Business Today

Mission Impossible?

Suresh Prabhu is on a mission to make the Indian Railways fast, efficient and profitable. But he faces extraordinary odds in his quest.
twitter-logoAnilesh S Mahajan | Print Edition: August 28, 2016
Railway employees working at Delhi's locomotive shed (Photograph By Vivan Mehra)
Railway employees working at Delhi's locomotive shed (Photograph By Vivan Mehra)

Every week, without fail, Railways Minister Suresh Prabhu takes stock of the two dedicated freight corridors (DFCs) that are being constructed - one running from Delhi to Mumbai and the other connecting Ludhiana to Dankuni in West Bengal. He pores over the reports giving details of different segments of the two stretches. And he has also started getting drone footage of various stretches, which will be sent to him quarterly.

Photo: Vivan Mehra
Work on the two corridors, which began under the UPA government in 2008, had been slow. Things began to change when Prabhu became minister in November 2014 after the new NDA government took charge. Today, 95 per cent of the land is acquired, and projects worth Rs 48,000 crore allocated. The first stretch of the Eastern DFC connecting Khurja (near Aligarh) to Bhopur (near Kanpur) is expected to be commissioned in December 2017. And both the DFCs are likely be commissioned in full by end-2019.

Prabhu is clear that nothing should hold up work on these projects. After all, the DFCs are crucial to his plan to raise revenues and regain lost freight market share from roads. There are hiccups - 1,042 court cases and 3,391 arbitration cases are being fought between those who lost land for the projects and the DFCCIL. But Prabhu is undeterred - he wants to add three more DFCs connecting Delhi-Chennai (north-south), Kharagpur-Mumbai (east-west) and Kharagpur-Vijayawada on the east coast. The new DFCs will optimise the existing tracks and will opt for greenfield projects selectively.

However, DFCs are not the only thing occupying the minister's mind currently. Prabhu is also in the process of restructuring the Railway Board (See The Restructuring of Railway Board) to change the way decisions are taken in the Indian Railways, improve passenger amenities by upgrading the quality of coaches, adding Wi-Fi, running special trains like super luxury Tejas and modern Deen Dayalu, etc., while also reducing costs, speeding up project execution, and dreaming up new ways of raising finances.

Fixing the Indian Railways, the fifth biggest rail network in the world with 1.3 million employees, won't be easy. It connects the entire country through 68,525 km of route track (in 2014), 12,961 passenger trains, and 8,637 freight trains. It also runs 125 hospitals, 586 polyclinics, 102 schools and sundry other initiatives.

Impressive. But it is also archaic with poor facilities and on-time record. It spent 92.5 paisa last year to earn every rupee of revenue, leaving practically nothing to invest in new facilities or improve current ones. Then there are unions to deal with, who dislike all change, small and big. And Prabhu plans to spend Rs 8.56 lakh crore to fix all problems by 2019, assuming he remains the Railways Minister.

It is a Herculean task. What works for the Railways is that it can still count on huge passenger traffic where both road and airlines are unviable for multiple reasons. It also owns thousands of acres of land. Both factors can be leveraged to raise funds as well as recurring revenues. But to understand whether he can make a difference or not, one needs to look at both the details of the problems he needs to solve, as well as the plan he has worked out.

The Nitty-Gritty

Different Union governments and railway ministers have commissioned multiple studies on what ails the Railways and how to turn it around. Over the past 10 years, at least 12 committees have presented their reports on the sector, the latest being the Bibek Debroy Committee report, which was commissioned in 2014 (two months before Prabhu took charge) and was presented in June 2015. Most reports agree substantially on the basic problems, though they differ in their approaches to solutions.

The first problem is that all governments worry about the Railways becoming a big financial burden on the Union Budget, and want to make it a largely self-sufficient organisation run on the lines of an efficient corporation. But they also want Railways to serve as a transport system for the poor. Result: much of the passenger traffic is cross-subsidised heavily, and some decisions - like new trains and routes - are often decided on non-commercial reasons. Successive railway ministers, for example, have refused to raise passenger fares. Dinesh Trivedi from Trinamool Congress, who was the minister in 2012 in the coalition UPA II government, had to resign because he raised passenger fares without checking with his party leader Mamata Banerjee. As a result, passenger fares, especially at the lower end have remained static for more than a decade.

