Rakesh Mohan Committee Report - Highlights of the
Executive Summary
The Indian Railways (IR) has been a vital component of the social, political and economic life of the country. IR's transportation network has played a key role in weaving India into a nation. This network has not only integrated markets but also people across the length and breadth of this huge country. IR's role in times of war and natural calamities has also been commendable: it has always risen to the occasion and transported men and materials in large numbers at short notice. It is because of these reasons that IR is one of the foremost institutions of the country today. At the same time, because of a series of developments in the 1990s, IR is today on the verge of a financial crisis. Urgent action is needed to revitalise it so that it can continue to serve the nation.
The reasons for its difficulties are several. First are reasons internal to the railways themselves. A tradition has been built up that sees the railways as an essential public service, access to which should also be available to those who are unable to pay fully. Freight users and passengers using higher classes of services are seen as those who can pay more than their fair share. It is the users of lower class passenger services who are seen to require subsidies. Consequently, freight services subsidise passenger services as a whole and upper class passengers subsidise lower class passengers to some extent. Suburban services are heavily subsidised at all levels.
Second, the economic reforms of the 1990s have also subjected IR to greater external pressures. With the opening up of the economy in 1991, and with trade and tariff reform accompanied by different measures of internal deregulation, Indian firms have become increasingly conscious of their costs. With the drop in international transport costs the natural protection enjoyed by domestic industries has also fallen. For domestic firms to be internationally competitive, the cost of infrastructure also has to be competitive with that in other countries.
Over the last decade, the proportion of the total production of bulk commodities that was transported by rail has gone down in almost all commodities. IR has seen a slowdown in the rate of growth of freight cargo transportation. The annual growth rate measured in 'net tonne kilometres', averaged 5.33 per cent between 1984 to 1991 but dropped to 1.86 per cent in the next eight years 1992-99.
Third, investment in unremunerative projects has escalated during the 1990s. The adoption of the unigauge project which has involved large investments during this period has been particularly harmful to the finances of IR. Whereas it is possible that economic benefits from this project may be felt over the long term, it is clear that there have been no short term returns. Investment in electrification has also been excessive to the needs of traffic in relation to the newly electrified segments. The temptation to begin a myriad of new lines for political reasons has been much greater during the politically fractured 1990s. Although progress in actual investment in these new lines is small, this activity does divert engineering and managerial resources to a significant extent, detracting from other serious tasks.
The loss of market share in the profitable freight business, lack of flexibility in pricing, high cost of internally sourced products and services together with investments in unremunerative projects have meant that the rate of growth in revenues has been outstripped by the rate of increase in costs, particularly in the last five years. These problems have essentially resulted from the wrong organisational structure of IR which devalues accountability at every level.
Rising employee costs, poor productivity and declining budgetary support have compounded the problem. Staff costs, which account for about 50 percent of the costs have been growing the fastest. This percentage is likely to increase even faster with the implementation of the recommendations of the 5th Pay Commission. The relatively low levels of employee productivity in the Indian Railways compound the problems of having a large workforce.
As compared with the
increase in real wages (average per railway employee) of 108 per cent the
increase in average productivity measured in terms of output in 'Traffic Units'
over the period 1981-82 to 1998-99 works out to only 82 per cent. The disparity
would be still more adverse if the component of pensioners' benefits is added
to the average staff costs. Pension outgo accounted for 10.5 paise out of every
rupee earned by IR in 1998-99 -a steep increase as compared to 1981-82 when it
was just 3.4 paise to each railway rupee. The
root of the financial problem confronting IR is therefore found in the lack of
adequate productivity increases that are commensurate with the real wage
increases over time.
The proportion of expenditure on repairs and maintenance has been declining steadily over the years. The strain on the IR's resources has also prevented adequate investment in track renewals and other safety related areas. This is another consequence of the unigauge project. Consequently, the arrears of track renewals have grown from 3,548 km to 11,211 km over the last ten years. Though the overall number of accidents and the number per million train kilometres have shown a declining trend, the absolute numbers are still high, with scope for improvement.
