Loco Motives

Indian Railways is facing a cash crunch – and it is only going to get worse

In a tough year ahead, it faces extra expenditure, income that can't keep pace and indifference from the finance ministry.

When Minister for Railways Suresh Prabhu presents his second Rail Budget on February 25, he will attempt to pull off an unusual stunt that he managed last year as well. Prabhu has set himself the uneasy task of doing just the opposite of what railway ministers before him have done routinely – he will attempt to cut freebies and may once again refrain from introducing new trains and increasing passenger fares.

It is easy to criticise Prabhu or rest of the rail ministry and its decades of history for the Railways’ legacy of inefficiency and underperformance but it’s tough to explain why these have persisted over the years despite growing traffic at exponential levels.

At the beginning of this year, the Railways was spending as much as Rs 97.8 to earn Rs 100 – a sign of worsening financial health and an operating ratio level not seen in more than a decade. The target set for this year was of an operating ratio of 88.5.

While the final results will be known only on the morning of Budget presentation, Railways’ performance has been largely underwhelming over the past few years – a worrying sign for the economy as well as the Rail Minister who vowed to “transform” railways in the last year’s budget.

He took the first step right by not moving on any of the dozens of the requests for new trains, stations and stoppages that his ministry received before the budget and kept the situation as is. While he didn’t increase passenger fares during the budget, rates were hiked by introducing levies on First Class and all AC fares by 4.35% in November while general and sleeper class rates remained unchanged.

Flashing red

However, much seems to have remained unachieved as one looks forward to the Rail Budget of 2016-'17 when the situation, experts say, is only set to worsen for the Railways.

“This is going to be the first year in the last three decades or so that railways' passenger kilometres carried are going to be less than previous years,” said former Railway Board Chairman Vivek Sahai. “The financial distress is more a function of slowdown in Railways’ growth than anything else. They are simply not running enough trains to increase revenue from passengers.”

Sahai pointed out that over the years, cancellations of trains have increased and this has led to idle rolling stock which not only increases costs but fails to bring in any revenue which a running train would have – even if it is running late.

In the current financial year, while Railways has so far overtaken last year’s earning figures, it has fallen short of targets. For instance, earnings from freight till December 2015 were 6.2% more than what it achieved in the same period last year, the earnings are short by Rs 2,150 crore of its own target of raking in Rs 82, 676 crore. The situation is even grimmer when it comes to volumes. The railways reportedly carried only 8 million tonnes of freight more than last year by December 2015 while its target is to ferry 85 million tonnes extra by March 2016 which looks almost impossible to achieve.

Similar is the case with passenger earnings which did not grow as much as expected, falling short of the target of Rs 35,042 crore by Rs 1,937 crore.

This is not where the Railways’ financial troubles end – it’s where they begin. The Railways is about to incur an additional Rs 33,000 crore on salaries each year due to the Seventh Pay Commission which has bumped up salaries and pensions of its employees by more than 20%.

The Railways expects another 5 lakh personnel to retire in the coming decade, which means even more amount will have to be shelled out of its kitty in paying its former and current staff. Moreover, there is no clarity on the kind of expenditure the railway might actually end up incurring due to the seventh pay commission because there are many other allowances which haven't been taken into account, explained Bibek Debroy, member of NITI Aayog.

"There's no way to know exactly how badly will the railways be hit by the pay commission because a lot of pay elements have been left out of estimates," Debroy said. "We have accounted for salaries but a large part of compensation is travel allowances etc which could add another Rs 8,000 crore or so to the final bill."

It is with in this backdrop that one must note that the freight revenue is not growing as fast as the railways expected because of slowing economy and lukewarm demand which has resulted in wagons, line capacity, engines going unused and only accumulating further losses on upkeep and depreciation.

“When there is no demand from the ports to ferry coal or iron ore from the mines, the rail industry is bound to suffer,” said NP Srivastav, former Finance Commissioner with the Indian Railways. “There are specific wagons and infrastructure for different commodities," he explained. "You can’t carry passengers or even other goods in wagons specifically made for carrying coal or iron ore.”

Cash strapped

Anticipating the situation, the railway minister approached the finance ministry for additional funds but received a stern no for grant, followed by a 30% cut in the gross budgetary support from the central government. The finance ministry categorically rejected the Railways’ demand for grant in its communication and asked it to raise its own funds.

And this is where the problem lies.

Over the past years, railways has increasingly been dependent on central government grants and gross budgetary allocation to carry out its capital expenditure and network expansion activities, in addition to meeting overhead expenses.

As seen in the chart above, the share of the Railways' own revenue in financing this capital expenditure has been coming down becoming a cause of concern for the government which expects it to run like a company and report profit each financial year.

Infinite loop

It’s not just the rising expenditure that ails the railways, the public sector entity is also required to pay back dividend to the government each year which is determined by a parliamentary convention committee. In December, the committee denied the railways’ request for a waiver this year due to rising costs and pegged it at 4% for the current fiscal.

