INDIAN RAILWAYS

The Indian Railways (IR), the world's largest rail network under a single management,
registered total earnings of approximately Rs. 444.72 billion for the period April-
November 2007.

This represented a growth of 12.11 percent compared to the same period in

2006.Analysts felt the figures showed that the dramatic turnaround story of the IR
continued. IR was in deep financial trouble in the 1990s. Its fund balances had touched a
low of Rs. 1.49 billion in FY 1999-2000.

IR cited many reasons for its bad performance including the leadership of the then
Railway Minister, Nitish Kumar. Some analysts attributed the dramatic turnaround to the
leadership qualities of Laloo Prasad Yadav (Yadav) who became the Minister of
Railways in May 2004.

Though IR was the world's fourth largest freight carrier, and also the largest employer in
India, it was consistently losing money in the 1990s. In mid-2001, the Expert Group on
Railways noted, "Today IR is on the verge of a financial crisis.To put it bluntly, the
'business as usual low growth' will rapidly drive IR to fatal bankruptcy, and in sixteen
years, Government of India will be saddled with an additional financial liability of over
Rs 61,000 crore [610 billion]. On a pure operating level, IR is in a terminal debt trap.The
bleeding continued through 2004, with IR incurring losses of around Rs. 1.37 billion in
FY 2002-2003 and again in FY 2003-2004.

However, in FY 2005-2006, in what was termed as the most remarkable turnaround of

any company ever, IR registered profits of Rs. 150 billion.The next year, it generated
profits of Rs. 147 billion and in FY 2006-2007, of around Rs. 200 billion despite a cut in
passenger fares. As of 2007, IR was India's second largest profit making Public Sector
Undertaking (PSU) after Oil and Natural Gas Corporation Ltd. (ONGC).

Analysts felt that Yadav had not only turned IR around, but had also been able to
significantly boost its financial performance. Under the turnaround plan, Yadav focused
on certain key determinants which would help in reviving the IR, such as, goods,
passengers, and other services related to parcel, catering, and advertising.

Initially, he emphasized bolstering the freight carriage system since it was the major
revenue earner for IR, contributing to 70 percent of its annual revenues. The freight
revenues were earned due to an increase in the loadings of coal, steel, iron ore, and
cement.

In 2006, the freight carrying capacity of IR was pushed up by increasing the wagonload
by 64 million tons. This led to a significant hike in earnings.

Another core focus area for IR was the passenger segment. IR aimed to increase its
earnings from passengers by deploying 24 coach trains, installing additional coaches,
running additional trains, etc. The demand for the additional trains was determined based
on the data obtained by the passenger reservation system.

Other initiatives taken by the IR to increase revenues from the passenger segment
included increasing cancellation charges for tickets and augmenting the time limit for the
'tatkal scheme', that targeted 'last minute' passengers, from one day to three days and later
to five days

The tatkal scheme helped in boosting IR revenues as the Railways adopted a differential
pricing strategy, the charges depending on the booking time. As a result, IR reported
passenger earnings of Rs. 10.13 billion in FY 2005-2006.

Laloo Yadav also focused on other areas including services related to parcel, catering,
and advertising. The IR parcel capacity utilization was a mere 5 million tons compared to
its capacity of 35 million tons. The cost incurred by IR on parcel services was Rs. 18
billion including haulage costs and staff salaries while revenues earned from the services
were only Rs. 5 billion.

To address this issue, IR adopted an outsourcing strategy through a public private

partnership. The parcel services were leased out to parcel service providers, thereby
decreasing costs to IR. Similarly, catering contracts were leased to caterers through an
annual open tendering system by the Indian Railway Catering and Tourism Corporation
(IRCTC).

IR proposed to increase its earnings from advertising services by open competitive

bidding of space for hoardings and advertisements and wholesale leasing of stations in
contrast to retail leasing. On the whole, parcel, catering, and advertising services
contributed earnings of Rs. 5.99 billion in FY 2005-2006.

IR's successful turnaround caught the attention of renowned business schools and
corporations around the world as well as railway service-providers of other nations. In
late 2006, around 100 students from the Harvard Business School and 30 students from
Wharton School of the University of Pennsylvania along with seven professors came to
attend a lecture by Yadav on the IR turnaround story.

In January 2008, IR announced its plans to modernize railway stations and offer value-
added services like restaurants, cyber cafes, shopping malls, etc. These services were
mainly targeted at people who came to the railway stations to send off or receive
passengers.

Several corporations such as the Tata Group, Reliance Industries Ltd., Larsen & Toubro,
GVK Group, etc., expressed interest in modernizing the railway network. The principles
of airport modernization can be applied to railway station modernization, too. There is
huge potential for non-ticket-based revenues in railway stations like the concept of non-
aeronautical revenues in the privately-run airports.
Industry observers opined that under Yadav's leadership, IR had not only become
profitable but had also been able to generate surplus funds of Rs. 215 billion, according
to the FY 2007-2008 IR budget presented by Yadav.. However, critics contended that IR
was still facing some tough challenges and was yet to fully come out of the red.