Indian Railways is in a desperate position to generate revenues.Besides the need to cover its operational costs and pension costs, the revenues are required for a large number of initiatives that are urgently required for the upgradation and modernization of Indian railways. These include safety measures, building of tracks and bridges, upgradation and modernization of signalling, investments into rolling stock, building stations and terminals, building dedicated freight corridors, high speed passenger train corridors, training and upgrading skills of human resources in railways and creating indigenous capacity for development.
Railways have always played a significant role in the development of any economy and have been particularly significant for the Indian economy. A recent study by KPMG on economic impact of the second phase of high speed railways in UK concludes that the project could potentially generate GBP 15 billion per year for the economy. The analysis was a critical input into policy making for rolling out high speed railways in UK. And thus, a strong railway network plays a significant role in strengthening and growth of the economy. As a corollary, a dilapidated railways is detrimental to any economy.
Hence it is imperative that Indian railways continues to invest into its upgradation and modernization in order for the Indian economy to grow.
However, slow growth in revenues for the Indian railways while facing a galloping increase in costs has left Indian railways constrained in making the necessary investments required to transform itself into a modern, reliable and safe railway system.
Railways has been focussing on ticketing as a primary source of revenue generation. However, if railways has a significant multiplier effect on the economy, it should be possible to generate revenue by monetizing the economic value that Indian railways can generate. In fact, many railway systems globally, have a significant percentage of their revenues generated from non-ticketing sources.
Economic value is trapped in assets such as spaces, impact zones, monopolistic data and ability to create wealth by marrying tangible and non-tangible assets of the railways with capital, in a manner that no other organization is in a position to do.
One of the obvious mechanisms for monetizing the economic value unlocked by a railway system is to monetize the impact zones. Impact zones are areas which become accessible and hence open to commercial exploitation. It can include opening up areas that are non-arable for industries or even tourism.
However, significant revenues can be generated by the Indian railways by adopting a set of new trends in business models, operational models, financial models and technological models for achieving enhancing revenue generation.
Such models include increasing sales of other services and commodities to its captive passengers. Such offerings can stretch from in-coach sales of products to sale of insurances and even solicitation for sale of real estate etc.
Revenue can also be generated by exploiting non-tangible assets such as the data it generates, analytics of the data, diversifying into other data driven businesses that leverages Indian railways’ existing data and customer base and helping cargo customers optimize its logistics using the data under the possession of Indian railways.
Many of these revenue generating initiatives can potentially be taken up through a PPP mechanism, thus saving the Indian railways from even making the initial investments.
Needless to say, Indian railways also has a significant potential to cut costs and any cost savings also essentially means that extra revenue is generated. It can also significantly optimize its passenger train operations and cargo train operations by using modern techniques including analytics and reduce energy costs by adopting energy saving practices.
In order for the Indian economy to continue to grow, there is an urgent need for the Indian railways to generate revenues from non-ticketing sources in order to implement the initiatives necessary for its upgradation and modernization. Indian railways should consider roping in private investments into such initiatives through PPP mechanisms. These initiatives become even more important in the context that the Indian traveller is extremely price sensitive and is reluctant to pay a higher fare while any increase in cargo fare has an inflationary impact.
Jaijit Bhattacharya is Partner, Infrastructure and Government Services, KPMG in India