Sunil Jain: More milk in Lalu's cow?

RATIONAL EXPECTATIONS

Given the Railways' plan to generate surpluses of over 20 per cent of capital invested in 2007-08 as compared to a mere 2.5 per cent in 2000-01, the $5.5 billion question is whether the famed turnaround of 2006-07 can last. Much has been written about how, thanks to an increase in the freight loaded in each wagon, revenues rose a huge 17 per cent.

Critics argued there were limits to extra loading without damaging the tracks; that while lighter wagons would help, it would take years to replace all the 500,000 wagons (20,000 wagons which allow carriage of 75 per cent more freight will be produced this year); this column even cited the decline in growth in this year's freight projections to show the turnaround was illusory; new trains like the Garib Rath with slashed tariffs strengthened the view that Railway Minister Lalu Prasad was just being populist.

With freight revenues rising 12 per cent till December 20 against the year's 11 per cent target, and (loss-making) passenger revenues a bit below target at 14 per cent, should critics eat crow? These include the Expert Group headed by Dr Rakesh Mohan, now RBI Deputy Governor, which said in July 2001 that the Railways were hurtling towards fatal bankruptcy! Since the turnaround happened without carrying out the radical reform suggestions, has Lalu become, as his Officer on Special Duty Sudhir Kumar puts it, Professor Lalu, messiah to the masses and management professor to the classes?

A final conclusion will require a deeper analysis. For instance, if the turnaround is based only on over-charging on freight (the Railways earned Rs 15,700 crore in 2006-07 from transporting 309 million tonnes of coal, which works out to a freight cost of around 50 per cent!), it means the strategy of subsidising customers is hurting the economy by adding to costs. The cost of carrying a passenger costs 36 paise per km versus the earning of 26 paise (that's a loss of Rs 7,700 crore this year); it costs 52 paise to move a tonne of freight per km and the earnings are 91 paise (that's a profit of Rs 20,000 crore). 

PROMISE VERSUS PERFORMANCE
(Rs crore)	Cash Surplus	Operating Ratio
2005-06
Budget	7,000	90
Actual	13,000	84
2006-07
Budget	15,000	84
Actual	20,000	79
2007-08
Budget	22,000	79
Actual*	-	-
* Till Dec, freight earnings up 12% as compared to 10% target; passenger up 14% against 15% target

That said, it must be conceded Lalu's cow has a lot more milk than most imagined "" if you don't milk it properly, Prof. Lalu's famous saying is, the cow will get sick. Data from the Railways suggest the degree of under-utilisation of assets is to be seen to be believed (more milk!) and this has resulted in some seriously novel thinking on the part of the management.

So, if 1AC fares are 20 times those on ordinary trains, why are earnings per coach just 0.7 times higher? 1AC compartments, Sudhir Kumar explains, pack in much less people than ordinary coaches do. The lesson: what matters are not high tariffs, but yields per coach kilometre "" sleeper class fares are thrice the ordinary class, but at Rs 16 per coach km, the yields are 30 per cent lower. Two actions resulted from this analysis. First, more coaches have been added to most trains, showing there was a dramatic under-utilisation of the powerful engines in the past. Second, tariff rationalisation has tried to ensure high-yielding sections rather than high-tariff ones rise the fastest. In the case of the Garib Rath, since it seats 1,929 as opposed to a Rajdhani's 799, this has ensured the 24-coach train costs 34 paise per passenger km as compared to 58 paise for a 17-coach Rajdhani (and 47 paise for a 24-coach one). Indeed, the Railways claim if the number of coaches is increased from 14 to 20 on Mail and Express trains, they break even without raising fares!

On freight, similarly, the focus has been on increasing the number of wagons as well as the turnaround. Four years ago, the Railways turned around a goods train in seven days (that means 570 trains could be used per day from the stock of 4,000 the Railways had); with this at 5.2 today, the number of daily trains has risen to 770 "" this itself adds around Rs 12,600 crore a year to revenues.

In the long run, it's possible the Railways will have to corporatise with an independent regulator deciding tariffs, but for now there's a whole lot of efficiencies to be extracted. Prof Lalu's on the right track.