains and
advance booking period, seasonal discount for Upper classes of travel. This resulted in boost in revenue.
2. Outsourcing of non core activities like catering and parcel service.
Catering has been given to IRCTC along with its staff and parcel services to private contractors.
Cost reduction and revenue generation
3. Discovering new source of revenue
Advertising in rolling stock and railway premises.
Increased revenue from sundry earnings.
4. Plugging leakage of revenue
a) Intensive ticket checking introduced.
b) Scrap sale through efficient Scrap Management Cell
a) Reduced ticketless travel and increased revenue. b) Increase in scrap revenue.
5. Balancing social and commercial obligations
Reduction in fare and allowing more number of concessions
Attracted more persons to rail travel and which resulted in increased revenue.
6. Modernisation of Infrastructure
Doubling, Gauge conversion, electrification, modernisation of signalling, communication etc.
Improvement in safety, reduction of accidents, maintaining punctuality, reduced cost and increased revenue.
7. Improvement in passenger amenities
a) IT innovations implemented in almost all areas particularly in ticketing,
b) Improvement in service quality for all classes of travel, cleanliness and hygiene, safety and security measures
a) PRS, UTS and e-ticketing and e-payment are highly effective and resulted in reduction in workload of employees. It also helped to reduce the queue at the counter.
b) Attracted more number of passengers for rail travel.
8.Accounting reforms
a) Capitalisation of principal amount. b) Income from uneconomic branch
line is treated as other income c) Presentation of financial
performance.
a) Falsified overcapitalization is removed. b) Helps to show actual expenses and income against
strategic lines. c) More transparent and provides information for both
accountability and decision-making.
Chapter 3
118 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
During the period, efforts were taken to grab the opportunities in transport of goods and passengers due to the boom in economy.
In addition to major strategies, there are some minor strategies which enabled railways to increase revenue, improve service quality and contributed to turnaround.
Table 3.23: Minor Strategies and its Impact on Turnaround
1. Running of uneconomic branch lines.
Private parties are not interested, except in lines having tourist potential.
No relevance. Not taken over by private parties.
2. Creation of several Corporations. RITES, RVNL, IRCTC and CONCOR, DFCCIL etc.
Highly effective - Focused on specific operation with government control, helped to reduce cost.
3. GMs are given freedom for initiating new action for revenue generation.
Only a limited number of GMs have utilized this power (e.g. branding of trains in NR and recently by SR)
Highly effective whereever it is practiced.
4. Improved investment planning and selection of projects.
LRDSS (Long Range Decision Support System) needs to be implemented in all decisions.
It is highly effective and should plan new freight lines linking plans of other Ministries. E.g. Port links.
5. PPP cell
For the manufacture of wagons, facilities with PPP.
Not functioning effectively. No strategic policies and decisions- only transactions. Hassan-Mangalore, Mundra and Pipavav. Projects, Wagon Investment scheme were successful.
6. Alliance with Research Institutes and Consulting Associates
Alliance with IIM, Ahmadabad, IIT Delhi, IIT, Kanpur and IIT Mumbai.
It is highly effective in redesigning and simplifying the processes.
7. Dedicated Freight Corridors
In addition to Eastern and Western Corridors, Chennai to Goa and Mumbai to Ernakulum are under consideration.
Most of the DFCs are under construction only. It is expected to be successful on completion.
8. Double-stack containers Introduced in Nehru Port and some other diesel routes.
Highly effective. Saved 7 per cent on capital cost and 25 per cent on operating expenses.*
9. Initiative in safety and security. Anti - collision devices, train warning devices at gates.
Highly effective and number of accidents reduced.
10. Environmental factors
a. Growth of Indian economy, b. Supreme court ban on overloading
of trucks.
a) Rise in demand for transport and increase in exports.
b) Shifted freight traffic from road to rail.
Source: Own compilation *Annual statements of IR, 2008.