To keep its finances from going underwater, successive ministers have also raised freight charges, making freight uncompetitive vis-à-vis roads. This strategy worked reasonably well in 2004-2009 when Lalu Prasad was the railway minister. The global and Indian economy were booming and customers did not worry too much about freight costs. But as the economy slowed, Railways' freight charges became increasingly uncompetitive, though ministers like Mamata Banerjee and Trivedi - who came after Lalu - kept raising them and refrained from touching passenger fares. "Our passenger fare is cheapest in the world and freight is the costliest. This is increasing the inefficiencies, distortion, and the performance of Railways," says Railway Board Chairman A.K. Mittal. In the last Budget, Prabhu tabled freight earnings of Rs 1,11,853 crore out of the gross traffic receipts of Rs 1,67,834 crore. The rest were from passenger fares and advertisement revenues. That ratio should ideally be 1:1.

The other two reasons for losing freight market share are inefficiency of railway freight and continuous neglect of infrastructure. The days of liberalisation saw subsequent governments increasing investments only in roads.

The second challenge: Indian Railways has bloated into a mammoth, centralised organisation with hierarchical decision-making and a culture of operating in silos. As a result, even simple decisions take years to resolve. Debroy talks about one decision on hot cases to keep food warm for passengers, which was kept pending for 25 years. "The member (electrical) had one view, while the member (traffic) had another," he says.

The third problem lies with finances and accounting. Indian Railways spends heavily on revenue expenditure - there is little left for capital expenditure. As a result, that money comes mostly from the Union Budget. But for real change, IR needs to generate enough funds on its own for capital expenditure and also find new, non-government sources of funding. But that can only happen if Railways is run as an efficient corporation with a healthy balance sheet that can be leveraged to raise debt. Currently, it doesn't even maintain accounts on commercial lines. So, when a new train is introduced, it cannot tell whether the line is profitable or loss-making. No return on expenditure is calculated on any expansion or any new project currently, points out the Debroy Committee report.

Bharat Salhotra, President and CEO, Alstom Transport (now Alstom India) [Photo: Vivan Mehra]

"The assured offtake (of locomotives) gives us comfort of designing the whole project"

The fourth big problem is general inefficiencies that have been built in over the years. On almost all parameters, Railways lags behind. Its projects are both commissioned late and end up with cost and time overruns in execution. In the previous fiscal, it missed most of its targets, including of electrification, track renewals, bridge works, and doubling of tracks. In fact, out of the capital outlay of Rs 1,00,010.62 crore, it could spend only Rs 82,192.11 crore. In 2014/15, projects worth Rs 6.5 lakh crore were stuck, including works related to doubling, new lines, gauge conversion, traffic facilities, and electrification. Today Railways faces a burden of Rs 4,83,511 crore for the execution of 458 unfinished projects.

More worrying, operating ratios (what Railways spends to earn each rupee) are likely to get worse as costs pile up, including money for the 7th Pay Commission recommendations - nearly Rs 28,000 crore this year to retirees and serving employees. Prabhu's request for additional budgetary support of Rs 32,000 crore from the finance ministry was rejected. The Railways is expected to save Rs 5,000 crore in fuel costs (diesel, thanks to global slowdown and electricity because of innovations), but Prabhu needs to do more to reach the targeted operating ratio of 92 this year.

"If Railways has to perform like a corporate house, rationalisation needs to come," says Vijay Kumar Dutt, former additional member of the Railway Board. But Sudhir Kumar, who was OSD to Lalu Prasad when the latter was Railway minister, believes it is impossible to implement because no minister wants to start increasing fares rapidly. One reason for that, says a person working with Prabhu closely, is that over the years passenger amenities have deteriorated, which makes passengers disinclined to pay extra. Prabhu is working to rapidly improve passenger amenities so that charges can slowly be increased.

Stitching the Plan

Prabhu has started on the recovery process by implementing a recommendation of the Debroy Committee - commercial auditing. An audit has started in Ajmer division, which will cover the country in the next two years. Prabhu says that he has asked his PSU, Centre for Railway Information Systems (CRIS), to do an analysis of potential earning and actual earning of every train. "This exercise will give us enough data to understand which train makes how much money, and what more alterations can be made to make more money and expand operations," he says.

Next up, Prabhu is unlocking stranded projects. He has appointed seven mission directors to ensure smooth and efficient execution of the projects, who report directly to him and to Mittal. Along with this, he has started very few new trains in the past two years. In his two budgets, Prabhu has taken the outlay to Rs 1.21 lakh crore. He has come up with a five-year plan, and is committed to take the investments in Railways to Rs 8.56 lakh crore by 2019. Since this is beyond the budgetary support he can get from the finance ministry, Prabhu is looking at other ways of financing, including SPVs with states and PSUs for projects that are specific to them, and raising money via debt - LIC has committed to a loan of Rs 1.5 lakh crore.

