Report Re-imagining Railways Yes Bank - Re-imagining Railways.… · Indian Railways, the national carrier of India, serves millions of travelers across the country every day, thereby

Knowledge Partner

Re-imaginingRailwaysGiving a New Life to

the Lifeline of the Nation

AuthorsStrategic Initiatives & Government Advisory (SIGA), YES BANK &Corporate Finance, YES BANK

YEAR December 2012

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TITLE Re-imagining Railways: Giving a New Life to the Lifeline of the Nation

(i)

Indian Railways has played a critical and historical role in weaving our huge country into a nation. Its network of over 64,000 route-kms has integrated markets and connected communities over widely spread out geographies across the length and breadth of the country. It plays a pivotal role in development and operation of infrastructure sectors such as coal, power, steel, cement, and other critical sectors like fertilizers.

Our rapidly growing economy will offer promising possibilities for growth in future. However, such growth will not be automatic and will be attained only if Railways approach the task with a carefully crafted and meticulously executed plan.

ASSOCHAM welcomes the recent policy initiatives taken by the Government of India to encourage and attract private investments in Indian Railways. ASSOCHAM is organizing an International Conference 'Rail @ 2020: Public–Private Partnership'. ASSOCHAM along with YES BANK has come out with a study on the subject and I hope this study will be useful for all the stakeholders of Rail Sector and help in identifying newer avenues for the much needed private sector investment in this crucial sector.

Best wishes,

Rajkumar Dhoot, MP President

MESSAGE

(iii)

Indian Railways, the national carrier of India, serves millions of travelers across the country every day,

thereby acting as a very important enabler for socio-economic linkage. As the fourth largest railway

network in the world, the Indian Railways plays a very important role in connecting the vast Indian

subcontinent. However, the 160-year old network now needs a new vision to transform it technologically

and functionally with superior service, the highest levels of safety measures and efficiencies and at the

same time, become a vehicle of inclusive development.

The role of the Indian Railways has expanded from primarily being a carrier of masses and goods to a niche

tourism vehicle and also as the means to bridge connectivity to remote and backward areas through

socially desirable rail connectivity schemes to foster growth. The modernization of the Indian Railways calls

for an investment of around INR 8,39,140 cr in the next five years as per the Ministry of Railways, of which

INR 2,29,024 cr is expected to be raised through Public Private Partnership (PPP). However, no investment

through this route has materialized till date.

While authorities realize the importance of PPP, the Indian Railways is yet to come up with an effective PPP

policy. PPP is an understanding between two parties and can be structured to fit in the requirements of

various projects. PPP essentially brings in the credit line and investment opportunities for the investors

within the ambit of the Government's requirement.

The Cabinet Committee on Infrastructure (CCI) has recently approved a proposal from Ministry of Railways

for a policy framework for private participation in rail connectivity and capacity augmentation projects. The

policy would provide much-needed impetus to building of critical missing links in the railway network and

evacuation from ports, mines and large industrial units. The proposed policy framework should be able to

encourage speedy execution of rail connectivity projects and thereby generate both direct and indirect

employment, besides spurring growth of freight-intensive industries, leading to overall economic growth of

the country.

In the light of the foregoing, I am pleased to present the ASSOCHAM - YES BANK Knowledge Report

'Re-imagining Railways' that outlines the future roadmap for transforming the Indian Railways through a

comprehensive development policy with a future outlook of 20 years supported by financial plans and

policies that integrate sustainable PPP models into future development.

I am confident that the contents of the knowledge report will provide important insights to policy makers in

achieving the transformational vision set forth for the Indian Railways.

FOREWORD

(v)

Thank You.

Sincerely,

Rana KapoorFounder & CEO, YES BANK &Senior Vice President, ASSOCHAM

World-class infrastructure is the key to a globally competitive economy and India's objective of sustained double digit growth can only be achieved through a quantum growth in the infrastructure sector. As the backbone of transport infrastructure in the country, the Indian Railways have stepped up their investment efforts to meet the growing needs of the economy.

The Indian Railways envisions towards becoming a vehicle of inclusive growth by providing efficient, affordable, customer-focussed and environmentally sustainable transport solutions. In this endeavour, Government of India has been supporting Public Private Partnership projects through number of policy initiatives.

ASSOCHAM is organizing International Conference 'Rail @ 2020: Public–Private Partnership'. ASSOCHAM along with YES BANK has come out a study on the subject. I hope this study will be useful for the Government agencies, policy makers, industry analysts, private sector investors and other stakeholders in this important sector.

Best wishes,

D S Rawat(Secretary General)

MESSAGE

(vii)

C O N T E N T S

Chapter 1: Overview of Indian Railways 1

Chapter 2: Modernization of the largest carrier in India 7

Chapter 3: Sustainability and Economics of Railways 15

Chapter 4: Railways as a vehicle of Inclusive Development and 27National Integration

1.1 Introduction 3

1.2 International outlook 4

1.3 Commercialization Opportunities 5

2.1 Passenger safety and comfort 9

2.2 Roll as an economic instrument: Bulk carrier and tourism enabler 12

3.1 Projected investment requirement: Capacity building and 17

technological upgradation

3.2 Financing feasibility 20

3.3 PPP: An important enabler towards a sustainable growth trajectory 21

4.1 Social Sustainability: Reducing carbon footprints 29

4.2 Transforming the quality of services 31

(ix)

Overview of Indian Railways

Chapter 1

3Re-imagining Railways: Giving A New Life to The Lifeline of The Nation

1.1 Introduction

Indian Railways has proved itself as a front-runner in terms of the development of integrated

transport system all over the country, used extensively for passenger and freight transfer. With

thousands of railway stations across the country, the Indian Railways network is the most

affordable, convenient and well-connected network. The Indian Railways has a total network

of about 64,000 kms (route kms), spread across 8,000 stations.