These tendencies
became accentuated in the 1990s and the economics of IR are now extremely
vulnerable. For first time in 17 years last year IR was not able to pay a
dividend to the government on its past investment. It is in financial crisis.
Its ability to invest adequately in providing efficient and cost competitive
services in the future is seriously in question. Thus IR is in a watershed period in its history today and therefore
drastic action needs to be taken in a number of areas to make this august
organisation the country's pride once again.
If IR is to survive as an ongoing transportation organisation it has to
modernize and expand its capacity to serve the emerging needs of a growing
economy. This will require substantial investment on a regular basis for the
foreseeable future. With the prospect of getting substantial free or
subsidised resources from the government increasingly unlikely, new investment
will have to be financed on a commercial basis. This is the challenge facing
the Indian Railways.
B. LONG TERM TRAFFIC GROWTH PATTERNS
The ability of IR to accelerate the growth rate of its
revenues from both freight and passenger traffic is central to the success of
any effort to restructure the organization and to finance the necessary
investments. All the new investment and organizational restructuring that is
envisaged will be of little use if the demand for railway services does not
increase apace.
One of the major reasons for the deterioration of the organization's financial condition has been a steady decline in the growth rate of freight traffic in recent years. The growth rates of passenger traffic, in contrast, have been fairly healthy, and there is a significant increase in the share of revenues being realized from the higher classes of passenger services. Despite this trend, however, an overwhelming proportion of passenger revenues is still being raised from the lower classes.
Passenger fares, specially for the lower classes, are set with clear political considerations in mind, which almost inevitably leads to subsidization. Some of this is made up by inflating upper class fares, but the potential for fully compensating for the subsidy for the lower classes from this source has been limited. To maintain some control over IR's financial deficit, the burden of cross-subsidization inevitably falls on freight traffic. IR has been steadily losing its market share of freight to road largely because it has not been able to compete on prices.
Looking to the future, the changing structure of production in the economy in the next decade may further erode the competitive position of the railways. Manufacturing activity, which is relatively more transport intensive than services particularly with respect to bulk transportation, appears to be peaking at somewhat less than 30 per cent of GDP. In India, the service sector is already by far the dominant sector, accounting for about 48 per cent of GDP and also appears to be the fastest growing. The implication of this pattern is that every increase in GDP will require faster bulk transport services. IR will have to compete even harder with other modes in order to sustain its traffic volumes, let alone accelerate growth. Thus a significant change is needed in IR's strategy towards its freight services.
International trade has increased and will continue to increase in its importance relative to GDP. This means that transportation services will become increasingly integrated, with road, rail and sea striving to become a part of a seamless chain of goods movement. To exploit the potential in the non-bulk segment, mere pricing will not be sufficient. IR can compete for this traffic only if it offers an attractive total logistics package.
If IR takes steps to recover its market share through a combination of tariff re-balancing and quality enhancement measures, and to increase its share of the transportation of other commodities, a growth rate of 7 per cent per year or more over the next decade does not appear to be an infeasible objective. A medium annual growth rate of 5 per cent for freight traffic can be achieved without major organisational changes provided the physical capacity is made available. However, there is potential for increasing this rate further through a strategy that has pricing and operational components in addition to providing physical capacity. This will require significant organisational restructuring.
The Expert Group made detailed projections for freight growth possibilities. If appropriate measures are taken to capture back lost bulk freight and to carry a greater proportion of non-bulk freight, freight revenues could rise by an average of 6.9 to 7.2 per cent per year for the next 15 years.
The Expert Group also made detailed projections for the potential of
passenger traffic and revenue growth. The projections are based on:
- Greater availability of upper class services consistent
with the changes in income distribution taking place in the economy.
- Tariff rebalancing consistent with the observed
elasticities of demand as estimated by the Expert Group.
It is found that with tariff rebalancing over the next 5 years, passenger revenues can grow by about 8.6 per cent per year; without tariff rebalancing, the growth in revenue would be about 7.5 per cent, per year both in real terms. These projections account for some fall in growth in passenger volume growth in the lower classes that would result from fare increases.
