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Besides giving the basic information on the organizational, operational and financial
performance of the Railways, the document incorporates an analysis of the performance,
highlighting the achievements and shortcomings. A strengths, weaknesses, opportunities
and threats (SWOT) analysis has been drawn upon conceptually, leading to a useful
comparison between Railways globally, allowing benchmarks to be identified against which
the Indian Railways' performance can be judged.
Intention has been to introspect and analyze. The infirmities that have shown up as a result
of the analysis have been outlined in this document.Our biggest concern today is the
financial health of the Railways and the need to generate resources for development
and growth of capacity in an inclusive manner . Strategies for upgradation and growth
of railway infrastructure as well as improvement of service to the customer, especially
for the vast mass of common citizens of our nation whose prime mode of transport is the
railways, will be formulated based on the findings of this Paper .
In recent times, financial turnaround of the Railways has been a topic of discussion and
debate. An attempt has been made in this Paper to take a dispassionate look at the
issue.

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The first railway on Indian sub continent ran over a stretch of 21 miles from Bombay to
Thane. The idea of a railway to connect Bombay with Thane, Kalyan and with the Thal and
Bhore Ghats inclines first occurred to r. George 1lark, the 1hief Engineer of the Bombay
Government
during
a
visit
to
Bhandup
in
1843.
The formal inauguration ceremony was performed on 16th April 1853, when 14 railway
carriages carrying about 400 guests left Bori Bunder at 3.30 pm "amidst the loud applause of
a vast multitude and to the salute of 21 guns." The first passenger train steamed out of
Howrah station destined for Hooghly, a distance of 24 miles, on 15th August, 1854. Thus the
first section of the East Indian Railway was opened to public traffic, inaugurating the
beginning of railway transport on the Eastern side of the sub continent.
In south the first line was opened on Ist July, 1856 by the adras Railway 1ompany. It ran
between Veyasarpandy and Walajah Road (Arcot), a distance of 63 miles. In the North a
length of 119 miles of line was laid from Allahabad to Kanpur on 3rd arch 1859. The first
section from Hathras Road to athura 1antonment was opened to traffic on 19th October,
1875.
These were the small beginnings which is due course developed into a network of railway
lines all over the country. By 1880 the Indian Railway system had a route mileage of about
9000 miles.  c
 , the premier transport organization of the country is the
largest rail network in Asia and the world's second largest under one management.

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Indian Railways is a department owned and controlled by the Government of India, via the
inistry of Railways. As of ay 2010, the Railway inistry is headed by amata Banerjee,
the Union inister for Railways, and assisted by two ministers of State for Railways. Indian
Railways is administered by the Railway Board, which has a financial commissioner, five
members and a chairman.

RAI WAY ZONES

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14

15.

West
1entral

16. Western

Salem, Tiruchchirapalli,
Thiruvanathapuram

W1R 2003, April 1 Jabalpur

WR

1951,
November 5

umbai

Jabalpur, Bhopal, Kota


umbai 1entral, Ratlam,
Ahmedabad, Rajkot, Bhavnagar,
Vadodara

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With approximately 1.6 million employees, Indian Railways is the country's single largest
employer. Staff are classified into gazetted (Group A and B) and non gazetted (Group 1 and
D) employees. The recruitment of Group A gazetted employees is carried out by the Union
Public Service 1ommission through exams conducted by it.The recruitment to Group '1' and
'D' employees on the Indian Railways is done through 19 Railway Recruitment Boards which
are controlled by the Railway Recruitment 1ontrol Board (RR1B).
The training of all cadres is entrusted and shared between six centralised training institutes.

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Indian Railways manufactures much of its rolling stock and heavy engineering components at
its six manufacturing plants, called Production Units, which are managed directly by the
ministry. As with most developing economies, the main reason for this was the policy of
import substitution of expensive technology related products when the general state of the
national engineering industry was immature. Each of these six production units is headed by
a General anager, who also reports directly to the Railway Board.
There exist independent organisations under the control of the Railway Board for
electrification, modernisation and research and design, each of which is headed by a General
anager. A number of Public Sector Undertakings, which perform railway related functions
ranging from consultancy to ticketing, are also under the administrative control of the
inistry of railways.

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Indian railways uses four gauges, the 1,676mm broad gauge which is wider than the 1,435mm
standard gauge; the 1,000mm metre gauge; and two narrow gauge 762 mm (2 ft 6 in) and 610 mm (2
ft) . Track sections are rated for speeds ranging from 75 to 160 km/h.

The total length of track used by Indian Railways was about 111,600 km (69,300 mi) while
the total route length of the network was 63,273 km (39,316 mi) on 31 arch 2008.About
28% of the route kilometre and 42% of the total track kilometre was electrified on 31 arch
2008.
Broad gauge is the predominant gauge used by Indian Railways. Indian broad gauge1,676
mm (5 ft 6 in)is the most widely used gauge in India with 96,851 km of track length
(86.8% of entire track length of all the gauges) and 51,082 km of route kilometre (80.7% of
entire route kilometre of all the gauges) on 31 arch 2008.
In some regions with less traffic, the metre gauge (1,000mm) is common, although the
Unigauge project is in progress to convert all tracks to broad gauge. The metre gauge had
11,676 km of track length (10.5% of entire track length of all the gauges) and 9,442 km of
route kilometre (14.9% of entire route kilometre of all the gauges) on 31 arch 2008.
The Narrow gauges are present on a few routes, lying in hilly terrains and in some erstwhile
private railways (on cost considerations), which are usually difficult to convert to broad
gauge. Narrow gauges had a total of 2,749 route kilometre on 31 arch 2008. The Kalka
Shimla Railway, the Nilgiri ountain Railway and the Darjeeling Himalayan Railway are
three notable hill lines that use narrow gauge.

The share of broad gauge in the total route kilometre has been steadily rising, increasing from
47% (25,258 route km) in 1951 to more than 83% in 2010 whereas the share of metre gauge
has declined from 45% (24,185 route km) to less than 13% in the same period and the share
of narrow gauges has decreased from 8% to 3%. However, the total route kilometre has
increased by only 18% (by just 10,000 km from 53,596 route km in 1951) in the last 60
years. This compares very poorly with 1hinese railways, which increased from about 27,000
route km at the end of second world war to about 90,000 route km in 2010, an increase of
more than three fold. ore than 28,000 route km (34% of the total route km) of 1hinese
railway is electrified compared to only about 18,000 route km of Indian railways. This is an
indication of the poor state of Indian railways where the funds allocated to new railway lines
are meagre, construction of new uneconomic railway lines are taken up due to political
interference without ensuring availability of funds and the projects incur huge cost and time
overruns due to poor project management and paucity of funds.
Sleepers (ties) used are made of prestressed concrete, or steel or cast iron posts, though teak
sleepers are still in use on few older lines. The prestressed concrete sleeper is in wide use
today. etal sleepers were extensively used before the advent of concrete sleepers. Indian
Railways divides the country into four zones on the basis of the range of track temperature.
The greatest temperature variations occur in Rajasthan, where the difference may exceed
701.
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As of arch 2008, 18,274 km of the total 63,273 km route length is electrified.[19] Since
1960, almost all electrified sections on IR use 25,000 V A1 traction through overhead
catenary delivery.[20][21] A major exception is the entire umbai section, which uses 1,500 V
D1.[21] and is currently undergoing change to the 25,000 V A1 system. Another exception is
the Kolkata etro, which uses 750 V D1 delivered through a third rail.
Traction voltages are changed at two places close to umbai. 1entral Railway trains passing
through Igatpuri switch from A1 to D1 using a neutral section that may be switched to either
voltage while the locomotives are decoupled and swapped. Western Railway trains switch
power on the fly, in a section between Virar (D1) and Vaitarna (A1), where the train
continues with its own momentum for about 30 m through an unelectrified section of
catenary called a Y Y .[21] All electric engines and EUs operating in this section are
the necessary A1/D1 dual system type (classified "W1A" by Indian Railways).

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Indian Railways operates about 9,000 passenger trains and transports 20 million passengers
daily across twenty eight states and two union territories. Sikkim, Arunachal Pradesh, and
eghalaya are the only states not connected by rail. A standard passenger train consists of
eighteen coaches, but popular trains can have up to 26 coaches.
1oaches are designed to accommodate anywhere from 18 to 108 passengers, but during the
holiday seasons and/or on busy routes, more passengers may travel in unreserved coaches.
ost regular trains have coaches connected through vestibules. However, 'unreserved
coaches' are not connected with the rest of the train via any vestibule.
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Several long trains are composed of two to three classes of travel, such as a 1st and 2nd classes which
have different pricing systems for various amenities. The 1st 1lass refers to coaches with separate
cabins, coaches can be air conditioned or non air conditioned.
Further, other A1 classes can have 2 or 3 tier berths, with higher prices for the former, 3 tier non A1
coaches or 2nd class seating coaches, which are popular among passengers going on shorter journeys.

In air conditioned sleeper classes passengers are provided with sheets, pillows and blankets.
eals and refreshments are provided, to all the passengers of reserved classes, either through
the on board pantry service or through special catering arrangements in trains without pantry
car. Unreserved coach passengers have options of purchasing from licensed vendors either on
board or on the platform of intermediate stops.
The amenities depend on the popularity and length of the route. Lavatories are communal and
feature both the Indian style as well as the Western style.

At the rear of the train is a special compartment known as the guard's cabin. It is fitted with a
transceiver and is where the guard usually gives the all clear signal before the train departs. A
standard passenger rake generally has four general compartments, two at the front and two
behind, of which one is exclusively for ladies. The exact number varies according to the
demand and the route. A luggage compartment can also exist at the front or the back. In some
trains a separate mail compartment is present. In long distance trains a pantry car is usually
included in the centre. A new class; Economy A1 three tier is introduced in the Sealdah New
Delhi Duronto train.

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There are two UNES1O World Heritage Sites on IR the 1hatrapati Shivaji Terminus and
the ountain railways of India. The latter is not contiguous, but actually consists of three
separate railway lines located in different parts of India:
The Darjeeling Himalayan Railway, a narrow gauge railway in West Bengal.
The Nilgiri ountain Railway, a metre gauge railway in the Nilgiri Hills in Tamil
Nadu.
Rc The Kalka Shimla Railway, a narrow gauge railway in the Shivalik mountains in
Himachal Pradesh.

