turnaround strategy for indian railways shivani pal mansi baranwal aditya mukherjee

Turnaround strategy for Indian Railways

Shivani PalMansi Baranwal

Aditya Mukherjee

Agenda

Qriusteam

1. Does Railways have a problem?

2. Has Railways tried to address these issues? And how?

3. Then why is Railways still facing problems?

4. Can the core constraints to implementation be weakened?

5. Rejuvenating brand IR & Ten-Rupee-Profit coaches

6. Alternate revenue streams for quicker monetization

7. The 10 paisa development charge

8. The Train Bazaar – opening a new product category

9. Summary and potential impact

Passenger business earnings haven’t grown significantly

considering inflation

The freight segment market share has declined in key

bulk commodities

Effective subsidy has doubled over the last 10

years*

• Decline in cement, POL, Iron & Steel largely due to challenges from road, pipeline and costal shipping

• Total losses incurred in the passenger business in 2009-10 is INR 20,000 Cr

• Nearly 90% of these losses were due to subsidy in the lower fare segments *

• Subsidy has increased keeping inflation in consideration

* Subsidy increased at average inflation rate of 8% over the last 10 years. Losses share percentage obtained from primary data

1 2 3

Performance review

1993-94 1994-95 2003-04 2004-05 2005-06

56.3

49.5

39.9 40.9 41.242.9 42.6

25.9 24.7 25.1

Cement POL2007-08 2008-09 2009-10

6524 6920 7246

19250

2187023420

Traffic Revenue

Indicators show that Indian Railways’ current operations are unsustainable

CAGR ~ 7%

1

Net deficit of around Rs 2,500 crore & operating ratio > 94%Expected to have a budget deficit of Rs 20,000 crore in 2012

This high subsidy has led to financial constraints

Thus only 13000 kms of new lines were added after independence losing the infrastructure edge India has over other Asian countries

Productivity of employees has stagnated Freight operations have not kept up with economy

•Network & employee productivity of Chinese Railways is more than double of Indian Railways

•This is mostly since IR has hired excess labor personnel

Productivity of employees has stagnated

•Roads account for 57% of freight as against 44% in US & 22% in China

•Maximum permissible axle loading is 22.5 tons as compared to 30, 32,5 and 37 in US, Australia and China

Freight operations have not kept up with economy

Most importantly, 2nd class accounts for >90% of passengers but is subsidized almost 100%

Indicators show that Indian Railways’ current operations are unsustainable 2

Productivity not keeping up with increase in effective subsidy• As compared with the increase in real wages of 108%, the increase in average productivity from 1982 to

1999 works out to 82 %

Strong labor unions and Govt. ‘model employer’ status mean that excess workers cannot be downsized• Pension outgo accounted for 10.5 paise out of every rupee earned by IR in 1998-99

All this leaves Railways with very little cash for investment to even raise capacity in profitable segments like freight (which are already running full capacity)

Effective subsidy is increasing because costs increase with inflation (reflected in pay commission wage rise) while prices static due to political compulsions

Four basic problems are causing the decline in performance

1

2

3

4

Agenda

Qriusteam










IR has deep core capabilities that allow it to maintain large operations despite low passenger fares

Good at day-to-day operations at an extremely large scaleExperience in managing huge number of employees, labor unions, vast infrastructure base and extremely large number of customers

Well-trained and motivated work forceNew ideas from zonal officers were approved & implemented from the highest level e.g. branded train names, increasing wagon capacity

Good worker relationsLabor union supported increase in working hours for higher freight productivityDuring the super cyclone in Orissa, railway networks functioned while phone & mobiles faltered

Balance between customer, market & social focus

1

2

3

4

An exemplary large public sector organization with strong social focus

Indian railways is the only railways in the world charging extremely subsidized amounts and still providing extensive network of passenger trains to each and every corner of the

country simultaneously ensuring quality of service & employment for 1.4 million people