Railways were first introduced to India in 1853 - running from Mumbai to Thane. In 1951 the

rail systems were nationalized as one unit, the Indian Railways (IR), becoming one of the

largest networks in the world. Indian Railways operates both long distance and suburban rail

systems on a multi-gauge network of broad, metre and narrow gauges. Indian Railways owns

locomotive and coach production facilities at several places in India and are assigned codes

identifying their gauge, kind of power and type of operation. The Indian Railways is divided

into 17 Zones, each headed by a General Manager. The Zonal Railways are further divided into

smaller operating units called Divisions.

Currently, Indian Railways is the fourth largest rail network in the world. Indian Railways has

attracted significant attention from overseas players recently due to its successful turnaround

to profitability. In 2007–08, its cash surplus before dividend and net revenue amounted to

about USD 6.17 bn and USD 4.5 bn, respectively. As a result, Indian Railways ranked higher

than many fortune 500 companies.

The prime mover of the nation also has the distinction of being the largest railway system in

Asia. Even as the national carrier operates more than 11,000 trains per day of which 7,000 are

passenger trains, it plays a critical role in catalyzing the pace of economic development and

continues to be an integral part of the growth engine of the country.

Overview of Indian Railways

As highlighted in the introduction, Indian Railways is

currently the fourth largest rail network in the world

on the basis of railway track network coverage. As

depicted in exhibit 1, only the United States, Russia

and China have a rail network larger then India.

Though only a minor quantitative difference exists with

China, there is a stark contrast in the quality of services

offered and provisioning of safety and comfort. A case

study provided in exhibit 2, comparing Indian Railways

to the railway system in China supports the claim

made above.


1.2 International outlook Exhibit 1: Comparison of India's rail network with other countries (as of 2010)

Countries Networklength (kms)

Number ofemloyees

United States

Russia

China

India

Canada

Germany

France

South Africa

Japan

Australia

2,26,706

84,158

63,637

63,327

57,042

33,897

29,488

24,487

20,050

9,639

1,87,000

11,28,000

20,67,000

14,06,000

34,000

2,31,000

1,66,000

36,000

1,32,000

13,000

Source: www.ibef.org

The sector had its share of financial difficulties in the 1990s, which hampered its growth and there were

concerns raised on its viability as the transport services in the future. This was in large part due to the

tradition of seeing railways as an essential public service, the usage of which cannot be denied even to

those unable to pay.

Under a tariff regime, where freight services continually subsidized passenger services and with the

railways losing freight traffic to the roads steadily, a crisis was always expected. However, the Indian

Railways has staged a dramatic turnaround in recent years. The railway's renaissance has been engineered

by simple entrepreneurial practices, which have evoked the admiration of internationally renowned

institutions and companies alike. In a marked departure from its legacy, the focus on capacity utilization,

reduction in unit costs, and improvement in quality of service has yielded remarkable results.

The Railways achieved the declared target of INR 20,000 cr surplus revenue in the financial year 2006-07.

The revenues were on an all time high and are still increasing. Modernization, safety and security of

passengers, replacement and renewal of assets, track renewal, improvement in passenger amenities,

reduced expenditure, increase in productivity and reduction in operating ratio, computerization of railway

systems, induction of new technologies for signaling and telecom and prevention of leakages of revenue

have been the salient features of the overall development of the Indian Railways.

However, the current financials have again shown a dip in the surplus of the railways to the tune of INR

4,457 cr in 2008-09 from INR 11,449 cr in 2007-08. In 2009-10, alarmingly the surplus dipped to INR one cr.

Though it has now improved to INR 5,358 cr, it clearly needs an overhauling and strategic planning to draw

the vision for the Indian Railways.

However, despite the lacunae in the operation of the Indian Railways in comparison to other countries,

there are some positives which cannot be ignored. These are as follows:

Indian Railways employs the second largest workforce in the world to run the lifeline of Indian

transport.

In terms of cost of transport, Indian Railways still remains the cheapest mode of transport in India.

When compared to any other countries, Indian Railways offers the cheapest ticket travel for a

journey.

It remains one of the biggest owned railways under Government control in the world.

Unlike other countries such as Germany and Japan, Indian trains undertake one of the longest

journeys that stretch to days together. Although the Russian line of around 5,000 miles remains the

longest running train in distance terms.

As part of its long-term strategy towards organizational reforms and restructuring, the Indian Railways (IR)

has made serious attempts to induct professionalism into their stream and divest its peripheral areas of

operation connected to its core business of transport. The marketing wing of the IR namely the Indian

ü

ü

ü

ü

1.3 Commercialization Opportunities


The first Chinese Railway train was operated in 1876, from Shanghai to Woosung (15 miles) nearly a quarter of a century

after the first train in India was run in April 1853 between Bori Bunder and Thane (21miles). In 1945, China had 27,000

km of rail of track. In 1947, when India got independence, India had 53,596 Route kms. of track. Overall, China had just

about ½ the route kms of India in the mid- 1940s and that too for a much larger area.

Chinese Railways today has 78,000 route kms, overtaking India sometime in the mid 1990s making only the rail networks

in the USA and Russia larger in size. The total track length is 1,54,600 route kms. By contrast Indian Railways has

stagnated at 63,327 route kms. of network.

The Indian Railways has suffered from the same neglect and apathy towards creating a solid foundation of

infrastructure, as our roads, power, irrigation, airports. As of 2007, Chinese Railway owned about 5,78,000 freight

wagons, 44,000 coaches and 18,300 locomotives. India had 2,25,000 freight wagons, 45,000 passenger coaches and

8,300 locomotives. This vast difference in the number of freight wagons and locomotives explains why Indian Railways

carries less than a quarter, ~22%, of the freight carried by the Chinese Railways.

In 1950 Indian Railways carried 44 bn freight tonne km, against 39 bn in the case of Chinese Railways. Last year, India

moved 750 mn MT of freight last year while China moved 4.5 times that i.e. 3,300 mn MT of freight. On a global basis,

China's rail transport volume is one of the world's largest, having 6% of the world's operating railways, and carrying 25%

of the world's total railway workload.

China regularly runs heavy-haul freight transportation speed limit to 120 km/h. The highest speed notched up for a

freight train, on the Indian Railways is 100 km/h (62 mph) for a 4,700 metric tonne load.