C.
POSSIBLE GROWTH SCENARIOS AND INVESTMENT REQUIREMENTS
We have used all the current information available from IR to construct three possible investment strategies for IR over the next fifteen years. The first two scenarios, of Low Growth and Medium Growth are constructed in a Business as Usual framework, whereas the third scenario, strategic High Growth will require substantial focused remunerative investment and corresponding organisational restructuring of IR internally and its relationship with government, including corporatisation.
The Low Growth case assumes no organisational restructuring and an investment programme similar to that observed in the 1990s. The Medium Growth case assumes significantly improved functioning of IR within the current organisational framework, but with higher investment levels and higher revenue growth. Even with these optimistic assumptions, it is found that neither of these two cases are financially viable without excessive levels of budgetary support which do not seem to be feasible, even if socially justified. The only feasible, but extremely difficult scenario, is the Strategic High Growth one.
The principal strategy for achieving a very high growth lies in aiming at a growth rate of goods traffic that has not been reached in the past. The second part of a plan for very high growth will be to ensure that such high rates of growth are not at the cost of passenger traffic, especially long distance. The third important requirement will be to undertake structural changes to make possible the simultaneous high growth of freight and passenger traffic possible, as outlined in this report.
Our financial
projection exercises show that for IR to be financially viable as a commercial
organisation, incremental improvements in traffic growth will not be adequate. For IR to survive over the next 20 years
and beyond, it has to adopt a strategic perspective where it rekindles high
growth in both the passenger and freight segments. It is imperative that IR
achieves this strategic growth. Although this scenario is ambitious in its
goals, it provides an attainable target for IR with respect to growth in revenues.
Freight is the key profit earner for IR. The long-term strategy of increasing freight rates regularly too frequently over the Eighth Plan -to protect railway profitability has been counterproductive, driving freight customers to other modes of transport, or even resulting in structural changes in their industries to reduce transportation costs. There is urgent need for a new viable, long-term strategy to profitably grow the freight business.
The Strategic High Growth option is marked by a signal departure from recent investment practices. The new element is an investment package making up a total business plan mainly targeting the needs of the railways users. The main parts of this strategy are as follows:
-
Strategy
to improve speed of freight trains: A significant improvement in
freight train speeds will need to be brought about for which it is necessary to
eliminate obstacles to fast train movement.
-
Up-grading
rolling stock: The present wagon design will need to be improved in
order to make for a smooth interface between bogie and track and thereby reduce
cost of maintenance as well as number of break-downs.
-
Specific
commodity related investments: Certain commodities,
particularly types of finished steels, and cement movement in bulk, require
special types of wagons and handling arrangements. This will need to be planned
over selected sections that cater to the commodities mentioned.
-
Improved
signaling and communications: The elimination of road
crossing, together with the planned introduction of higher capacity locomotives
and wagons of improved designs will create the condition necessary for reducing
the speed differential between freight and passenger trains. For realizing this
improvement, large investments will be needed in signaling and communication.
-
Container
terminals: New operators should be permitted to enter the field for
container traffic, which is a very high growth area. To fully exploit the
demand and arrange for coordinated growth between road and railways, there is need
to set up two or three additional container depots each in the large
industrially advanced states and at least one container depot in all other
states.
-
Ensure that there is no real increase in freight rates
which is uncompensated by added value to customer, and that present rate structure is rationalized to
remove distortions that have crept in.
-
Special focus to customer needs of commodities that are
drifting away from railways.
These trends imply a major revamping of IR's approach to freight traffic. IR has to regain its primacy in bulk freight, and at the same time, has to increase its competitiveness in the haulage of other commodities.
With respect to the lR's movement of passengers the central problem is that more than 90 per cent of traffic is in the low-price segments. The key challenge to IR is to maintain its obligations on the lower price services, while at the same time increase both capacity (through investment) and utilization (through innovative pricing and other marketing instruments) of the upper classes. The revenue potential from the upper classes needs to be exploited to the maximum extent. The prognosis here is quite optimistic in view of the ongoing changes in income distribution towards higher incomes in the country. IR has already responded to these ongoing changes in the demand pattern for passenger services by introducing new classes of services such as Second Class A.C. 2 tier, Chair Car services and new trains such as Shatabdi Express. Continued innovation in this direction will lead to the attainment of the kind of revenue growth projections that have been made in this Report.