• World's third largest railway network under a single management

• Transports >23 MM passengers and >2.5 MM tons of freight daily

• World’s second largest commercial employer (1.4 MM)

• IRCTC is the most popular ecommerce website in Asia, in terms of total transactions

SCALE OF OPERATIONS

• One of the cheapest railways in the world with lowest operating costs

• One of the lowest number of accidents per MM train kilometers – Japan 0.63, Germany 0.82, France 0.87, Italy 0.65 and India 0.44 (2003)

• Extremely effective disaster management – service resumed in 12 hours after 2006 terrorist attack on Mumbai suburban trains

OPERATING EFFICIENCY

• Mumbai’s Deccan Odyssey and Maharaja’s Express rated among world’s best 25 trains by US-based global rail travel society for being some of the “most luxurious”

WORLD CLASS LUXURY TRAINS

IR has continuously innovated in last 10 years to increase revenue 1

FREIGHT

• High speed dedicated freight corridors• Containerization for seamless transfer• Integrated logistics hubs• Private container trains• 24 hour loading-unloading facilities • Private investment for infrastructure dev.• Increase in axle load from 20.5 to 22.9

SPEED & CAPACITY

• Door-to-door service for bulk & non-bulk freight including road transport, loading & unloading

• Wagon leasing services• Single window booking & faxing of invoice to

destination• Commodity specific concessions

EASE OF USE

• Increased corrosion resistance & size of wagons• Decreased turn-around time & weight of

wagons• Online parcel & wagon tracking• Terminal, rake & crew management systems• Web based claim management system

TECHNOLOGY UPGRADE

IR has continuously innovated in last 10 years to increase revenue 2

PASSENGER

MONETIZATION

• Increase in average speed of trains & number of express trains

• Garib Raths (25% less fare than AC)• Special holiday trains with dynamic pricing• Special Railway Safety Fund• Extremely quick disaster management• Track modernization & track maintenance

SPEED, CAPACITY & SAFETY

• Reduction in fares for AC 1st & 2nd class, no increase in fares of other classes for past 10 years despite 6% inflation

• Internet booking & home delivery in 181 cities• Train enquiry system for running status, PNR status & seat

availability status• Unreserved ticketing system• Scheme of Frequent Travelers• Mechanized cleaning of stations & coaches

SERVICE QUALITY

ORGANIZATION STR & HR

• Trains named after brands• Advertisements on trains, tickets, inside

coaches, on stations, on website and IVR • Railway Land Development Authority -

development of vacant Railway Land for commercial use for the purpose of generating revenue by non-tariff measures

• Productivity linked bonus for employees• Training for officers in foreign institutes• Catering outsourced to spin off (creating

internal sub-organizations)• Restructuring zonal and divisional org• Reduction in manpower from 1.65 to 1.4 MN

Agenda

Qriusteam










IR has the same core constraints as most government organizations in India

- Cross subsidization leading to loss of paying customers- Subsidy increases with inflation

- Lack of incentives for productivity, higher than market wages- Labor union protest against many necessary changed

- Favoring PSUs and indigenous suppliers- Capacity issue (e.g. wagon procurement)- Higher expenditure

- Colonial style hiring, few class I officers thus low management bandwidth- Benefits of scale not attainable despite large workforce if project management unavailable

LOWER INCOME GROUPS CAN NOT SEE SUBSTANTIAL COST INCREASE

GOVT AS ‘MODEL EMPLOYER’ WITH STRONG LABOR UNIONS

SOCIALISM IN PROCUREMENT NORMS LACK OF MANAGEMENT BANDWIDTH

These leads to some recommendations targeting fundamental problems not being implemented

Four fundamental recommendations dealing directly with continued financial and operational weakness have not been implemented

• Organizational restructuring– Separation of roles into policy, regulatory and management functions– Cross functional leadership team to champion transformation

• Reducing staff costs through 20% reduction in workforce– Spinning off ancillary activities– VRS scheme, normal retirement