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The   


is a specially designed train, frequently hauled by a steam locomotive,
for promoting tourism in Rajasthan. On the same lines, the aharashtra government
introduced the  Y

covering various tourist destinations in aharashtra and Goa,


and was followed by the Government of Karnataka which introduced the Y   
train connecting popular tourist destinations in Karnataka and Goa. However, neither of them
has been able to enjoy the popular success of the Palace on Wheels.
The  

is a train that runs between India and Pakistan. However, hostilities


between the two nations in 2001 saw the line being closed. It was reopened when the
hostilities subsided in 2004. Another train connecting Khokhrapar (Pakistan) and unabao
(India) is the   

that restarted operations on February 18, 2006; it was earlier


closed down after the 1965 Indo Pak war. The Kalka Shimla Railway till recently featured in
the Guinness Book of World Records for offering the steepest rise in altitude in the space of
96 kilometre.
The    

is a special train popularly known as the "Hospital on Wheels" which


provides healthcare to the rural areas. This train has a carriage that serves as an operating
room, a second one which serves as a storeroom and an additional two that serve as a patient
ward. The train travels around the country, staying at a location for about two months before
moving elsewhere.
Among the famous locomotives, the     is the oldest operating locomotive in the
world today, though it is operated only for specials between Delhi and Alwar.   , a
locomotive older than Fairy Queen, operated in 1981 commemorating its 150th anniversary.
Kharagpur railway station also has the distinction of being the world's longest railway
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platform at 1,072 m (3,517 ft). The Ghum station along the Darjeeling Toy Train route is the
second highest railway station in the world to be reached by a steam locomotive. The
umbaiPune Deccan Queen has the oldest running dining car in IR.
The u
!

, between Kanyakumari and Jammu Tawi, has the longest run in terms
of distance and time on Indian Railways network. It covers 3,745 km (2,327 mi) in about 74
hours and 55 minutes. The  "Y

is the fastest train in India today having


a maximum speed of 150 km/h (93 mph) on the FaridabadAgra section. The fastest speed
attained by any train is 184 km/h (114 mph) in 2000 during test runs.
The #Y 

and  "Y

are the superfast, fully air conditioned trains that


give the unique opportunity of experiencing Indian Railways at its best.
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Fares on the Indian Railways across categories are among the cheapest in the world. In the
past few years, despite a recessionary environment, the Indian Railways have not raised fares
on any class of service. On the contrary, there has been a minor dip in fares in some
categories.
Ticketing services are available at all major and minor railway stations across India. In 2003,
Indian Railways launched online ticketing services through the IR1T1 website. Apart from
E tickets, passengers can also book I tickets that are basically regular printed tickets, except
that they are booked online and delivered by post. According to comScore, the Indian
Railways website was the top visited Indian travel site in April 2010, with 7.7 million
visitors.
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IR1T1 takes care of the tourism operations of the Indian Railways. The Indian Railways
operates several luxury trains such as Palace on Wheels, Golden 1hariot, Royal Orient
Express and Deccan Odyssey; that cater mostly to foreign tourists. For domestic tourists too,
there are several packages available that cover various important tourist and pilgrimage
destinations across India.

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IR carries a huge variety of goods ranging from mineral ores, fertilizers and petrochemicals,
agricultural produce, iron & steel, multimodal traffic and others. Ports and major urban areas
have their own dedicated freight lines and yards. any important freight stops have dedicated
platforms and independent lines.
Indian Railways makes 70% of its revenues and most of its profits from the freight sector,
and uses these profits to cross subsidise the loss making passenger sector. However,
competition from trucks which offer cheaper rates has seen a decrease in freight traffic in
recent years. Since the 1990s, Indian Railways has switched from small consignments to
larger container movement which has helped speed up its operations. ost of its freight
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earnings come from such rakes carrying bulk goods such as coal, cement, food grains and
iron ore.
Indian Railways also transports vehicles over long distances. Trucks that carry goods to a
particular location are hauled back by trains saving the trucking company on unnecessary fuel
expenses. Refrigerated vans are also available in many areas. The "Green Van" is a special
type used to transport fresh food and vegetables. Recently Indian Railways introduced the
special '1ontainer Rajdhani' or 1ONRAJ, for high priority freight. The highest speed notched
up for a freight train is 100 kilometres per hour (62 mph) for a 4,700 metric tonne load.
Recent changes have sought to boost the earnings from freight. A privatization scheme was
introduced recently to improve the performance of freight trains. 1ompanies are being
allowed to run their own container trains. The first length of an 11,000 kilometre (6,800 mi)
freight corridor linking India's biggest cities has recently been approved. The railways has
increased load limits for the system's 225,000 freight wagons by 11%, legalizing something
that was already happening. Due to increase in manufacturing transport in India that was
augmented by the increase in fuel cost, transportation by rail became advantageous
financially. New measures such as speeding up the turnaround times have added some 24%
to freight revenues.
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inistry of Railways have planned to construct a new Dedicated Freight 1orridor (DF1)
covering about 2762 route km on two corridors, Eastern 1orridor from Ludhiana to Sone
Nagar and Western 1orridor from Jawahar Lal Nehru Port umbai to Tughlakabad/Dadri
along with interlinking of two corridors at Dadri. Upgrading of transportation technology,
increase in productivity and reduction in unit transportation cost are the focus areas for the
project.
Dedicated Freight 1orridor 1orporation of India Limited (DF11) is a special purpose
vehicle created to undertake planning & development, mobilization of financial resources and
construction, maintenance and operation of the Dedicated Freight 1orridors. DF11 has been
registered as a company under the 1ompanies Act 1956 on 30 October 2006.

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The Railway Budget deals with planned infrastructure expenditure on the railways as well as
with the operating revenue and expenditure for the upcoming fiscal years, the public elements
of which are usually the induction and improvement of existing trains and routes, planned
investment in new and existing infrastructure elements, and the tariff for freight and
passenger travel. The Parliament discusses the policies and allocations proposed in the
budget. The budget needs to be passed by a simple majority in the Lok Sabha (Lower House).
The comments of the Rajya Sabha (Upper House) are non binding.
Indian Railways is subject to the same audit control as other government revenue and
expenditures. Based on anticipated traffic and the projected tariff, requirement of resources
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for capital and revenue expenditure of railways is worked out. While the revenue expenditure
is met entirely by railways itself, the shortfall in the capital (plan) expenditure is met partly
from borrowings (raised by Indian Railway Finance 1orporation) and the rest from
Budgetary support from the 1entral Government. Indian Railways pays dividend to the
1entral Government for the capital invested by the 1entral Government.
As per the Separation 1onvention (on the recommendations of the Acworth 1ommittee),
1924, the Railway Budget is presented to the Parliament by the Union Railway inister, two
days prior to the General Budget, usually around 26 February. Though the Railway Budget is
separately presented to the Parliament, the figures relating to the receipt and expenditure of
the Railways are also shown in the General Budget, since they are a part and parcel of the
total receipts and expenditure of the Government of India. This document serves as a balance
sheet of operations of the Railways during the previous year and lists out plans for expansion
for the current year.
The formation of policy and overall control of the railways is vested in Railway Board,
comprising the 1hairman, the Financial 1ommissioner and other functional members of
Traffic, Engineering, echanical, Electrical and Staff departments.
Indian Railways, which a few years ago was operating at a loss, has, in recent years, been
generating positive cash flows and been meeting its dividend obligations to the government,
with (unaudited) operating profits going up substantially.[32] The railway reported a cash
surplus of INR 9000 cr in 2005, INR 14000 cr in 2006, INR 20,000 cr in 2007 and INR
25,000 cr for the 2007 2008 fiscal year. Its operating ratio improved to 76% while, in the last
four years, its plan size increased from INR 13,000 cr to INR 30,000 cr. The proposed
investment for the 2008 2009 fiscal year is INR 37,500 cr, 21% more than for the previous
fiscal year.[3] Budget Estimates 2008 for Freight, Passenger, Sundry other Earnings and other
1oaching Earnings have been kept at INR 52,700 cr, INR 21,681 cr, INR 5,000 cr and INR
2,420 cr respectively. aintaining an overall double digit growth, Gross Traffic Earnings
have been projected as INR 93,159 crore in 2009 10 (19.1 billion USD at current rate),
exceeding the revised estimates for the current fiscal by INR 10,766 crore.[3] Around 20% of
the passenger revenue is earned from the upper class segments of the passenger segment (the
air conditioned classes).

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In a largely government controlled economy, the Indian Railways (IR) has been used as a tool
of dispatch towards government objectives. A separate budget owing to historical
circumstances is just one of the features that mark the close bondage between the
government and its chief logistics agency. The basic attitude of running IR is that of a
bureaucracy. A welfare outlook have burdened IR with many liabilities.
Populist measures leading to an irrational fare structure with a heavy cross subsidy of the
passenger sector by freight has corroded its viability as a profit making entity. Its share in the
goods transport sector has steadily slipped behind road. An unwieldy workforce means that a
greater part of its finances are being diverted towards staff costs and pensions. This is
seriously compromising IRs ability to invest in capital goods like tracks and rolling stock
leading to an alarming safety issue and the inability to keep abreast with global technology
standards.

Railway Government Interface.


While considering the IR government interface, it is necessary to understand certain roles and
define some terms. IR is under the inistry of Railways, which is referred to as the central
government in the Indian Railways Act. The word government in this paper refers to the
Government of India (GOI) which consists of all the other government agencies (including
the Finance inistry) other than IR. The Railway inister (who heads the inistry of
Railways) acts as a link between the GOI and IR. The Railway Board heads the executive
arm of IR and is also the secretariat to advise the Railway inister on all matters concerning
railway management. This section begins with an examination of the Indian Railways Act,
1989. This is followed by an analysis of the financial interface of IR and GOI. The special
railway budget is considered next followed by an overview of the different issues related with
political interference in the working of IR. IRs interactions with state governments form the
last part of this section.
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The Indian Railways Act 1989.


The Indian Railways Act enacted by Parliament vests the central Government (inistry of
Railways) with powers over the functioning of IR. There are chapters dealing with railway
administrations, 1ommissioners of Railway Safety, construction and maintenance of works,
opening of railways, fixation of rates, carriage of passengers and goods etc. The act provides
for operational independence of IR. There are only few instances when there is need for
direct interaction with Parliament. They are related to safety, and exemptions and
amendments with respect to the Act. The 1hief 1ommissioner of Railway Safety is required
to lay down an annual report of the activities of the 1ommissioners of Railway Safety before
Parliament. Exemptions from the rules or inclusion of new rules into the Act also require the
approval of Parliament.
The separate Railway budget (discussed later), that is presented annually in the
Parliament, is more a matter of convention and is not required by the Act.

