2Aug
railways-l1

Understanding Indian Railnomics

The Railway Minister of India presented the budget in India today. I really enjoyed the structured and thoughtful presentation but I think there is even greater scope for thinking further. I wrote this blog post sometime back when the fares were hiked but glad that there is no fare hike this time.

If I were tasked with running such a large enterprise called ‘Indian Railways’, then, I have to make choices on two things 1. Increasing revenues while decreasing costs 2. Ensure that Indians from all parts of the country have access to the rest of country in an affordable and convenient manner but right now, the rail ministers of several governments have made choices that 1. Increased costs while decreasing profits 2. Cleverly hide under the ‘social’ umbrella and don’t hold themselves accountable for the ‘losses’. What is going wrong? Passengers are increasing, fares are increasing and our losses also seem to be increasing.

What metrics does the government use to evaluate performance?How many routes are running profitably in India? What is the break-even for every route? Which are the loss making routes? How are they subsidizing the not so profitable routes? Above all, the big question— ‘Who needs to manage this business and generate capacity so that the trains run optimally?’ — has so many structural challenges that will require intervention of the highest order.

Let’s take one case study and try to understand the challenges of the Rail Business Model. I am originally from Madurai and I’ll use the example of the train that runs between Madurai and Bodi. I am going to make several assumptions but the objective here is to think expansively about this problem and not to get the details right. The distance between Madurai and Bodi is 120 kms. The train usually has 5 coaches and each coach has approximately 80 seats. So, the train can seat 400+400 = 800/day. Let us analyze the business model of operating this train in this sector.

Profit Formula:

Costs:

Fuel Costs: Let us assume that the train needs 80 litres of diesel for a round trip per day. Total in a year = 80*300*50 = 12,50,000

Salary of Employees (25)= 25*1,00,000 = INR 25,00,000 per year. Employees include the ticket inspector, driver, support staff, rail gate staff at in between stations etc.

Let us assume that the train is bought on a loan for 5 crores and the 5 crore has to be repaid in 20 years which means we need to pay 25 lakhs every year.

Maintenance Costs = 10,00,000

Salary Costs = 25,00,000

Fuel Costs = 12,50,000

Train loan costs = 25,00,000

Total Costs = 72,50,000

Revenues:

At full capacity per day : 800 * INR 40 per ticket = INR 32,000.

At Full Capacity per year = 32,000 *365 = INR 1,16,80,000

To break even, the train needs to hit 62.2% capacity on average.

Target Customers:

People living between Madurai and Bodi who will want to travel either between these two places or between intermittent stops covering other cities or key landmarks like Madurai Kamaraj University, AAC College — Karumathur etc. From my experience, I know that there are several colleges on the way, important towns like Usilampatti, Andipatti and Theni that may attract traders, govt employees, daily wage workers on a daily basis. Could we find 1000 people who are willing to use the train and spend Rs.50 per day or 5000 people spend Rs.10 per day or 10,000 people spend Rs.5 per day? With an estimated population of more than 30 lakhs in the area between Madurai and Bodi, Is it going to be hard to find 10,000 people or 0.3% of population? Does the Railway Manager have a customer profile with key characteristics and their important pain point that this service will address?

Value Proposition:

I tried a simple ‘value curve’ across the various options available. While the cost of local trains is much cheaper than other options, that alone will not ensure adoption by people and hence cannot hit full capacity.

Value curve

If we analyze the value proposition,

  1. People have so many options these days for short distance travel like autos, share autos, buses etc and why would they choose a train for such short distances and when it comes to long distances, the buses reach Bodi in 2 hrs — Can this train compete with the buses for speed?
  2. The train’s sleeper style seating can accommodate only 800 people (both ways in its current timing)and it is hard to stand in these trains and go.
  3. There is only one train in the morning and there is one train in the evening. If the customer misses the train, there is no other option and so there is no room for ‘mistakes’ which is big barrier to entry.

Will customers pay and use a service that has so many limitations and one that needs so many behavioural adjustments?

Key Resources:

What resources do the managers have at their disposal to run this service? If we recollect some staff who work for this train, it includes ticket agents, TTR, Engine Driver, Station Masters, Gate Keepers etc and then, train tracks plus the train itself. If the train has a restaurant, then it is usually outsourced.

  1. Let us assume that the Madurai Divisional Rail Manager is responsible for the trains that start from Madurai and go to places like Bodi, Rameshwaram, Coutrallam etc. The train Madurai — Bodi is one account and I am not sure whether there is anyone person responsible for this account. Do we have an Account Manager?
  2. If the train is using this line once in the morning and once in the evening, what are the staff doing during the day? Can they be used to do some work that will generate additional revenue?
  3. The Managers who lead Rail services are hired through the UPSC/TNPSC Civil Services Exams.This exam is one of the most difficult exams to crack but does that mean that people who pass this test have the desired background to run an enterprise of this size. It is like assuming that the student with the best GMAT score is the best person to lead GE. What training is provided to them? Do they have any business background to manage P&L?

Key Processes:

  1. Money Collection: Can one ticket inspector ‘check’ all the passengers for tickets? How do we ensure that there is 100% collection? Right now, most of the passengers are free riders and there is no accountability,whatsoever, of any kind.
  2. Maintenance: Do we know how much it costs to maintain the tracks, cleaning routines, quality control for the maintenance?
  3. Ticket Counters: Is the process of getting a ticket easy? In a bus, the conductor issues the ticket but the train counters usually have long queues. Will a customer wait so long to get a ticket? How do we ensure that this is taken care effectively?