• Tariff rebalancing in line with elasticity of demand – Increasing passenger fares (maintain ratio of 1:9 between fares of II

class and AC I)– No real increase in freight rates

• Compensation from GOI for investment and losses made on services provided at Government behest

Lack of Management

bandwidth partly responsible

Govt. as ‘Model Employer’ and labor

union resistance

Seen as adverse to social welfare for poorer sections

This would reduce subsidy, again seen

as anti-poor

We have created an approach to determine which of these constraints can be changed

Perceived negative impact on social

welfare

Deviation from existing government norms

Leadership Bandwidth

Govt as ‘Ideal Hirer’

Higher prices for lower income groups

Socialism in procurement

* Harvey balls indicate potential opposition from the government

Reasons these constraints need to be addressed

As can be seen, the best chance of weakening a core constraint is ‘Lack of Management Bandwidth’

How can we judge if these constraints can be changed

•Quick fixes for instant monetization do not solve underlying sickness affecting railways•Sickness is caused by these 4 constraints that must be weakened for sustainable operations

There are three main factors strengthening these constraints:

Whether changing it will be perceived as having a negative welfare effect

Whether change will conflict with existing govt. norms

Whether the issue is politicized at present

Implement-ability zone

1

2

3

Agenda

Qriusteam










Lack of management bandwidth can be targeted to increase Railways capacity to change and innovate

Learning for Indian Railways on innovation and change

Key

Que

stion

Key

solu

tion

Obj

ectiv

e

Cultural change through internal organizational restructuring

What can Indian Railways learn from big multinationals on constant innovation and change ?

• To promote the role of idea generator, innovation sponsors and project champion in the organization

• Indian Railways could have a dedicated Innovation Board for

-For forming project teams for implementation

- Qualified officers designated as sponsor for formalizing lower level ideas

How can Indian Railways change its culture of passive idea generation and development ?

• To train and promote cadres from entry level specialist roles to generalist roles to enhance project management and build leadership

• Separation of sub-corporations including manufacturing, particularly packaged goods freight

• Cadre silos only at lower hierarchy levels; generalist profiles after mid manager levels

1 2

Proposed organizational restructuring for Indian Railways to make organization dynamic

Ministry of Railways

Public Sector undertakings

/Corporations etc

Railway Board Innovation Board

Entry level cadres

Zonal Railways Production units Other Units

General Manager (Engineering Services)

General Manager (Operations)

General Manager (Finances)

We feel this is the only constraint that can realistically be weakened as of now

Agenda

Qriusteam










Basis of brand rejuvenation is pride in the excellence Railways provides given the low fares

However, to do so it NEEDS A PRODUCT FOR 21st century that can provide the required ‘solid’, respectable service without being hobbled by an unsustainable subsidy

Railways is seen as a stodgy government organization that doesn’t innovate

•This is in spite of the fact that Railways has innovated significantly in last ten years

•Mass consumers are influenced by low service level in Passenger segment and newspaper reports

Railways has a perception of being unsatisfactory in sanitation and facilities•Expected, the unreserved class is highly loss-making so maintained badly, & other classes overpriced

Freight customers feel Railways is not market oriented or business friendly

•Mostly since freight is overpriced to subsidize low-income passengers

Why is the Railways brand suffering?Brand statement has to be based on actual

capabilities

Railways cannot change cross-subsidization and thus it will never provide service excellence at par with

the modern service economy

However, Railways does something incredible. It provides operations at a scale and cost that is

absolutely world-beating

It’s operational capability is remarkable and its workers genuinely motivated. They know they are a

part of nation-building

Thus, while Railways may not have service excellence, they are critical for millions of lives.

