Success of the Indian Railways in recent times can be traced to the right strategy, say V. Nilakant and S. Ramnarayan in ‘Changing Tracks’ (www.landmarkonthenet.com). “The strategy was to: (a) enhance freight volumes, (b) increase freight rates for selected commodities such as iron ore, and (c) focus on high-value, high-margin segments in freight and passenger traffic,” they elaborate.
The key metrics in focus, as the authors describe, were unit costs, unit revenues and more importantly, the difference between unit revenues and unit costs. They cite statistics such as that between 2001 and 2004 the unit cost of freight (per tonne kilometre) fell from 61 paise to 57 paise; and despite the fall of unit revenue from 74 paise to 72 paise, the Railways enjoyed a margin.
Interestingly, between 2004 and 2008, when the unit cost for freight fell a further 3 paise, the unit revenue increased from 72 paise to 93 paise, thus reversing the earlier trend as regards revenue. This was due to change in tariff policy and carrying more freight, the authors explain.
“Similarly, in the passenger segment, the unit cost fell from 41 paise to 39 paise per passenger kilometre during the same period. However, reversing the earlier trend, the unit revenue increased from 25 paise in 2004 to 27 paise per passenger kilometre in 2008.” Unit revenue enhancement was the result of targeting high-value, high-margin customers and increasing the length of trains.
Can the Railways sustain the growth? Yes, if three risks are managed, note Nilakant and Ramnarayan. First, the strategy assumes a favourable economic environment, with growth rather than volatility. That is, the ‘play on volumes’ strategy requires high economic growth and low-to-moderate inflation to succeed. “The risk for Indian Railways arises from its high operating leverage – it has high fixed costs. It cannot reduce costs significantly. Therefore, it needs to spread these costs over bigger volumes of output.”
The second risk factor is quality manpower, especially engineering and management talent, because the organisation is simply not perceived ‘cool’ as an employer! Needed are managers and engineers who can not only generate new ideas but also take on leadership roles to implement those ideas, the authors observe.
And the third factor is right leadership style. “The leaders should set clear goals, communicate them simply and widely, and aggressively chase people to make sure that the goals are achieved. It requires leaders who are highly focused, energetic, committed, and willing to do everything necessary to achieve the goals.”