Decentralizing helping Railways fast-track projects: Prabhu

The Railways Ministry is considered by many as one of the best-performing in the Narendra Modi government.Suffering from chronic under-investment, a lot of flab and an over-dependence on freight revenues, Railway Minister Suresh Prabhu has looked to turn things around."We are looking to invest about USD 142 billion in the next four years for rail infrastructure modernization," Prabhu told CNBC-TV18's Latha Venkatesh, Sonia Shenoy and guest editor Adrian Mowat (of JP Morgan) in an exclusive interview.This, he said, would partly be funded by a sharp increase in capital expenditure supported by the government Budget -- it rose from Rs 57,000 crore in FY15 to Rs 97,000 crore in FY16 and is pegged at Rs 1.21 lakh crore in FY17 -- but a lot of it would be outside the Budget, such as PPP spending on the Dedicated Freight Corridor and High Speed Railway."The government is putting in place a National Plan for Rail Infra Development. Funding for all projects for the next two-three years has been tied in," he said.In the interview, he discussed how the speed of projects sanction has increased in the Railways, thanks to decentralization, how it is redefining its approach to customer service and explained the economic opportunities that will come with its modernization.Below is the verbatim transcript of Suresh Prabhu’s interview with Latha Venkatesh, Sonia Shenoy and Guest Editor, Adrian Mowat on CNBC-TV18.Adrian: It was a question about trying to get an increase in market share for rail freights. We have seen an increase in rail freight charges at the same time as diesel prices have been falling and so you have had a relative move in competitive advantage towards using road over rail. Would it be considered reduction in rail freight cost in order for it to remain competitive with trucking? A: Of course, in a way all markets are integrated and in a way if you have intrinsic strengths like the Indian market has of many institutions, many important players, domestic demand, I think we in a way are also insulated. So, we get affected adversely but because of intrinsic strength we could also ride this difficult phase in a much better manner than many other countries. What we are doing currently is to ensure that we are increasing our domestic capabilities to face such challenges that come from global headwinds and at the same time we make sure that we also respond to some of these global challenges -- what happens in the currency market, capital market anywhere in the world gets – India will get affected because also we are integrated. So, that strategy has to be two-fold, to work on domestic strengths to be enhanced as much as possible in shortest possible time. We have certain legacy issues which we try to keep them behind and try to address them. The honorable Prime Minister personally monitors untangling of some of the stuck assets that happened as a result of past policies. However, again our Finance Minister, if you saw in the Budget has laid down a very clear signal. Yesterday, the central bank has also responded positively putting faith in Indian economy in a very significant way. As you know our central bank, Reserve Bank of India (RBI), is completely independent, autonomous, they function in their own wisdom and they also have faith in growth trajectory that India is expecting and therefore we feel that we will be able to ride the wave in a much positive way than many other countries. Our job is of course, we want to make sure that the global economy also gets benefit of this because if any economy of size of India expands little more than rest, obviously the benefit will accrue to other economies also. Like we see that the Chinese the second largest, Japan is the third largest two large economies in Asia, we are the third so we have a great responsibility also to make sure that we also contribute in our own way to some recovery in rest of the world economy. We are not as big as the largest economy like US, China, Japan but still we feel we will also contribute. So, we have time to weather the storm globally in terms of making sure that we work in a proper manner. We are seeing lot of interest within the country. Now investments are picking up. We are also seeing lot of global interest in India thanks to realisation of the intrinsic strength of the Indian economy but also because of the leadership of our Prime Minister who inspires the global community of investors to ensure that they will come here, they see a regime which is very positively responding, which is business friendly but also does not necessarily favour a particular entity. So, it is no crony capitalism, it is true working of market forces institutionalised by government policies by making sure that each of the ministry also contributes.Adrian: Can I ask you specifically to talk about what railway projects will be announced over the next 12 months. I understand the ministry has been doing a huge amount of home work in developing credible projects in the railway sector particularly in urban transportation where I think people are probably underestimating how important that is going to be in terms of its multiplier effects on growth. Could you maybe run us through some of the metro schemes that the railway ministry will be promoting? A: There are huge opportunities in transportation sector of India and because the urbanisation is rising, as you correctly mentioned, even the urban transportation itself, so, there is a great opportunity because people will move. What is urbanisation, when they come to urban areas, you need to provide urban transport solutions. However, where do they come into urban areas? They come from hinterland so you also need connectivity from hinterland to the cities.So, actually speaking, we need a holistic management of integrated transport solution