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Turnaround strategy for Indian Railways Shivani Pal Mansi Baranwal Aditya Mukherjee.

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Presentation on theme: "Turnaround strategy for Indian Railways Shivani Pal Mansi Baranwal Aditya Mukherjee."— Presentation transcript:

1 Turnaround strategy for Indian Railways Shivani Pal Mansi Baranwal Aditya Mukherjee

2 Agenda Qrius team 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

3 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 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 123 Performance review Indicators show that Indian Railways’ current operations are unsustainable CAGR ~ 7% 1 1

4 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 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, 2 nd class accounts for >90% of passengers but is subsidized almost 100% Indicators show that Indian Railways’ current operations are unsustainable 2 2

5 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 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

6 Agenda Qrius team 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

7 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 scale Experience in managing huge number of employees, labor unions, vast infrastructure base and extremely large number of customers Well-trained and motivated work force New ideas from zonal officers were approved & implemented from the highest level e.g. branded train names, increasing wagon capacity Good worker relations Labor union supported increase in working hours for higher freight productivity During the super cyclone in Orissa, railway networks functioned while phone & mobiles faltered Balance between customer, market & social focus

8 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

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

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

11 Agenda Qrius team 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

12 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

13 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

14 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

15 Agenda Qrius team 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

16 Lack of management bandwidth can be targeted to increase Railways capacity to change and innovate Learning for Indian Railways on innovation and change Key Question Key solution Objective 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 12

17 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)

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

19 Agenda Qrius team 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

20 Basis of brand rejuvenation is pride in the excellence Railways provides given the low fares However, to do so it NEEDS A PRODUCT FOR 21 st 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

21 ‘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

22 A rough calculation suggests that general compartment has avg. Rs 70 subsidy per ticket Adding 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

23 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 2 nd class as opposed to 90% in general/ordinary 2 nd today This will keep total subsidy same as today, while generating added revenue of Rs 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

24 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

25 आपकी हर मंज़िल तक आपका साथी

26 Agenda Qrius team 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

27 Alternate revenue streams can be generated by charging premium for services that are a choice Net Profit (K Crore) 5.5 FY 10 ~ 0.2 Option 1 IR Additional revenue streams 5.8 ~ 0.1 Option 2FY 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

28 Net 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 13 Option 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

29 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 rail/notice/ _CmmlExterior2nd2011TN.p df 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

30 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:

31 Agenda Qrius team 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

32 If Railways charges a 10 paisa/km ‘development charge‘ from all passengers it’s budget deficit is met 2 nd 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 2 nd 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

33 Agenda Qrius team 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

34 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?

35 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?

36 Agenda Qrius team 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

37 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

38 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

39 Back up

40 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 (3/4 th thumb rule). Gross contribution of all passenger segments is believed to be in surplus * Category wise passenger traffic and fares

41 Typical Fares DistanceClassTotal fare (Rs.) 100 kmGeneralRs kmSleeper ClassRs kmAC 3 TierRs kmGeneralRs kmSleeper ClassRs kmAC Chair carRs kmAC 3 TierRs kmGeneralRs kmSleeper ClassRs kmAC 3 TierRs kmAC 2 TierRs. 1610


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