A.K. Mittal, Chairman, Railway Board (Photo: Vivan Mehra)

"Today capital is no issue for us; we need to make our projects bankable and make them earn good IRRs"

He is also trying to rope in private investments, such as for the redevelopment of 412 stations. The first station - Habibganj in Madhya Pradesh - is already undergoing redevelopment; next in line are Bijwasan and Anand Vihar in Delhi, and Chandigarh. "Private players are negotiating that the age of lease must be extended from 55 to 99 years; Railways is working out the modalities," says Shashanka Shekhar Panda, CEO of Blue Earth Enterprise, a public policy strategy consulting firm. Prabhu told BT he is reworking the entire plan to make it more lucrative for investors.

Prabhu is moving on other fronts as well. To cut the inefficiency in track electrification, he roped in Power Minister Piyush Goyal. Last fiscal, Railways met its target of 1,600 km of electrification. Goyal is bringing in the expertise of power ministry's PSUs EESL and Power Grid Corp to execute electrification of 35,000 km in the next seven years. Apart from speeding up execution, this will also cut diesel consumption. Last year, Railways consumed diesel worth Rs 16,000 crore. Railways is also complementing Goyal's endeavour of pushing renewable energy by adding 1,000 MW by 2020. This includes turning several stations completely on solar. "We are working on the modalities," says Goyal. "The nation would save a lot once this is executed."

Restructuring the Organisation

Prabhu wants to create a holding company for Indian Railways, and bring all its PSUs as subsidiaries. This holding company can take financial leverage and access bond or debt markets, and may also help in improving execution. The flip side: faulty execution of projects could land Railways in a debt trap. "You have Air India run as a 'corporate' entity, and its finances are a complete mess," says a former Railway Minister on condition of anonymity. "You have to delink politics from the economy of Railways to make it run like a business house."

Prabhu also took Cabinet approval for his ambitious plan to form JVs with states. But critics say it is not an original idea. "The MOU with states is only repackaging, with some changes, of earlier participative models and practice to provide connectivity to ports, miners and industrial hubs, besides building new railway overbridges and underbridges and for new manufacturing facilities," says former Railway Minister Pawan Kumar Bansal.

Prabhu's plan, though, is more integrated. He wants these JVs to also take up projects of station redevelopment, construction of new lines, formulation of new suburban railway networks, etc. The JVs will be allowed to form project-specific SPVs with equity holding from other stakeholders such as banks, ports, PSUs, mining companies and others. "These JVs not only give you managerial support from state governments, they also increase the efficiency and ensure early completion of projects," says an official from the Railway ministry.

But a BJP chief minister questions this. "Most state governments don't have enough funds to finance their own schemes; how do you expect projects of Railways to get fund from state budgets?"

Road Vs Rail

It's a battle that successive Railway ministers have lost. The contribution of railway transport has shrunk to 0.8 per cent of GDP; for roads, it is 5 per cent. What worries many is that Railways' freight output is stagnant at 660 billion tonne km. And there is increasing competition for passengers from low-cost airlines for traffic in AC-1 and AC-2 category. The draft civil aviation policy recommends easing air connectivity of smaller cities, a Railways stronghold.

One of the solutions on offer is a regulator to rationalise tariffs. In January, Prabhu floated a consultation paper to set up a regulator to determine tariff (passenger and freight), to ensure fair play for private investors, and to maintain efficiency and performance standards. The Cabinet note to formulate this is ready, and might come up as an executive order, which would later be followed by the legislature. Currently, Parliament has the authority to fix tariff and fares, and it would require approval from both Houses to delegate the powers to a regulator.

There are critics to introducing a regulator such as Bansal, Kumar and Lalu Prasad. "The regulator will work on cost-plus model. This will not allow Railways to reap the benefits of a free market, or to work like a corporate entity," argues another former Railways minister. Prabhu sees this as a reform that would give stakeholders, including private investors, a level playing field.

