On track

At the root of this turnaround is an analysis of Railway finances over 25 years. According to this in-house study, its expenses in 2004 were lower by 6 per cent than in 1981, based on constant prices (in real terms, they increased 10.3 per cent a year). Concluding that there is no positive correlation between throughput and expenses, the turnaround strategy was simple: increase throughput to increase revenues and lower unit costs. “This,” says Sudhir Kumar, officer on special duty to Minister of Railways, “is the foundation of the turnaround.”

Its building blocks are market forces. What the Railways had failed to note or react to was the changing paradigm of the economy in post-1991 liberalising India. One of its biggest customer, the iron and steel industry, for instance, saw the end of the Freight Equalisation Policy. Now, for companies like SAIL and Tata Steel, every extra rupee spent on freight was a cost to be cut. Meanwhile, for all increases in expenses, the response was an across-the- board increase in freight rates and AC1 and AC2 fares. Combine the two and the clang of the death knell for the Railways was loud.

What the Railways forgot was a basic principle of economics: price elasticity of demand. “We took the market for granted,” says an official. And paid the price — in 1991, the Railways had 80 per cent of the iron and steel market share; by 2004, it had dropped to 32 per cent.

This share has not fallen in areas of the Railways’ core competency: bulk products like limestone, scrap, minerals, coal over long distances, where its rates are a third of roads’; door-to-door delivery from mines to factory furnace; providing total logistics solutions. The fall has largely been in areas where multiple handling is required.

Or where the quantities are small. Says Lalu Prasad: “A trader can’t use the Railways to transport piecemeal goods, as we don’t offer that service. But we’re addressing it (See interview on page 4).” The Railways is also weak in distances of less than 500 km. As if that were not enough, many potential customers like Reliance Industries’ Patalganga and Hazira plants don’t even have a rail siding. A rationalisation of freight rates was initiated and across-the-board hikes and cuts are now history. “Our pricing policy is to play the market,” says a Railway Board member.

If volumes are the key to the turnaround, building capacity was one of the locks that had to be opened. This has been done in two ways. One, the turnaround time of wagons — the time spent in customer sheds for loading or unloading — has been reduced from seven days in 2003 to 5.5 days in 2006. The Railways is now able to run 800 trains a day, against 565 earlier. Two, the same infrastructure — wagons, tracks, locomotives, people — carries greater load. Wagons that carried 58 tonnes earlier cart 68 tonnes today (64 tonnes on passenger routes). Without buying any rolling stock, the total carrying capacity is up 35 per cent.

In addition, the opening up of the container business to private players is expected to allow smaller quantities to be moved on rails (See story on Page 3). This, says Lalu, should mean Rs 10,000 crore more in revenues. Every year.

Even as the turnaround was underway, a new enemy raised its head in the form of diesel price hike of Rs 12 per litre. The hike turned out to be a mixed blessing. For trucks, diesel is about 60 per cent of their total cost, compared to about 8 per cent for the Railways. “Overnight we became more competitive,” says V.K. Raina, general manager, South Eastern Railway.

The driving force behind this turnaround is Lalu’s rustic, earthly logic. An insider recalls this incident. “How many hours do trains run for,” Lalu asked the Railway Board. The answer: 24, members laugh. Lalu: “How many hours does loading happen for?” The answer: office hours only, members sit up. Terminals were then illuminated to make them round-the-clock. This, going hand-in-hand with time incentives for customers, helped reduce turnaround time of wagons.

Such common sense is generating smart numbers. Lalu’s third budget has delivered a 15.5 per cent growth in revenues to Rs 54,700 crore, with projections for 2007 standing 9.7 per cent higher. Freight traffic is up 11 per cent, the highest ever, to 668 million tonnes, and is projected to rise 8 per cent to 726 million tonnes (insiders,

citing Infosys-like guidance, say it could go to 750 million tonnes). Backed by an operating ratio of 84.3 per cent, last seen about a decade ago, at Rs 14,293 crore (with a ‘guidance’ of Rs 18,000-20,000 crore), the Railways could well be India’s biggest profit maker in 2007.

Having this money is adding confidence, if not a little swagger, at Rail Bhawan. There are murmurs of a Rs 3,00,000 crore 11th Plan target — a five-fold jump over the 10th Plan. Impossible? So was the turnaround two years ago. Perhaps, some elephants dance.

India and China: changing lanes

In 1992, the Indian Railways had a longer track network than China Rail — 62,458 km versus 58,100 km. By 2002, China Rail’s network was 14 per cent longer than India’s. During those 10 years, Indian Railways trailed China Rail on all key parameters.

• Investment outlay of the Indian Railways totalled $17.3 billion — one-fifth of the $85 billion for China Rail

• Both recorded almost identical passenger km, but China Rail carried 4.5 times the freight km carried by Indian Railways

• The operating ratio of Indian Railways rose from 90 per cent to 96 per cent, bringing it close to bankruptcy. In China Rail, while that figure rose more steeply, from 51 per cent to 74 per cent, the margin remained comfortably high.

• The average passenger tariff of Indian Railways is 55 per cent lower than China Rail’s, while the average freight tariff is 66 per cent higher.

J.P. Batra; Chairman, Railway Board

‘More output per employee’

On freight traffic. Overall growth for the past three years has been 4-5 per cent. This year, our freight traffic has increased by about 10 per cent, passenger traffic by 6.3 per cent.

On passenger traffic. Non-suburban traffic is increasing by 9 per cent and is helping us reduce losses. During the coming years, we will increase the number of longer trains — 22-24 coach trains.

On staff productivity. For the past 10 years, we have been surrendering 1-1.5 per cent of our workforce strength. It’s down from 2 million to 1.43 million. It will keep coming down. Meanwhile, output has been increasing.

On Lalu. Our minister has given the direction, under whom, you will find from year to year, growth rate is increasing and improving. I don’t need to say anything more.

S.B. Ghosh Dastidar; Member Traffic, Railway Board

‘We’re getting more efficient’

On the turnaround. Freight growth has been phenomenal — in the last two years, 8 per cent; this year, it will exceed 10 per cent. Compare this to a period like 1977-78 to 1985-86, when freight traffic grew at an annual rate of 2.5 per cent.

On passenger traffic being a loss-making business. Everybody does cross-subsidisation. Airlines charge more in peak period than in lean period. Since their total expenditure remains the same, by charging less, they try to up volumes. We are increasing coach km per coach day. The same coach is running a greater distance per day, so that the more passenger and passenger km we do, the more money we earn. This is efficiency.

On Lalu. He may have another image in the media, but all this has been possible because of him. He has given us a free hand, with the rider that service must improve.

Sudhir Kumar; Officer on Special Duty to Minister of Railways

‘An eye on the market’

On the turnaround. In a nutshell, we increased throughput to increase revenues and lower unit costs.

On the problems earlier. To any problem, the solution was, “don’t touch passenger fares and do anything else”. So, we kept increasing freight rates and fares of higher classes. Nobody paid any attention to the market.

On solutions. To play the volumes game, we have to increase capacity. We have done this by reducing our turnaround time for wagons, increasing axle load and restructuring rates.

On Lalu. The media is not giving him credit. In 2001, the operating ratio was 98 per cent, dividend default stood at

Rs 2,800 crore. See the results today and judge for yourself.