Source: http://streamlinesupplychain.wordpress.com/2008/12/14/chinese-railways-versus-indian-railways/

Exhibit 2: Comparing Indian Railways with China


Railway Catering & Tourism Corporation Ltd (IRCTC) is currently working on certain policies, on

accommodating private parties from the travel trade fraternity to participate in their joint ventures to

promote tourism in the country. These moves and policies shows to a large extent that the railway

authorities have decided to make their presence felt in the tourism scenario as the largest passenger

transport company of the country and strengthen their market presence through commercialization.

With the IRCTC pushing electronic booking of tickets and scores of online travel portals entering the

business, the share of tickets sold online in the total ticket revenues of the railways has increased to more

than 30%. All the offers that were given on airline tickets are now being tried on railway tickets also. For

instance, various consumer durables companies are now trying to push vouchers to rail tickets as well.

According to the JuxtConsult study, only 9% of the 35.09 mn internet users buy products online as most of

them do not have credit cards or do not trust the medium. Hence, the true potential which can be achieved

through the commercialization of railways has not been attained and there is still more that can be

leveraged by commercializing railways.

Commercialization of Railways has been limited to a few sectors like the food provision in specific lines or

charging the passengers the true fare in select luxury trains (mainly tourism focused trains). Though the

Vision Paper of Railways and the Annual Report has hinted at commercialization (fee based structure for

the facilities provided), the Railways have not been able to implement it on ground, with the exception of a

few lines/ routes.

A few other initiatives have been the commercial use of land from its 4.59 lakh hectares of land bank, which

may not be required by the railways for its immediate future use. Through an amendment to the Railways

Act, 1989, Rail Land Development Authority (RLDA), under the Ministry of Railways has been constituted on

November 1, 2006 to undertake all tasks related to commercial development on railway land/air-space

under the control of Ministry of Railways. So far, 135 sites have been entrusted to the Authority for

Commercial Development.

While significant commercialization has not been done in other services, for railways, commercialization

has remained akin to privatization. As privatization of various services like safety measures, onboard

communication facilities and signaling would have forced this carrier to charge the customers commercial

rates, this was one aspect that was never mooted significantly.

Modernization of the largest carrier in India

Chapter 2


2.1 Passenger safety and comfort

India is lacking in investments in the railways infrastructure. There is an urgent need to enhance capacity st

and modernize the Indian Railways to meet the country's growing social aspirations in the 21 century and

improve the contribution of railways to the total GDP by at least 1.5% to 2%.

Passenger safety and comfort is closely linked to modernization of the railways in India. The only attempt

on the sake of modernization that has taken place in the past has been in the form of introduction of new

train routes without any significant improvement in the quality of services being provided by the railways.

Modernization of railways requires additional funds and these have not been sufficient in the recent past

to allow for significant upgradation of rail infrastructure of the country. The graph drawn below highlights

the paucity of funds currently being faced by the Indian Railways.

Modernization of the largest carrier in India

Exhibit 3: Financial performance of Indian Railways

-20000

0

20000

40000

60000

80000

100000

120000

19

80

-81

19

90

-91

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

Gross traffic receipt

Working Expenses

Surplus

Fin

an

cia

l P

erf

orm

an

ce

in

IN

R c

r

Source: Economic Survey of India (Various Years)


The graph clearly demonstrates that the surplus available with the railways has not been substantial to be

able to sustain modernization programmes of the railways. Infact the surplus available for the railways has

declined substantially post 2008-09.

The gross traffic receipts have been increasing steadily but the working expenses have also been increasing

on a similar pace along with increase in dividend payouts. Other reasons behind the paucity of funds being

faced by the Indian Railways include:

Slow growth of freight business

Decrease in passenger traffic

Increase in fuel prices (It has inflated its expenses by approximately INR 1,000 cr)

Reduced investment by private freight carriers

According to the report of the Expert Group for Modernization of Indian Railways, an investment of INR

8,39,000 cr is required during the twelfth five year plan, which includes INR 3,96,000 cr of modernization

plan investment recommended by the group. It is a quantum jump from investment levels of INR 2,03,000

cr in the eleventh five year plan and INR 84,000 cr in the tenth five year plan. The strategy as identified by

the above group can be understood from the table below:

•

•

•

•

Exhibit 4: Focus areas to drive modernization in Indian Railways

Core Assets 1.0 Track and Bridges Signaling

Revenue Models

Enablers

Resources

PPS

ICT

Funding

Land

Source: Report of the Expert Group for Modernization of Indian Railways

Rolling Sto kc Stations & Terminals

Dedicated Freight Corridors High Speed Trains

Indigenous Development

Human Resource

Safety

15.0 Organization

Exhibit 4 clearly highlights that safety standards cannot be achieved without modernization, as safety and

modernization are two sides of the same coin. At the same time, modernization cannot take place without

financial resources and professionalization of manpower. Some of the safety measures which are

indispensable and need to be integrated in the Indian Railways have been highlighted in the following

paragraphs.

The five focus areas which would need immediate attention from the perspective of safety aspect are

tracks, bridges, signaling & telecommunication, rolling stock and station and freight terminals.

Projects Review of existing and proposed Projects


Passenger comfort is another crucial aspect of modernization for the railways. Indian Railways currently has

more than 8,000 stations and enhancing the comfort level requires improved availability of amenities like

waiting halls, benches, adequate lighting, drinking water, toilets and proper platform services. Some of the

other user friendly measures include installation of escalators, provision of regional meals at nominal

prices, book a meal, neat and clean waiting areas available on the basis of additional charge, introduction

of coin/currency operated ticket vending machines as a pilot project.

Maintaining hygiene and cleanliness is a very specialized activity which comes under the core area of

house-keeping. Indian Railways is duty bound to provide high standards in both, as this is giving a bad name

to the otherwise efficient rail system.

India Railways should come alive to its social responsibility and additional services for differently abled

persons. The railways can take the task of manufacturing coaches with earmarked areas for these people

and also provide the necessary toilet facilities.