Prabhu is also pushing his men to look for ways to increase the freight basket from 10 commodities to over 40. Initially, they looked for an answer in TransLoc. Starting with a paid-up capital of Rs 500 crore, this new enterprise was to have 10 existing goods sheds and develop 30 small multimodal logistic parks. The ministry was also to develop its air cargo infrastructure to integrate the movement of air cargo between inland container depots (ICDs) and the gateway airports. This could have been the first serious move by Indian Railways to move away from the traditional 10 commodities, like iron ore, aluminium, coal, and grains, which bring in 90 per cent of its freight earnings. But the Prime Minister's Office (PMO) did not want a new PSU to be created. In June, Prabhu initiated a JV with Delhi Mumbai Industrial Corridor - an SPV under Nirmala Sitharaman's DIPP. "This will speed up things, as DMIC already has land, and are anyway developing their projects adjacent to DFCs," says a senior official from the PMO.

This new logistics JV, along with Prabhu's pet project of setting up an auto hub in Walajabad near Chennai, could help Railways reclaim lost market share. Last fiscal, Railways reported earnings of roughly Rs 100 crore by moving 4 per cent of India's automobile deliveries. Prabhu wants to take this to over 20 per cent by 2026. One rake can take 300 cars, in comparison to 20 cars in a container truck. On March 1, the first phase of the Walajabad facility was inaugurated, which can park 5,000 cars. The first train moved in July, and covers Delhi to Chennai in 72 hours against 14 days earlier. The adjoining areas such as Oragadam, Sriperumbudur and Singaperumal Kovil have capacities of Hyundai, Nissan, Ford, Daimler, etc., and can manufacture a million cars annually.

But while it is cheaper for companies to move freight on trains, they prefer roads. "I am ready to move my products on Railways, but Prabhu needs to convince me his trains will not get late, and I will be able to track where my goods are," says an official at a top automobile manufacturer. The Delhi-Chennai freight train, in fact, is the first to run on time. If this continues, the Walajabad hub can easily save 20-25 per cent of logistics cost of original equipment makers (OEMs) on movement of their products. But if it doesn't, Prabhu's calculations will remain only on paper.

Prabhu is also busy improving last-mile connectivity and building infrastructure to increase traffic from ports and bigger industrial projects. Last fiscal, Railways commissioned connectivity with Tuna port, and work is on to reach Jaigarh, Dighi, Rewas and Paradip.

Pawan Kumar Bansal, former Railways Minister (Photo: Yashbant Negi)

"The Railways does not appear to have the means and the capacity to service the debt"

Make it For Railways

On November 9, 2015, a day after Prabhu's party BJP faced a humiliating defeat in Bihar's state assembly elections, his ministry issued a letter of awards to the US major GE and French firm Alstom. The agreement is to set up two separate locomotive manufacturing facilities at Marhowra and Madhepura districts of the state, respectively. This was critical for Indian Railways, as the message went out that the fate of projects would be measured on pure business grounds. "The file also never went to the minister. This was unthinkable just a few years ago," says Mittal. More importantly, these were the biggest orders Indian Railways committed in several years. These projects will allow Railways to upgrade several of the existing 10,773 locomotives, and also allow some old and inefficient ones to retire. GE has committed to manufacture 1,000 four-stroke diesel locomotives, whereas Alstom will manufacture 800 electric locomotives, in 10 years from setting up of the factories.

To make this happen, Prabhu opened the doors to FDI. The ideological parent of BJP, RSS is fundamentally against FDI and initially opposed it as well. The powerful Railways unions too are sceptical of big corporates coming and "taking away" their jobs. "The private investments and FDI are not welcome. They will only lead to more exploitation in the name of more profits," says Shiva Gopal Mishra, General Secretary, All India Railwaymen's Federation. While he admits that to expand the network and modernise operations, Railways needs more capital, he argues this should come from government coffers. Prabhu is engaging with these unions and taking them along. Meanwhile, Prime Minister Narendra Modi convinced the top leadership of RSS. RSS leaders say the leadership agreed but insisted that the NDA government must push for technology transfer.

The international majors were pushing for assured offtake. In negotiations, Prabhu made them agree to Railways' demand of committing to maintenance, and making the pricing formula work. More than that, Prabhu faced a challenge as this was the first time Railways was dealing with foreign players for such a big deal, and the officers were not willing to take risks. And they had their own apprehensions. For example, former chairman of Railway Board, Arunendra Kumar, who was part of the initial deliberations on allowing FDI in locomotive manufacturing, says he had his differences on pricing in comparison to domestic players. "The private entry is an experiment," he says. "Nobody has ever given this big an order of 10 years."

His apprehension may not be misplaced. Each locomotive manufactured at Diesel Locomotive Works (DLW) Varanasi is priced at Rs 13-18 crore. GE refused to share its price with BT. But Nalin Jain, President and CEO at South Asian chapter of GE (Rail, Mining, Defence & Aerospace), said that its locomotives will be of Evaluation grade -which is modern technology, and the prices are competitive. The market estimates are Rs 14.7 crore a locomotive.