Financial Interface between GOI and IR


The financial interface between GOI and IR has three dimensions: budgetary
support, IRF1 and dividends. The budgetary support is a direct fund input by the GOI into IR
for plan investments. The borrowings of IRF1 warrant mention in this section as they involve
an indirect funding support to IR The GOI eventually guarantees all IRF1 borrowings. The
dividend is a return on investment that IR pays annually to GOI.
It is to its credit that IR, unlike its counterparts even in many developed countries, has been
able to maintain an operating profit and has been sourcing funds for investments through
internal resources. Even so, there is not enough funding. Part of this shortfall has been met by
the governments budgetary support. The share of budgetary inputs in the investment plans
has been varying, with IR having to look for other strategies like market borrowings through
the Indian Railways Financial 1orporation (IRF1) and schemes like Build Operate Lease
Transfer (BOLT) and Own Your Wagon (OYW).

Table shows IRs sources of funds for the 5 year plans.

The budgetary support of 1entral Government for IR plan investment has been
gradually falling from the peak of 75% during 5th five year plan period to about 25%
during 9th and 10th five year plan periods, as can be seen from the chart below :

Due to constraints of support from General Exchequer, IR has been forced to increase
reliance on internal resource generation and market borrowings. The year wise break up of
resources raised is given here under:

Source: Planning 1ommission Website

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Heavy investments will have to be made for enhancing capacity of rolling stock,
technical up gradation and advancement in technology to achieve the ambitious targets set
for passenger and freight business segments, in the 11th Five Year Plan. It has been planned
that Railways will invest Rs.2,30,000 crores (46.84 billion USD) in the 11th Five Year Plan,
which is almost three times the amount allocated in the 10th Five Year Plan..
The plan expenditure of 46.84 billion USD is proposed to be financed by internal
generation of 18.01 billion USD, market borrowings of 1 0 billion USD, budgetary
support of 10.83 billion USD and 8 billion USD through the PPP route. It may be added that
while the contribution of budgetary support and PPP projects to the 10th plan was 44. 73%
and 0.72%, the targeted figures for the 11thPlan are 23.12% and17.1% respectively.
As per the Economic Survey 0f 2008 2009 , the plan outlay in FY08 on Railways was Rs
29,983 cr while the budget estimate for FY 09 is placed at Rs 36,726 cr

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IR realized the resource gap between the requirement and funds available as long
back as in 1984, when it started market borrowings through its first special purpose
vehicle (SPV), Indian Railway Finance 1orporation (IRF1). oney raised by IRF1
through issue of bonds was used for acquiring rolling stock like locomotives and wagons,
which were then leased to IR against committed lease charges. IR in turn distributed
these assets to Zonal Railways, who were then paying lease charges to IR as a part of
their revenue expenditure. This arrangement continues even today.

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The second initiative taken in 1980s was to encourage big institutional customers to own
their wagons through Own Your Wagon Scheme (OYWS). The wagons so procured
were operated on predetermined routes as decided by the company owning the wagons.
The 1ompany was given guaranteed supply of wagons by IR and also predetermined
discount in freight rate as lease charges. This policy did not survive for long as it suited
only few cash rich industrial units with consistent source of supply and regular need of rail
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By mid 1990s, IR revolutionized their loading performance by introducing speedier bulk
movement with only end to end train examination. During the same time, IR
established 1ontainer 1orporation of India Ltd. (1ON1OR) to cater to smalls and
piecemeal traffic through containerized service. Both these initiatives led to higher
growth and better services in cargo and piecemeal traffic. 1ON1OR remains under IRs
control but has since outsourced lot of its activities to private sector during its expansion.

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IR was providing catering and tourism services on its own.
It was felt that a
professional body should take over these activities relieving Railways of this ancillary
Industry. This resulted in creation of Indian Railway 1atering & Tourism 1orporation Ltd.
(IR1T1) in 1999. The 1orporation was given the mandate to stimulate PPP in
hospitality industry which they have successfully done in food plazas, internet ticketing
etc., details of which are given later.

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With a view to meet aspirations of various State Governments, the concept of cost sharing
with State Government was first initiated on umbai Suburban System for linking
umbai with Navi umbai through Thane 1reak Bridge. aharashtra Government
through its PSU, 1ID1O contributed 2/3rdcof the cost of this project. The cost was
proposed to be recovered through surcharge on all tickets issued to stations in Navi
umbai. The model and its variants have been subsequently tried out for projects in the
states of Karnataka. Andhra Pradesh, Jharkhand. Tamil Nadu & West Bengal There
are a large number of other states which have also signed agreements with IR. The
improvement in infrastructure helps the State Government ultimately and Railways get the
advantage of having to do only part funding of the projects.c

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IR has launched several schemes to supplement investment in partnership with private
players for specific projects to develop port linkages. These include setting up of private
terminals and public private partnership to provide rail connectivity to new upcoming
ports. Rail linkages to Gujarat Pipavav Port Ltd and Adani Port Ltd. were thecearliest
projects to be done under the scheme.. Similar efforts are on for developing other port
linkages with private participation.
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Apart from construction/ gauge conversion of railway lines through private
participation, Railways have also privatized tourist trains. Palace on Wheels has been
operating for over a decade now. Another tourist train Deccan Odyssey is being run by
aharashtra State Tourist 1orporation. Privatisation of some more tourist trains
including the Kisan Tourist Train to cater to common people is on the anvil. c
As can be seen from above, though some progress has been made since last over a decade
to bring in alternative financing, it has not been enough for meeting the investment
requirement of IR; both in capacity augmentation and revenue generating projects.
There is a growing realization that the solution lies in Government sharing the cost and the
risks with private sector through fair and appropriate risk sharing mechanisms
embedded in well designed concession agreements for PPP projects.

PPP Initiatives
Several models of Private Public Partnership are now being used in various
infrastructure projects in the Transport Sector including Railways. The spectrum of
projects varies from leasing out of Government owned facilities to BOO (Build, Own,
Operate) and BOT (Build, Operate and Transfer).
While it is possible for other infrastructure projects in ports, highways & airports to be an
independent system which could be operated and maintained independently of the existing
system, the same is not possible for Railways. Here any project has to be
supplementary or an extension to an existing larger railway network. Due to this
historical perspective, railway activities are not readily available to private sector which
poses a new challenge of building capacity with private sector through PPP. Following are
some PPP project initiatives undertaken by Railways. Detailed write ups on these
projects, their efficacy and lessons learnt from them are as follows:

1ONTAINER 1ORPORATION OF INDIA LIITED (1ON1OR)


1ON1OR was set up in arch, 1998 as a public sector enterprise under the inistry of
Railways. The prime objective was to develop multi modal transport logistics
infrastructure to support domestic container traffic, for ISO containers as also the
countrys growing international trade. The 1orporation started with an equity capital of
Rs.64.99 crores and now has a net worth of Rs. 3183 crores in 2008 with Rs. 2244 crores of
gross block. It recorded a top line Rs 3413 crores and a Net Profit of Rs 820 crores in FY 09.
1ON1OR has a consistent record of paying dividend to its shareholders. Being a consistently
profit earning company, Government of India has divested its equity holding through three
disinvestment exercises in 1994 95, 1995 96 and in 1998 99. 1urrently, Government
holds 63% of the equity and balance is held by FIIs / Fs /individual shareholders.
1ON1ORs business is threefold i.e. as a carrier, a terminal operator and as a container
freight station operator. The inland container depots (I1Ds) are freight terminals solely
owned by 1ON1OR. As a carrier, 1ON1OR transports domestic cargo in containers
and International cargo from ports to its terminals situated in the hinterland. As a
container freight station (1FS) operator, it provides value added services by offering
warehousing to store as well as help in import / export of cargo.
Since 1ON1ORs terminal business depends on International Shipping lines bringing
their containers to I1Ds, 1ON1OR as a business strategy is going in for joint venture
1FSs at the I1Ds. At Dadri I1D, 1ON1OR has gone in for partnership with four private
companies to develop 4 separate 1FSs, the cost being funded through a DER of 2:1. In these
companies, while the private partner has 51% equity, the balance 49% is being held by
1ON1OR. The other major 1ON1OR terminal is at JNPT in umbai, jointly ownedby
aersk and 1ON1OR with former being the majority partner and 26% stake with
1ON1OR. Another upcoming 1ontainer Transhipment Terminal is coming up at
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Vallarpadam promoted by Dubai Port International with 1ON1OR having 15% equity
partnership.
As on date, 1ON1OR has a network of 58 1ontainer terminals across the country. Each
terminal is a custom bonded dry port with all the facilities like warehousing, container
parking, repair and even customs clearance. 1ON1OR now owns 7200 high speed
container flats (BL1 wagons), and 20,000 different types of containers either owned or
leased. During the year 2007 08, it handled 2.45 million Twenty feet Equivalent Units
(TEUs).

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So far, 1ON1OR was practically enjoying monopoly with captive traffic and strategic
long term advantage, but recently inistry of Railways have decided to open up
container business to other private players. Fourteen offers have been received and terms and
conditions are being worked out by inistry of Railways.
In a competitive
environment, 1ON1OR will lose its monopoly and will have to strive hard to maintain its
financial standing in the market.

LESSONS LEARNT
The basic proposal to create a separate company to deal with container traffic has helped in
improving the overall load ability of Railways.
1ON1OR has so far enjoyed IRs infrastructure network and captive market which have
driven its profitability. The impact of opening up of this sector on the fortunes of
1ON1OR is yet to be known.

ajority ownership in a Joint Venture 1ompany with private partner is a less attractive
proposal.It is better to have Joint Venture management under private control for
improved efficiency.

B.

INDIA RAILWAY 1ATERING & TOURIS 1ORPORATION LIITED

(IR1T1)
Indian Railway 1atering and Tourism 1orporation Ltd. has been set up by the
inistry of Railways with the basic purpose of hiving off entire catering and tourism
activity of the railways to the new 1orporation so as to professionalise and upgrade these
services with public private participation.
IR1T1 was incorporated in 1999 as a marketing arm of IR with an authorized capital of
Rs.50 crores and a paid up capital of Rs 20 crores to hive off the entire catering and internet
booking activity of Railways. It started its operations from 1stAugust, 2001.
In all the above mentioned missions, IR1T1 has adopted PPP as a primary strategy. The
1ompanys operations have been profitable and it earned a net profit of Rs 20.75
crores in FY 08 and paid a dividend of Rs 4.15 crores.