This should be the basis of rejuvenation

‘Indian poor’ is not a monolithic segment, 45% of households are Aspirers earning > Rs 7000 pm

It is important to recognize India’s poor are not a monolithic segment

Aspirer segment can & deserves to be upgraded from general compartment

India’s Aspirers are the new ‘aam admi’ and they want basic comfort and cleanliness

Willingness to pay can be driven by a promise to provide value for money

There is a market segment of 500 MN people who are poor, but are aspirational and want dignity – ‘Aspirers’ in Mckinsey pyramid – earning Rs 7,000-15,000/month

More than 80% of Aspirers have cell-phones

They seek professional positions, urbanization

Aspirer households are ~45% of India and will be so in 2020, Deprived will be ~30%

•Aspirers and Deprived are not differentiated by Railways offerings•90% of passengers travel in general & ordinary second class compartments•AC T3 & Sleeper overpriced to subsidize gen compartment, giving Aspirers little choice•Aspirers can afford to pay actual costs for transport, cleanliness, even AC, but they are very value conscious

The idea is to provide the best service possible for India’s ‘aam admi’ without subsidy.Air conditioned, clean coaches, both reserved and unreserved , with only Rs 10 profit/ticket

A rough calculation suggests that general compartment has avg. Rs 70 subsidy per ticketAdding Rs 50 for variable cost of AC & added cleanliness + Rs 10 profit would raise the average ticket

price by Rs 130. For example, for a 200 km ride, current general ticket price is ~Rs 50. This would become Rs 180 for 200 kms of travel

We feel this initiative can only succeed if it’s clear that the social aspect is maintained

Imagine an ‘aam admi’ making a purchase decision for upgrading his cell phone

The color phone is better than the black-white phone he has. But is it worth it? After all, such things are costly

Imagine if Nokia could assure him that they would make only Rs 10 profit on the phone. The upgrade is designed to give value for money. The decision then is easy

Nokia can’t do that easily. But Railways can make this kind of promise thus assuring customers they’re getting a good deal & increase willingness to buy

Aspirers form 45% of the popn., probably more than 60% of Railways customers

The branding statement of ‘Rs 10 profit’ will reduce political meddling in Pragriti fares

Thus, Pragriti coaches should form at least 20% of Railways capacity

It will usher in a new era and image of IR and be IR’s answer to economic progress

Pragriti Class: Ten-Rupee-Profit coaches; provide value-for-money, respectability & commitment

Doing so will radically change the image and finances for Indian Railways

•By 2020 there will >13 billion originating passengers in Railways•Railways should add capacity such that 20% travel in the Pragriti coaches and 70% travel in general/ordinary 2nd class as opposed to 90% in general/ordinary 2nd today•This will keep total subsidy same as today, while generating added revenue of Rs 46800 crore and profit of Rs 2600 crore

Pragriti coaches will go a long way in solving IR’s subsidy problem

This will be the basis of IR’s makeover to be relevant to a resurgent India

Can this be done?

We understand that Railways cannot remove any general compartment coaches to replace with a

more expensive option

However, Railways has to add capacity at >7% a year. This addition should be biased towards Pragriti

coaches such that 20% of Railways capacity in 6 years is Pragriti i.e. 40% of added capacity / yr

The real image problem Railways faces is because of poor conditions in General Compartment – IR has to understand this is because the aspirations

of India’s poor have changed

This ties into image in two ways:

The other big image issue is because of over-pricing of freight making IR seem inefficient when they actually aren’t – freight prices are kept high

to maintain subsidy

The idea of Pragriti Coaches is not to make money, but to change the capacity mix towards a more sustainable subsidy ratio allowing all of IR to

provide services at the desired level

This rejuvenation can be used for a branding campaign for IR

“Aapki har manzil tak aapka saathi”The idea is to focus on how IR plays a critical part in millions of Indians achieving their dreams

•IR does not provide service excellence per se, but it provides basic services at the lowest prices in the world

•This allows it to empower hundreds of millions of people across India to find work, study, do business, live life