High speed trains are becoming an indispensable part of the rail network existing in different countries. In

some countries of Europe and Japan, railways are looked at supplementing the air operations and not

complementary to it as in the case of India. High speed trains enhance the level of comfort especially in the

case of busy routes. The concept of high speed trains is gaining traction in the Indian context and

Tracks and Bridges - With almost 80% of the traffic carried on 40% of the rail network, the high density network (HDN)

routes are over-saturated and there is a crying need to upgrade and expand capacity to reduce congestion, provide

time for maintenance and improve productivity and safety. This would include progressive shift to flash butt

technology for welding of rails, progressive use of 60 kg rails instead of 52 kg, provision of thick web switches at

points & crossings, mechanized maintenance with the latest track machines and increased frequency of ultrasonic

testing of tracks.

Signaling Systems - Signaling system on Indian Railways need to be modernized with the provisioning of advanced

technological features. These include panel/route relay interlocking, interlocking of crossing gates in addition to the

those already interlocked, complete track circuiting at identified stations, installation of axle counters at 3000 more

stations and provision of isolation at the remaining stations. One of the significant advancement would be the

provisioning of Train Protection & Warning System (TPWS), which ensures automatic application of brakes whenever

a driver over-shoots a signal at danger, thereby eliminating chances of collision of trains.

Modernization of rolling stock - upgradation of coaches including EMU coaches, locomotives and wagons will be one

of the key areas of modernization during the next few years for improving safety and convenience & comfort of

passengers.

Stations & Freight Terminals - Stations and Freight Terminals are our business centres. Indian Railways have often

drawn flak for not providing an enabling ambience to these business centers which are used by customers. Surveys

and feasibility studies for developing new coaching terminals need to be undertaken.

Source: Budget Speech of the Honorable Union Railways Minister, 2012

Exhibit 5: Achieving safety through modernization


prefeasibility studies have been successfully completed in six corridors as on March 31, 2012. One more

corridor to be studied this year is Delhi-Jaipur-Ajmer-Jodhpur. Study of Pune-Mumbai-Ahmedabad corridor

has been completed and work is on finalization of financing of this project. Government of Kerala is also

pursuing a high speed corridor between Thiruvananthapuram to Kasargod. One plaguing issue with the high

speed corridor is that they are extremely capital intensive and adequate resources need to raised through

innovative funding mechanisms.

Freight is one of the major sources of income for Indian Railways. Freight is paid by the customer at a

railway station (loading point) where a customer books some goods for transporting to other station

through railways.

The graph below shows the trend in gross traffic receipts of the railways earned from transportation of

goods. The transport of goods by railways has a higher contribution to the gross traffic receipts as

compared to the passenger coaching.

2.2 Roll as an economic instrument: Bulk carrier and tourism enabler

0

20000

40000

60000

80000

100000

120000

Gross traffic receipts

Passenger coaching

Goods

1980-81

1990-91

2001-02

2007-08

2008-09

2009-10

2010-11

2011-12

Exhibit 6: Financial performance of Indian Railways (in INR cr)

Source: Economic Survey (Various Years)

Passenger earnings formed 27.19% of the gross earnings, of which 6.95% was from suburban services,

75.61% from express long distance and 17.44% from ordinary short distance traffic. Bulk freight like coal,

ores, iron & steel, cement, food grains, fertilizers, POL products, limestone, dolomite, stones other than

marble, salt and sugar contributed 87.8% of the total goods.


Tabular representation of revenue earning goods traffic on Indian Railways is given in Exhibit 7. This table

clearly highlights that contribution of coal to total revenues originating from freight traffic is the highest

followed by iron ores, food grains, cement, fertilizers and other goods.

Exhibit 7: Revenue earning goods traffic on Indian Railways (bn tonne-km)

Commodity 1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2006-07 2007-08 2008-09 2009-10a 2010-11Pa

Source: Economic Survey (Various Issues)

1 2 3 4 5 6 7 8 9 10 11 12

1. Coal 11.3 20.5 27.8 36.4 85.9 133.4 191.5 208.5 230.1 247 268.3

2. Raw materials for Steel

Plants except NA 2 2.7 4.3 7.5 13.5 16.9 7.9 7.5 8.9 9.8

iron ore

3. Pig iron & finished steel

i) steel plants NA 3.3 6.2 8.6 11.6 12.1 22.4 21.2 22.2 25.4 24.9

ii) from other NA NA NA NA NA NA NA 3.8 4.7 6.1 7.4points

iii) Total NA NA NA NA NA NA NA 25.1 27 31.5 32.2

4. Iron ore

i) for export NA NA 5.5 7.3 7.5 7.9 19.9 27.6 21.9 25 15.5

ii) for steel plants NA NA NA NA NA NA NA 10.8 10.1 10 9.6

iii) for other NA NA NA NA NA NA NA 15.7 18.8 19 21.2

domestic users

iv) Total NA NA NA NA NA NA NA 54.1 50.8 54 46.4

5. Cement NA 2.5 7 7.2 18.9 24.9 41.1 43.2 46.5 53.8 57

6. Foodgrains 4 9.6 14.5 24.3 35.6 33.1 47.9 46.9 45.6 50.3 52

7. Fertilizers NA NA 3.8 8.9 17.3 23 25.5 25.8 33.1 36.6 40.7

8. POL NA 2.6 5.3 11.7 15.1 19.9 24.7 23.4 24 24.9 26.1

9. Container Service

i) Domestic NA NA NA NA NA NA NA 4.8 9.7 12.7 13.8

Container

ii) EXIM Containers NA NA NA NA NA NA NA 18.3 28.4 31.6 27.2

iii) Total NA NA NA NA NA NA NA 23.1 38.1 44.3 41

10. Balance 22.3 31.9 37.9 39.1 36.4 44.5 91.2 63.5 48.8 49.5 52.3(other goods)

11. Total revenue 37.6 72.3 110.7 147.7 235.8 312.4 481 521.4 551.5 600.6 625.7

earning freight

traffic


As discussed above, a substantial portion of the receipts also comes from passenger traffic. Railways have

come a long way from the fastest means of transport to ferry general passengers and goods long distance.

