Bankruptcy to Billionaire

Amulya Pandit – 11123Naresh-11130 Kaustubh Sinha – 11145Gourav Sharma - 11138Samrat Raha – 11167Soumya Siddhartha Rout – 11172

1. Bankruptcy to Billions!.......................................................................................................................3

Despite the odds....................................................................................................................................4

Breaking the Myths...............................................................................................................................4

Crafting the coalition of the willing.......................................................................................................5

From Ideas to Action.............................................................................................................................5

Evolution...............................................................................................................................................6

Operational Crisis Of The 1980s............................................................................................................6

Financial Crisis In 2001..........................................................................................................................6

Beyond Bankruptcy...............................................................................................................................6

Bit Of a Contradiction............................................................................................................................7

Earning Trust.........................................................................................................................................7

Analysing The Political Economy...........................................................................................................7

Crafting The Space For Reforms............................................................................................................7

Strategy.................................................................................................................................................7

3. The Market........................................................................................................................................8

The Puzzling Monopoly..........................................................................................................................8

Business Portfolio..................................................................................................................................8

Freight...................................................................................................................................................8

Passenger Business................................................................................................................................8

Miscellany..............................................................................................................................................9

Cost Structures......................................................................................................................................9

Objective :-........................................................................................................................................9

Issue:-................................................................................................................................................9

Background :-....................................................................................................................................9

Faster trains:-...................................................................................................................................10

Analysis...........................................................................................................................................11

Introduction

The Indian Railways is one of the world’s largest state-owned enterprises with around 1.4 million employees, over 63,000 kilometres of network, running around 13,000 trains each day. Bankruptcy to Billions reveals for the first time how the Indian Railways transformed from near bankruptcy to post US$ 6 billion (Rs 25,000 crore) annual cash surplus in 2008. Using data, analyses, and insight, the book reveals how the turnaround story was scripted in just four years between 2005 and 2008.

Well, that is the story of the Indian Railways from 2004 to 2008, and it is clearly told in this book "Bankruptcy to Billions" by Sudhir Kumar and Shahgum Mehrotra. Sudhir Kumar, a Government employee in the Indian Administrative Services was deputed on Special duty to the Minister of Railways (Lalu Prasad Yadav) and played a key role in this miracle story. Keep in mind that India has one of the largest railway networks in the world - daily running 13,000 trains (including 9000 passenger trains) over 63,000 km of routes and carrying 17 million passengers.

1. Bankruptcy to Billions!

This is an overview of Indian Railways was transformed in four years (2004-2008), counter-intuitively, under populist leader Lalu Prasad Yadav.. the Railways graduated from near bankruptcy in 2001 to US$ 6 bn annual cash surplus in 2008.

The Railways earned a cash surplus of `15,000 crore (US$ 3.5 bn) in 2006 and the minister was keen to translate the financial gain into rewards for the Railways employees.

During this period, the annual bonus for railway employees was increased from 59 to 73 days of their respective wages. Annual cash surplus grew to `25000 crore in 2008 (US$ 6 bn).

Despite the odds

The author has talked about the changes in product-mix in favor of high-value and high-margin air-conditioned and long distance travel segment. The following points describe the details of the turnaround:

Railway is the only affordable and the most convenient mode of transportation across the country.

In 2001, Railways faced a severe financial crisis when its cash balance shrank to a paltry `359 crore (US$ 83 mn), operating ratio deteriorated to 98 per cent

In 2001 the railway’s expenses grew at over 13 per cent per annum, while its revenues lagged at 8 per cent making them unable to generate cash for the replacement of old assets.

This under-provisioning for depreciation endangered operations and led to stacking up of replacement arrears year after year. To liquidate these arrears the GoI had to constitute a special railway safety funds worth `17000 crore (US$ 4bn),

In tough times The Railways didn’t Privatize, retrench or didn’t hike the fares. In 2008, the Railways internally generated six times more cash than its annual

debt repayment obligation of about `4000 crore, (US$ 0.93bn), making it a grossly under-leveraged organization.It generated investible surplus of 2000 crore.

.

Breaking the Myths

Here the author talks about the Railways as an organization driven by its processes and products leading to make profits and optimize the utility of the assets. The details are as follows:

There was a notion that the railways is a monopoly service provider and required tariff regulation and the consequences were poor growth rates and low or negative margins.

Growth in freight earnings from transporting iron-ore for export – from 900 in 2004 to ` 4400 crore in 2008.

The pricing policy was creatively modified laying stress on low end passenger segment rather than on driven and customer centric.