PPP IN FOOD PLAZAS


IR1T1 has tied up with well known entities in hospitality industry such as cDonalds,
Subway, Amul, Haldiram etc to open food plazas at major stations. Till arch 2008, 53 food
plazas had become operational and licences for 10 more had been issued.
The
partnership is fully market driven and entire investment is through private partner on long
term basis with a concession of at least ten years. The payment is in two parts, one time
upfront fee and then an annual fee based on land use charges and business license fee.
The annual fee is then shared with IR to the extent of 40%. This arrangement is working well
as can be seen from example of Bombay 1entral Station. A cDonalds / R.K.
hospitality food plaza opened at that station has given an upfront concession fee of Rs.
2crores, an annual land use charge of Rs.3 lakhs plus an annual license fee of Rs.2.5 lakhs to
the Railways.

PPP IN RAIL NEER PROJE1T


IR1T1 has launched packaged drinking water under brand name of Rail Neer in
Northern India in ay, 2003 and Eastern India in arch 2004 with its plants located at
Delhi and at Patna. These plants are being operated and maintained on Public Private
Partnership by Ion Exchange Ltd. as its O &  1ontractor with initial investment and

ownership by IR1T1.The contract for transportation and distribution


Transportation 1orporation of India and the model is working very well

is

with

PPP IN INTERNET TI1KETING


The Internet Rail reservation was launched in August 2002 with Railway booking
through the internet with ticket delivery to the customer. During 2007 08, a total of 1.89
crores e tickets valued at over Rs 1705 crores were booked through the IR1T1 web site.
IR1T1 has also launched Rail Reservation through obile phones of HUT1H,
RELIAN1E and IDEA 1ELLULAR. This service is available in all circles of these
operators. IR1T1 is now tying up with mobile companies for reservation through SS.
IR1T1 earns revenue out of payments made to them by IR for each such ticket out of
service charges levied by them on the customers

RAIL SAPARK 139


IR1T1 had taken up the project for launch of Integrated Train Enquiry System Rail
Sampark 139 with the objective of providing State of the Art enquiry services to Railway
Passengers all over the country. This was a pioneering PPP project where the call centre was
taken on a revenue model rather than on a cost model. This project has brought about a sea
change in the quality of enquiry services available to Rail Passenger across the
country. Work is on for launch of various value added & premium services

PPP IN BUDGET HOTELS & YATRI NIWAS


IR1T1 has taken over Yatri Niwas at New Delhi, Howrah and BNR hotels at Puri.
In
addition, IR1T1 proposes to establish Rail Yatri Niwas on surplus unused Railway land for
passengers at Bangalore, Secunderabad, Bhopal, 1handigarh, adurai and Sealdah in the
first phase. In all these PPP initiatives, IR1T1 will act as an interface between IR and
the private investor
DEPARTENTAL 1ATERING BUSINESS
IR1T1 has from 1st January, 2004 onwards taken over 18 departmental catering units,
659 commission vendor and almost 3125 staff. The departmental staff will be phased out
gradually and business would be gradually outsourced.

FUTURE OUTLOOK
1omplete takeover of departmental catering activity and licensee management from IR
along with the departmental staff. 1onsolidate Railway catering services through public
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private partnership. Enhance tourism business by utilizing Rail passenger services on major
routes and hill Railways. Promote multiple distribution channels for Rail tickets through
state of art technologies Establish Rail Yatri Niwas / Budget hotels on surplus unused
Railway land.

SU11ESS / FAILURES
It has been a success story all the way. IR and IR1T1 have hugely benefited from PPP in
food plazas.IR1T1 has helped IR in reducing its workforce in this loss making
peripheral activity and has hugely succeeded in improved ticketing, enabling business tie ups
with Banks, mobile phone service provider, credit card and cash card companies etc.

LESSONS LEARNT
IR1T1 model as an intermediate PSU for privatization and outsourcing has proved to be a
success. This is more so because IR provides a captive market for peripheral services. There
is an untapped huge opportunity in licensing of commercial space for which, another
1orporation is being proposed. The success of IR1T1 has reinforced the perception
that Railways should concentrate on what it does best manage the railway operations
and exit all the peripheral activities.

1. PIPVAV RAILWAY 1ORPORATION LIITED (PR1L)


While Konkan Railway 1orporation was the first public public partnership project,
Pipavav Railway 1orporation Ltd. also nicknamed PR1L was the first special purpose
vehicle under public private partnership. PR1L was constituted to provide B.G. rail link
to Port of Pipavav in the State of Gujarat. The SPV was to undertake execution of gauge
conversion and new line extension from Surendranagar Rajula 1ity Pipavav Port (270
kms.). While the gauge conversion project was already sanctioned, the work was moving
very slowly due to paucity of funds. Since Gujarat Pipavav Port Ltd. (GPPL) wanted
an urgent connectivity to the port, they approached Railway inistry for a joint venture
with 50:50 partnerships. Both the partners to SPV i.e. inistry of Railways and GPPL
contributed Rs. 100 crores each towards equity and balance Rs.173 crores was raised by
PR1L through a non recourse debt. The SPV not only constructed the line but was given
mandate to operate and maintain the line like a Non Government Railway for the
concession period of 33 years. While the Port guaranteed minimumaggregate quantity
of traffic, Railways also committed sufficient number of rakes for cargo evacuation
from the port.
The initiative of this SPV resulted in advantages to both Railways and GPPL such as:
FOR RAILWAYS
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Rc Implementation of uni gauge project of sanctioned work through PPP.


Rc Railways saved capital expenditure of Rs.233 crores (Project cost of Rs.333
crores less equity participation by Railways Rs.100 crores).
Rc Project completed within 18 months as against anticipated completion of similar
project of 6 7 years due to paucity of funds.
Rc Saving on cost of staff as against 1900 existing staff, SPV deployed only 667 staff for
O & .
Rc With full marketing efforts of GPPL, IR got incremental inward and outward
traffic. The annual losses of Rs.22 crores per annum for operating the erstwhile
uneconomic branch line were fully wiped off.
Rc Railways earned from passenger services on this section without passing on any
share to GPPL.

FOR GPPL
Rc The port connectivity through Rail provided another cost effective transportation
option.
Rc PR1L became the catalyst for growth of the port with containerization as a major
activity.
Rc GPPL may, in the long run, with substantial container traffic at its command
begin 1ON1OR like operations.

As regards the risk profile of the SPV, there was hardly any construction risk as Western
Railway did work at its own pre estimated cost. The project company was guaranteed 1
million tonne from first year, 2 million tonne from second year and 3 million tonne from their
year of operation onwards. PR1L procured all material required for construction and
handed it over to Western Railway and the Railway is carrying out O &  of this line at
mutually agreed cost on fully recoverable basis. Thus the project line became fully
dependent on the port for freight traffic. While OR regulates tariff fixing, the same
is collected by Railways and apportioned to the project company on standard
apportionment rules.

SU11ESS/ FAILURES
While the project was completed and commissioned in time, the port development got
delayed by almost three years with the result that committed minimum traffic could not be
achieved. During the first year, company could generate less than half a million tonne and it
almost doubled in the second year to 1 million tonne. Against Rs.22 crores required
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for debt servicing and Rs.12 crores for O & , Project 1ompany could generate Rs.5 crores
in the first year and Rs.9 crores in the second year. 1ompany defaulted on its debt servicing
due from April, 2005. Traffic guarantee of GPPL was not encashed by the Railways due to
future potential of traffic expected after modernization.

LESSONS LEARNT FRO PR1L EXPERIEN1E


Rc For port linking project, there is a need to coordinate port development with the
rail link.
Rc Debt servicing of almost Rs. 29 crores by PR1L in the very first year was over
ambitious.
Rc There is thus a need to provide a minimum gestation period of four to five years
without any debt servicing liability, for such developing projects. Alternately a
ballooning of repayments should be considered.
Rc Traffic forecasting needs to be more realistic with greater accountability of the
agency doing the forecasting.
Rc There is a need to review the traffic guarantee clause in such agreements as the
guarantor being a major shareholder leads to a conflict of interests

D.

RAIL VIKAS NIGA LIITED (RVNL)

With a view to cope with the increasing demand of traffic, the Government of India
framed and approved National Rail Vikas Yojana (NRVY) on 15th August, 2002 with an
estimated investment of Rs.15, 000 crores. The investment was proposed for Port
connectivity works and improvement of the Golden Quadrilateral (GQ) for meeting
future transportation needs. For this purpose, inistry of Railways created a Special
Purpose Vehicle (SPV), the Rail Vikas Nigam Limited (RVNL) to undertake project
development, mobilization of financial resources and implementation of selected Railway
Projects on fast track basis.
RVNLs vision has been to make Indian Railway network free of capacity constraints and to
generate transport capacity ahead of demand. RVNL has an Authorised capital of
Rs.3, 000 crores and paid up capital of Rs.950 crores. The broad identification of
financial models for implementing the projects are as follows:
For the Golden Quadrilateral project, out of required investment of approx. Rs.8,000
crores, Government of India will provide budgetary support of Rs.1,500 crores, another
Rs.1,500 crores through Railway Sector loan from ADB and balance Rs.5,000 crores to be
mobilized from the market. Port connectivity projects are being implemented in PPP format
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by setting up of project specific SPVs in which RVNL will hold a minimum of 26% of the
equity. The financial resources from the market are planned by implementing the
projects through Build,
Own, Transfer (BOT) route, which means that the entire capital expenditure on the
project would be arranged by the BOT concessionaire. The 1ompany is also planning to
have rail linkages to private ports on the lines of Kutch Railway 1ompany Ltd with entire
capital investment made by the Ports.
Some of project specific SPVs for which emorandum of Understanding (OUs) have been
executed with the strategic partners are listed below:
Rc Surat Hazira New Line (RVNL, Government of Gujarat, Hazira Port Pvt. Ltd. &
Essar Steel Limited).
Rc Bharuch Dahej Gauge 1onversion Project (RVNL, Government of Gujarat,
Gujarat Adani Port Ltd., Welspun Ltd.)
Rc Bhildi Samadari Gauge 1onversion (RVNL, Government of Gujarat, Gujarat
Adani Port Ltd., Kandla Port Trust)
Rc Haridaspur Paradip New Line (RVNL, Government of Orissa, Paradip Port,
Jindal Steel & Power, ESSEL ining Industries & Rungta ines Ltd.)