While it is still the most affordable cross country carrier in India, it can also be given a makeover of a luxury

carrier for tourists, given that it offers a comfortable journey. One of the largest passenger train service in

the world, the railways offer a variety of dedicated luxury trains like The Palace on Wheels for Rajasthan,

The Deccan Odyssey of Maharashtra, Royal Rajasthan on Wheels, The Golden Chariot dedicated to South

India. Also the toy trains maintained by railways are a beautiful attraction in the hilly states of India. The

ride on the train with a 4,500 kilometers track chugs through the popular hill stations of the country like

Shimla, Darjeeling, Ooty and Matheran. Down south, railways offer wonderful trip around the Nilgiris. The

journey through the tea and coffee plantations, into the dense forests and up to the mountains offers the

humming insects and the chirping birds simultaneously. Deep ravines and the cascading green slopes come

as bonuses to the tourists of the Indian Railways.

While Indian hospitality is evident in the offerings made by the railways, nonetheless these are few and do

not cater completely to the budding upper middle class. While railways currently cater to all strata of

people in terms of being a passenger carrier, it also need to look into specific needs of luxury tourism to

include more options apart from the super luxury trains mentioned above.

Sustainability and Economics of Railways

Chapter 3


3.1 Projected investment requirement: Capacity building and technological upgradation

Investment need

The Planning Commission's Approach Paper for the twelfth five year plan outlines the

objective of the 'faster, sustainable and more inclusive growth'. The Approach Paper further

stresses the 'urgent need of modernization' of the Indian Railway network and suggests that it

should be accorded the top priority in the twelfth plan period.

The High Level Safety Review Committee headed by Dr. Anil Kakodkar carried out a critical

overview of the function of Indian Railways in 2011-12. In its report, the committee points out

that the 'present environment on Indian Railways reveals a grim picture of inadequate

performance largely due to poor infrastructure and resources. The commitment and passion

of its strong workforce of 13.62 lakhs though commendable has done little to translate into

productive action due to present environment'. The report further points out that 'the

financial state of Indian Railways is at the brink of collapse unless some concrete measures are

taken'.

Similarly, the Expert Group for the Modernization of Indian Railways, headed by Sam Pitroda,

points out the severe and chronic under investment in railway infrastructure leading to an

unnecessary and disproportionate traffic diversion towards road resulting in a larger freight

cost to GDP ratio and higher environmental cost per route km of freight and passenger traffic

than in other countries.

The traffic projections for the twelfth five year plan period as estimated by the Planning

Commission Working Group on Railways is given in exhibit 8. This is the scenario under which

the Indian Railways records a 2% increase in its share of freight transportation.

Sustainability andEconomics of Railways


In addition to the traffic

growth, a gradual shift in

composition of freight traffic

towards coal, iron ore and

containers (which are more

profitable commodities to

carry) is also projected

(exhibit 9). This further

underl ies the need to

enhance investment in

modern age light weight

wagons and permanent way

which supports higher axle

loads of 25-30 tonnes.

659

660

661

662

663

664

665

666

0

200

400

600

800

1000

1200

1400

1600

2012-13 2013-14 2014-15 2015-16 2016-17

Exhibit 8: Traffic projections for twelfth plan period

MT (million)

NTKM (billion)

Lead (Km)

CAGR = 9.1%

CAGR = 9.0%

Source: Working Group Report for twelfth Plan – Railway Sector

Exhibit 9: Traffic split projection for twelfth plan period

Balance other goods Containers POL Fertilizers Foodgrains Cement

Iron Ore Total Iron & Steel RMSP except Iron ore Total Coal

Source: Working Group Report for twelfth Plan – Railway Sector, 2012

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012-13 2013-14 2014-15 2015-16 2016-17

0%

2011-12


Given the GDP led traffic growth of the Indian Railways expected over the next five years, it is obvious that

railways need a significant infusion of capital towards capacity augmentation. The Pitroda committee has

projected an investment requirement of INR 5.60 trillion for modernization (exhibit 10). The twelfth five

year plan estimates (in addition) are INR 4.43 trillion (exhibit 11) and the Kakodkar committee recommends

an investment of INR 1.03 trillion for safety related improvements over Indian Railways. While there may be

some common cost elements, the overall investment requirement would be around INR 11.06 trillion over

the course of the next five years.

Exhibit 10: Total investment requirement for modernization (in INR bn)

Track & Bridges Signaling Rolling Stock

ICT Train Stations (PPP) Logistics Parks

Traffic Segregation Indigenous Development

DFC Feeder routes (Part PPP) Other PPP Initiatives

Source: Report of Expert Group on Modernization of Railways, 2012

New Lines DFC Gauge Conversion Doubling

Railway Electrification Manpower Training & Planning

Traffic Facility

Exhibit 11: Total investment requirement as per twelfth plan (in INR bn)

1,223

1,005

178

325

74 143 142


13

5

330

725

1,100

2,040

2,040

970 250

170

Exhibit 12 illustrates the total investment required on safety improvement as recommended by the High

Level Safety Review Committee headed by Dr. Anil Kakodkar. Almost 50% of the projected expense is

towards elimination of all level crossings across the Indian Railways by construction of RoBs and RuBs.

Modernization Requirementth XII FYP

Investment on Safety

Total Investment Requirement

thRequired during XII FYP

thRequired during XIII FYP

20

10

20.1

Advanced Signalling Systems Elimination of all Level Crossings

Switchover to LHB Coaches Zero Discharge Toilets

Workshops & Depots Track Friendly Bogies

ICT on Rolling Stock Track Machines

Training, Research & Development Others

200

500

100

30

50

70

31


3.2 Financing feasibility

Capital requirement for investment plans

Based on estimated requirements, Indian

Railways had requested the Planning

Commission for a plan allocation of INR 10

trillion during the twelfth five year plan. The

Planning Commission has finalized a Gross

Budgetary Support (GBS) of INR 3.54 trillion

to be provided to railways over the twelfth

five year plan period. Although the GBS

recommended by the Planning Commission is

higher than what was widely expected, this

still leaves a substantial requirement of INR

6.49 trillion (out of which INR 4.85 trillion is

required in the next five years) (exhibit 13)

which is expected to be funded from internal

generation (~INR 2.00 trillion), leases/market

borrowings, Green Energy Fund, Road Safety

Fund (~INR 168.5 bn), State sharing and PPPs.