The attainment of financial health will necessitate both higher growth in traffic as well as tariff rebalancing. IR has little option but to rebalance passenger tariffs in a manner consistent with the elasticities of demand for the various classes.
The Expert Group finds that appropriate tariff rebalancing will require an annual adjustment of about 10 per cent increase in second class sleeper fares and 8 per cent in second class ordinary fares on a continuous basis for about 5 years assuming about 6 per cent annual inflation over the period. It is also found that upper class demand elasticities are such that revenues will increase if the upper class fare increases are muted to around 1-2 per cent a year over the same period, assuming that capacities are expanded appropriately in terms of local availability to meet the enhancement in demand expected. The Expert Group is aware that such differential increases in tariffs would appear inequitable and therefore difficult to implement. This is the result of excessive increases in upper class fares in the past. Moreover, at the end of such a tariff rebalancing exercise the ratio of fares between II class (Mail and Express) and ACI class would be about 1: 9, quite similar to the 1:9.6 ratio recommended by the 1993 Railway Freight and Fare Committee. Such fare restructuring would have to be accompanied by tangible improvements in service, particularly for all II class services.
We have not studied the structure of suburban fares in any degree of detail. But it is evident that similar measures will have to be taken there. Alternatively, if the relevant cities or states are keen to subsidise their urban commuters, the resources should come from them.
With the kind of measures suggested for both freight and passenger traffic, the Strategic High Growth Scenario would see average annual revenue growth at about 7.5 per cent per year at constant prices over the projection period of 2001-02 to 2015-16.
Along with the achievement of higher revenue growth as indicated, IR will have to explore every avenue of cost reduction. Among the cost reductions to be implemented staff cost reduction will be crucial. If Indian Railways is to become a truly modern transportation system offering services that could face up to the emerging competition, the issue of an accelerated reduction in manpower has to be addressed without delay.
In any set of financial projections, a substantial net reduction in employee strength (at least twenty per cent of the total) has to be provided for. Retention of current strength would rule out any upturn in IR's performance, even in a high traffic growth scenario. Going by the conclusions of a diagnostic study on this problem carried out by RITES for the Railway Board the excess manpower could be more than 25 per cent of the total. On a very conservative basis therefore, a reduction of twenty per cent of the present overall strength should be targeted over the next five to seven years. This will require, apart from reductions through normal retirements, the spinning off of ancillary activities and also a well-designed VRS scheme to be implemented early, in phases.
IR has an enviable record of very healthy labour relations. This must not be compromised. Any such programme of staff rationalization must be fully discussed with the employees and an acceptable programme formulated.
·
Further attention to cost reduction in all aspects.
·
The devolution of some portion of pension liabilities
devolving on the Government of India, possibly about 20 per cent for the
foreseeable future.
·
Asset sales of about Rs. 500 crore in each of the first 5
years.
* It is also assumed that the Government would compensate IR
for investment and losses made exclusively
because of services provided at Government behest, for strategic or
socially desirable objectives. With this kind of scenario, IR can be
financially viable while responding to the changing needs of the customers in
both its freight and passenger services. This is vital for adequately providing
for the emerging transportation infrastructure needs of India’s growing
economy.
The investment requirements over the next 5 years under the Strategic High Growth Scenario amount to about Rs. 70,000 crore at 2000-01 prices. It is felt that if adequate commitment is shown by both the Government and Indian Railways to undertake the kind of reform and reorganisation process proposed in this report, it will be feasible for IR to raise the kind of resources required. This will need extended support from external long term funding from multilateral agencies along with the structuring of innovative financial instruments domestically.
The Strategic High Growth Scenario suggests that with the kind of investment, growth, financing and reorganisation proposed, IR will become fully commercially viable after a period of about 7 years. During this period it will require exceptional government support and commitment.
