India - Railway Modernization and Maintenance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. PROJECT PERFORMANCE AUDIT REPORT INDIA: RAILWAY MODERNIZATION AND MAINTENANCE PROJECT (CREDIT 844-IN) November 30, 1987 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ABBREVIATIONS CIF - Cost, Insurance, Freight COFMOW - Central Organization for Modernization of Workshops GDP - Gross Domestic Product IDA - International Development Association IR - India Railways IRR - Internal Rate of Return MODI - A Railway Modernization and Maintenance Project MODII - Railway Modernization and Maintenance Project II MODIII - Railway Electrification and Workshop Modernization Project OED - Operations Evaluation Department 0IS - Operating Information System PCR - Project Completion Report POH - Periodic Overhauls PPAM - Project Performance Audit Memorandum PPAR - Project Performance Audit Report R&D - Research and Development RDSO - Research, Design and Standards Organization SAR - Staff Appraisal Report TA - Technical Assistance FOR OFFICIAL USE ONLY THE WORLD BANK Washington. DC 20433 USA O04ce at D0WeC1(r-Ge~era Opematuesim Ivauiatior November 30, 1987 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on India Railway Modernization and Maintenance Project (Credit 844-IN) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on India Railway Modernization and Maintenance Project (Credit 844-IN)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their ofitcial duties. Its contents may not otherwise be disclosed without World Bank authorization. -4がら‘- I i FOR 0"KUL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INDIAt RAILWAY MODERNIZATION AND MAINTENANCE PROJECT (CREDIT 844-IN) TABLE OF CONTENTS Paste No. PREFACE .......... so .... *.so ....... **so ... 0000 ..... BASIC DATA SHEET .................... ... so.. EVALUATION SUMMARY .*ooo*oooo .... PROJECT PERFORMANCE ALTIT MEMORANDUM ................ o ........... I. INTRODUCTION ................... ......... s II. INDIAN RAILWAYS ................... 2 IIT. PROJECT OBJECTIVES, DEFINITION, AND DESIGN ........... 8 IV. PROJECT IMPLEMENTATION ............... .... 0 13 V. PROJECT ECONOMICS AND SUSTAINABILITY ................. 18 VI. LESSONS LEARNED ................. ............ 22 ATTACHMENT I - Comments from the Borrower .... 25 PROJECT COMPLETION REPORT .............. 51 Is Introduction and Background ..... so.* ... 9. 53 II. Project Identification, Preparation, and Appraisal ... 55 III. Project Implementation and Cost ....... 0* .......... 000 58 IV. Traffic and Operating Performance os*oo**oo&eo, ... o ... 66 V. Project Impact .... *0 .... ... 00.0 ..... 0 ... 66 VI. Institutional Performance and Development ............ 69 VII. IRts Financial Performance 70 VIII. Bank Performance ...... 73 IX. