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On track? Corporatising Railways’ production units

A closely integrated management ethos habitually eludes IR, else the proposal to create two corporatised holding companies for the PUs wouldn’t have surfaced. A single-holding company would be a better fix.

Showcasing the NDA government’s “achievements” in the initial 100 days of its second term, ministry of Railways, like other various ministries and departments identifying specific plans and programmes in their respective domains, listed “Corporatisation of Production Units (PUs) of Rolling Stock” among 11 projects and activities. It proposed to hive off its PUs into a new government-owned, called the Indian Railways Rolling Stock Company.

Until 1947, India relied mostly on imports for railway equipment. The famous “Bombay Plan”,1944 made it clear that the private sector was neither able, nor willing, to make investments in capital and technology required for the purpose. Severely constrained by scarcity of forex, government directed self-sufficiency to be the primary focus of all economic activities, as it launched its first Five-year Plan.

Five PUs came to be established during 1950-1990. The Chittaranjan Locomotive Works (CLW) was the first unit established in 1950, followed by the Integral Coach Factory (ICF), Perambur in 1955 for manufacture of all welded, lightweight steel coach shells. It was expanded in 1962 to produce fully-furnished coaches. The Diesel Locomotive 0Works (DLW), Varanasi, was the third unit to come up in 1961, for manufacture of diesel locomotives, and the fourth unit, the Wheel & Axle Plant set up Bangalore in 1984 started manufacturing cast steel wheels and forged axles. The Rail Coach Factory (RCF), Kapurthala established in 1985 rolled out the first coach based on ICF design in 1988. Next to come was the Diesel Loco Modernisation Works, Patiala for upgrades and overhaul, and, thereafter, the Modern Coach Factory (MCF), Raebareli, and the Rail Wheel Plant, Bela in Chhapra (Bihar).

Meanwhile, two state-of-the-art manufacturing units have come up recently: one, the Diesel Locomotive Factory, Marhowra (in Bihar)-a joint venture between IR and General Electric, for high capacity diesel locomotives; second, the Electric Locomotive Factory, Madhepura (Bihar)-IR’s JV with Alstom SA.

The status of IR’s PUs differentiates them from the PSUs, which are autonomous corporate entities. In comparison, the PUs are hamstrung by constraints inherent in IR’s vertically integrated structure. They have no managerial cadres, each unit has a General Manager as the head, with all managerial personnel integrated with respective railways’ disciplines, resulting in excessive mobility.

With the Railway Board deciding on the number and types of locomotives, coaches, etc to be manufactured each year, PUs have little operational autonomy. Further, contrary to normal business principles, ‘transfer price’ is the norm. The sheltered market for products and absence of competition provides little motivation for quality and technology upgrades.

Thus, the PUs have suffered from technology stagnation. To make a successful entry in the international market, the production units need to upgrade technology, garner financial resources, and develop global marketing expertise. They missed the technology bus in the 1980s and 1990s. For example, even after the design of diesel locomotives manufactured at DLW became obsolete, import of new technology took too long. It took over two decades to process the tender for inducting German design for the Linke Hofmann Busch (LHB) coaches for passenger services.

China established a modern enterprise system with “a clear distinction of production and ownership”. All manufacture and repair of rolling stock, construction, design, etc, were transferred to “enterprises”, which operated as autonomous commercial entities. To induct new technology and also to bring in new investment, joint ventures with foreign collaboration have been set up. China’s rail equipment steadily became as ubiquitous across the world’s railway systems as the “Made in China” manufactures are in world’s consumer markets. The Chinese behemoths in the rail equipment sector now threaten even the world’s leading rolling stock suppliers such as Alstom, Bombardier, Siemens, Kawasaki, et al.

It is long overdue for the PUs to be hived off from IR into autonomous enterprises under a corporate structure. The underlying objective has been to distance railways’ core business from rigid bureaucratic system of the government and gain from freedom and flexibility associated with a corporate structure.

Several expert bodies have been recommending, inter alia, for IR’s manufacturing units to be spun off into separate companies, and their costing and pricing determined on commercial principles, besides private sector being allowed easy entry into those segments. The first step is to corporatise them; it will encourage the growth of expertise within these firms, and enable them, as separate corporate entities, to form joint ventures with international leaders in technology. The joint ventures will be able to leverage large and strong domestic market, enabling them to become production bases for export too. China adopted this strategy, and India, if it wishes to stay in the game and become a major player in the market for railway equipment, needs to heed the trend.

At present, both Indian Railways and its production units are at crossroads. IR’s monolithic structure is no longer relevant or sustainable. IR can ill afford to dither. Hark, how country’s habitual naysayers have soon got into the act. In addition to railways’ labour unions, the swadeshi lobby has jumped into the fray; even the mainstream Congress party’s top leadership led the protest, especially as the latest among the passenger coach manufacturing unit, Modern Coach Factory at Raebareli was identified as the first among the PUs to be taken up for corporatisation.

Still more worrisome has been a manifestation of the deeply entrenched departmental divide, the proposal, like the well-known T18 trainset story, appearing to slide into a turf war between two departments. Ostensibly to tide over the departmental virus, the two Members of the Board were recently re-designated: the erstwhile Member Electrical named as Member Traction (for all motive power-electrical as well as diesel), and the earlier Member Mechanical as Member Rolling Stock (for all passenger carrying stock and freight cars). A closely integrated management ethos habitually eludes IR, else the proposal to create two corporatised holding companies for the PUs, one for rolling stock, and the other, an Indian Railways Motive Power Company wouldn’t have surfaced. It would appear obvious that a single-holding company responsible for all rolling stock would indeed be a better fix.

With belated initiative announced by the government to merge the existing eight railway service cadres into a unified Indian Railways Management Service, the debilitating divide among IR departments will hopefully be buried. IR management is contemplating setting up the Indian Railways Rolling Stock Company with an authorised paid up capital of `1,700 crore. It will incorporate the Modern Coach Factory at Raebareli, while the other coach building units—RCF and ICF, along with the wheel producing plant will be brought in subsequently. Any dithering and fumbling needs be avoided; a definite timeframe may well be stipulated for the entire corporatisation process. Sooner, the better.

The writer is senior fellow, Asian Institute of Transport Development, Delhi.

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