The Hindu Business Line : Railways: The turnaround story

The Railway Minister, Mr Lalu Prasad, is credited with turning around the loss-making Railways into a profitable enterprise with significant improvement in its financial performance.

The Railway Minister, Mr Lalu Prasad, who is now riding a popularity wave as a new management guru, will be presenting the Rail Budget for 2007-08 next month against the backdrop of pervading optimism and enhanced expectations. The next Annual Plan and future expansion plans of the Railways are expected to be quite ambitious in keeping with the requirements of an economy which has now entered a higher growth path.

Though the turnaround story of the Railways has now become a case study for management students, much more remains to be done and the tasks ahead are quite daunting. Hence, it is a good time to review recent developments, including the turnaround strategy, the new plans, the need for public private partnership as also the challenges facing the system.

DRAMATIC TURNAROUND

Mr Lalu Prasad is credited with turning around the loss-making Railways into a profitable enterprise with significant improvement in its financial performance. The internal generation of resources and the fund balances of the Railways have surged over the past two years because of the series of measures initiated to improve the organisation's productivity.

The truth is that the Railways' performance has been on an upward curve since 2002-03, much before Mr Lalu Prasad became the Railway Minister and, fortunately for him, the economy entered a higher growth phase soon after, registering an unprecedented growth of over 8 per cent between 2003-04 and 2005-06. According to Mr R. C. Acharya, a former member of Railway Board, the general increase in economic activity could easily account for about 70 per cent of the increased earnings. This is not to suggest that Mr Lalu Prasad had no role to play in bringing about a turnaround in the Railways fortunes. He brought in an Officer on Special Duty who studied the overall working of the system and pushed through the much-needed reforms and vital changes that were long overdue. NEW STRATEGY

The enterprising railway officials discovered the Gujral formula that was buried in the Railway archives and put that to effective use in enhancing the productivity of the entire system. The formula, authored by Mr M. S. Gujral, a former chairman of the Railway Board during the 1980s, had a three-prong strategy:

increase the freight load of each existing wagon by eight tonnes;

ensure longer and extended run by freight trains without changing the locomotive engines, and

reduce the frequency of checking wagons and tracks during a journey.

In addition, it was decided to introduce round-the-clock loading of wagons instead of the earlier limited hours at all major sidings. The results are there for all to see.

The turnaround time of goods trains has been reduced from seven to five days, thereby giving the benefit of loading 700 trains a day against 500 in the past. The revenue-earning freight traffic rose from 518 million tonnes in 2002-03 to 668 million tonnes in 2005-06. It is expected to exceed 720 million tonnes this fiscal.

Evidently, the ``increase volumes, reduce unit costs'' strategy adopted over the past three years has now started yielding rich dividends. To provide a further boost to this strategy, freight rates were rationalised over the past two years to cut carrying costs for a range of commodities and discounts were offered to attract major customers. It needs to be emphasised that at least two crucial decisions of the Vajpayee Government also played a significant role in improving the performance of the Railways:

In 2001, it was decided to create a non-lapsable Rs 17,000-crore Special Railway Safety Fund through a one-time Central Government grant of Rs 12,000 crore and impose a safety cess on passengers to mop up Rs 5,000 crore; and

In 2003, it was decided to provide extra budgetary support of Rs 15,000 crore for the Rail Vikas Nigam to strengthen the Golden Quadrilateral.

Emerging challenges

It was relatively easy to put to better use the existing assets and improve their productivity since they were grossly under-utilised because of poor management practices.

The difficult part of sustaining the turnaround and improving upon it will begin now since much more remains to be done in respect of railway safety, super-fast corridors, connecting the hinterland and ports, etc.

The freight target of 726 million tonnes set for 2006-07 now appears well within reach. However, achieving the much more ambitious target of 1,200 million tonnes set for 2012 is not going to be easy. Serious efforts are needed to complete the work on the proposed High Axle Load Freight Corridor on western and eastern routes.

Apart from the proposed dedicated freight corridor, the Railways is faced with massive plans involving track renewals, gauge conversion, modernisation of bridges, upgradation of suburban routes and modernisation of stations and train terminals, construction of metro rail in major cities, increasing the manufacture of rolling stock etc. The required investment for all these activities is estimated at over Rs 300,000 crore by 2015.

Meanwhile, the Railway Ministry is saddled with as many as 268 unprofitable populist projects that were announced from time to time.

These projects consisting mainly of laying new lines and gauge conversion, some of which are lying unfinished for over 20 years, are estimated to cost around Rs 54,000 crore. Pragmatism suggests that the Railways take up only those projects that would yield a reasonable rate of return on investment.

WAY FORWARD

Considering the kind of resources required to push ahead with the expansion and modernisation plans, the Railways would do well to concentrate on core activities such as provision of necessary infrastructure and operation of trains. The non-core activities should be farmed out to private players. Even in respect of providing infrastructure support, the accent should be on public-private partnership in many more areas.

The Railway Minister has already stressed the need for close co-ordination and liaison with the private sector in modernisation of railway stations, setting up of agro-product outlays at railway stations, construction of sidings and logistic parks, wagon manufacture, port connectivity and setting up of the dedicated freight corridor.

In this context, the signing of concession agreements with 14 private players to handle container transport operations is a step in the right direction.

Some other areas that need special attention include measures to attract higher value freight (currently bulk traffic accounts for almost 95 per cent, of which about 50 per cent is coal), a rationalisation of lower class passenger fares on suburban and long-distance routes aimed at reducing the huge losses being suffered on these segments, providing a push to commercial utilisation of landed properties owned by the Railways and seeking more World Bank and other foreign direct investment.