The business portfolio: Focus on core, spin off the rest

This is the second part in a series of abstracts from the Interim Executive Summary of the Report of the Expert Group on Railways, submitted to the Government earlier this year. This part focuses on the proposed restructuring plan and governance of the Railways. Excerpts:

THE INDIAN Railways needs to critically examine its current portfolio and decide which of its many businesses are core and which should be spun off. The view of the Expert Group is that less is more. In other words, the Railways should engage itself only in those businesses directly related to its core activity of rail-based logistics and passenger transport. Non-core businesses should be spun off on an arms length basis.

The eventual ownership of these entities is not an issue that concerned the expert group. The group does acknowledge, however, that the Container Corporation (Concor) model represents one way forward. It anticipates that priority candidates for accelerated spinoff would be all manufacturing units followed by units related to construction (examples, Indian Railway Construction (IRCON)), maintenance and consultancy (RITES).

The group's preliminary definition of `non-core' business consists of production units, residential colonies, catering, other onboard services, security, hotels (Yatri Niwas etc.), sanitation, printing presses, medical facilities, and schools, colleges and research facilities.

The Railways's management would be able to concentrate on its core business of transportation if it reduces considerably the burden of managing all these peripheral activities.

Restructuring plan

The study of restructuring experiences of railways around the world has revealed that the process is long, often taking 8-12 years and sometimes even longer. The sequencing of various actions often depends on the outcome of the key steps implemented earlier in the process. This makes it difficult to provide a complete restructuring plan at the outset. The expert group has therefore defined a broad vision for the medium term and detailed the near to medium term actions necessary to kick-start and sustain the restructuring process.

The proposed plan covers the first five years of the restructuring process. It has been divided into three phases (see diagram), identifying the key milestones that will need to be reached by the end of each phase. Although the group has recommended that corporatisation should take place within 3-5 years, it could well take longer.

Governance

If the Railways is expected to function on commercial principles, its management needs to be allowed a degree of autonomy that is comparable to any other commercial organisation. To grant the Railways autonomy by creating an arms length relationship with the Government is one of the salient features of railway restructuring around the world. In Europe, most countries have separated railway operations from government influence and have introduced independent regulators for the sector. China had stated an aim to ensure complete separation of government and enterprise functions within the railway operations. Russia is currently separating operations, regulations and policy.

Governance defines the roles and institutional relationships associated with policy, regulation and management. These roles are now blurred and need to be clarified and institutionalised based on the assumption that railways in India will evolve into a broad-based industry with multiple players and multiple owners.

The expert group debated long and hard on the most desirable restructuring of the governance of the Railways, and, on the role of the Government in governing it. In view of the mixed record of restructuring elsewhere, there was considerable discussion on the extent of re-organisation that should be suggested. In view of the complexities involved in restructuring as large an organisation as the Railways there is great need to ensure that the steps recommended and taken are in the correct direction. One strand of view has been that commercialisation can be done without corporatisation.

It has been pointed out that the functioning of a large number of public sector corporations in India would suggest that the mere act of corporatisation does not automatically reduce government interference. This is indeed correct. Mere corporatisation will not accomplish anything.

For any reorganisation to be successful there has to be an ex ante acceptance and commitment by the Government and the Railways alike that the latter will operate on commercial lines. Implicit in this is that non-commercial activities mandated by the Government will be clearly demonstrated and the Railways appropriately compensated for such activities. Only if there is this understanding can the commercialisation proceed apace.

In view of the state of finances of both the Railways and the Government, there is little choice. If the Railways is to recover there is little alternative but to pursue the strategic high growth path. Given the key objective of commercialising the Railways and making its management autonomous, the group concluded that nothing short of major restructuring will be necessary along with eventual corporatisation. However, some members of the expert group expressed their scepticism regarding the usefulness of corporatisation.

It is often argued that the present Railways organisation, which combines the policymaking, regulatory and executive functions, actually makes decision-making faster and more effective. This is difficult to accept. The current structure, wherein the Railways is a government department, subjects the organisation to numerous pressures that impede its functioning along commercial lines. Rather than speeding up decision-making a lot of time is wasted in warding off pressure to take decisions that are not commercially viable. As long as policymaking and execution are part of the same organisation, the Railways will find it extremely difficult to have arms length negotiations with the Government. It is therefore imperative that the restructuring plan addresses the issue of operational autonomy and insulates the Railways from political/government interference.

The Railways must aim to be corporatised into the ``Indian Railways Corporation'' (IRC). The Government should be in charge of setting policy direction. It would also need to set up an Indian Rail Regulatory Authority (IRRA), which would be necessary to regulate IRC's activities as a monopoly supplier of rail services to begin with, particularly related to tariff setting. The IRRA is necessary to distance IRC from the Government. This kind of restructuring has already taken place in the telecom sector, though that restructuring itself has gone through various stages of thinking and implementation and is still in some process of flux.

The IRC will be governed by a reconstituted Indian Railways Executive Board (IREB) whose characteristics will be outlined in the next section.

The Union Government should be in charge of setting policy direction and constituting IRRA and IREB. As key responsibilities, it should:

* Implement change in the structure, according to its vision. As owner of the system it will constitute Indian Rail Regulatory Authority and Indian Rail Executive Board by approving legislative packages necessary to constitute those bodies (new Indian Railways Act, new Indian Railway Board Act and other required laws/by-laws).

* Define the extent and nature of `social obligations' to be fulfilled by the railways and provide adequate funding. The Railways will contribute to the Indian social/development sphere, expanding socially desirable routes, providing essential services and fostering development in backward regions. The width, depth and limits to those social obligations is a political issue reserved to the Union Government that will be stated, differentiated and funded with full transparency. Also the Government will have the power to requisition railway services during times of emergency/calamity.

* Appoint/dismiss people holding key responsibilities at both Indian Rail Regulatory Authority and Indian Railway Executive Board as ultimately responsible for their overall performance. However, these powers should be appropriately circumscribed in the appropriate legislation.

The expert group recommends an immediate and comprehensive review of the legal framework and specific statutes required to create a vibrant rail based industry grounded in such a structure. The group anticipates that one of the features of this review and formation of IRC will be a change of status for the Railways so that it will no longer be required to present a separate budget to Parliament.

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