This is one example of how the model is flawed and the lack of thinking at the highest level. I am sure there are 100s of such loss making routes which drain all the profits earned by the busy routes. It is easy for the government to ‘hide’ behind the loss making routes saying that the people in remote places need access. People need access but not this kind of inefficient access which is why they dont use this service.

What can be done?

To make changes in even this one sector is not easy. This sector is part of a massive organizational structure and there is so much connectedness that serious rethink needs to be given for the following from the strategic level to the tactical level.

Integrating Transport Ministries: Instead of having three separate ministries — Surface Transport, Civil Aviation and Railways and even ports, there needs to be one Ministry of Transport which will have two sub ministries — Ministry of Transport — Operations and Ministry of Transport — Infrastructure.Operations Ministry will be run like a business with everal departments — Infrastructure Division, Business Operations Division, QC & Maintenance Division, Marketing & Customer Experience Division, Strategy Division etc. Infrastructure Division will be run like a VC firm and it will make investments that generate double bottom line — ROI and Social Impact. This way, the government can have a bird’s eye view of different transport options, their plus/minuses and make choices that will not cannibalize each service. It will also allow them to shut down non profitable routes and provide ‘road’ options that work. It will help them to achieve economies of scale in training, manufacturing, R&D. Right now, there is a complete lack of coordination between Road, Rail and Aviation Ministries. Everything is jumbled and there is no clear accountability.

Resources:

  1. Are IAS Officers the right people to lead this enterprise? I dont think so. They dont have any business experience of any kind and we need professional Managers who can run the operations with a focus on ROI and that may be a better way to sustain this large enterprise.
  2. The staff who are sitting idle can be used to collect data about the people, do ethnographic studies and report back important data that could be used to segment people based on pain points. I am sure there are so many ways they can contribute to the department.
  3. Railways could be a platform where many private sector services can plugin to ensure quality and great service.
  4. Design metrics to track performance and ensure that the junior most employee know how his work is going to impact the country as a whole. Design a rigorous feedback system to continuously monitor and make adjustments. The ground level employees have the most knowledge of the problem and they are also better positioned to know which solution will work in their context.

Processes: The following things can be done differently in terms of fixing some of the processes.

a. Tickets: In Italy, city bus tickets can be bought at any local grocery shop. City train tickets could be made available at all Tea Shops and people can buy from anywhere so that they need not wait in long queues.

b. Technology: Gate Keepers can be replaced with technology. All the unmanned gates could be easily controlled by technology eliminating needless manpower who are not productive. One of the cost effective technologies that caught my imagination was the one that helps farmers to use mobile phones to switch on/off water pumps from remote locations saving precious time and money. This remote control mobile technology can be explored to open/close unmanned gate crossings and could be even used by the driver. Technology can also allow passengers to enter the train station with only tickets which will eliminate loss of tickets

Policy:

a. All the above customer profiles need to use the train at different times which makes it inefficient to get these customers to use the train? Is it possible for the government to issue orders that will enable the markets, offices and colleges/schools to start around the same time?

b. Banning freights from road transport could drive adoption of trains by the traders but that is only possible if all the transport options come under one unit.

C. Any new infrastructure like colleges,schools, industries need to be approved if they fall along the railway line which will then create more opportunities for the train service.

D. Making the train line as a Hub and pushing various other surface transport as Spokes will help drive adoption. The tourists to Thekkadi could use this train and if they have good connectivity from Bodi to Thekkadi will generate new revenue streams.

E. The train starts at Madurai in the morning and returns to Bodi in the evening. Can this be flipped so that it starts from Bodi at 5:30am to reach Madurai at 7:45am which will enable traders coming to the city to use the train and its fleet service? Once it reaches Madurai, it can now target students/working professionals who can reach their places by 9am. College opening times can be coordinated as well if the colleges are okay with it.

All of the above may be feasible or may not be feasible. But has anyone thought about this issue in a systematic fashion? This train is in service for 40 years and I have never seen anything positive coming from this service. This is an example of a loss making route and there are 100s of such routes which are subsiduzed by the profitable routes. We can learn from Aravind Eye Care in Madurai which provides excellent service to their paying customers and use the margins earned to give free eye surgeries to the poor people who cannot afford them. It is fine to subsidize as long as there is some ‘logic’ and ‘reason’ for doing so.

What is Railways at the end of the day? It is a Social Enterprise — Needs to help the citizens of the country while making money to sustain the enterprise. If the Railways Minister acts like the CEO of a Social Enterprise, he will not be complaining about the losses while making investments on new train routes that doesn’t promise profits. If there are losses, he will find the reasons for the losses, cut the losses and make it work. Raising prices without showing how the increased revenues is going to increase profitability is continuing the madness that is going on for decades of poor governance. Either do a root cause analysis and try out an option like the above or even consider privatizing the service or shut down the service.

Right now, It looks like we are taking a blood sample to conclude that a patient has fracture and giving medication to cure the fracture. We need CT scan or Xray, blood sample, urine sample, patient symptoms and a doctor’s interpretation of how all the connections affect the body and what treatment is needed. A systemic diagnosis is required. Government at the end of the day is a social enterprise — it needs to work for social impact and also, it needs to generate money to sustain profitably. For that, bold and tough decisions need to be taken at the structural level. Right now, the government claims that it has taken bold decisisions but it has given medication to treat a fracture using evidence from a blood sample. We know what the outcome will be with the old structure — it will be like investing in a aircraft engine to drive a train in the old tracks.

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