Restructuring Indian Railways

The ritual of annual railway budget is over. Mamata Banerjee was loud and
clear that social responsibility is more important than economic
responsibility. Having said that, rest of her budget speech was focused on
the election track in West Bengal rather than on the railway track. So
additions of few trains and tinkering here & there, was all she could manage
in spite of her busy schedule in Kolkata.

Lalu Prasad Yadav had gone on overdrive in teaching IIMs on how to fudge
performance. Mamata Banerjee does not consider performance as any
obligation to the nation. She is focused on leveraging Railways for laying
her political track in West Bengal.

Mamata Banerjee has ruled out privatization of Railways but accepted

Public Private Partnership. Considering the strategic importance of the
railways to serve as life line of the nation, it is understandable not to
privatize the same. However, there are other options to improve the overall
management and give boost to Indian Railways. What we need is a mix of
management structures of corporate sector and public sector to move out of
government departmental structure & attitude.

It is no doubt 4th largest railway net work in the world with more than 1.5
million employees. But look at large public sector companies like ONGC or,
Oil Marketing Companies, GAIL, or BHEL, which are being managed
efficiently in spite of political patronage. They are all strategically important
to the nation. Today the pity is that not many know the real brains and top
managers of Indian Railways. I felt bad to see a small interview of chairman
of Railway Board with tongue in cheek answers to very routine questions
relating to the budget (one can’t afford to displease the mercurial minister).
We can not wish away the political patronage but we need to bring in CEO
approach to this monolith.

Vision 2020 and Strategic Leap:

Vision 2020 calls for investment of Rs. 14 lakh crores in ten years or Rs. 1.4
lakh crores on annual basis. Every time one talks about an organizational
leap it is inevitable to crystallize strategy, program and organization
structure to achieve the same. Vision 2020 document has brought out three
important strategic components for growth over next decade. First
component is segregation of dedicated double line corridors for passenger &
freight, second is increasing the speeds from 130 to 160-200 kmph range,
and third is introduction of four high speed bullet train services at 250-350
kmph range.

Restructuring the Organization:

If Vision 2020 has to be implemented, there would be need to change the

organization structure for effective decision making, accountability and
performance. Since independence we have not added any significant new
routes and have just been building on the British legacy. What is now
required is to create new infrastructure, new routes, new technologies and
new means of funding the investments.

Corporatization:

The Railways should have a public sector holding company with the board
of directors headed by an Executive Chairman. The mandate to the company
should be to establish & operate the railways net work efficiently and
generate surplus revenue for redeployment into existing and new projects.
The government funding of new infrastructure projects through budget along
with operational subsidies on certain sectors and activities have to be
accepted for say first ten years till new model stabilizes.

Fortunately for the railways, there is no problem of finding markets with

ever growing population. They just have to be competitive with other
alternative means of transportation through technology up gradation and
passenger focus.

The restructuring of Railways therefore should aim at focus on infrastructure

development, technology development, and operational efficiency. The first
two aspects are of strategic importance and therefore should be handled
through Strategic Business Units. Weakness of the railways is in operational
efficiency and therefore restructuring of the operations should aim at
improving the same.

Strategic Business Units:

The most significant approach to run the railways in future should
involve separation of ownership & management of infrastructure &
technology development and operations. In my opinion, the restructuring
should be done to manage three strategic components of Vision 2020
separately with three Strategic Business Units (SBUs). This calls for setting
up two SBUs to set up new and manage existing infrastructure for dedicated
corridors of passengers and freight separately. The strategy to increase
speed levels needs to be driven by separate SBU for modernization and
technology up gradation of existing infrastructure of the net works.
Logically, the same SBU can establish infrastructure for high speed bullet
trains. This restructuring would give strategic identity and focus for
implementation of the Vision 2020.

Public Private Partnership:

PPP has been accepted by railways for certain limited and selective aspects.
To crystallize an option, let us look at road transport which is the most
efficient mode today. The infrastructure of roads and highways net work
is by and large owned and established by the government. But the
rolling stock on the roads is owned by millions of individuals and
thousands of companies in private as well as public sector. This little
difference is an important driver of efficiency & productivity. Can we
not adopt & adapt the same model suitably to rolling stock for
railways?

Own Your Wagon Scheme has been in operation in a very limited sense. I
would like to suggest a separate subsidiary company “Indian Railways
Rolling Stock Company” (IRRS), under the holding company, which would
own the rolling stock, ferry the cargo & passengers and be the user of the
railways network and infrastructure. IRRS should have the 99 year lease for
use of the network with lease rentals to be paid to the respective SBUs for
providing infrastructure and technology along with maintenance services.
IRRS should therefore focus on only operations. SBUs for infrastructure &
technology would be responsible for their respective activities at their own
costs recovered through rentals & annual maintenance contracts (AMC)
from IRRS.

The IRRS should be the entity for partnership of Indian Railways with
private companies & the public. It can raise finances by going public and
offering shareholding and long term bonds so that the rolling stock is
indirectly owned by the millions of shareholders and thousands of corporate
entities. IRRS should have only controlling interests through equity from the
holding company for strategic reasons. The net result of this approach would
enable the political establishment to focus on budgeting only for investments
in infrastructure and technology on one hand and operational subsidy on the
other hand. It is needless to say that the operations should be generating
enough revenue to offset the expenditure and generate surplus. It is
understandable that the decisions like passenger fares and freight rates have
to be decided in larger public interest and therefore an element of selective
subsidy can not be avoided.

This approach will also take the pressure off the exchequer for funding
resources for operations of the railways freeing the same for infrastructure
development. This would also bring in substantial improvement in the
customer orientation, operational efficiency and private sector participation
in management of services. In this initiative, the control of the strategic
assets would remain completely with the government and operations
would be funded by the users resulting in true public private
partnership initiative.

Vijay M. Deshpande
Corporate Advisor,
Strategic Management Initiative,
Pune

February 26, 2010

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