RVNL is presently having 55 projects broadly classified under two heads as under:
Rc Strengthening of Golden Quadrilateral and Diagonals
29 projects
Rc Provision of Port connectivity and corridors to hinterland 26 projects

The locations of these projects have been distributed throughout the country and hence
RVNL has established Project Implementation Units (PIUs) in various state capitals /
important cities viz. Secunderabad, Bhubaneswar, Bilaspur, Bhopal and Jaipur.
During the financial year, 74.28 Km of Doubling, 103 Km of Gauge 1onversion & 53 Km
of Railway Electrification, have been completed. RVNL has till now completed 155 Kms. of
new lines, 898 Kms. of gauge conversion 350 Kms. of doubling and 1007NKms. of Railway
Electrification, Thus as on 31.03.08, approx 36% of the total length (6686 km) of 55
projects assigned to RVNL, have been completed.
The status of 55 projects is as under:
Projects completed upto arch 31, 2008

16

Projects under implementation

31

Projects under sanction

WORKING:
RVNL had a paid up equity capital of Rs 2015 crores and Net Worth of Rs 2119 crores as on
arch 31, 2008. The entire equity is held by GOI. It earned EBIDT of Rs 47 crores and
PBT of Rs 34 crores for FY 08. It paid a nominal dividend in FY 08

SU11ESS/ FAILURE
One conclusion that can be drawn is that the system of umbrella SPV is an efficient and faster
mode of executing PPP projects in the context of IR.

E HASSAN ANGLORE RAIL DEVELOPENT 1OPANY Ltd.


This Public Private Partnership was developed with State of Karnataka with setting up of a
new company named K RIDE (Karnataka Rail Infrastructure Development Ltd.). OU
was signed between Government of Karnataka and inistry of Railways in September
2000 to develop and finance four specific rail projects, one of which was Hassan
Kankanadi 183 km. gauge conversion project. This was developed through another
SPV named Hassan angalore Rail Development 1ompany Ltd. (HRD1) promoted
by OR, GOK and K RIDE in July, 2003. HRD1 was granted a concession for
32 years on BOT basis, to develop; finance, design and construct, as well as O& of the
project. Out of the estimated cost of Rs.291 crores, the expenditure of Rs.141 crores
which had already been incurred by OR till 31.3.2002, was converted into unsecured
debt, repayable by the project company out of loans to be raised by the SPV from banks
and financial institutions. The shareholding of the SPV was equal stakes of 40.95%
for OR and GOK, 16.36% for K RIDE and balance 1.82% with strategic investors,
including New angalore Port Trust having strategic business interest in the project.
HRD1 in turn entered into agreement with South Western Railway, for construction,
operation and maintenance of the facility separately through various agreements.

The salient feature of these agreements, were


Rc While the target of completion was 12 months, there was no penalty for any delay and
thus the project company had to bear the entire implementation risk.
Rc The entire operations to remain with SWR and the project company to pay for all
operating activities on actual cost basis. The operating risk however would lie
completely with Project 1ompany. .
Rc Like in case of operation, entire maintenance to be with SWR but entire
maintenance risk lies with Project 1ompany
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Rc The concession agreement entitles the project company to only the freight
operating rights while the passenger service operations remain with the Railways.
Like in case of PR1L, tariff fixing remains with Railways and Project 1ompany will
get proportionate revenue sharing on standard apportionment formula adopted
between Zonal Railways.
Rc The financial appraisal of the project is based on expected 6 million tonne annual
freight traffic over the project line. Almost 55% of traffic of iron ore expected
through New angalore Post Trust (NPT) and balance 45% mainly of coal,
edible oil, LPG, fertilizers and other. Since traffic other than iron ore will depend on
transfer traffic sent by SWR to the project Railway, the market risks are
higher. There is no commitment from SWR for any minimum guaranteed transfer
traffic.

LESSONS LEARNT
In terms of expediting the construction of this strategically important Railway project,
HRD1 is a successful model of partnership with State Government. It also provides
private partnership equity upto 16.36% through investment by strategic partners. This
can also increase in future, with more private players. Due to committed fund to the
project, construction cost overruns have been avoided. Also the model premises
improved operating efficiency by following efficient O& on the pattern of KR1L. Thus K
RIDE being an umbrella organization promises a good future for more similar
partnership projects.

F. KUT1H RAILWAY 1OPANY Ltd. (KR1)


inistry of Railways under Prime inisters Rail Vikas Yojana launched another SPV
(Special Purpose Vehicle) in the State of Gujarat by the name of Kutch Railway
1ompany (KR1). This 1ompany is a joint venture of IR, Kandla Port, Gujarat Adani
Port and Government of Gujarat to undertake construction and operation of 314 km.
broad gauge line connecting Palanpur and Kandla Port via Bhildi. With direct BG link
between Gandhidham and Palanpur, the distance will reduce by 120 km. thus giving
shorter connectivity of ports of Gujarat to North India.
KR1 was formed as a company under The 1ompanies Act, 1956 in arch 2004 to
implement the project mentioned above. The equity capital of Rs.200 crores has been
subscribed to by IR (50 percent), Kandla Port (26 percent), Adani Port (20 percent) and
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Government of Gujarat (4 percent). The project cost was estimated to be Rs.550 crores and
it was proposed to raise non recourse debt of Rs 300 crores from Banks/ financial
institutions to part finance the project.
KR1 is an ambitious project of Gujarat Government because the direct link between
Kandla and Palanpur shall reduce the distance between the two stations by more than
25percent. This will not only result in reducing the transportation cost for the exporters but
will also provide faster connectivity from Northern hinterland leading to shift of cargo
from umbai / JNPT to the ports in Gujarat. A number of industries are already lined
up in Kutch area and more are expected to follow with KR1 opening up fresh
opportunities to them, Apart from Kandla & Adani Port, 1ompany is also in touch with
major power houses in Rajasthan and Punjab and it is expected that significant quantity of
imported coal shall move on KR1. Through the reduced distance, Railways will be more
competitive to road, resulting in cargo shift and incremental traffic to IR as well.
Further the 1ompany, in order to reduce cost of transportation of EXI traffic, shall run
double stack container trains and work to clear all identified overhead structural
obstructions on this Section has been undertaken.
Seeing growth in Kandla Area, Government of Gujarat has further decided to fund broad
gauge conversion of 223 km. line from Bhildi to Samdhari. This will provide direct rail
connectivity to Punjab which will reduce the distance by another 350 km. With the
above connectivity, it is expected that Gandhidham area will handle additional traffic of 15
to 20 million tonne traffic by rail, after it becomes operational.

LESSONS LEARNT
As in case of PR1L, two experiences have been important
Rc For Port connectivity project, there is a need to coordinate port development with the
rail link.
Rc A minimum gestation period of four to five years is required without any debt
servicing liability as it takes time for traffic.

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The total investment being planned for the eight year time frame (2007 2015) was tentatively
in the order of Rs 350,000 crores. This was a significant increase from the planned Rs 60,000
crores (actual expected to cross Rs 80,000 crores) in the X Plan period of 2002 07.
This confidence was a result of what the Indian Railways (IR) achieved, not only due to he
rising trend of performance, but also due to the significant growth in the past two years
(2004 06) (Exhibit 1). The fund balances had crossed Rs 12,000 crores. These two years
coincided with r Lalu Prasad being at the helm of affairs of the IR, having moved into his
position on 23rd ay, 2004.

IR was considered to be heading towards bankruptcy, as per the report of Expert Group on
Indian Railways (also called the Rakesh ohan 1ommittee report), submitted in July 2001
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(of which the author was a member) which studied the IR for nearly two years [N1AER,
2001]. They had stated,
Today IR is on the verge of a financial crisis... To put it bluntly, the business as usual low
growth will rapidly drive IR to fatal bankruptcy, and in sixteen years Government of India
will be saddled with an additional financial liability of over Rs 61,000 crores On a pure
operating level, IR is in a terminal debt trap.
The fund balance at the end of 1999 00 had reached a low of Rs 149 crores, improving to Rs
5228 crores by the end of 2003 04 and over Rs 12,000 crores by the end of 2005 06. A 20
year perspective since 1987 88 gives a birds eye view of the performance of IR, in terms of
total earnings, total working expenses, operating ratio and net revenues (Exhibit 2). The
operating ratio (ratio of total working expenses (including depreciation and pension, but
exclude dividend to GOI) to total earnings) and net revenues (total earnings less total
working expenses, adjusted with miscellaneous transactions) had reached low levels of
performance in 2000 01 (98.3%) and then had consistently improved till 2005 06 (83.7%).

The figures were however not strictly comparable. There had been a decrease in allocations
to the depreciation reserve fund during the late 1990s from over Rs 2000 crores to a low of
Rs 1155 crores in 1998 99. This was followed by a gradual increase until 2004 05 to Rs 2700
crores. In 2005 06, the allocation jumped to Rs 3600 crores (Exhibit 3). Further, there was a
change in accounting practice in 2005 06 when Rs 1615 crores of lease charges to IRF1
towards the principal amount for wagon procurement had been shifted from working
expenses to miscellaneous expenditure. The operating ratio, for the sake of comparability
with earlier years, would be 86.6%. Exhibit 4 gives the key statistics of IR as on 31st arch,
2005.
As a recognition of this turnaround, some of the worlds biggest asset managers,
investment bankers and consultants including Goldman Sachs, Deutsche Bank, HSB1,
ckinsey etc had shown interest in working with IR.

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The trend of IRs total earnings and total working expenses are shown in Figure A and Figure
B. The good years were between 1993 94 to 1995 96, after which the expenses caught up
with the revenues until 2000 01, when the net revenue shrunk to a little over Rs 1000 crores.
The situation started improving steadily to reach an actual net revenue of just over Rs 8000
crores in 2005 06, for a total earnings of Rs 54,404 crores. This figure, collated after the
financial year ended 2005 06, has been a significant increased achievement over and above
the budgeted and revised estimates for the same year. The increase in net revenue is attributed
significantly due to better utilization of freight rolling stock.
The budgeted estimate for the year 2006 07, before the actuals for 2005 06 were collated, is
total earnings of nearly Rs 60,000 crores with a surplus of about Rs 7500 crores. The actuals
are expected to be at least 10% higher on earnings and 50% higher on the net revenue.

Total Earnings and Total Working Expenses

Growth Rate for Total Earnings and Total Working Expenses

Based on the ratio of total working expenses to total earnings, a parameter called the
operating ratio is assessed as a percentage. Figure 1 presents the operating ratio since 1987
88. The operating ratio had reached a peak of 98.3 in 2000 01, reflecting a relatively poor
performance. After that, it had reduced year on year till 91.0 in 2004 05. It dropped sharply to
83.8 in 2005 06. (As stated above, this was both due to better utilization of rolling stock and
changes in accounting practice.)
The IR is targeting an improved operating ratio of 77 for 2006 07. This means that it aims to
earn Re 1 by spending 77 paise in 2006 07, against 83.8 paise in the last financial year
[Business Line, ay 6, 2006].