A review of the current railway planning process shows that public and parliamentary pressures are only some of the factors adversely affecting railway investments and that even in areas where these pressures do not apply, the investments do not follow proper priorities. The results are evident in the declining trends in productivity. From the analysis of IR’s Planning policy certain trends are evident. These are:
·
Unsustainable shares of investments get allocated to
projects of low priority and doubtful return.
·
Standards of project selection have slackened, especially
in recent Plan years, and the investments made have not and in many cases, could not have improved
-traffic output to a corresponding degree.
·
Overall, the incremental approach to capacity augmentation
is now yielding diminishing returns.
From the point of view of investment strategy, the most undesirable feature of the annual
budget exercise is the very short-term
focus it imparts to all investment initiatives.
The priority for Indian Railways is to invest in debottlenecking points of congestion in the network (particularly on the saturated arterial networks of the Golden Quadrilateral linking Delhi, Kolkata, Chennai and Mumbai). Instead of debottlenecking, Indian Railways is being forced against its wishes to invest in initiatives that make matters worse not better. About half the Capital Fund has been absorbed in gauge conversion which has produced no discernible performance improvement. New lines have absorbed 20-30 per cent of borrowed capital, only to increase Indian Railways reach into areas where there is little or no traffic, at a time when non-remunerative lines should have been closed in order to free resources to liberate those arteries clogged with traffic.
Unfortunately , plans for the future are worse still. At present, there are 70 new rail line projects included in the railway budget with a total estimated cost of approximately Rs.23,000 crores. If it were not for the fact that the patient will die long before it has the opportunity to transfuse this Rs. 23,000 crores into unremunerative lines, these self destructive investments would surely be terminal.
The hardheaded conclusion is that the Railway Works Programme has lost focus over the last decade and is on the way to becoming an autonomous process with little connection to organizational aims or resource limitations. The prevailing structure has served well in a captive market and the planning needs associated with it. In a changing scenario brought about by the economic reforms, IR is now in a competitive environment where there is need to bring in customer orientation at the project framing stage itself.
E. IMPLICATIONS
FOR THE ORGANISATION: REINVENTING INDIAN RAILWAYS
IR over the past decade has fallen into a vicious cycle of under investment, mis-allocation of scarce resources, increasing indebtedness, poor customer service and rapidly deteriorating economics. The root cause of the decade of decline is an unstable political system increasingly driven by short-term political compulsions. Prices could not be adjusted, costs could not be cut and investment decisions were increasingly distorted because of political compulsions. In short, the new populist political reality effectively tied the hands of management.
Indian Railways is one of the most studied institutions on the planet. For almost every conceivable question that can be asked there already exists a comprehensive and rigorous report that lays out the facts and indicates the answers. What is striking, however, is that there has been little action on the many reports IR has commissioned, both internal and external. The overwhelming sentiment of the Expert Group is that time has run out. Action is overdue. The imperative is to get started fast on a programme of restructuring and reform.
The Expert Group focus on root causes has highlighted three priority areas: institutional separation of roles; clear differentiation between social obligations and performance imperatives; and the need to create a leadership team committed to and capable of redefining the status quo.
With regard to institutional separation of roles, into policy, regulatory and management functions, these roles are currently blurred, which causes confusion about the underlying vision and mission of IR. The institutional separation of roles will mean that policy makers are limited to setting policy (and paying for what they ask for); regulators fix competition rules in general and pricing in particular; management manages and is measured against clear performance indicators.
With regard to social obligation it is not the role of an Expert Group to call into question the prerogative of Parliament. It is however, the role of the Expert Group to comment on how best to manage the social obligation issue. There is not a shadow of doubt that the social obligations pressure has increased substantially in the past decade. Over 70 per cent of the nearly RS.40,000 crore of ongoing projects, many of which are actually on the back burner and will never be tackled, are in the so-called social sphere. This would be perfectly acceptable if these obligations had clear objectives and means of funding. The problem is that the increased pressure to carry social obligations has not been backed up by an increase in funding. In other words, Government is demanding more and giving less. IR calculates that the annual social obligation cost is approximately Rs. 4,000 crore for which it receives Rs. 800 crore compensation. The situation is wholly unsustainable and risks draining the livelihood from the heart of the business.
