Restructuring Indian Railways The ritual of annual railway budget is over. Mamata Banerjee was loud and clear that social responsibility is more important than economic responsibility. Having said that, rest of her budget speech was focused on the election track in West Bengal rather than on the railway track. So additions of few trains and tinkering here & there, was all she could manage in spite of her busy schedule in Kolkata. Lalu Prasad Yadav had gone on overdrive in teaching IIMs on how to fudge performance. Mamata Banerjee does not consider performance as any obligation to the nation. She is focused on leveraging Railways for laying her political track in West Bengal. Mamata Banerjee has ruled out privatization of Railways but accepted Public Private Partnership. Considering the strategic importance of the railways to serve as life line of the nation, it is understandable not to privatize the same. However, there are other options to improve the overall management and give boost to Indian Railways. What we need is a mix of management structures of corporate sector and public sector to move out of government departmental structure & attitude. It is no doubt 4th largest railway net work in the world with more than 1.5 million employees. But look at large public sector companies like ONGC or, Oil Marketing Companies, GAIL, or BHEL, which are being managed efficiently in spite of political patronage. They are all strategically important to the nation. Today the pity is that not many know the real brains and top managers of Indian Railways. I felt bad to see a small interview of chairman of Railway Board with tongue in cheek answers to very routine questions relating to the budget (one can’t afford to displease the mercurial minister). We can not wish away the political patronage but we need to bring in CEO approach to this monolith. Vision 2020 and Strategic Leap: Vision 2020 calls for investment of Rs. 14 lakh crores in ten years or Rs. 1.4 lakh crores on annual basis. Every time one talks about an organizational leap it is inevitable to crystallize strategy, program and organization
structure to achieve the same. Vision 2020 document has brought out three important strategic components for growth over next decade. First component is segregation of dedicated double line corridors for passenger & freight, second is increasing the speeds from 130 to 160-200 kmph range, and third is introduction of four high speed bullet train services at 250-350 kmph range. Restructuring the Organization: If Vision 2020 has to be implemented, there would be need to change the organization structure for effective decision making, accountability and performance. Since independence we have not added any significant new routes and have just been building on the British legacy. What is now required is to create new infrastructure, new routes, new technologies and new means of funding the investments. Corporatization: The Railways should have a public sector holding company with the board of directors headed by an Executive Chairman. The mandate to the company should be to establish & operate the railways net work efficiently and generate surplus revenue for redeployment into existing and new projects. The government funding of new infrastructure projects through budget along with operational subsidies on certain sectors and activities have to be accepted for say first ten years till new model stabilizes. Fortunately for the railways, there is no problem of finding markets with ever growing population. They just have to be competitive with other alternative means of transportation through technology up gradation and passenger focus. The restructuring of Railways therefore should aim at focus on infrastructure development, technology development, and operational efficiency. The first two aspects are of strategic importance and therefore should be handled through Strategic Business Units. Weakness of the railways is in operational efficiency and therefore restructuring of the operations should aim at improving the same. Strategic Business Units:
The most significant approach to run the railways in future should involve separation of ownership & management of infrastructure & technology development and operations. In my opinion, the restructuring should be done to manage three strategic components of Vision 2020 separately with three Strategic Business Units (SBUs). This calls for setting up two SBUs to set up new and manage existing infrastructure for dedicated corridors of passengers and freight separately. The strategy to increase speed levels needs to be driven by separate SBU for modernization and technology up gradation of existing infrastructure of the net works. Logically, the same SBU can establish infrastructure for high speed bullet trains. This restructuring would give strategic identity and focus for implementation of the Vision 2020. Public Private Partnership: PPP has been accepted by railways for certain limited and selective aspects. To crystallize an option, let us look at road transport which is the most efficient mode today. The infrastructure of roads and highways net work is by and large owned and established by the government. But the rolling stock on the roads is owned by millions of individuals and thousands of companies in private as well as public sector. This little difference is an important driver of efficiency & productivity. Can we not adopt & adapt the same model suitably to rolling stock for railways? Own Your Wagon Scheme has been in operation in a very limited sense. I would like to suggest a separate subsidiary company “Indian Railways Rolling Stock Company” (IRRS), under the holding company, which would own the rolling stock, ferry the cargo & passengers and be the user of the railways network and infrastructure. IRRS should have the 99 year lease for use of the network with lease rentals to be paid to the respective SBUs for providing infrastructure and technology along with maintenance services. IRRS should therefore focus on only operations. SBUs for infrastructure & technology would be responsible for their respective activities at their own costs recovered through rentals & annual maintenance contracts (AMC) from IRRS. The IRRS should be the entity for partnership of Indian Railways with private companies & the public. It can raise finances by going public and
offering shareholding and long term bonds so that the rolling stock is indirectly owned by the millions of shareholders and thousands of corporate entities. IRRS should have only controlling interests through equity from the holding company for strategic reasons. The net result of this approach would enable the political establishment to focus on budgeting only for investments in infrastructure and technology on one hand and operational subsidy on the other hand. It is needless to say that the operations should be generating enough revenue to offset the expenditure and generate surplus. It is understandable that the decisions like passenger fares and freight rates have to be decided in larger public interest and therefore an element of selective subsidy can not be avoided. This approach will also take the pressure off the exchequer for funding resources for operations of the railways freeing the same for infrastructure development. This would also bring in substantial improvement in the customer orientation, operational efficiency and private sector participation in management of services. In this initiative, the control of the strategic assets would remain completely with the government and operations would be funded by the users resulting in true public private partnership initiative. Vijay M. Deshpande Corporate Advisor, Strategic Management Initiative, Pune February 26, 2010 Scroll down for my other blogs Or Click here www.strami.com