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Here's how Suresh Prabhu can reengineer the Railways

By Shreekant Sambrani
November 18, 2014 11:27 IST
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The railway minister knows that he has to tap resources outside the government, which is why he has announced a slew of direct investment opportunities.

RailwaysSuresh Prabhu knows that he has to tap resources outside the government, which is why he has announced a slew of direct investment opportunities. Yet smart and serious money will follow to an ailing organisation only when there is an assurance that its finances will be prudently managed

Suresh Prabhu, the new railway minister, described his charge as being 'the engine of growth'.

And rightly so, not just in India but the world over.

His to-do list -- enhanced safety, greater passenger amenities, faster movement and timely completion of projects -- is not very different from that of his umpteen predecessors.

He has promised greater delegation to zonal and divisional managers, and assured greater transparency and accountability.

All to the good, but as always, there is a fly in the ointment. Mr Prabhu knows only too well the Marathi adage that you can pretend all things but not money.

The tendency to provide more revenue-losing passenger services while holding down fares, at the cost of freight movement, may have accelerated in the last 10 years -- but it has been the bane of the railways for ever so long.

The railways run almost twice as many passenger trains daily as freight services, even though freight revenues are triple passenger revenues.

Never in the pink of financial health, they are now virtually bankrupt as a result of these populist policies. They have sought government bailouts almost on a regular basis.

Mr Prabhu knows that he has to tap resources outside the government, which is why he has announced a slew of direct investment opportunities.

He has already managed to create a buzz about his initiatives, thanks to his proven track record in his earlier assignments. Yet smart and serious money will follow to an ailing organisation only when there is an assurance that its finances will be prudently managed.

How do the railways measure up against these expectations? We know that they are bleeding -- and largely because of underpriced passenger services -- but we know no specifics that could lead to targeted correctives. Enterprises the world over place their faith in earnings before interest, taxes, depreciation and amortisation (Ebitda) as the gold standard for assessing the intrinsic viability of an activity. Except for their dozen-odd manufacturing facilities, the railways have no clue to this.

Remember, until the mid-1970s, they did not even use depreciation.

The first order of task for Mr Prabhu is, therefore, to undertake a complete process re-engineering that alone will yield the desired outcomes of transparency and accountability, as well as create investor confidence.

A newspaper column does not afford adequate space to dwell at length on what this involves, but it is possible to provide some bullet points.

Think corporate: it is a no-brainer that an enterprise that provides a vital commercial service to people and industry, has an annual turnover of over Rs 1.3 lakh crore (Rs 1.3 trillion) and employs 1.3 million people should be a corporate entity. And it must be a real corporation, unlike government telecommunication organisations that masquerade as companies but function as departments. Indian Railways is still a government department because that suits political interests.

Instead of wasting energy on a formal structure, Mr Prabhu could get the railways to function in a corporate manner. He has already signalled his intent for greater decentralisation and delegation. He should function as the chairman-chief executive, and the chief of the railway board as the chief operating officer. Together, they should exhort their juniors, who all sport managerial designations, to function as managers -- alert to their service responsibilities and responsible for delivering key results -- and not merely as government officers exercising control.

Restructure for result-orientation: despite the great concern for mounting losses, we do not really know what activity yields what. That is because the present structure of 17 zones and 68 divisions has each of these lower levels doing everything that the railways on the whole do.

Railways manage both fixed and moveable assets, the permanent way (tracks and stations/yards), as well as the rolling stock (carriages, wagons and locomotives). A desirable structure would place the entire permanent way under unified control and the zonal railways as owners of the rolling stock. The zones would earn traffic revenues and would in turn pay usage fees to the permanent way body on a “per train/km” and a “per halt at a station/yard” basis. These could be determined fairly accurately. Such a practice would enable the railways to determine Ebitda for each train, station and all the other facilities, which would in turn facilitate true management control.

This is already practised in air and road transport. Airlines and road lines own vehicles and provide transport. They pay usage fees to the owners of airports and roads. British Railways owns the track and stations, while various regional railways run the trains. Mr Prabhu has himself recently suggested that competing entities could provide last-mile delivery of electricity, using common power transmission facilities not owned by them. That eminent logic applies equally well to the railways. This radical restructuring could just be the big push the railways need to reform.

Subsidies to government account: As a commercial enterprise, the railways need to charge a cost-based tariff. But other considerations, such as building and operating non-viable lines in sensitive areas or manageable commuting costs, may mandate lower actual fares. In such cases, the structure recommended above will be able to put an exact price tag on such decisions. Logically, that should be to the government account, as is the domestic fuel subsidy. The railways will then have no alibi for their inefficiencies.

Mr Prabhu is the prime minister’s trusted sherpa and preferred interface with the business community. He has also demonstrated his abundant ability to apply his mind to technical and managerial issues. He has the opportunity now to combine these initial advantages with some out-of-the-box thinking to make him an unusually competent driver of this locomotive of growth.

Image: People travel in an overcrowded passenger train. Photograph: Ajay Verma/Reuters

Shreekant Sambrani taught at Indian Institute of Management, Ahmedabad, and helped set up Institute of Rural Management, Anand

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