Exhibit 12: Investment required on safety improvement (in INR bn)

Source: Report of High Level Safety Review Committee, 2012

Exhibit 13: Total investment requirement (in INR bn)

5,600

4,430

1,031 11,061 8,390

1,640

–

2,000

4,000

6,000

8,000

10,000

12,000

Modernization Requirement

thXII FYP Investment on Safety

Total Investment

Requirement

Required th during XII

FYP

Required th during XIII

FYP

Source: Report of Expert Group on Modernization of Railways, 2012 and Report of High Level Safety Review Committee, 2012


The Pitroda committee expects INR 2.30 trillion to

come from various PPP initiatives of the Indian

Railways viz. Wagon Investment Scheme and Long

Term Concessions for (i) Purchase of Railway

Locomotives and Coaches; (ii) Captive power

generation; and (iii) Renewable energy projects.

While Indian Railways has had difficulties in

arranging enough market support for its PPP

initiatives, the success of PPPs elsewhere in India

(particularly in the roads and ports sector) is an

enticing opportunity for tapping much needed

private capital for capacity augmentation.

Exhibit 14 illustrates the expected funding pattern

with a visible funding gap of INR 1.05 trillion i.e.

~10% of the total required investment.

Exhibit 14: Expected funding pattern (in INR bn)

3,540

2,018

1,010

2,290

240

168

1,047

Gross Budgetary Support Internal Generation

Leasing/Borrowings PPPs

Dividend rebate Road Safety Fund

Funding Gap

3.3 PPP: An important enabler towards a sustainable next growth trajectory

PPP as a source for capital and efficiency

The focus areas for Indian Railways are capacity augmentation, network and rolling stock modernization,

improvement in asset utilization and productivity, modernization of maintenance practices and

improvement in the quality of services. Capacity augmentation has to be focused on high density corridors

and debottlenecking the existing network to support higher traffic volumes.

To meet the expected surge in GDP led demand, investment would need to be prioritized towards the

following key areas: (i) Dedicated Fright Corridors; (ii) High capacity rolling stock; and (iii) last mile

connectivity.

Given the huge investment requirement, it is imperative that Indian Railways figures out ways to tap the

markets for capital and expertise in areas where private capital is ready and willing. Railways' experience

with true PPP has been few and far between due, in some parts, to the complex nature of its obligation

towards its customers. Further, due to legal restrictions, core railway operations cannot be privatized.

Source: Report of Expert Group on Modernization of Railways, 2012 and Report of High Level Safety Review Committee, 2012

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Railways Airports Roads Ports Telecom Electricity



Due to these reasons, although PPP as a vehicle to raise finance was relied upon in the eleventh five year

plan, the total amount gathered fell far short of estimates. The total Extra Budgetary Resources (EBR)

expected to be arranged in the eleventh five year plan period was INR 796.5 bn, however; only INR 544.6

bn is expected to be arranged by the end of year 2012, a shortfall of 32%. Failure to arrange finance from

PPP's is a major constituent of the shortfall. Exhibit 15 illustrates that private investment mobilization for

railways is less than 4% of total plan outlay which is far less than the private capital share in other

infrastructure project viz. Ports - 80%, Telecom - 82%, Electricity - 44%, Airports - 64% and Roads - 16%.

However, the successfully executed PPP projects viz. the Viramgam Mehasana Gauge Conversion Project,

Surendarnagar Pipavav Rail Project and the Gandhidham - Palanpur Railway Project (predominantly in the

area of port connectivity and largely based on guaranteed traffic/annuities) will lead to few more such

experiments especially in the area of last mile connectivity for core infrastructure and industries.

A couple of notable fresh such endeavours are the twin projects of Diesel and Electric Locomotive

manufacturing and maintenance (at Marhowrah and Madhepura) under long term concession agreements

currently under bidding. There seems to be a lot of interest from global locomotive manufacturers for these

projects. The projects are currently significantly delayed. However, if successfully bid out and executed,

these projects would herald a new path towards involving the private sector in the railways growth story

and provide the Indian Railways with excellent opportunities at tapping the private markets.

Exhibit 15: Share of private investment of total plan outlay


Institutional Roadblock and Facilitation—Policy Change to facilitate PPP in Railways

Over the years different situation has tried to address the issues like:

•

•

•

•

•

•

•

Operational Risks

•

•

•

“PPP means an arrangement between a government or statutory entity or government owned entity on

one side and a private sector entity on the other, for the provision of public assets and/ or related services

for public benefit, through investments being made by and/or management undertaken by the private

sector entity for a specified time period, where there is a substantial risk sharing with the private sector and

the private sector receives performance linked payments that conform (or are benchmarked) to specified,

pre-determined and measurable performance standards.”

- Ministry of Finance

Arrangement with Private Sector Entity

Public asset or service for public benefit

Investments being made by and/or management undertaken by the private sector entity

Operations or management for a specified period

Substantial risk sharing with the private sector

Performance linked payments

Conformance to performance standards

For the railways specifically, the institutional set up should have been conducive to PPP, as the decision is

taken centrally by the nodal ministry without any dependence on the State policies. While the railways have

zonal divisions and sub-divisions, which perform certain duties and have got limited powers, the orders are

taken from the Central Ministry. Thus an effective policy framework should have been easy to implement,

but in reality the railways have found it most difficult to bring in an conducive policy to govern private

investment rules. Even in the current scenario the proposal approved by Cabinet Committee on

Infrastructure has only addressed the possibility of PPP in rail connectivity and capacity augmentation

project.