which we are working on. I already announced in my Budget which is presented six weeks ago to the Parliament, that we will actually be putting into place a national plan for railway network expansion, which will encompass all the concerns of all the stakeholders in the country including private sector, state government and others so that it will be a holistic plan available for implementation. Now, in terms of projects, in fact in city of Mumbai, we already talk about elevated corridor. There are about 8 million people travel by Mumbai every day, so just imagine the potential of that business. Mumbai is a commercial capital of the country; we are doing the same thing for a technical capital of India, Bengaluru. We are trying to do many things. There is a huge potential, we have a large number of projects now available to us including urban station development. There are 7 billion passengers who travel by railway every year. Now, just imagine 7 billion is close to the global population. That many footfalls, that many eyeballs and therefore those urban stations where redevelopment could take place on the top of the station using the land and air rights, just imagine the potential for that project. So, there are huge opportunities for investment into the railways. We are using all resources available within the country, we are already borrowing USD 25 billion from the largest insurance company in India but we obviously are open to finding out how other countries can contribute. There are 13 countries with whom we have got agreements for development. We are already working with Japan on a USD 16 billion project for linking Mumbai and Ahmedabad, two urban centers with hi-speed train. Yesterday, we launched another semi hi-speed train going from Delhi to Agra which is the home to one of the world’s best known site Taj Mahal.Latha: I wanted to ask you exactly how much of contracts you gave out in FY16 and how much you will give out in FY 17. I am asking because if you looked at the Budget numbers, there was an 80 percent jump in the amount of money that the railways spent. The expenditure budget – from Rs 56,000 crore in FY5, you have risen to Rs 97,000 crore in FY16. FY17, the budget is Rs 1,21,000 crore, 25 percent rise. So, how many contracts do you actually give out in FY16? How many do you expect to give out in FY17?A: You will be surprised and shocked that government’s railways capital expenditure is more than double of previous five years average. It is more than double. There is more than 30-40 percent more than previous year’s capital expenditure. So, you can imagine how much we are spending in the railways. But this is only from the capital expenditure of the railway which are mentioned in the Budget. In addition to this, we have already spent about, there is a dedicated freight corridor. We gave away the contract this year, which will be at least about Rs 30,000-40,000 crore. We are already working on the projects like port connectivity project which is another high amount. Then we gave contracts for USD 6-7 billion to General Electric (GE) and Alstom to manufacture diesel and electric locomotives this year. So, if you go outside of the Budget, without the number which I gave you which is double than the previous five years, this is an addition to what these numbers are. So, if you add these numbers, they are phenomenal numbers which already happened. Next year will be far better, because this year, we have to start from scratch. There was no available projects, so we had to prepare detailed projects report. We had to get sanctioned for these projects. Now, the sanctioned projects available with the railways. As a result of the good work that we had done last year, actually will be sufficient to even cater to the next 3-4 years of capital expenditure. And funding is more or less tied for the next 2-3 years, so therefore, there is no real issue in terms of that.In addition to this, we are making joint ventures with the state government. There are 16 state governments who will work with us. The contract that will be given to the joint venture will be far excess of what has ever happened. So, you can imagine the amount of money that is going to be spent by the railways directly for the Budget which I just mentioned. Next year we are talking about Rs 1,20,000 crore. But this is only one part. The part that is going to be spent outside of that will be even far more. And just imagine, this was the year when we actually had no projects. So, the railways used to take more than two years from the projects is announced till the tender is given. We brought down this gap to less than six months this year. So, just imagine, it is not easy, if you feel that spending is something so easy, you just take the money out and give it to people. It is not as simple as that. It is not giving away alms. This had to be followed a procedure, but despite this we have done it. So, I am very sure we will do better this year._PAGEBREAK_ Adrian: This is more of a request rather than a question. I fully appreciate that your ministry has been incredibly busy developing these projects. I am already seeing the momentum building. When I talk to investors globally, they have become more cynical on India, particularly in terms of infrastructure spending. And it will be great to get you out speaking to global investors about what is going on in the railways sector in India which I think is massively underappreciated.A: The railways are really changing in a significant way. But you try to understand the challenge of railways. First there is no other enterprise as big as railways which the government runs. So, we have to run the railway, transport seven billion passengers, the higher commercial employer in the world, with more than 1.3 million people with the largest number of meals we cook, the largest number of freight we