Third is the need to create a leadership team committed and capable of redefining the status quo. Wars are not won by managers. Independence was not won by managers. Great victories require great leaders. Indian Railways needs a leadership team committed to changing the status quo. The current structure simply does not permit such a team to evolve.
The current system has two flaws
that the Expert Group believes must. be corrected: tenure and skills.
Tenure is an old chestnut but remains a key issue. Tenure based promotion may have many advantages but forming a powerful team of leaders is not one of them. A system which effectively rewards those on the basis of seniority and age with a position on the Board for a few months prior to retirement is not the mechanism to breed leaders. An expected tenure of 1-2 years of the top management team is not designed to inspire strategic thinking nor initiation of any significant change process.
Skills in the leadership team need to be broadened and deepened. The
current bias towards home grown technocrats starves the system of refreshing
mindsets. IR urgently requires an injection of fresh ideas and fresh skills to
accelerate its development into a commercially savvy market oriented set of
businesses. And civil servants will neither provide such skills, nor a
refreshing mind set.
IR does not currently have a vision. IR does have a 5 year plan but this is not a vision; it is not even a strategy. It is merely a worthy exercise to assemble the requirements of the businesses as they exist today. The type of planning system used by IR is a powerful mechanism designed to avoid change and embed the status quo.
An essential criterion for success in developing a meaningful vision is that it is both owned and understood by the organisation and also syndicated and accepted by all those directly involved in transforming vision into reality. It is therefore inappropriate for the Expert Group to define the vision for IR. We have, however, drafted a Purpose and Vision statement as a starting point to catalyse the process of debate.
The heart of this vision states
that:
·
The purpose of Indian Railways is to playa central role in
India’s overall economic growth by providing customer focused cost effective
transportation solutions. We will do this through an integrated transport
system which includes the Railways and other modes of transportation.
·
Indian Railways will be run primarily on a commercial
basis. This will ensure that Indian Railways at least meets/ exceeds the cost
of capital on an overall basis.
·
In line with our social/ developmental role, we will
subsidise select freight and passenger services. This will be done only at the
instance of the Government and only to the extent of funds made available by
it.
IR needs to critically examine its current portfolio and decide which of its many businesses are core and which should be spun off. The view of the Expert Group is that less is more. In other words, IR should engage only those businesses directly related to its core activity of rail based logistics and passenger transport. Non-core businesses should be spun off on an arms length basis. The eventual ownership of these entities is not an issue that concerned the Expert Group. The Group does acknowledge, however, that the CONCOR model represents one way forward. The Expert Group anticipates that priority candidates for accelerated spin off would be all manufacturing units.
The Expert Group’s preliminary definitions of non-core businesses include the activities such as production units, residential colonies, catering,-other on board services, security, hotels (Yatri Niwas etc.), sanitation, printing presses, medical facilities, schools/colleges and the like.
The Expert Group has carefully examined the experience of European and other railways in their restructuring efforts.
There is no doubt that many of the compulsions that drove developed countries do not apply to India. There is also no doubt that the wholesale privatisation pursued in some countries is neither feasible nor advisable in India and that the UK experience reflects a hasty and ill- considered experiment driven by political expediency, and is not a model to be followed.
It has become clear that with a few exceptions at the margin the focus should be on commercialisation rather than privatisation. It is clear from international experience that privatising railways is not only exceedingly difficult and controversial but also that no approach has yet proven to be satisfactory. In contrast, the verdict with respect to commercialisation is clear. This involves reorganising the rail system into its component parts, spinning off non-core activities, restructuring what remains along business lines and adopting commercial accounting performance management systems.
