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Understanding railway’s miracle

This book explores how a chronically loss-making, state-run enterprise was transformed into a money machine—offering key lessons to even the best-run private companies.

Vinayak Chatterjee | Print Edition: May 17, 2009

Drawing room chatterati had been quite dismissive about Lalu Prasad Yadav being appointed as Railway Minister. He was not a PLU (“people like us”), and with a fodder-scam cum Bihardown-the-tube personal history-sheet, it seemed hardly likely to do any good.

As the turnaround story started gathering momentum and successive rail budgets began presenting glowing financials and operating ratios, the skepticism started getting replaced with grudging acceptance that something good was indeed happening. But this feeling was also laced with a degree of suspicion that the turnaround was no “real” improvement but an astute play on increased axle-loads and clever rejigging of commodity freight rates.

The raison d’être for this book, Bankruptcy to Billions, is that the Indian Railways (IR) did transform from near bankruptcy to post a Rs 25,000-crore annual cash surplus in 2008. Considering that the Railways is one of the world’s largest state-owned enterprises with around 1.4 million employees, over 63,000 kms of network that operate 13,000 trains every day, this is a phenomenal achievement. One also has to take into account that it was achieved in just four years— between 2005 and 2008.

Seven clear interventions emerge as vital reasons for this turnaround success: thorough analysis revealed that room for reform was extensive; realisation that profits and social obligations were not necessarily in conflict; the minister gave the Railway Board significant autonomy thus fostering mutual trust between the bureaucracy and political leadership; an awareness that the Railways was not a monopoly, but was clearly losing out to alternative modes of transport like airlines, and roadways; the team capitalised on the global commodity boom, increasing freight rates and added Rs 9,000 crore in profits over four years; management employed a scale-driven strategy to increase freightvolumes, reduce unit costs, gain market share and ultimately profit; focus shifted from pricing per passenger or per tonne to maximising profits through yield and margins per train.

The authors suggest that this model of “inclusive reforms” can be applied to other public sector services like water supply or energy. One would tend to agree with this view, subject to recognising that some fertile ground conditions need to exist as it did in the case of the Railways turnaround. First, the operational upswing was facilitated by a particular phase of India’s economic history characterised by high growth and low inflation. Thus, an aggressive “scale-driven” strategy could work on a hitherto listless organisation with capacity in place.

Secondly, IR has always been characterised by a well-knit cadre of recognised technocrats who have been fiercely loyal to the institution even amidst the worst of times. Not all public systems have this advantage. Finally, there needs to be a very special “bridge” between the political and bureaucratic establishments that genuinely fosters two-way appreciation of points of view. This task was admirably performed by Sudhir Kumar, an IAS Officer on Special Duty to the Minister of Railways.

An economic historian reflecting on this turnaround story is likely to concede that while this is indeed a commendable phenomenon, it still hasn’t tackled issues related to institutional and structural reform. Much of this was dealt with in the epochal Rakesh Mohan Committee Report on Railways submitted in February 2002. While the railway establishment has distanced itself from it, few can argue against its recommendations which call for a separation of roles—into policy, regulatory and management functions. Nevertheless, read this book. It will redeem your faith in politicians and bureaucrats. More importantly, it will make you feel good as an Indian.

— Vinayak Chatterjee is Co-founder of Feedback Ventures and a leading infrastructure expert.

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