Operating Ratio

The net revenue receipts are then appropriated for dividends payable to the government of
India and into various capital funds. Figure D gives the dividends paid out of the net
revenues, including when the payment was due to deferred dividends. As can be seen, the
deferred dividend payments have happened in the good years, which have followed the
bad years when the IR would have sought deferment of the dividend.
The deferred dividend liability from 1978 79 onwards aggregated to Rs 428.43 crore by end
of arch, 1990. The amount was cleared by 1992 93. The dividend payable in 2000 01 and
2001 02 worked out to be Rs 2,131 crore and 2,337 crore respectively, out of which Rs 1823
crore and Rs 1000 crore respectively have been transferred to a deferred dividend liability
account. This amount is expected to be cleared by 2006 07.
Net Revenue Receipts

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The Indian Railways have played an integrating role in the social and economic development
of the country. Railways also have an advantage of being less energy intensive and more
environments friendly. However, Indian Railways have experienced a continuous decline in
market share in the transport sector. The economic recovery experienced in 1999 2000
continued until the first half of 2000 01, before a slowdown again set in. ainly as a result of
the same, against the target of 475 million tonnes of revenue earning goods traffic
(originating), the Railways freight traffic aggregated to 473.5 million tonnes during 2000 01.
This was 3.7 per cent higher than the performance in 1999 2000.
Several parts of the country faced natural calamities, such as, the earthquake in Gujarat and
drought in parts of Rajasthan, Gujarat, aharashtra, adhya Pradesh, Bihar, etc. The
Railways organized massive movement of relief materials including fodder and water to the
affected areas, free of charge. 9.67 A target of 500 million tonnes of revenue earning freight
traffic was set for 2001 02. However, owing to the continuation and, indeed, deepening of the
economic slowdown, freight traffic during the first five months of the financial year stagnated
at last years level. The performance in this respect during April December 2001 02
registered an increase of only 2.7 per cent over the corresponding period of 2000 01. While
there was an increment of 9.4 million tonnes of freight traffic over April December 2000. An
increase in the quantity of freight traffic moved was recorded in respect of coal, raw materials
to steel plants, iron ore for export, pig iron and finished steel, cement and food grains. The
quantity of freight traffic was lower in respect of Fertilizers, and Petroleum Products (Table
9.6). In terms of Net Tonne Kilometre (NTK), the increase in revenue earning goods
traffic was 4.4 per cent during April December 2001. 9.68 The administrative costs of the
Indian Railways have been increasing rapidly. With about 1.55 million employees, the Indian
Railways are the largest employer among public sector undertakings in the country. There is
also a substantial burden of pension liabilities. The

Railways have, therefore, drawn out an elaborate plan for right sizing the manpower. A norm
of restricting the intake to a maximum of one per cent of the strength on rolls in certain
Departments is being kept, while only 0.5 per cent intake is being allowed for the Production
Units. Simultaneously, measures have been taken to raise manpower productivity. A concept
of bench marking has been introduced to measure and compare the manpower productivity in
the various facets. Increased emphasis is also being laid on retraining of staff rendered
surplus and its re deployment elsewhere in expanding areas of activity. 9.69 The Railways
have been performing the dual role of functioning as a commercial undertaking and a
provider of public utility service. Social Service Obligation, involves a measure of cross
subsidization of passenger services by freight revenues, as also subsidization within
passenger and freight segment. Operation of certain uneconomic services, like those in
suburban sections and branch lines, is also undertaken on social considerations. The total loss
on such public service obligations (PSOs) performed by Indian Railways during 2000 01 is
estimated at Rs.4,000 crore.

Like most of the other railways in the world, IR faced a very challenging environment
towards the closing years of the 20th century characterized by severe competition from
road in freight and airlines, luxury buses and personal vehicles in the passenger segments. A
period of continuous and precipitous erosion in the share of railways in traffic
followed. IR responded with a carefully crafted strategy of reform; built around its core
strengths unique amenability of railway operations to achieving substantial reduction in
unit cost by carrying ever larger volumes of traffic. arking a radical departure from the
tariff focused policy of revenue generation, the new strategy stressed on capturing
largevolumes for the Railways. On the freight side, this meant quick generation of
capacity, not through investment but through optimization of the existing infrastructure
and efficient asset use.
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Rc Fares for premium classes where the competition from airlines, luxury buses and
personal transport vehicles was the most severe were reduced.
Rc The length of the popular trains on densely trafficked routes was increased to 24 26
coaches from the existing length of 16 18 coaches.
Rc Speed of the trains was reviewed and upgraded within the constraints of the
infrastructure.
Rc Participation of private operators in passenger related non core areas such as parcel
and catering was encouraged.
Rc Information Technology was used to make ticketing and reservation easily accessible
not only at stations but from the convenience of homes and offices.
Rc An airline style up gradation for passengers in the lower classes to higher classes
was introduced
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Rc Axle load was increased from20.3 tonnes to 22.9 tonnes and later to 25 tonnes on
select routes.
Rc Wagon turnaround time was brought down from 7 days to 5 days
Rc Tariff was rationalised around the principle of elasticity of demand.
Rc Tariff for cement & steel which faced threat from road sector was reduced.
Rc Freight discounts were allowed for loading in empty flow direction & in lean seasons
for customers offering incremental traffic

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ajor strategies followed by the Indian Railways which led to the complete turnaround are
as follows:

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The Indian Railways has a massive infrastructure in place and the costs incurred are
predominantly xed and independent of the operations. The challenge was therefore to
achieve enhanced capacity while not incurring additional capital expenditure. Following are
some key innovative and e>ective measures that led to this:
#-,i i)c *+#/*  By increasing wagon loading capacity and signicantly
reducing wagon turnaround time. This is seen from data in Figure:

In the past, loading/unloading was done only during day time (10 hours a day on an
average) and trains used to lie idle at customer sites overnight. The Indian Railways provided
incentives to customers to undertake loading/unloading 24 hours a day. 1onsequently, the
average time taken for loading came down from 30hrs to 16hrs and for unloading from 34hrs
to 18hrs, reducing the turnaround time by over a day.

IR did away with the system of train examination, which consumes about 16 hrs on an
average. Earlier, train examination was done every time a train came back to its base station,
irrespective of the distance traveled in the interim. In recent times, examination is being
conducted only after 4,500 kms. or 15days (whichever is later). This strategy was very
successful and has been later extended to 7,500 kms.

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Till recently, IR had a xed price policy, irrespective of demand scenario and competition. In
order to be able to e> ectively face the challenges posed by sti> competition, a Dynamic
Pricing Policy was introduced for freight as well as passenger, for peak and non peak
seasons, premium and non premium services, and for busy and non busy routes. As per this
policy the rates for non peak season,non premium service and empty ow directions would
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be less than the general rates and the rates for peak season and premium services could be
higher than normal.
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To simplify and rationalize goods tari>, the classication of items was reduced from over
4000 to a mere 28 groups of commodities. In 2005 06, the total number of classes in the
freight tari> schedule was reduced from 27 to 19. The highest class 250 for charging freight
was lowered to 220 in 2006 07.This was a very clever policy as more classes were put in the
higher price category. Thus even though the maximum cost was lower in new tari> rates, the
nett revenue weighted over the tra c in all the classes was larger.

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The demand for freight transportation typically dips from 1 July to 31 October on account of
monsoon. It was estimated that over 400 trains remain idle in this period due to lack of
demand. Hence, during this period, freight rebate of 15% was o>ered for incremental freight
revenues of over Rs. 51rore in a month and 10% for incremental earning of less than Rs. 5
1rore.

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erchants want to make transportation arrangement for goods on a long term basis. Hence,
long term freight discounts were o> ered to attract new customers and new freight tra c.
Under this scheme, zonal railway administrations were able to o>er a discount of up to 20%
during non peak season and up to 10% in the peak season for a period of three years. For
loading in empty ow direction, the discount was up to 20% and 30% during peak season and
non peak season respectively.

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The incentives to ramp up volume were complemented by a two pronged revenue


enhancement strategy, which capitalized on opportunities and reduced losses by exiting non
core operations.
The strategy in freight operations was to recognize low cost high volume operations where
the Railways enjoyed signicant comparative advantage vis a vis road and air transport and
achieve higher realizations on these operations. For example, the tari> on ore has been
increased by 70% (virtually no competition) at a time when rate on iron and steel has been
reduced 30%. The strategy to focus on capacity utilization resulted in high volumes and
compensated for the discounts and the lowered tari>s.
Some of the innovative measures adopted in the passenger segment included increasing the
number of coaches in popular trains and encouraging occupancy in the protable upper
classes. The passenger tari> was rationalized such that the fares of A1 First and A1 Second
1lass were 11.5 times and 6.5 times the Second 1lass fare respectively. This, coupled with
the innovative automatic upgradation scheme, enabled higher occupancy in the protable
upper classes.
The Railways also exited from the loss making parcel and catering services and o>ered it to
private players on a bidding basis. There was also a signicant thrust on non fare income
streams such as advertising and allied services including land use rights at railway stations.

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This principal strategy consists of several sub strategies including reviewing parts of
businesses that are not value adding, withdrawing from markets where the firm is performing
poorly, selling assets, reducing scale of operations, improving efficiency, downsizing,
outsourcing and such other strategies. The emphasis is on control of costs.
'c /i0i !c +"c #$c 1,"i ""c c c #c /l,c --i !2c The IR reviewed its
catering and parcel service business and decided to lease it out. The Railway inister
stated that by leasing out catering and parcel services IR have reduced catering and
parcel losses of more than a thousand crores. Similarly, the IR attracted private

investments under the wagon investment schemes and siding liberalisation scheme.
This freed up resources for utilisation in more remunerative activities.
'c E$$ii )c i*+#/* "2c The efficiency improvement brought by the IR can be
evidenced from the diminishing operating ratio (ratio of total working expenses to
gross revenue receipts), which was 98.8 percent in the year ending arch 2001 and
was brought down to 83.2 percent in 2006 and further to 78.7 percent by 2007.
Operating ratio is a key indicator of railway financial performance. 1hina Rails
2006 operating ratio was 60.7 percent, compared with 1anadian Pacific Railways
75.4 percent. A lower operating ratio is better. Thus, the IRs operating ratio is now
comparable with that of other large rail networks in the world. The IR has a plan to
bring it down further to 65 percent by 2010.
Table below shows the decline in operating ratio achieved over the years.