•No other single organization in the world does this better than Indian Railways

•Thus, it is that empowerment that should represent Indian Railways

•The ads should show students, grass-root entrepreneurs, young professionals, doctors, nurses, teachers using Railways as a matter of course

•At the end, some statistic about IR’s impact should be shown

Why this focus? Example ad copy

A professional looking man helps a young man get a large sack into the general compartment

The man remembers how he started out as a trader of goods in his younger days, and similar train journeys

The man returns to his AC two tier cabin, smiling

Single stat showing number of people IR transports in a day shown against black background with punch-line

आपकी� हर मंज़ि�ल तकी आपकी� सा�थी�

Agenda

Qriusteam










Alternate revenue streams can be generated by charging premium for services that are a choice

2

4

6

8

10

12

Net Profit (K Crore)

5.5

FY 10

~ 0.2

Option 1

IR Additional revenue streams

5.8~ 0.1

Option 2 FY 13

Allowing seat selection in the online booking portal. This feature can be charged at Rs 25 which primary data suggests is within willingness to pay. Assuming 20% of those reserving online use this, additional revenue (almost wholly profit) of INR 210 crore

OPTION 1: Seat selection

Offer superior food and bed linen at Rs 20 extra. Non-linear value increase will tempt people towards the higher value-for-money option. If 10% of non-general compartment travelers use this option it will lead to increased profit of INR 140 crore

OPTION 2: Food & bed linen

Railways can introduce choices in providing basic utilities, in line with its social

objectives, while charging a premium

2

4

6

8

10

12Net Profit (K Crore)

5.5

FY 10

~ 0.2

Option 1

IR Additional revenue streams

5.99~ 0.14

Certain small modifications to coaches can lead to further revenue enhancement

Option 2

~ 0.15

FY 13Option 3

• Small vendor stalls in trains by clearing the space of one side berth in two or three coaches in a train

• High premiums can be charged since there is a captive passenger audience on trains and the snacks are not ‘essential utilities’

• Capital investment of less than INR 2 Lakh per train

• Assuming 20% of captive of passenger audience would buy snacks worth an average of INR 30, expected revenue receipt ~ INR 2100 Crore *

• This would translate into an additional profit of INR 105 Crore

OPTION 3: Small vendor stalls in trains

* Assuming 1000 passengers per long distance train

Additionally IR can speed up the process of getting revenues from station development and advertising

•Average reserved price for advertising space of 2000 sq ft (i.e. 4 bogey faces) on one rake is nearly INR 5 lakh per annum*

•At 8 bogey per train of advertising space, and only 10% space successfully rented, Railways should make ~ INR 120 crore

http://www.eastcoastrail.indianrailways.gov.in/eastcoastrail/notice/1315832270743_CmmlExterior2nd2011TN.pdf

•12000 passenger trains each with 4 out of 18 bogeys painted as hoardings

•Railways has 7083 stations , with 6 metros and 24 tier 1 and 2 cities.

•The non-metros will have a maximum of 20 commercial paying INR 0.5 lakhs: totalling to INR 52.8 crore

•Altogether maybe INR 8 Crore per month

•Sums to INR 96 crores a year

• Metros are 6 stations only. With an average of 40 commercial set ups per station, each paying INR 1.5 lakhs a month, we generate INR 43.2 crores from the metros

Advertising Commercial establishment/land development




1) Increasing capacity in crucial corridors, that IR is already doing

2) Making freight rates competitive, that cannot be done without non-freight ways to pay for the passenger segment subsidy

We have consciously avoided freight proposals, since increasing freight revenues depends crucially on:

Agenda

Qriusteam










If Railways charges a 10 paisa/km ‘development charge‘ from all passengers it’s budget deficit is met

2nd class passenger subsidy is too high, and other classes’ ticket prices are already overpriced. Can 2nd class prices be increased without a blatant price hike?

Given the scale of IR, no indirect method will make up for the rising loss from this subsidy

How can fare rationalization as recommended by Expert Group be carried out?