Crafting the coalition of the willing

The author talks about what all approaches the Railways adopted to create deep sense of belongingness among the employees. :The incentivizing of performance within the bureaucracy through a combination of normative and economic incentives the reformers motivated the railway employees to seek ownership of the change and improve their productivity, while non-performers were not particularly penalized.

From Ideas to Action

With lot of obstacles like narrow departmentalism, monopoly mindset the railways could not implement some of the decisions in the past. Now with a new mindset, this business perspective was translated into action through five critical management interventions. Indian Railways deployed a combination of management strategies:

Setting stretched targets. Leveraging resources to optimize existing assets. Working through cross-functional teams. Fostering alliances. Investing strategically. Adopting a deliberative and calibrated approach.

Chasing projects to swift completion to reap high returns.

2. Political Economy of Reforms

Indian Railways, Its Structure And Functioning

The Indian railways is a unique state owned enterprise with 1.4 million employees and 1.1 million pensioners. It has one of the world’s largest networks-over 63,300 km of routes-and runs approximately 13,000 trains each day, including 9000 passenger trains. It carries over 2 million tons of freight and some 17 million passengers between 7000 railway stations each day. This is achieved with a fleet of 2,00,000 wagons,40,000 coaches and 8000 locomotives The organization structure of railway is as follows:

Minister assisted by two ministers of state

manufacturing Units,Railway Board,Public

System Enterprises

16 zones68 divisions

Evolution

The inception of the railroad in india is associated with the journey of a 14 carriage train carrying 400 passengers between Mumbai and Thane on 16 april1853.Much of the initial railroads were constructed by the east india company

Operational Crisis Of The 1980s

After the nationalization of railways ,especially in the year 1980 there was severe operational crisis due to old stock which was less efficient and required high maintenance technology .The engines were old and outdated. M.S.Gujral,as the chairman of the railways board.he introduced some very bold steps on arrival. He transformed the the entire picture of Indian railways.

Financial Crisis In 2001

In 2001,Indian railways faced a severe financial crisis.its cash balance shrank to a paltry Rs.359 crore .the profitable freight business was recording a poor growth rate of 3 per cent per year in response to currency crisis

Beyond Bankruptcy

A combination of political interference, conflicting commercial and social objectives, fiscal crunch, lack of market incentives, and unproductive employees hindered investment in track renewals and other safety measures. For this the government consulted some brightest policy makers. Government set up Rakesh Mohan committee to deal this issue.

Bit Of a Contradiction

Lalu Prasad introduced certain reforms that were in total disagreement with the mohan committee proposed reforms. Lalu Prasad action implementations were opposite of what earlier mohan committee had proposed then to the organisation was working very well.

Earning Trust

Lalu prasasd adopted a hands-off approach allowing the management to select their own teams based on meritocracy He never encouraged the political interference in routine administrative activities.

Analyzing The Political Economy

The Railway Minister had to achieve the daunting task of converting the Loss Making Indian Railways into a profitable organization by adopting few politically feasible reforms.his vision and mission were clear from day one,to turn railway organization into a profitable one as he did with his herd business.

Crafting The Space For Reforms

All the segments of the railways were divided into a number of political and apolitical segments.these apolitical segments had enormous untapped potential which were recognized and measures were taken to convert them into economically viable segments.

Strategy

The ministry had to think very carefully before publicly taking any stance on any issues. Because there were certain cases were they had to reverse their decisions because of incorrect timings

3. The Market

The Puzzling Monopoly

The Indian Railways considered themselves to be the only supplier in the market. However the market share of the Indian Railways decreased substantially in both the land-based transportation segment as well in the passenger segment.

Business PortfolioThe business portfolio of railway comprised of

Freight

Passenger Business

Miscellany

FreightThe Indian Railways provided door to door service in case of commodities like iron ore, manganese, gypsum etc. But it charged less in this segment. And it provided station to station or door to station in case of heavy goods like steel, cement etc. This was an unprofitable segment still they charged more here.

The revenues from the freight were divided in the following format

coal; 63%

cement; 9%others; 6%

Iron and steel; 3%

fertilizer; 4%

POL; 6%

Food grains; 8%

Other min-erals; 3%

iron ore; 15%

Sales

coalcementothersIron and steelfertilizerPOLFood grainsOther mineralsiron ore

Passenger BusinessThe mail and express trains constitutes 12% of 5.2 billion, but contribute 72 % of total passenger earnings. Of 603 million mail and express train travelers, 411 travelled in unreserved class, 155 in non-air conditioned sleeper class and only 38 in air conditioned classes.

MiscellanyThe Indian Railways were in a loss in other segments as well. Like it was earning very less from advertising, catering, parcel etc.

Cost StructuresThe most of the cost of the Indian railways are out of control and are determined exogenously. The cost break down is given below which shows that majority of costs are fixed in nature. The 49% of cost are for salary and pension.