carry, everything else. So, we run the business. We are the only other, probably in the world, the railways create their own budget and present it to the parliament. So therefore I have to balance the book, I have to make sure that I maintain it. That is the second challenge.The third challenge, I have to capital expenditure of a magnitude that is necessary, railway has never invested anything, even close to what China did in the last 10 years, even a fraction of that. So, we are now trying to gear up, we are trying to put USD 142 billion into the railways in the next 4-5 years.We are also trying to make sure, at the same time, modernise the railway system. That is why I am saying, we are doing more collaboration, we are trying to do it. I am trying to internally reorganise the organisation. So, I delegated all my power, we are empowering the people at the ground level. It was a more centralised organisation in the world. We are trying to decentralise it, we are going to make it efficient and that too, in the same system that we are bound by government rules and regulations.So, we have the very massive task of reengineering. We are trying to get the best of talent to manage this different issues. So, we are getting even people like Ratan Tata, who is advising us on business reengineering. We have got IT, the communication and information technology. So, someone like Mr Chandrasekaran who actually is one of the best brains available in the country as the CEO of TCS, he is working with us. So, we are getting top class people to come and help us pro bono to make sure that we work on a basis that this is a national enterprise which can transform India.Like so many reports coming from so many reputed institutions like Nomura, like Morgan Stanley and many others, they are saying that railways is turning around, railway is trying to develop. Railway can contribute as per most of these research reports. 1-2 percent to gross domestic product (GDP) in the next few years time. Just imagine, normal GDP growth, added by, fuelled by, accelerated by the railways, you can imagine. Railway will benefit because there will be more freight coming to us because of economy growing. But also, we will contribute to growth of economy because of our own activity.Sonia: On that point that you just made about more freight, can you give us what the freight revenue growth could be for the railways in the next couple of years because currently two thirds of revenue already comes from freight and I understand that you have unveiled a new policy to ramp up freight volumes which includes traffic rationalisation, etc. What could the growth in freight revenues be over the next couple of years? A: All this is related to the growth of economy and growth of core sector. So, railways can handle freight only when freight is available in the marketplace. So, therefore this is directly related to the growth of core sector, the steel, the cement, the power sector, and all others, so this is related to that. However, what we are also targeting is like global players, we want to make sure that 20-30 percent of the total revenues of railways must come from non-railway sources. If you just rely on freight and passengers only to sustain yourself, it will not be possible anywhere in the world and therefore changing the strategy of the railway, for the first time in the railway’s history, to bring in non-rail revenues as a major source of revenue for the railways taking it over a period of time to as high as 20-25 percent, maybe 30 percent. However, to make that, we need strategy and strategy cannot be implemented in a quarter. It has to be implemented over a longer period. We need to reorganize the structure, we want to align our policies to what the market needs so all of that I have started last year. We continue this year, we will see a huge result of this. In fact this year again, we will see some result but I will not be happy with incremental growth. I want a very big transformative growth which will happen over a three to five year timeframe. However, I am sure in that timeframe you will see the railways will not just be dependent on freight.On freight, we have been dependent on only few commodities. We have already started working on that. We will diversify our freight basket, we will also first time in railway probably for so many decades, we have not increased the freight rate, but we are in fact talking about rationalising it. So, just imagine the new thing. I am appointing a customer service manager for each of the important customer for the railways. We are making sure that all our policies are developed on the basis of dialogue which we started on the next day of the Budget. So, cement industry, steel industry, aluminimum industry, coal industry, they all keep coming to us, talking to us, we understand their concern. We are also getting private sector to come into the wagon business and other so we are trying to work on such a way that freight which is the mainstay of railway’s income today, is sustained and at the same time we make sure that we also start getting revenue for non-railway operation which is the only long-term sustainable solution for the railways to be commercially viable. We are also trying to increase our passenger fares. We have already launched yesterday Gatimaan. Soon we will launch another four important products, one which will run even at a speed higher than Gatimaan, that will come as Tejas. We will also start trains which is Humsafar which again is a premium product. We will start a product called Uday which is an overnight double-decker train which again will be a semi premium product and then we will launch a product only for the poor and the common people, fully unreserved train which will be called Antyodaya. So, all the new products will also get new business, so idea is that we want to make money