The strategies used to improve gross revenue receipts As for the bringing down of
working expenses the numerator it was achieved through measures such as the freeze
on filling up vacancies, improving technical efficiency etc. To improve efficiency the IR
adopted following strategies:
The IR took several initiatives at technology up gradation and modernisation. These
include (a) introduction of modern signalling and telecommunications technology in order to
enhance safety, and enhancing line capacity (b) improving operating efficiency of freight

transportation through the introduction of Freight Operating Information System (c) the
complete computerisation of control office, 1oaching Operations Information Systems and
interfacing of both these systems with the National Train Enquiry System so as to directly
benefit passengers and other rail users. Increased use of technology resulted in improving
technical efficiency in provision of services. In addition, the IR also focused on the sub
strategy capacity enhancement and ensured better capacity utilization. Through enhanced
axle load and reduction in turnaround time of wagons by 14 percent, the IR increased wagon
capacity available per day by 36 percent. Due to the rapid uptake of technology the IR
bagged IT Transformation Award 2006 of NASS1O Indias peak IT industry
association.
'c #0 "izi !c'cThe number of employees, which peaked at 1.652 million in 1991, was
brought down progressively to 1.472 million by 2003, and to 1.412 million by 2006.
One of the elements of retrenchment strategy is to trim off excess staff. The approach
that the IR adopted was not to fill in vacancies created due to retirement or other
reasons. This approach commenced during the term of r Nitish Kumar as the
Railway inister and has been continued by r Yadav. Again, downsizing as a
strategy for reducing costs was initiated when r Nitish Kumar was the Railway
inister. Over the years the IR reduced the staff on payroll from about 1.58 million in
1999 to about 1.41 million by 2006, down 0.17 million or 10 percent. This resulted in
the decline of overall expenditure by at least Rs 2,000 crores in 2006 (see Table 4),
compared to what it would have been had the staffing levels been comparable to those
in 1999. s

In 1998, due to the impact of the Fifth Pay 1ommission the expenditure on staff and pension
payments increased by almost 35 percent in just one year. It will be seen from above that
growth rate in wage bill was contained (brought down to single digit growth rate from double
digit growth rate) during the period of r Nitish Kumar who was the Railway inister in
1998 1999 and again in 2001 2004.
'c ,"#,i !.c Besides the catering and parcel service activity, the IR also outsourced
advertising activity. In the other business areas of parcel, catering and advertising, the
strategy of outsourcing through public private partnership and wholesaling rather than
retailing was adopted.
The evidence presented above in respect of sub strategies such as the review of
businesses that are not value adding, efficiency improvements, downsizing and outsourcing
appears to provide support that retrenchment strategy helped the IR to contain costs which
ultimately helped its turnaround.

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This strategy includes several sub strategies like focus on growth, product innovation,
product differentiation, re branding, and all these ultimately leading to capturing market
share. The focus of this strategy is on revenue generation as opposed to cost control. Various
measures taken by the IR are outlined below.
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'c [#,"c# c!#0. As stated above, the focus of policy change effected by the IR was
on meeting the requirement of its customers. Railway customers are primarily of two
types those availing freight services and those availing passenger services. The two
major sources of revenue for the railways are then goods (freight) revenue and
passenger revenue which respectively form about two third and one third of total
railway revenue. The IR has shown an impressive growth in both freight and
passenger revenue as can be seen from the rising growth rate after 2004.

There was a steep growth in freight revenue after 2004. The turnaround of the IR was mainly
freight revenue driven. The increase in the freight revenue can be traced to three factors (i)
increased axle load (ii) reduced wagon turnaround and (iii) market oriented tariffs and
schemes. The first two managerial actions increased the IRs capacity to move higher volume
of goods while the third action market oriented tariffs and schemes helped raise the per
unit revenue from freight.

The major reason for rise in freight revenue was higher loading volume (axle load)
through existing wagons given that augmentation in the number of wagons takes time. In
three years from 2004, the incremental loading achieved was about 170 million tonnes, which
exceeded the total incremental loading of the 1990s by 120 percent. Freight earnings were
increased through carrying increased tonnage by enhancement of loading limits from six
tonnes to ten tonnes.
To reduce wagon turnaround days, cash incentives were offered to freight customers
to free up the wagons faster. Handling capacity of freight terminals was increased; strict
control was maintained over idle wagon capacity through the use of Freight Operations
Information System. To free up wagons users were encouraged to adopt round the clock
loading and unloading of rakes at terminals. Through these measures, the IR was successful
in reducing the wagon turnaround from seven to five days. Simultaneously, the connectivity
to ports was increased to facilitate quick clearance of imported goods arrived at the ports and
similarly to facilitate speedy export of goods. For effective transportation of perishable goods
like milk and vegetables more refrigerated parcel vans were introduced. All these measures
put together resulted in raising the percentage of average annual growth rate in freight
volume from 2.34 (2001) to 7.90 (2006) and freight revenue from 6.31 (2001) to 17.90
(2006) and to 14.96 (2007) as can be seen from the Table above. In volume terms there was

some but not a substantial change in the rate of growth of goods traffic. This shows that the
revenue generation was achieved mainly by appropriate pricing of freight on goods.
The IR also adopted several market oriented tariff levying strategies. The tariff
schedule for wagon use by customers was simplified and rationalised. Items in the schedule
were reduced from some 8000 to less than 100. 1lassification of certain commodities from
lower tariff to higher tariff band resulted in the increase in freight earnings. In addition, the
upward revision in freight rates (shown in parenthesis) was as follows: coal (8 percent), iron
ore (17 percent), cement (4 percent), limestone and dolomite (17 percent), and food grains
(33 percent). As the above table shows the rate per net tonne km, which declined to 72.44
(2004) was increased to 82.55 by end of 2006. However, this reflects monopoly elements
some of which may not be sustained as competition from the road hauliers increases with
improvement in the quality of roads and in the purchase of vehicles with very large carrying
capacity. However, the use of its competitive advantage in certain areas (monopoly power in
some cases) demonstrates the change in strategic thinking of the IR management.
The IR adopted two pronged strategy to improve passenger revenue: (a) competitive
pricing and (b) substantial increase in passenger comfort and amenities. To arrest the
dwindling market share in passenger market segment, the IR decided to maintain the present
level of passenger tariff as is reflected in Table below. The average rate per passenger km has
remained around 24.50 paise3 only. The IR, however, improved various passenger amenities
and introduced additional coaches in areas of high demand. Further, in response to
burgeoning competition from new low cost aviation sector, the IR reduced fares for air
conditioned coaches.

A major concern of the railway passengers was about their safety. The IR took several
measures as follows to address this issue. Yadav (2006) states that the IR created a Special
Railway Safety Fund of Rs. 170 billion to improve safety environment, through replacement
of over aged railway assets, that is, tracks, bridges, rolling stock, signalling gears etc. The
number of accidents have been more than halved from 473 (2001) to 200 (2007). Use of high
technology for passenger safety is also a hallmark of the IR success. In the area of train safety
devices like Train Protection and Warning System and Anti 1ollision Devices were
introduced. Railway Protection Force was strengthened to escort passenger trains in security
sensitive areas. Single window service to the customers for providing value added service
was introduced. The combined effect of these measures was an increase in the volume of
passengers by approx 29 percent over the period 2001 to 2007 (see Table 6A). As Table 5
shows, the IR recorded significant increase in absolute amount of passenger revenue receipts.
Passenger revenue receipts that were Rs. 105 billion (2001) rose to Rs. 172 billion (2007)
a rise of 64 percent.

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#/i# 2cThe IR introduced double stack container trains on diesel route between

Pipavav port and Jaipur. These containers increased the carrying capacity of each train to
2,500 tonnes against 1,500 tonnes, and also reduced line capacity constraint by nearly half
and led to saving of about seven percent on capital cost and 25 percent in operating expense
(Das, 2006:1). Similarly, as stated by the Railway inister in his budget speech 2007 08, the
IR enhanced the capacity of existing lines and made available wagons designed to suit the
specific need of new cement, steel, and power plants. The IR also developed freight terminals
with more than 15 wagons per month handling capacity which enabled the IR to expand its
freight traffic. Further, it introduced new design of wagons with higher pay load (carrying
capacity) but lower tare weight (weight of the empty wagon) that improved safety features.
The effect of these measures can be seen in higher freight revenue.
#-,c -i$$ ii# 2c Product differentiation can take many forms. These include
differentiating in quality and price of the product from that of rival firms, differences in
product design and features, differences in availability of product in terms of time and
location etc. In order to compete in the passenger market segment, with other modes of
transport viz., road, aviation, coastal shipping, the IR embarked on a program of improving
passenger amenities (discussed earlier). To win over passengers the IR introduced e ticketing
through Internet from home which became very popular. Further, it introduced passenger
coaches with new layouts that have significantly high capacity than previous coaches. It also
brought about perceptible improvement in the passenger amenities. While the IR improved
passenger amenities as stated by the RBI after arch 2003 passenger fares had remained
unchanged (RBI, 2005: 464).
*+#/i !c*c"2cThe share of the IR in freight market was progressively declining
for several years in a row. For the first time, the IR reversed this trend. The annual freight
growth rate which was 1.4 percent (2001) increased five fold in 2005. The IR achieved a
growth rate of 7.67 percent in one year in freight loading and regained some market share
(Yadav, 2005:4). The IR adopted several marketed oriented and customer friendly policies to
attract business as detailed earlier. The IR adopted two pronged strategy to regain market
share. Where it had competitive advantage it used economic principles by charging higher
prices and where it faced tough competition, it lowered prices to regain market share.
The above evidence suggests that the IR pursued sub strategies of focus on growth,
product innovation and product differentiation for revenue rising. There is no evidence to
c

suggest that the IR used other sub strategies to boost revenue. The sub strategy of focus on
growth consisted principally of raising revenue through dynamic pricing approach for freight
and passenger traffic. Efforts were also made for raising volume of freight and passenger
traffic. Based on above evidence we are inclined to accept proposition 2 above that the
repositioning strategy had positive impact on the IR turnaround. The success in significant
revenue increase was achieved not only through managerial actions but environmental factors
also contributed to this as discussed below under the relevant sub head.
#! i"i# 2c This turnaround strategy consists of all strategies that are supporting the
above two principal strategies for turnaround, that is, retrenchment and repositioning. This
involves sub strategies such as changes in planning systems, decentralising, human resources
planning, organisational culture and such other related issues. In the Railway Budget speech
on 6 July 2004, the inister stated Indian Railways is committed to optimum utilisation
of human resources (Yadav, 2004:12). The IR took several steps in the direction.
 !"c i c +l

i !c ")"*"2c The IR introduced improved accounting and management

information systems to provide financial, operating and management information needed to


increase efficiency, meet emerging business needs and improve commercial orientation. It
introduced Long Range Decision Support System and related systems for investment
selection on the basis of expected returns (ADB, 2002:37). To cater to the rising passenger
numbers which run into millions each day, the IR introduced state of art passenger
reservation system. Similarly, the freight business was streamlined through the Freight
Operating Information System and Enterprise Resource Planning (ERP) packages were
implemented in workshops, production units and selected zonal railways.
 li"i !c The IR decentralised its organisational operations by creating more zonal
centres. The number of zones was raised from nine in 2003 to 16 in 2005 which helped faster
decision making and provided better customer service. The 1AGI (2006) states the IR
decentralised procurement through the introduction of Vendor anagement System which
considerably raised vendor satisfaction due to the transparency, fair play and equal
opportunity it provided something that was missing in the earlier system.
,* c"#,"ci iii/"2cAs fatigue enhances probability of accidents, several measures
were initiated by the IR to improve working conditions of drivers and guards. 1rew friendly
drivers cabins and brake vans were designed. Another initiative was the establishment of
c