Salary and pension; 49%

Stores and others; 17%

Energy; 20%

Lease charges & depreciation reserve fund;

14%

SalesSalary and pensionStores and othersEnergyLease charges & depre-ciation reserve fund

4. Milking the cow

Objective :- Increasing the freight loading target

Issue:- Utilizing the resources and asset of Indian railways.( i.e. learn to get more milk from one cow rather than purchase more cows.

Background :- on 2004, railways achieved a freight loading of 557 million tons , prior to the tenure of Sri. Lalu Prasad yadav as Union minister of Railways. Railways used to set a target growth of freight loading below 2%, until 2004. So they never utilize fully resources. In 2005, railways budgetary freight target was set at 600million tons, under Lalu Prasad Yadav ,which which they not only achieved but exceeded it by loading 602million tons. That was the the highest ever increase in one fiscal year.

In duration of 2005-08, Railways freight loading increased from 557 million tons to 795 million tons.

Faster trains:- faster train means time-reduction in the time lapsed between two successive loadings. In 2004, turnaround time was 7 days-2 spent in travel and 5 spent in non travel activities like loading, unloading, examination and maintenance. For reducing the turnaround time either the speed of the trains had to be increased or the non-travel time had to be reduced or both, increase speed of the train is not possible due to short run so railways decide to to reduce non-travel activities like loading and unloading time.Railways also modified the train examination practice. In earlier ,train were examined prior to loading and the validity of examination expired at the end of every trip.

It translated into US$ 3billion incremental revenue and intervention cost railways few 100 crore rupees.

Longer Trains:- Sometimes in short run trains ,it is impossible to produce more coaches. So they detached coaches from less demanding trains and added them to trains with long waiting lists. The additional coach generate 3000 crores in addition to 3000 coaches.

Heavier Trains:- Railways were loading 30000 wagons each day in 2004, which increased to 40000 in 2008. They added an extra ton of load to each wagon which translated into 40000 additional tons or 15 million tons a year. 6 tons were added to a wagon, instead of 1 ton. It translate into 90 million tons of incremental load each year or Rs.6000 crore.

The Big Five :- Uptill 2004,railways unutilized its assets, but under Lalu Prasad Yadav they stretched their goals, optimally utilized their assets and made big fortunes. Indian railways graduated from sleeper( which has nascent capacity to leverage resources but lacks ambition) to winter ( which stretches goals and achieves them through resources leveraging) by deploying a combination of setting stretched targets, working through cross functional teams, fostering strategic alliances, investing strategically, finally chasing projects to swift completion to reap high returns.

Analysis:- From all the discussions, we get to know that when its not feasible to increase the resources and get the desired output its always better to efficiently utilize the resources in hand,Stretch your target strategic plan and achieve your goal. Indian Railways did same thing under the tenure of Sri Lalu Prasad Yadav and turned railways into one of the most profitable organization generating a cash surplus of Rs.25000 crore.

CHAPTER 5

Service With A Smile

THE ISSUES : Trying to establish itself as a customer-centric organization, Indian Railways found itself facing several challenges to make the shift from a statist and monopolistic organization to a demand responsive –dynamic, differential and market driven –customer focused organization. Some of the highlighted major issues are as follows;

Looking In The Wrong Place –

Despite reducing freight charges of steel and discounts, the rail coefficient of steel kept on declining. As it started trying to take steps in the right direction, the rail coefficient for steel increased from 35 to 45 percent and for cement from 41 to 45 percent.

Rationalization Of Tariffs & Rate Rationalization –

After 2005 in order to simplify the tariff schedule, a comprehensive revision of tariff was undertaken. All the obsolete entries were deleted and all commodities were clubbed under 24 generic group heads. This resulted in elimination of systemic corruption, suboptimal use of wagons and increased transparency.

Post rationalization and simplification, the ratio between the minimum and maximum freight rates has been narrowed down to 2 by decreasing the fares of the highest classes. This was both commercially prudent and socially optimal.

Differential Pricing Policy –

As the pricing policy of the Indian Railways remained unchanged, a differential and customer-centric pricing strategy was adopted & the result is new Tatkal Seva & Garib Rath, the poor peoples’ chariot which ultimately resulted in increased profits and consumer satisfaction.

Pricing –

To meet the challenge of competitors, The Railways decreased prices in lean seasons and increased surcharge in peak season. An automatic up gradation scheme was also employed to fill the empty seats. The Railways aligned its price to the industry norm of speed and reliability which resulted Railway’s parcel and luggage earnings more than doubled between 2004 and 2008 from Rs 476 crore to 1008 crore.