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 119
All these strategies resulted in organizational turnaround and the
operating ratio decreased from 98.1 per cent in 2001 to 75.8 per cent in 2008
and the net surplus increased from ` 763 crores to ` 13, 431 crores for the
respective period.
Figure 3.6 Conceptual Framework of IR Turnaround
3.6 Sustainability of Turnaround
Turnaround happened in IR did not sustain after 2007-08 due to many
reasons. Though IR had a turnaround, it could not be sustained for more than
three years, despite the initiatives taken by the Railways. The initiatives
focussed on high density routes, linkage with ports and DFCs and passenger
corridors which depend on PPP have not become effective. However, the
changes which are made on the basis of economies of scale, unit cost
strategies, and competition will definitely sustain for the future. The growth
Chapter 3
120 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
in road transport is unsustainable not only on environmental and safety
matters, but also in terms of wastage of resources. Axle loading has reached
the maximum and wagon turnaround reached the minimum. With the
introduction of container traffic in rail transport, the lost traffic was regained
to a certain extent.
However, IR being freight oriented railway, infrastructure development
like capacity augmentation, port connectivity and up gradation of track and
rolling stock are not in proportion to the projected growth in freight traffic. The
track structure is unfit to carry freight trains at high speeds and the development
of freight terminals was not in tune with the growth in traffic in certain sections.
Some of the strategies used for turnaround were aimed at short-term immediate
results. Men and machines were over-utilised. Hence, the turnaround did not
sustain. To sustain the turnaround in future, Strategic Business Units (SBUs)
within the organization are to be initiated. DFCs are to be constructed in high
density routes on priority basis. Maintenance of infrastructure is to be done
properly. Improvement in Service quality and boost in employee morale and
motivation is also to be done to sustain the turnaround.
3.7 Present Financial Position of IR
The excess generated by IR has gradually increased from ` 6193.32
crores during 2005-06 to ` 13431.09 in 2007-08 and then sharply fallen to `
4456.78 crores in 2008-09 and further fallen to a deplorable surplus of ` 0.75
crores in 2009-10. As the surplus has come down, the internal resource
generation has been adversely impacted to the extent of ` 1298 crores. The
rapid depletion of cash surplus within a short span of time may be due to the
impact of Sixth Pay Commission and droop in the economy with a decrease
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 121
in freight earnings on account of reduction in average lead of freight traffic.
The rise in fuel prices also aggravated the situation.
The three Funds viz. Capital Fund, Depreciation Reserve Fund and the
Development Fund maintained as on April 1, 2008 is wiped out. A reserve of
` 18000 crores are now in the negative balance of ` 21000 crores in 2010-11.
Earnings in all segments- passenger, goods and other coaching – were below
the target during the first eight months of the current financial year (2011-
12). The Ordinary Working Expenses have exceeded by ` 2036 crores. The
implementation of the Sixth Pay Commission had incurred an additional debt
of ` 70000 crores due to the lacuna of the accounting system followed in IR.
All these made IR to face another financial crisis now.
To avert the impending crisis, Comptroller of Accounts and Audit
General (CAG) have recommended rationalizing of freight and passenger
tariffs to improve its finance. Unviable projects are asked to be wound up and
suggested to focus on viable projects. Lack of funds is the major constraint for
speedy modernisation, which is further hampered by diversion of funds to
lower prioritised purposes due to political compulsions. Inordinate delay in
execution of projects is also due to inadequate co-ordination from State
Government, Environment Ministry for clearance of forest land and
availability of land, which contributed to huge cost and time overrun.
Plan outlay has been massively downsized by ` 9079 crores and the
Board has empowered all General Managers to divert funds from one head to
another under the same plan head and allocate funds with priority for safety
and targeted works, in order to ensure better utilisation. Railways decided not
to fund uneconomical projects out of Capital bonds.
Chapter 3
122 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
To boost revenue from freight and passenger segment, modernisation
of infrastructure or network is highly required. The urgent need is to
rationalize the heavily subsidised passenger services by increasing the fare.