A few risks to the PPP framework when dealing with Railways are as listed below

Existing rail network fully owned by Indian Railways

Lack of full access to existing rail network and huge capital investments may hamper the growth of

private sector

Condition of current infrastructure may not allow for capacity addition


•

•

Market Risks

•

•

•

Macroeconomic Risks

•

•

•

Lower priority given to freight trains over passenger trains may cause delays

Lack of a inclusive intermodal freight network

Indian Railways and CONCOR has a monopoly share of rail based bulk/container cargo services

Existing infrastructure of the incumbents may act as a barrier for private competitors to offer end-

to-end services

Withdrawal of complementary rail network adversely affecting private projects

Directly dependent on the economic growth of a country.

Aberrations or slowdown in the economy/exports may lead to huge losses to the industry

Huge investments in building road network will lead to a reduced demand for rail freight services

over a medium term

Logistics in the railways, which is a more lucrative business proposal to the manufacturing companies who

need, direct lines to shipping and other dedicated inland freight corridors. Just a model to the possible PPP

structure that can bring in this expected investment on-board is given in Exhibit 16.

CONSTRUCTION CONTRACT

FINANCIAL INSTITUTION

PROJECT COMPANY (SPV)

PROJECT DEVELOPER CONTRACTOR

LOAN AGREEMENT

SHAREHOLDERS AGREEMENT

SHAREHOLDERS AGREEMENT

O & M and SHAREHOLDERS

AGREEMENT

LAND USE AGREEMENT

GOVERNMENT- STATE / CENTRAL / INDIAN RAILWAYS

GOVERNMENT SUPPORT (SUBSIDIES) AND

CONCESSION AGREEMENT

INVESTOR

Exhibit 16: Possible PPP structure to bring in investments

Source: Strategic Initiatives and Government Advisory, Knowledge Banking, YES BANK


In the proposed/ model SPV, as shown in exhibit 16, the SPV towards implementing the PPP project could

be manifested as a non-commercial one, with the commercial cost being calculated and a percentage of

that being borne by the Government. In this fashion, not only can a plan be there to phase out the subsidy

in medium term but also run the project viably. One such example will only bring in more investment

opportunities to the railways.

The Government and the Indian Railways should come with a clear policy framework for promoting

private sector investment and FDI

PPP being promoted in passenger services should be extended to freight operations

Indian Railways may look at capitalizing on the existing rail infrastructure by creating a separate

holding company. This would free up resources and provide additional capital for improving services

Equal competition opportunities should be created for attracting private sector, by sharing of

existing infrastructure

A central planning body should be set up to study, plan and implement a nationwide network of

logistic operations – air, sea, land & rail

Increasing the access to Capital Markets by floating bonds for financing projects for the railways

A few pointers to take PPP forward

•

•

•

•

•

•

Railways as a vehicle of Inclusive Development and National Integration

Chapter 4


4.1 Social Sustainability: Reducing carbon footprints

The Indian Railways has played and continues to play a key role in India's social and economic

development. It is an extremely crucial mode of transportation for millions of passengers

along-with acting as a major carrier of bulk freight viz. ores and minerals, iron and steel,

cement, mineral oils, food grains and fertilizers and containerized cargo among others with 164,460 kms as its route length.

Up to March 2011; 30.42% of the total route kilometres had been electrified. While 49.9% of

passengers train kms were covered by diesel, 37.1% of freight train kms were covered by

diesel in 2011. Thus a significant portion of both passenger and freight train travel has to be

electrified for reducing the greenhouse gas footprint of Indian Railways, as grid electricity

gradually increases its renewable energy feed ins.

Though rail is a relatively cleaner mode of transportation vis-à-vis road transportation, there is

a huge potential of reducing the overall Greenhouse Gas (GHG) footprint of the same. Vision 22020 document of Indian Railways speaks about concrete measures of reducing its overall

emissions. Some of them include sourcing of 10% of the total energy consumed via renewable

sources of power and free distribution of 26 million CFLs to the employees which would lead

to an annual reduction of 0.14 million tones of CO emissions.2

Various abatement levers exist for decreasing the GHG footprint of Indian Railways. They can

be broadly classified into short term and long term solutions as highlighted below:

Railways as a vehicle of Inclusive Development and National Integration

1 'Indian Railways Yearbook',2011, Ministry of Railways (Railways Board), http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/yearbook10-11/Year_book_10-11_eng.pdf2 'Indian Railways Vision 2020',2009, Ministry of Railways (Railways Board), http://www.prsindia.org/uploads/media/Railways%20Vision%20Document%202020.pdf


Short term abatement levers

•

•

Long term abatement levers

•

Diesel fuel replacement with liquefied natural gas (LNG): The Indian Railways and the Indian Oil

Corporation recently signed an MoU to explore the potential of replacing diesel with LNG as the

main fuel in diesel multiple units and locomotives. INR 1,000 cr can be saved on an annual basis, if 3

LNG is successfully introduced in Indian Railways.

Energy Efficient appliances: It has been mentioned in the vision 2020 document of Indian Railways,

that it will procure only three star rated or above electrical appliances for both tractive and non-

tractive usage.

The long term solutions to curb GHG emissions mainly include technological interventions. These include

the following:

Dedicated Freight Corridor (DFC): Dedicated Freight Corridor Corporation of India Ltd. (DFCCIL) is a

special purpose vehicle, created to undertake planning and development, mobilization of financial

resources among other objectives for constructing DFC in Eastern and Western India, which would

cater to a total freight volume of 5216 billion tonne-km. It has been estimated that with DFC rolling, 4

approximately 6 million tone CO can be avoided.2

3 'Railways to go LNG way for lesser carbon footprints',http://articles.economictimes.indiatimes.com/2011-08-14/news/29886577_1_bio-diesel-lng-locomotives, accessed on 30.11.124 'Final Report: Green House Gas Emission Reduction Analysis for Dedicated Freight Corridor', http://dfccil.org/DFCC/Public%20Notices/PublicNotices, accessed on 30.11.12

Exhibit 17: Dedicated Freight Corridors (Eastern) Exhibit 18: Dedicated Freight Corridors (Western)

Source: http://dfccil.org/DFCC/Home/Home Source: http://dfccil.org/DFCC/Home/Home


Regenerative Braking Technology: New trains introduced in Mumbai suburban section with

Inflated-Gate by Bipolar Transistor (IGBT) based propulsion system have been equipped with

regenerative braking features which have recorded energy regeneration while braking to the tune

of 30-35% of energy used for hauling these trains.