The Expert Group recommends ticket price of lowest to

highest class as 1:9

Doing so would require 2nd class fares

to have a higher percentage rise

This will be seen as anti-poor and is

deemed politically indefensible

However, a per km charge will accomplish the same since it will result in a higher percentage increase for lower classes

The idea is similar to the ‘education cess’ that is used so successfully to raise funds for SSA

The charge per km of 10 paise is low enough to have a chance of being politically defensible

With 9,03,465 million passenger km, in one stroke

it will create the 10,000 crores Railway Minister says

will be the budget deficit this year

1

2

Agenda

Qriusteam










The Train Bazaar – having trains where coaches are shops, visiting each station once a fortnight for a day

Indian villages commonly have a problem that longer-lasting goods e.g. utensils, plastics, textiles, electronics cannot sell in enough volumes to have a permanent retail outlet

Indian villages do not have volumes to support full-time retail outlets for non-FMCG

Lack of a distribution channel also inhibits manufacturing for domestic market

For these goods villagers have to travel to nearby towns where there is sufficient population for permanent shops

However a travelling shop that comes once a month is sustainable

How can Railways reclaim its position as a cultural force? Can it directly target some deep social need?

The Train Bazaar – having trains where coaches are shops, visiting each station once a fortnight for a day

While this will make only modest profits, it can kick-start a consumption revolution

• Railways by its very nature and route connects a large number of villages through which a travelling shop can travel

• A station is a well-understood point of connection with the outside world

•We assume that for each village the businesses renting the coaches pay Rs 1000 •This generates an annual revenue of Rs 126 crore•Profit generated will be almost nil

Consumables that may be bought once a year by a

family e.g.. Utensils, plastic buckets, textiles, even

furniture, farm equipment, electronics and fertilizers

•A Bazaar train will travel on existing routes stopping at each village for 2 pre-determined days once a month•This will cater to the ~50 households around there

How will it happen? What will be sold? Will it make money?

Agenda

Qriusteam










Summary of our recommendations

Ten-Rupee-Profit coaches

Railway innovation board

“Aapki har manzil tak aapka saathi” – Indian Railways

10 paisa development charge

Train Bazaar

Charging premium on increased choice

Potential impact of our recommendations

Renewed self-respect and appreciation from public

Organization more participatory yet geared towards innovation and change

Passenger revenues enhanced with low capital cost

Train retail opened with the possibility of sparking a rural consumption revolution

Total profits increased by more than 13,000 crores

Back up

• According to Director Operations, Centre for Railway Information Systems, 17 million passengers travel every day by IR, of which less than 1 million travel on reserved tickets*

• Category wise profit loss report shows losses in almost all classes(except AC 3 tier and AC chair car).

• However, allocation of common costs such as labor cost (50% of Railway’s total working expenses), track maintenance, control lines etc. is skewed against passenger segment (3/4th thumb rule). Gross contribution of all passenger segments is believed to be in surplus

* http://www.cips.org.in/public-sector-systems-government-innovations/documents/The_Unreserved_Ticketing_System_Of_Indian_Railways.pdf

Category wise passenger traffic and fares

http://www.cips.org.in/public-sector-systems-government-innovations/documents/The_Unreserved_Ticketing_System_Of_Indian_Railways.pdf

Typical Fares

Distance Class Total fare (Rs.)

100 km General Rs. 50

100 km Sleeper Class Rs. 120

100 km AC 3 Tier Rs. 230


500 km Sleeper Class Rs. 215

500 km AC Chair car Rs.450

500 km AC 3 Tier Rs 575


1500 km Sleeper Class Rs.425

1500 km AC 3 Tier Rs. 1165

1500 km AC 2 Tier Rs. 1610

turnaround strategy for indian railways shivani pal mansi baranwal aditya mukherjee

Documents

leaves railways

double of indian railways

high subsidy

capacity effective subsidy

china freight operations

average productivity

potential impact slide

average inflation rate