If IR is expected to function on commercial principles, its management needs to be allowed a degree of autonomy that is comparable to any other commercial organisation. To grant the railway autonomy by creating an arms length relationship with government is one of the salient features of railway restructuring around the world. In Europe most countries have separated railway operations from government influence and have introduced independent regulators for the sector. China had stated an aim to ensure complete separation of government and enterprise functions within the railway operations. Russia is currently separating operations, regulations and policy.
Governance defines the roles and institutional relationships associated with policy, regulation and management. These roles are currently blurred and need to be clarified and institutionalised based on the assumption that railways in India will evolve into a broad-based industry with multiple players and multiple owners.
The Expert Group debated long and hard on the most desirable restructuring of the governance of Indian Railways, and on the role of the Government of India (GOI) in governing IR. In view the mixed record of restructuring elsewhere there was considerable discussion on the extent of organisation that should be suggested. In view of the complexities involved in restructuring as large an organisation as IR there is great need to ensure that the steps recommended and taken are in the correct direction. One stand of view has been that commercialisation can be done without corporatisation of IR.
It has been pointed out that the functioning of a large number of public sector corporations in India would suggest that the mere act of corporatisation does not automatically reduce government interference. This is indeed correct. Mere corporatisation will not accomplish anything. For any reorganisation to be successful there has to be an ex ante acceptance and commitment by the Government 'and IR alike that IR will operate on commercial lines. Implicit in this is that non commercial activities manadated by the government will be clearly demonstrated and IR appropriately compensated for such activities. Given the key objective of commercialising IR and making its management autonomous, we have concluded that nothing short of major restructuring will be necessary, along with eventual corporatisation. However, some Members of the Expert Group expressed their skepticism regarding the usefulness of Corporatisation.
Before corporatisation of IR can take place, a great deal of prior internal reorganization Implementing would be required. The underlying design principle is to create outward-looking, business-oriented, customer-driven institutions. This will involve reorganization of the core transportation network into its key component parts; freight, passenger, suburban, fixed and shared infrastructure and others. These business units would operate with a large degree of autonomy, yet be held accountable for a balanced score-card of commercial performance measures. Disaggregation in such business is the first step towards commercialization.
Prior to the proposed corporatisation of IR it will also be necessary to recast IR’s accounts into company format. The Government will therefore need to initiate the process of restructuring the financial accounts of IR in accordance with the Company Act 1956. The objective is to develop financial statements (Balance Sheet, Profit & Loss Statement) that can be understood by the financial community and the public at large. This will also take some time.
In addition to adhering to commonly accepted financial accounting norms, railways around the world have also focused on capturing and usage of both financial and non-financial information in management decision making. Again IT based MIS systems are now essential for adopting such an approach. Both the Swedish as well as the German Railways use financial parameters like ROE used to measure performance of commercial functions while operational parameters like efficiency, punctuality are used for the evaluation of social service functions.
Once the broad framework of the proposed restructuring is accepted, the Government of India, Ministry of Railways will have to set up a special task force to frame the new legislation enabling the new organisational framework. This task force would need to commence operations with a thorough review of the Indian Railways Act and the Indian Railway Board Act. New legislation would need to be drafted that:
·
Mandates corporatisation
of the Indian Railways into the Indian Railways Corporation (IRC)
·
Permits a revamp of the Railway Board
·
Redefines the relationship between Government and a
revamped Indian Railway Executive Board (IREB)
·
Provides for exemption from taxation -excise, sales tax
etc. for the period of transition, say 5 to 7 years.
·
Permits private participation in Railway operations.
·
Facilitates the induction of personnel form outside the
Railways
·
Mandates the subsidisation in social areas to extent of
funds provided by Government
·
Sets up a social safety net to take care of surplus
labour.
Indian Railways must eventually be corporatised into the Indian
Railways Corporation (IRC). The Government of India should be in charge of
setting policy direction. It would
also need to set up an Indian Rail
Regulatory Authority (IRRA), which would be necessary to regulate IRC’s
activities as a monopoly supplier of rail services to begin with, particularly
related to tariff setting. IRRA is necessary to distance IRC from the government.
This kind of restructuring has already taken place in the telecom sector,
though that restructuring itself has gone through various stages of thinking
and implementation, and is still in some process of flux.
