The Bailout Plan

Is the Indian Railways chugging towards a gargantuan bailout? Startling as it may sound, the question is within the realms of plausibility given the lumbering behemoth’s financials.
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<p> Consider this: The railways’ operating ratio is flashing red at 98.5 per cent. In simple terms, this means of every Rs 100, the country’s biggest employer earns Rs 98.5 flows out as its operational expenses. In the last five years, passenger km and freight output in terms of net tonne kilometre have grown at a meagre CAGR of 0.16 per cent and 2 per cent, respectively. The Seventh Pay Commission has hit the organisation hard with its salary bill and the pension liability is seeing a Rs 200 billion spike.</p>
<p>Meanwhile, long-distance rail haulage of coal- a key freight item for the railways- is diminishing. The roads have taken away the lucrative freight cargo and the current modal split has fallen to 30 per cent. The road sector has seen a significant investment over the years and the network is set to double in the next five years. Moreover, the much lucrative AC-class passenger segment is being weaned away by the airlines.</p>
<p>All the while, it has been piling up debt. The Indian Railways Finance Corporation (IRFC), its financing arm, has borrowed from different multilateral agencies such as the World Bank, the Japan International Cooperation Agency, Asian Development Bank and other financial institutions. The total debt burden of the railways is a whopping Rs 4 trillion. In fiscal 2017, its annual revenue of Rs 1.6 trillion almost equalled its expenses. This doesn’t give enough head room for sustained planned investment.</p>
<p>Overall, CRISIL Infrastructure Advisory believes that the future looks ominous. The question to ask in this context is how to put the Indian Railways on the right track? CRISIL have put together seven suggestions that can help it shape up.</p>
<p> <span style="font-weight: bold;">Diversify freight</span><br />
Traditionally, the railways have been doing business in bulk commodities where coal transport alone contributes half of its freight revenue. It needs to expand its freight basket to include non-bulk commodities such as construction material, horticulture, white goods and automobile. For example, in India, the railways’ share in automobile transport is less than 10 per cent whereas, in the US it is 70 per cent and in Europe 35 per cent. Various studies have indicated that the railways can increase this to 20 per cent which will enable it to earn a revenue of Rs 25 billion per annum, compared with Rs 1 billion now. The railways should set up at least two rail auto hubs like Walajabad. These hubs should be set up near Pune and Gurugram and should have adequate infrastructure and clear policies on the number of days of free storage, charges for demurrage or wharfage, etc. </p>
<p> <span style="font-weight: bold;">Pricing of passenger tickets, freight</span><br />
Allocation of tax payers’ money across projects or fare determination has to be based on the value for money. The railways’ passenger and freight businesses should be segregated for accounting purposes so that costs and revenues can be allocated to each service. Rail freight tariff in India is on an average 40 per cent more than China’s, while passenger tariff is on average 75 per cent cheaper. It is important to stop this cross-subsidisation and bring about fair pricing over a period. A pricing based on achieving certain operational parameters and a system which takes into account customer feedback can also be envisaged.</p>
<p> <span style="font-weight: bold;">Boost parcel business via technology, partnerships</span><br />
The railways need to provide reliable end-to-end connectivity like road transport. In India, a truck travels about 300 km a day. In comparison, a freight train runs 550 km. Clearly, rail transport is faster and cheaper and hence, has an edge over the road. In order to tap this potential, the railways need to offer an end-to-end service for parcel cargo and non-bulk cargo by tying up with logistics service providers. For example, in order to enhance the parcel or e-commerce business, it can partner with the postal department. However, the business would require investment in technology to boost efficiency in booking, handling and tracking parcels. This will ensure service predictability for customers and partners. The railways need to leverage its existing IT systems such as parcel tracking app Pluto and freight monitoring app Parichalaan.</p>
<p> It must think of itself as a part of a supply chain, rather than a stand-alone competitor. It must seek partnerships with air, road and marine transporters, and with traffic aggregators that can yield better returns. This is possible through transparent contracts, even as it remains a government entity.</p>
<p> <span style="font-weight: bold;">Use resources carefully</span><br />
The railways runs 125 hospitals, 600 polyclinics, 168 schools and other social ventures, including townships. The time has come for a careful evaluation of efficiently channeling its scarce resources. Also, it should monetise some of its vast land holdings.</p>
<p> <span style="font-weight: bold;">Focus on freight corridor</span><br />
The pace of highway construction has accelerated in the past four years. The Union Ministry for Road, Transport and Highways wants to expand the network of highways in the country to 200,000 km. This will have an implication for the railways’ freight income. If it has to stem the revenue loss to roads, the railways should operationalise the two freight corridors, viz., Eastern and the Western Dedicated Freight Corridor urgently and fast-track the implementation of the others. Also, it needs to decongest routes and lay new tracks on a priority basis. Some of the basic aspects such as the availability of wagons and the investment to procure them are given a miss. This is beginning to hurt the railways now.</p>
<p> <span style="font-weight: bold;">Boost revenue outside fares</span><br />
The non-fare revenue of the railways is a minuscule portion of its overall revenue now. This share should increase to 20 per cent over a period of time, in line with global standards. One of the areas that can be targeted is advertising through rail display network and make available on-train entertainment. As per a study by its infrastructure consultancy arm RITES, leveraging the railways’ 20 million daily passengers itself has an advertising revenue potential of Rs 100 billion. Currently, the revenue it garners through this route is mere Rs 3 billion.</p>
<p> <span style="font-weight: bold;">Improve the quality of service</span><br />
Passengers buying second class tickets form the biggest chunk of customers for the railways. About 60 per cent of the passenger revenue comes from the reserved class passengers. The railways can offer them refurbished station facilities, punctuality and better in-coach facilities. Predictability of service and the availability of reserved tickets are the key concern of a common commuter. There is enough empirical evidence to suggest people are willing to pay if they get value. </p>
<p>CRISIL believes that these are the initial steps that will help the railways improve its profitability. It can avoid being another drain on the exchequer only by willingly going for such a metamorphosis.</p>
<p> <span style="font-weight: bold;">Jagannarayan Padmanabhan, Director and Practice Lead-Transport and Logistics, CRISIL Infrastructure Advisory.</span></p>