This means that the Railways will have to shell out some Rs 8,000 crore to the Centre as dividend this year.

“The Committee believes that Railways should pay dividend. It may be less or more. However, dividend has to be paid every year. There is no case for granting waiver,” said Bhartruhari Mahtab, who heads the Railway Convention Committee, adding that rate was pegged one percentage point lower, providing the railways a relief of some Rs 2,100 crore.

While this sounds as a considerate move, experts point out that the problem is that the dividend is being paid for the last seven decades on capital-at-charge which was pegged at Rs 800 crore in 1951 and yet not a penny from that loan has been repaid.

“Whatever loans are received from the government are added to the capital-at-charge which is more than Rs 1.5 lakh crore as of now and there is no repayment period,” said Vivek Sahai. “It’s perpetuity based so even if we have paid three times the amount in dividend, the principal amount still remains a liability.”

This also came up in April last year when a committee headed by former railway minister Dinesh Trivedi recommended that the policy of paying dividends be scrapped. Calling it “contradictory and counterproductive”, the committee said that the government should adopt a two pronged approach to improve finances of the railways, involving cutting expenditure and raising revenues, but should keep away from charging dividend on general revenues.

Not much left to save

While the Railways finds itself buried under its own finances, the problem of low-demand being unable to boost freight revenues further exacerbates the situation. Estimates suggest that up to Rs 28,000 crore of losses on passenger fares are subsidised by freight income which is not going to benefit any longer from oil prices which provided a windfall last year.

That, experts feel, brings us back to the issue of raising passenger fares at least to an extent so that at least cost can be recovered.

“When you don’t have any viable option to earn, you save,” explained Srivastav. “The railways can’t save much from oil prices anymore, the government support has been slashed and it has to give interest payments as well as bumped up salaries. I don’t see where these funds will come from if not from a hike in passenger fares which is long due.”

In this context, it is worth repeating what Suresh Prabhu told domestic and international investors as well as the government about the Indian Railways’ need for funds.

“You have successfully invested in the telecom and power and roads sector, but never in the railways. The government also didn’t invest during the past two decades and so we’ve chalked out a five-year plan under which we are looking at an investment of Rs. 1 trillion this financial year and Rs. 8.5 trillion over the next five years,” Prabhu said. “For improving rail infrastructure we need to invest 10 per cent of the total infrastructure GDP of $2 trillion over next five years.”

It remains to be seen how much transformation his ministry can achieve in the remaining financial year. Sahai cautioned against being too optimistic.

"This is is an absolute majority government which should not shy away from making tough choices and doing what their predecessors," he said. "But that hasn't happened much. The railways has focused on being more customer centric but only for passengers, not the industry. We need to make businesses happy otherwise they will switch to road. We can't neglect them just because they don't tweet as much as general passengers do."

This is the second article in a three-part series on the railway budget. The first part can be read here.

We welcome your comments at letters@scroll.in.
Sponsored Content BY 

What hospitals can do to drive entrepreneurship and enhance patient experience

Hospitals can perform better by partnering with entrepreneurs and encouraging a culture of intrapreneurship focused on customer centricity.

At the Emory University Hospital in Atlanta, visitors don’t have to worry about navigating their way across the complex hospital premises. All they need to do is download wayfinding tools from the installed digital signage onto their smartphone and get step by step directions. Other hospitals have digital signage in surgical waiting rooms that share surgery updates with the anxious families waiting outside, or offer general information to visitors in waiting rooms. Many others use digital registration tools to reduce check-in time or have Smart TVs in patient rooms that serve educational and anxiety alleviating content.

Most of these tech enabled solutions have emerged as hospitals look for better ways to enhance patient experience – one of the top criteria in evaluating hospital performance. Patient experience accounts for 25% of a hospital’s Value-Based Purchasing (VBP) score as per the US government’s Centres for Medicare and Mediaid Services (CMS) programme. As a Mckinsey report says, hospitals need to break down a patient’s journey into various aspects, clinical and non-clinical, and seek ways of improving every touch point in the journey. As hospitals also need to focus on delivering quality healthcare, they are increasingly collaborating with entrepreneurs who offer such patient centric solutions or encouraging innovative intrapreneurship within the organization.

At the Hospital Leadership Summit hosted by Abbott, some of the speakers from diverse industry backgrounds brought up the role of entrepreneurship in order to deliver on patient experience.

Getting the best from collaborations

Speakers such as Dr Naresh Trehan, Chairman and Managing Director - Medanta Hospitals, and Meena Ganesh, CEO and MD - Portea Medical, who spoke at the panel discussion on “Are we fit for the world of new consumers?”, highlighted the importance of collaborating with entrepreneurs to fill the gaps in the patient experience eco system. As Dr Trehan says, “As healthcare service providers we are too steeped in our own work. So even though we may realize there are gaps in customer experience delivery, we don’t want to get distracted from our core job, which is healthcare delivery. We would rather leave the job of filling those gaps to an outsider who can do it well.”