Lighter metal in super structure: Usage of materials like Aluminum and stainless steel in

construction can lead to substantial decrease in emission levels.

Other technologies can include aerodynamic designing and rail and wheel lubrication

In order to become a truly world class and

enhanced focus on customer satisfaction and

experience, Indian railways can improve a few

points in the near future to have a makeover as a

service provider along with value of money. The

basis for transformation of the quality of service

rests on the following pillars:

Managing change

Scanning business environment

Execution

Inclusive Innovation

Resource Leveraging

Inclusive innovation highlighted in the above

diagram is critical for organic growth. Dynamics of

inclusive innovation work through a four pronged

approach of resource efficiency, low cost,

scalability and helping the disadvantaged become

successful through fulfillment of their aspirations.

Resource mobilization is centric to any kind of

innovation and change cycle.Incase of railways the resources required for modernization have been

highlighted in exhibit 10.

As discussed in the preceding chapters, an investment of INR 8,39,000 cr, during the twelfth five year plan,

is required which includes INR 3,96,000 cr of modernization plan investment recommended by us. It is a

quantum jump from investment levels of INR 2,03,000 cr in the eleventh five year plan and INR 84,000 cr in

the tenth five year plan. The sources of funds for this investment can be understood from exhibit 14.

The focus on leveraging on PPP is critical for obtaining the funds highlighted in the table above. PPP models

in various areas of Railways are needed to attract private investment to augment core capabilities related

•

•

•

4.2 Transforming the quality of services

•

•

•

•

•

Exhibit 19: Transforming Indian Railways

• Revenue streams

• Socio polictical context

• Cost centres

• Organization

• Building change capacity

• Appreciating change

• Mobilizing support

• Executing change

• Cross functional coordination

• Guiding coalition

• Resource Leveraging

• Inclusive Innovation

Scanning business

environment

Managing Change

Execution

Source: YES BANK Analysis


to:

Stations and Terminals

High speed rail corridors

Elevated rail corridor

Private freight terminals

Leasing of wagons

Loco and coach manufacturing units

Captive power generation

Renewable energy projects (solar, wind etc.)

Railway Hospitals

Railway Schools

Merchandizing

With the recent lift on the ban on transfer of government owned land, a new relaxed land transfer policy

and relaxation in approval for certain categories of projects including PPPs, there will be an improvement in

the speed for the award of PPP projects.

As seen in the past, takeover of land for development projects has resulted in social and economic rift

between classes which cannot be addressed by distribution of wealth, but it can be done by inclusiveness

through improvement of standard of living. The standard of living may mean better roads, quality water

availability or a weekly dispensary service, but the society needs to feel that the promoter/project

developers work for the society and is a part of it. With land availability a raging issue, without social

•

•

•

•

•

•

•

•

•

•

•

Exhibit 20: Social equity model for a developmental venture

Source: Strategic Initiatives and Government Advisory, Knowledge Banking, YES BANK Ó SIGA, YES BANK Ltd.

Promoter(Entrepreneur / s or

Company/ s)

NGO(s)

SPV/ COOPERATIVE/PRODUCER COMPANY

• Facilitators

• Synergetic Partnerships

• Private Sector Efficiency

• Branding

• Development &Implementation

• Capital & OverallManagement

• Contribute Land at commercial rates

• Structure Participation inManagement (cooperatives/producer)

• Equity in project (Social Equity)

• Employment

• Empowerment

• Govt Facilitation

Government

• Fiscal Concessions/SocialEquity investment

• Structuring Social Equitybased inclusive devt.

• Advisory, PPPimplementation, privateparticipation

• Showcase/ replication ofEstablished model

• Emission Trading/carbon Credits

Carbon Credits areploughed back as

Social EquityKnowledge Bank

Financiers /Investors

Local Community


inclusion it will be difficult to sustain old or new enterprises.

Changes in organizational structure and training related to human resources is critical to building change

capacity. Organizational reforms are essential to ensure that Indian Railways is able to achieve the goals set

out for modernization. The structure of the IR has remained largely unchanged for decades and it remains a

functionally oriented institution that is organized around its cadres instead of around its businesses or

customers. The crucial areas for organizational innovation include empowering zonal railways along with

accountability, revamping accounting systems and modernizing procurement processes and benchmarking

products and suppliers.

Enhancing the accountability of the existing human resource is a key aspect of the necessary capacity

building. Upgrading ICT skills and introducing courses in railway technology and management is

indispensable for the future. Create a system of reward for collective performance and variable pay linked

to incremental surplus generated by various units will improve the performance levels of the staff.

Modernization of infrastructure is crucial and the key pillars for the same have already been discussed in

detail in the preceding chapters. Lastly, the IT revolution has already contributed towards the

modernization of railways but more can be done with respect to set up Real Time Information Systems

(RTIS) to provide real time information at stations and on running trains, upgrade & integrate railway

websites and use social media creatively for customer feedback, consumer education and social messages

and providing internet access at major railway stations.

A growing economy like India provides the benefit of availability of umpteen unseen opportunities to

leverage from. The growth of Indian economy which we envisage that is inclusive growth requires a robust

physical infrastructure of the country and railway forms an integral part of it. However, as highlighted

through this report there exists potential in the overall improvement of the quality of railway services in the

country and scope of modernization. The potential areas of improvement include institutional innovation in

the overall management of the railways, augmentation of existing financial resources and enhanced private

sector participation. Indian Railways which is currently the fourth largest in the world in quantitative terms

has the potential to become the largest in qualitative terms and set an example for others to follow.

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Documents

Report Re-imagining Railways Yes Bank - Re-imagining Railways.… · Indian Railways, the national carrier of India, serves millions of travelers across the country every day, thereby