What Lalu couldn146;t do for Bihar

Railways became a part of India8217;s growth by redefining the problem 8212; from that of carrying too many people to that of transporting too little freight. Now it must change how it does business

The midst of the accolades accorded to Union Railway Minister Lalu Prasad Yadav, it is only natural that dissenting voices would be raised, questioning whether the boom in Indian Railways IR is sustainable and whether he is merely riding on the investments of his predecessors and the overall growth in the Indian economy. Is Lalu railroading IR into overusing its assets to illuminate his tenure at Rail Bhavan or is the turnaround more substantial and permanent?

The turnaround, as IR acknowledges, is driven by, one, increased axle loads on wagons, enabling it to carry more cargo on each wagon, two, reduction in wagon turnaround time, enabling them to be used more frequently and, three, selective reclassification of cargo, raising revenue realisation. IR has also increased the share of upper class passenger revenues and is building a surplus for the future. In sum, IR has utilised slack, increased efficiency and made prices market responsive 8212; just like private sector corporates in the recent past.

Is all this helped by the India growth story? Most certainly. Increasing wagon capacity and utilisation would not have helped unless economic growth had created the demand for transporting more bulk commodities like coal, iron ore, foodgrain and cement. Similarly, iron ore exporters could absorb tariff hikes because of booming international demand. But this does not detract from the turnaround story any more than it does for the rest of corporate India, for it happened only because the Railways responded. The news story is the adoption of a corporate approach in what was considered the most hidebound of public sector units PSU in India.

A PSU has no extrinsic motivation to react to market trends or improve efficiency. Its driving force has to be intrinsic; and a singular contribution of the railway minister seems to be in demanding performance and rekindling a sense of purpose. By redefining the problem of IR from that of carrying too many people to that of transporting too little freight, IR was made a full participant in India8217;s growth surge, rather than a burden on the system. To their credit, the Railway organisation has risen to the challenge instead of trying to stymie the change 8212; distinguishing it from the run-of-the-mill PSU.

More than the statistics, it8217;s this increasingly commercial approach that bodes well for the future. In IR, managerial accountability still seems to exist and managers appear competent to perform. Today8217;s tactical focus recognises the fixed nature of IR8217;s cost structure and concentrates on reducing unit cost by increasing both freight and passenger volume, a welcome application of marginal cost principles, though it is constrained by archaic accounting. But utilising slack can only take IR so far; beyond that it needs to make or foster investments in recapturing lost markets, in offering new services, in increasing track capacity and redesigning rolling stock.

The current freight boom is driven largely by public sector customers, coal and foodgrain, and relatively captive traffic from private iron-ore exporters. Freight is moving swiftly from a captive to a competitive market and just aggressive marketing and responsive pricing may not be enough. Container traffic and manufactured goods like hot rolled steel coils are high value traffic that can yield higher margins but for such traffic, IR must offer total transportation solutions to customers. It must partner such customers in designing future projects.

To quickly enhance track capacity, IR needs to move away from small, separate item-rate contracts, in sharp contrast to the modernising highway sector. It must adopt the turnkey approach of Konkan Rail, Delhi Metro and Rail Vikas Nigam Ltd RVNL and hopefully go even further, to BOT concessions. Private train operators can help bring in specialised rolling stock and compensate for IR8217;s weakness in marketing and increase utilisation of its fixed track assets, and, as in airports, catering, retail and budget hotels offer exciting sources for increasing non-fare income from passengers.

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To continue the turnaround, IR must thus substantially change how it does business. On paper, it seems to recognise this. It now claims to be in the 8216;business of transportation8217; and wants to encourage public private partnerships PPP. Unfortunately, its approach appears clumsy and not well thought through. Multi-modalism and PPP need specialist professional skills that IR does not yet have but appears reluctant to outsource. Indeed, starting private container services without a transparent track access policy appears impulsive, if not foolhardy.

Neither is there a mechanism to address the inevitable disputes that will arise. IR8217;s concession agreements could be much more transparent and effective. The argument for a rail regulator used to be the humdrum insulation of tariff setting from political exigencies. That role remains important to instill confidence that IR will continue its commercial approach, regardless of the identity of the rail minister; but another critical role in the future would be fair access to monopoly services and predictable and quick dispute resolution between IR and its private partners and between the private partners themselves.

Leveraging India8217;s growth, Indian Railways has seemingly transformed from yesterday8217;s mode of transport to an organisation holding its own in today8217;s competitive multi-modal transport market. But further progress will depend on its ability to radically alter its business practices, its accounting, and yes, accept an independent regulator, if it wants to leverage public private partnerships.

The writer is a senior fellow at the Centre for Policy Research