Meena Ganesh shares a similar view when she says that entrepreneurs offer an outsider’s fresh perspective on the existing gaps in healthcare. They are therefore better equipped to offer disruptive technology solutions that put the customer right at the center. Her own venture, Portea Medical, was born out of a need in the hitherto unaddressed area of patient experience – quality home care.

There are enough examples of hospitals that have gained significantly by partnering with or investing in such ventures. For example, the Children’s Medical Centre in Dallas actively invests in tech startups to offer better care to its patients. One such startup produces sensors smaller than a grain of sand, that can be embedded in pills to alert caregivers if a medication has been taken or not. Another app delivers care givers at customers’ door step for check-ups. Providence St Joseph’s Health, that has medical centres across the U.S., has invested in a range of startups that address different patient needs – from patient feedback and wearable monitoring devices to remote video interpretation and surgical blood loss monitoring. UNC Hospital in North Carolina uses a change management platform developed by a startup in order to improve patient experience at its Emergency and Dermatology departments. The platform essentially comes with a friendly and non-intrusive way to gather patient feedback.

When intrapreneurship can lead to patient centric innovation

Hospitals can also encourage a culture of intrapreneurship within the organization. According to Meena Ganesh, this would mean building a ‘listening organization’ because as she says, listening and being open to new ideas leads to innovation. Santosh Desai, MD& CEO - Future Brands Ltd, who was also part of the panel discussion, feels that most innovations are a result of looking at “large cultural shifts, outside the frame of narrow business”. So hospitals will need to encourage enterprising professionals in the organization to observe behavior trends as part of the ideation process. Also, as Dr Ram Narain, Executive Director, Kokilaben Dhirubhai Ambani Hospital, points out, they will need to tell the employees who have the potential to drive innovative initiatives, “Do not fail, but if you fail, we still back you.” Innovative companies such as Google actively follow this practice, allowing employees to pick projects they are passionate about and work on them to deliver fresh solutions.

Realizing the need to encourage new ideas among employees to enhance patient experience, many healthcare enterprises are instituting innovative strategies. Henry Ford System, for example, began a system of rewarding great employee ideas. One internal contest was around clinical applications for wearable technology. The incentive was particularly attractive – a cash prize of $ 10,000 to the winners. Not surprisingly, the employees came up with some very innovative ideas that included: a system to record mobility of acute care patients through wearable trackers, health reminder system for elderly patients and mobile game interface with activity trackers to encourage children towards exercising. The employees admitted later that the exercise was so interesting that they would have participated in it even without a cash prize incentive.

Another example is Penn Medicine in Philadelphia which launched an ‘innovation tournament’ across the organization as part of its efforts to improve patient care. Participants worked with professors from Wharton Business School to prepare for the ideas challenge. More than 1,750 ideas were submitted by 1,400 participants, out of which 10 were selected. The focus was on getting ideas around the front end and some of the submitted ideas included:

  • Check-out management: Exclusive waiting rooms with TV, Internet and other facilities for patients waiting to be discharged so as to reduce space congestion and make their waiting time more comfortable.
  • Space for emotional privacy: An exclusive and friendly space for individuals and families to mourn the loss of dear ones in private.
  • Online patient organizer: A web based app that helps first time patients prepare better for their appointment by providing check lists for documents, medicines, etc to be carried and giving information regarding the hospital navigation, the consulting doctor etc.
  • Help for non-English speakers: Iconography cards to help non-English speaking patients express themselves and seek help in case of emergencies or other situations.

As Arlen Meyers, MD, President and CEO of the Society of Physician Entrepreneurs, says in a report, although many good ideas come from the front line, physicians must also be encouraged to think innovatively about patient experience. An academic study also builds a strong case to encourage intrapreneurship among nurses. Given they comprise a large part of the front-line staff for healthcare delivery, nurses should also be given the freedom to create and design innovative systems for improving patient experience.

According to a Harvard Business Review article quoted in a university study, employees who have the potential to be intrapreneurs, show some marked characteristics. These include a sense of ownership, perseverance, emotional intelligence and the ability to look at the big picture along with the desire, and ideas, to improve it. But trust and support of the management is essential to bringing out and taking the ideas forward.

Creating an environment conducive to innovation is the first step to bringing about innovation-driven outcomes. These were just some of the insights on healthcare management gleaned from the Hospital Leadership Summit hosted by Abbott. In over 150 countries, Abbott, which is among the top 100 global innovator companies, is working with hospitals and healthcare professionals to improve the quality of health services.

To read more content on best practices for hospital leaders, visit Abbott’s Bringing Health to Life portal here.

This article was produced on behalf of Abbott by the Scroll.in marketing team and not by the Scroll.in editorial staff.