Improving Operational Efficiency –

Some of the major challenges faced by the Railways were reliability, punctuality, safety, productivity, operational efficiency and profitability and to meet these challenges the Railways made massive investments to upgrade its technology and modernize the rolling stock, signalling and telecommunications, tracks, and other assets. And also to improve the customer interface-across the value chain internet ticketing services have been deployed by the Railway’s own Indian Railways Catering and Tourism corporation. All this resulted in trebling of depreciation reserve fund from Rs 2300 crore to Rs 7000 crore between 2001 and

2008, the number of accidents declined from 320 in 2004 to 194 in 2008, the asset productivity and operating efficiency also made significant gains. Profit margins in freight business improved from 20 percent in 2001 to 80 percent in 2008.

The Microeconomic Concept –

In order to achieve maximum consumer satisfaction, the Indian Railways took steps, like it made e-tickets available at over 40,000 outlets across the country from petrol pumps to ATMs, bank counters, and several chain stores and small shops. It also made efforts to improve the quality of service through introducing several innovative products and services like mini-rakes, two-point unloading, Tatkal Seva and automatic up gradation of passengers.

6. Outcomes, Sustainability & Replication

Broad ObjectiveTo summarise the Railways’s achievements –improvements in Railways’s finances, tangible gains in capital and labour productivity, increase in market share and profit margins, better quality of service and enhanced stature of the minister.

Major Issues-Sustainability: Sustaining the growth of Indian railways is a major challenge for the administrative and political body.

-Replication: Replication in the sense that the policies and strategies applied for the improvement of railways working could be applied in other public sector undertakings.

OutcomesThe scale of the financial transformation of Indian Railways is best captured in the following:

1-In 2008,the railways had a cash surplus before dividend of Rs25006 crore,operating ratio of 75.9%,moreover the ratio of net revenue to capital at charge had improved from 2.5% in 2001 to 20.7% in 2008 making it relatively high return on equity for a capital-intensive infrastructure industry like the railways. Specifically the expenses grew 1% faster than its earnings over 1990’s but from 2001-08 earnings grew 4% faster than expenses.

Earnings have grown on account of growth in freight volumes selective fare hikes previously under priced freight business segments, as well as change in product mix in favor of high value and high margin segment.In some a few years after the predicted financial crisis.Indian railways became

one of the most profitable enterprises with US$ 4.7 billion in profits.

2001 2002 2003 2004 2005 2006 2007 20080

2

4

6

8

10

12

14

16

18

working expense (%)traffic earnings (%)

This substantial growth in traffic volumes has been achieved with the same network, rolling stock and employees- implying a significant gain in capital and labor productivity as summarized below in table.

Gains in productivity1991 2001 2008 1991-2001

CAGR %2001-2008CAGR %

Wagon utilization(NTKM/wagon/day)

1407 2042 3566 3.79 8.29

Track utilization(NTKM/ route Km in millions)

3.78 5.01 8.09 2.86 7.09

Track utilization(PKM/route in km million)

4.74 7.25 10.09 4.34 6.12

Labor productivity(NYKM/employees in millions)

0.15 0.22 0.37 3.9 7.71

Labor productivity(PKM/employees in millions)

0.19 0.32 0.55 5.35 8.04

Sustainability:Policy makers and academics have raised few major concerns regarding this transformation like Railways improved performance s a result of creative accounting. Financial gains are at the cast of safety. Growth in revenues is result of rapidly growing economy. Transformation of the railways is a result of plucking low hanging fruits. The Fate of transformation of the present political leadership departs is bleak.

The author has dealt with all these issues very judiciously and critically, by giving enough evidence in support of his argument to prove them wrong.

Replication:This successful transformation of Indian railways contains some transferable lesions that may be considered in the context of reforming other public utilities.

Inclusive reforms require productive politico-bureaucratic interface.

Commercial objectives and social obligations can be reconciled

Efficiency must be improved by optimizing an under-utilized system

There is need to think anew

Approaches to implementation: namely setting stretched goals etc

Some ground rules for navigating the political economy

In conclusion the railway’s transformation is an exemplar for how state own enterprises can improve services despite all the odds of balancing commercial and social objectives to fructify inclusive reforms.

ConclusionThe book has some drawbacks though - the most critical being the lack of visibility in the book, of the key players who achieved this miracle. The team is just mentioned as `reformers' - perhaps the author himself being one of them, was reluctant to project his role. Some more background of the railways from it inception at the time of the British, and its growth since independence, pictures of trains, stations and employees, would have been useful for non-Indian readers. The challenges that the team must have gone through are downplayed - the authors themselves don't seem to have fully realized the scope and impact of their achievement.

Bankruptcy to Billionaire

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