The Indian Railways Corporation (IRC) would be governed by a reconstituted Indian Railways Executive Board (IREB).
The Government of India should
be in charge of setting policy direction, and constituting IRRA and IREB. As
key responsibilities, it should:
· Implement changes in the structure, according to its vision. As owner of the system it will constitute Indian Rail Regulatory Authority and Indian Rail Executive Board by approving legislative packages necessary to constitute those bodies (new Indian Railways Act, new Indian Railway Board Act and other required laws/bylaws).
· Define the extent and nature of social obligations to be fulfilled by the railways and provide adequate funding. Railways will contribute to the Indian social/ developmental sphere, expanding socially desirable routes, providing essential services and fostering development in backward regions. The width, depth and limit to those social obligations is a political issue reserved to Indian Government, that will be stated, differentiated and funded with full transparency. Also, Government would have the power to requisition railway services during times of emergency / calamity.
·
Appoint/ dismiss people holding key responsibilities at
both India Rail Regulator Authority and Indian Railway Executive Board, as
ultimately responsible for their overall performance. However these powers
should be appropriately circumscribed in the appropriate legislation.
The Indian Railways Corporation (IRC) will be responsible for managing railway assets and resources to best me the objectives of the owner. Its main characteristics will be the following:
·
It will be an independent, corporatised, customer focused
and financially viable railway, run along commercial principles and subject to
generally accepted corporate accounting principles and reporting.
·
The Indian Railway Executive Board (IREB) will manage the
IRC and be responsible for the restructuring process.
·
It will focus on core activities, (eg. provision of
infrastructure and the operation of freight and passenger services). To provide
adequate focus on the core business as well as improve flexibility and cost
competitiveness, the non-core activities of the railways would be fully
divested over time, say 5 years.
·
It will combine a central organisation with a regional
decentralised structure. In that context, passenger, freight and suburban will function as profit centres and
infrastructure and service as cost centres.
The leaders of each business unit will be held accountable for their unit’s performance to a newly constituted India Railways Executive Board (IREB). The role of the IREB is to define strategy, allocate resources and ensure effective performance management. The IREB will comprise a diverse cross section of talent including appropriately qualified members of the private sector business community.
The critical next step is to initiate the redesign
of the legal framework. This is expected to take 3-5 years. A key milestone of great symbolic value is
abolition of the Railway Budget. If action on the legal framework and the road
map for corporatisation is initiated immediately, the Railway Budget could be
abolished by 2002. This will be a potent symbol of tile changing reality and
will help set the stage for creating a modern rail system to meet the needs of
a modern India.
Railways is a sunrise industry not just in India but in many parts of the world. Railways went out of fashion in the West from the 1960s to 1990s because rail was unable to respond to competition from road and air. Railways seemed like dinosaurs, too big, cumbersome and unable to adapt. For decades the only news about rail systems was about decline, strikes and retrenchment.
Recently the decline has been halted and reversed. Railways in many parts of the world are resurging based on new ideas (e.g. high speed trains), new appreciation about the environmental and safety benefits, new customer oriented services (e.g. multimodal), new attitudes amongst management and labour and new investment. All at a time when there is increasing strain on capacity on the roads and in the air which highlights the strategic value of a thriving rail system.
The view of the Expert Group is that the potential exists to double the underlying rate of growth in IR accepting anything less would be a loss to the nation. The rail system is too important to permit the withering of IR. The work of the Expert Group, has clearly revealed that the withering of IR 15 a clear and present danger. It is the default option if nothing is done to change how IR is structured and run. The decline of the Railways is not an immutable law of economics. The future of India’s primary infrastructure asset needs to be a choice. The choice, between decisive action to reinvent a modern railway system for a modern India or dithering debate that will result in a withering of one of the nation’s finest institutions.
Just as the road scenario in the country has been
fully transformed through the levy of the fuel cess and the highest importance
given to the National Highway Development Programme by the Prime Minister,
Indian Railways can also be similarly transformed if such importance is given
to the restructuring and financing of railways by the highest authority in the
country.