International Railway Strategic anagement Institute in 2005 under the aegis of International
Union of Railways. It is a premier institute to serve the training needs of managerial staff. To
increase participation of railway employees in management, regular dialogue with the
officers and the staff federations through a specially constituted forum called Participation of
Railway Employees in anagement (PRE) was established. The IR was also in the
forefront of taking affirmative action. It ensured that adequate representation is given to
disadvantaged sections of the society and to physically challenged people as required under
the relevant legislations. Suitable sports facilities were also made available to the employees
and the IR sports team won several laurels at national and international level. ore effective
use of manpower led to improvement in staff productivity. ulti skilling of staff was
emphasized. These strategies resulted in doubling of the staff productivity compared to the
productivity in the 1990s (Yadav, 2006:7). Revenue per staff witnessed a rise by 68 percent
(20012006) as against 49 percent (19962001).
 !"ci c#! i"i# lc,l,2c Probably the most significant cultural change witnessed
by the IR in recent years is the philosophical change from politicised decision making to
commercial, business oriented decision making. As already stated above, r Nitish Kumar
while presenting his 2001 02 budget stated Railways need to develop market oriented and
customer friendly outlook due to emerging competition within the transport sector (Nitish
Kumar, 2001:8). The transformation of the IR to a customer focussed organisation is
remarkable. For example, the IR has responded to the enhanced competition from the
aviation sector, with improved information for passengers through the creation of enquiry call
centres and regular updating of current vacancy positions. Several customer friendly actions
taken by the IR have been discussed earlier.
The above evidence appears to support proposition 3 that the reorganisation strategy
helped the IR improve its overall organisational culture and employee participation leading
to positive impact on turnaround. It is obvious from the above discussion that the managerial
strategies for turnaround (retrenchment, repositioning and reorganisation) did help the IR
turnaround. In addition, several macro economic environmental changes also contributed to
its turnaround, principally among these was the general growth of the Indian economy. In
paragraphs that follow, we describe how these factors impacted on the IR turnaround.
E /i# * lc$#"c

 !c i c c *#'# #*ic # -ii# "2c The general improvement in Indian macro
economic conditions helped the IR turnaround. This growth environment offered an
opportunity for the IR and had a significant impact on the turnaround (Raghuram, 2007: 10).
As can be seen from Table 7, the average growth rate of the Indian economy in the years
since r Yadav took over as Railway inister was 8.5 percent more than that recorded
for the preceding four years. This heightened growth in the economy raised the demand for
freight and passenger services which is reflected in the higher revenue earned by the IR as
already indicated above.
i"ci c-* -2cThe rise in freight revenue the main plank of the IR turnaround was
facilitated by the increased domestic demand for coal (for electricity generation), for cement
(for construction) and pig iron (for steel plants) due to economic growth. There was also an
increase in the iron ore for exports (mainly to the 1hinese market). In 2006, 1hina bought
more than 74 million tonnes, accounting for about 84 percent of Indias total iron ore exports.
The IR used the favourable international demand reflected in substantial increase in iron ore
price by raising the freight on iron ore. As stated earlier freight on iron ore was raised by 17
percent.
 !ci ccl!lc+#"ii# 2c One of the major changes that have impacted positively for the
IR was the Supreme 1ourt Ruling in November 2005 which banned overloading of road
transport vehicles. According to the KPG (2007:7) this was a shot in the arm for the
Railways as the road transporters traditionally over loaded 1.5 2 times the rated capacity on
trucks. The average road freight rate for transportation shot up by about 25 to 30 percent in
the short run increasing the difference between road and rail freight cost (athur, 2006:1). It
shifted the freight business more specifically of cement and steel to the IR and is
reflected in the sharp rise in freight revenue of the IR in the years 2006 and 2007. This played
a part in the turnaround of the IR.
 !"c i c c #, i !c +i2c The IR made an important change to the accounting
practice following from the international push for uniform accounting standards. Yadav
(2005) states the IR have accordingly set in motion an accounting reforms process .... Under
the Government accounting system, the total amount of lease charges paid to the Indian
Railway Finance 1orporation (IRF1) for rolling stock leases by the IR was treated as
operating expenditure. However, the charge consists of payments towards both interest and
principal repayment components, which are in the nature of revenue and capital expenditure,
c

respectively. To bring the IR accounting practice in line with Generally Accepted Accounting
Principles for lease finance and to ensure that the true nature of the transaction is reflected in
the accounts and the asset is recognised appropriately, from 2004, only the interest portion
was debited to operating statement, the principal portion was capitalised. These changes in
the accounting system have effected a reduction of Rs. 1,616 crores in the operating
expenses. This accounting change raised the surplus and lowered the operating ratio. For
example, the above change alone amounted to 26 percent of the surplus in 2006.
*+c #$c c )c #**i""i# 2c The major changes in the salary scales of Indian public
service employees (including Railways) are determined by the Pay 1ommissions that are
appointed by the GOI. The implementation of the Fifth Pay 1ommission in 1997, increased
the total wage bill of the IR by 34 percent during 199798. This wage rise does not include
the increase in pension costs. The share of pensions in working expenses rose from around
4.5 percent in 1980 81 to nearly 14 percent in 2003 04. By the time the present Railway
inister took over, the impact of this pay rise and pension liabilities had been absorbed by
the system through increased redundancies.
li c i c c $i  ilc #"2c The decline in overall interest rates and liberalisation and
expansion of financial markets helped the IR to raise external resources with ease. Also the
IR is required to pay only 6.5 percent dividend on the GOI investment in it, which naturally
reduces the overall financial cost to the IR and puts it at an unfair advantage vis vis the
road sector which is required to borrow at commercial rates. Similarly, the finance that is
raised from the market by the IRF1 is available at a lower rate as compared to the prime
lending rate of State Bank of India (see below); because of GOI guarantee for such finance.
Further, the bonds of IRF1 are tax free so these can be offered at lowering interest rate which
reduces the borrowing cost. The softening of interest rates in international markets also
helped in lower interest cost. A combination of such favourable factors led to lower overall
borrowing cost. Taking advantage of the soft interest rates during 200304 judiciously,
an overall weighted average cost of incremental borrowing at 5.59% for the year 2003 2004
and the previous year weighted average cost of 7.00%, the overall weighted average cost
of funds for the year worked out to 5.70% p.a (IRF1, 2004: 3). As against this, the prime
lending rate of State Bank of India was 10.25 percent in 2004. The softening of the
international interest rate environment helped IRF1 to raise larger amount of debt at lower
cost.

It can be seen from the above discussion that several macro economic factors have made
significant contribution to the turnaround of the IR. It will be incorrect, therefore, to ascribe
the IR success to managerial leadership alone. The exact impact of contribution of some of
these strategies to revenue or cost, however, could not be determined in the absence of data
availability. The favourable impact of macro economic factors supports the argument that
good luck also helped the IR turnaround.

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Financial back up from government.


Biggest company in the world in terms of Employee Strength.
Large Infrastructure.
Large Network across the country.
Luxurious and also affordable to common man.c

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c Assets are not properly utilized
c Government protocols, lot of negligence.
c Lack of safety measures in all trains.
c Delay in train timingsc

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c Use of Latest Technology.
c Better customer service.
c etro trains in cosmopolitans cities.c
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c Heavy vehicles with two trailers may replace freights carriage.
c Low cost airlines.
c Development of roadways.c
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The Indian Railways is owned and run by the government of India. As a result
There was lot of policy changes which resulted in increase in efficiency of the railways
During the period 2004 05.
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IR is a Public Sector Undertaking so fund flows were taken care of by the Government and
Revenue generated helped in economic prosperity of the country.

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As there was no further hike in the travel fare, so travel was made affordable for common
man at the same time the additional services were also provided. This led to considerable
increase in revenues and tourism.
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Introduction of Diesel engines, Electric super fast trains, redesigning of coaches and
improved safety measures were undertaken which earned more revenues to the railways.

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The contracts undertaken by the railways for freight carriages and insurance are major of
Legal aspects.

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Introduction of electric engine helped in decreasing the pollution. Also Introduction of
Kulhars (cups made of mud) and ban on use of plastic cups in train also led to decrease in
pollution and gave financial help to potters.c

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c Increasing number of trains requires sufficient number of tracks and setting up of
Tracks requires huge amount of time and expenditure.
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c Over use of old tracks can lead to accidents.


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c High way Golden Quadrilateral Plan should be complemented.


c Implementation of freight and high speed corridors in southern region should be
Done, so as to balance Northern Rail freight corridors railway.
c Private sector investments should be allowed so that financial and operational
Burden is met.
c Increase in financial and commercial investment to attract FDI.
c PPT frame work should be developed for the manufacture of state of art rolling
Stock, locomotives, track equipment and signaling infrastructure coupled with
Technology transfer arrangements.
c Development of infrastructure for Inter odal connectivity.
c Rationalization of freight tariffs to simplify freight tariff slabs.
c Railways should resort to progressive suppression of railway
Infrastructure and operation and maintenance.
c Independent and transparent rail tariff authority should be created.
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c Special teams should be appointed to check ticket less traveling.
c 1ensor monitoring system should be implemented to check extra luggage
1arriage.
c 1ustomer services should be taken care of by improvement of resting rooms on
Stations.
c Third track should be made for better freight transport.
c Safety measures of the railway should be checked at regular intervals and should
Be updated with the latest technology.

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I ndian railways should aim at performance enhancement keeping in mind performance

maintenance. Increasing customer expectations and rapid technological advances with


considering customer focus should be the main motto of the Indian Railways, thus adding
support to the economic development of the country.
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