from those sources who can afford to pay.Latha: We are both from Maharashtra, so I want to ask you a very specific question. When the Dabhol power project was restructured, you said you are buying power from them at Rs 4.70 which is much cheaper than the Rs 8.50 which others charge you. Is that not criminal? Are you into cost reduction or is Rs 8.50 going to be the power cost for the railways?A: Are you happy that we reduced the cost of energy?Latha: Very happy. I am asking you if you are going to do more of that.A: That is what I am saying. But what I am saying is that this is something you can imagine for years together, we are doing such a big blunder of paying, railways are paying through the nose for the price of electricity which should have been very low. When I was the minister of energy, electricity, power, I was the one who brought in this new law, which I knew has a provision for open access which was never used by the railways or by anybody else. We started using it, I used the most transparent method. I invited beats from the people, the cost of electricity with a saving will be Rs 3,000-3,500. Just imagine how much I have saved. In this year, I have saved about Rs 8,000-9,000 crore of expenditure. So, despite the fact that there was a very drop in the freight which was completely beyond my control, still I could manage only by neutralising most of it by way of reducing cost. So, this has never been attempted. So, my idea is that we should, and in fact, this year again my strategy is almost zero budgeting. We will go through every cost centre, find out why that cost should be incurred, otherwise what happens is the budgeting means that take historical cost, add 10-15 percent to it and budget for it. I do not like that budgeting. I want to ensure that each and every expenditure, point, I need to re-examine it to find out why that expenditure to be incurred to begin with. So, I have started that process. I am completely changing the accounting system, not just to make from single to double and clear from cash to accrual which was always advocated by the earlier experts that this would bring in the railways, a benefit, which I agree. But I am not happy with only just increment changes. I am trying to change it from budgeting, expenditures output to outcome, the entire chain of events should be captured in such a way that book keeping, accounting management accounting, management information system (MIS), costing all should be integrated into one so that we get a feel whether the expenditure has achieved that outcome or not. If you do not work like this, then I do not think we have the right to incur public expenditure in a way that does not give us that outcome. So, it is my obligation, as a minister to ensure that each and every rupee that is spent in the railways in used for something which is better for the good of the railways and also, investigate whether that cost was necessary to begin with.Now, the energy that you talked about comes from that thinking. We want to find out why should we pay for electricity when we are the largest buyer of electricity, why should we be the biggest payer for electricity? And that is how the thinking goes. We are trying to bring in energy conservation, we are trying to change the lighting to LED. We are trying to put solar energy, we are trying to put waste to energy. I have started water audits in the railways, energy audits in the railways, so all of that will bring in a lot of synergy, cost savings and also optimisation. Already the thinking has started the in the railway people that why should we not look at every expenditure, and try to investigate whether necessary.Adrian: Let me take you back to non-railway income. Can you talk a bit more about the strategy for redevelopments of railway stations; I think you are talking about 400 odd stations initially?A: This is something which is a most difficult as well as the most important but at the same time the biggest project of its kind anywhere. So, we already initiated it, we have given the first tender called Habibganj station in Madhya Pradesh near Bhopal. We are in the process of already working on some seven to eight projects on a very advance stage. We will be able to work on that soon. We are working with two stations in Gujarat with the state government of Gujarat. That also will be available in the next few months time. In addition to these, all these 400 stations, what we are doing is we are putting it on a website, it is a very interesting concept which we are trying to develop. First, it is not a swiss challenge because swiss challenge starts with unsolicited bids. We are soliciting bids. Let me explain to you how we are doing it. We solicit the bids, put all the information about the station on the website, then anybody has the right to submit a proposal, that proposal will be evaluated by the railways to make sure that it is normalised to suite the railways operational requirement because we have to run a train station there. It is not an icon that we are just building just for nothing. So, once it is normalised, then that project will be, that proposal will be independently evaluated by two teams, one technical team and other financial team. Once that evaluation comes in, the result of that will be put on website again and at that time anybody can challenge it. So, just imagine, now I have given a proposal for X amount and somebody else wants to challenge it, he has a right to challenge but the challenger must make sure that first challenge is possible to be implemented so we will take some guarantee and first proposer has a right of first refusal. So, we will be fair to him because he has made all the efforts so just imagine can there be a better transparent innovative process than this, this is our own idea, we developed it so this is not swiss challenge, it is better than that.