It is imperative that on the expenditure side, Railway has to improve
productivity reasonably through a number of austerity or economy measures
like better manpower planning, effective asset utilisation and reduced fuel
consumption.
Summary
IR witnessed a turnaround during the period 2004 to 2008, when the
loss-making railway suddenly started making profits on a continuous basis.
However, during the financial years 2008-09 and 2009-10, it took a U-turn
with a sudden increase in the operating expenses mainly due to the impact of
VI Pay Commission and increased fuel price. IR witnessed a dynamic phase
of growth with new initiatives for the effective utilisation of existing assets
and improved technology for offering world-class services in both freight and
passenger transportation during the turnaround period.
After 1990’s the railway’s expenses (12.01%) grew one percent faster
than its earnings (11.17) leading it towards bankruptcy. However, between
2001 and 2008, the railways have become solvent by inverting this
relationship i.e., earnings (10.85%) grew four percent faster than expenses
(6.67%). Earnings have grown on account of growth in passenger earnings,
freight volume, and differential price hikes and working expenses grew at a
lower rate due to inelastic cost structure in relation to volume transported.
Turnaround achieved in the year 2005-06 is admirable in the sense
that it has not taxed the ordinary passengers, at the same time, they are
provided with better services. IR is the biggest passenger carrier in terms of
Turnaround in Indian Railway
Turnaround in Indian Railways- A Study with Special Reference to Southern Railway 123
passenger kilometres and its passenger fare is lower compared to other World
railways. Passenger earnings increase was due to increase in number of
passengers coupled with increase in average rate / PKM, which may be due
to increase of average lead in AC class travel. Second class sleeper also
registered an increase in passenger earnings. A reduction in AC class fare
was offset by an increase in average lead and number of passengers. With a
low fare in passenger segment and a fare reduction continuously for three
years together with maximum utilisation of existing assets, facilitated IR to
make a dramatic turnaround.
The turnaround happened mainly in the freight sector due to the
strategy of increasing axle load coupled with increase in rate/NTKM due to
rationalisation of commodity classification. There was significant increase in
loading and average lead of iron ore, fertilizers and cement. Drop in food
grain movement (both in loading and lead) was offset by increase in
rate/NTKM. Moreover, increase in Sundry earnings was made through areas
of business that has not yet been explored, such as leasing of parcel vans and
commercial advertising and publicity in station premises and rolling stock.
The improvement in financial and operating performance indicators
was mainly due to increase in operating efficiency achieved by maximising
the utilisation of assets along with economies of scale in passenger and
freight operations and reduction in wagon turnaround. The change in
accounting method by excluding the principal amount of lease from working
expenses and the economic condition favoured the situation.
Many experts expressed serious concern about the transformation in
IR stating that it is due to change in accounting policy, boom in economy and
is made at the cost of safety. The study attempts to look into the problem and
Chapter 3
124 Turnaround in Indian Railways- A Study with Special Reference to Southern Railway
made a thorough analysis of its earnings and cost, changes in accounting
policies, and the managerial approach. The study concludes that along with
other factors, the political leadership during the turnaround period has also
contributed to turnaround. With a strong will and follow-up, the then
Minister has executed all the policy decisions taken by his predecessors to
increase the revenue and to reduce the cost. Consistency of direction and
follow-up made the axle load and automatic up gradation into reality. The
strategies taken during the period were to grab the opportunities in the
transport sector due to the boom in economy.
This turnaround was accepted globally by management students and
business collaborations. IR had signed a Memorandum of Undertaking
(MoU) with the railways of many nations including Germany, Japan, China
France, Italy and Singapore for further progress and development. However,
the turnaround could not sustain for long. A close observation reveals that
some of the strategies which worked out wonders in the short span of time
were not sustainable. It is evident from the reversal of financial performance
by 2009-10. Therefore, if those strategies are reformulated with a perspective
vision and a continuous follow-up, the Railways can now make a second
turnaround.