Another point of view came from Debroy: "I would have liked a model where Railways came out with their plan to procure X number of locomotives in, say, the next 10 years rather than committing the offtake." But for Alstom and GE, it's a good deal. With commitment of $2.6 billion investments, this is GE's biggest bet in India, whereas, the euro 3 billion commitment is significant for Alstom, too. "The assured offtake gives us comfort of designing the whole project," says Bharat Salhotra, Managing Director of Alstom Transport India. This also provides business opportunity for players like Bharat Forge, L&T, ABB, and Siemens.

China has the largest high-speed trains network in the world
Efforts are on to revive projects to build coaches as well. This includes expanding the Raibareli facility's capacity to 1,200 coaches from 400 annually. But the Railways is undecided on the Palakkad rail coach factory, which is delayed since 2008, and was to be the first coach manufacturing facility with private investments. Meanwhile, Railways has decided to allow import of train sets instead of insisting on manufacturing in India. The initial requirement is of 17 train sets (316 coaches), which can run on semi-high speed, out of which five can be brought in complete knockdown condition and assembled here, and the rest is to be made in India. The five bidders who qualified for the project are Alstom-BEML, CAF-Bombardier, Hitachi-Ansaldo, Siemens and Kawasaki-Toshiba-BHEL. In two rounds of financial bids, none of the contenders put in their bets. "We asked for increasing the order size from 316 to 1,000 coaches to make our investments viable," says the CEO of one consortium partner. But Railways disagreed.

Cutting to the Core

By 2019, Indian Railways is expected to have debt of Rs 2.5 lakh crore on its books. "Last year we spent on delegating projects, creating financial stability, improving operational efficiency," says a Railways official. "This year is for execution. We have a clear picture from where finances for the projects will come in the next three years."

Prabhu's baiters believe he is biting off more than he can chew. "There is a simple rule the corporate world teaches you: if you are taking financial leverage, you (as an organisation) need to bring operational leverage to the table. This is the only way. Else a debt trap is waiting for you," says a former railway minister. Adds Bansal: "The Railways does not appear to have the means and the capacity to service the debt. Only time will tell whether the Railways will be able to service the debt."

According to a senior Railway official, Prabhu's instructions to his GMs are clear: invest this money only where the IRR of the project is more than 12-14 per cent. LIC, in another first for Railways, agreed to offer debt through various instruments worth Rs 1.5 lakh crore over the next five years. This forms an integral part of Prabhu's Rs 8.56 lakh crore capex. The funds are available at a rate of 30 basis points over a 10-year benchmark yield. These bonds also come with a five-year moratorium on interest and loan repayment. "Today capital is no issue for us; we need to make our projects bankable and make them earn good IRRs," says Mittal.

That is easier said than done. Prabhu's real test will be in the execution of his plans. And on that would ride the future of Indian Railways.


India under Railway Minister Suresh Prabhu is not alone in reforming its mammoth Railways. The sector has undergone a major transformation in neighbouring China as well. In 2013, China dissolved its ministry of Railways. In the process, it separated policy and regulation from commercial operations. A new PSU - China Railway Corporation or CRC - was formed to run trains purely on commercial lines, whereas the transport ministry would do all the policy and planning. China is now in the league of countries like Australia, Brazil, Canada, Germany, Japan, Russia and the US, which have unitary transport ministries at the central level.

Can India take a leaf out of this? Not likely. While the railway operations of the eastern neighbour are of similar scale to India's, the issues might be identical and may require the same medicine, but the problem is that India is much slower in execution. India requires major investments to uplift the existing infrastructure. Plus, the Indian Railways has traditionally had a social obligation of providing cheap travel to the poor.

China also doesn't have the kind of suburban or intra-region service networks that India has. Although CRC would be compensated if required to provide services that are not commercially viable, China actively discourages shorter distance passenger trips. Such trips, in many countries including India, form a loss-making business.

Then, unlike China, India requires access to technologies for modernisation and more strategic investments, such as FDI. To clear the current mess, more government patronage would be required. The Bibek Debroy Committee report, Rakesh Mohan's India Transport Report, or Sam Pitroda's report to modernise railways, among others, recommended that India run its Railways on commercial lines. Prabhu, too, wants to set up a holding company, on the lines of CRC and make all the railway PSUs subsidiaries. But this requires Prabhu's reforms to take shape. Quickly.

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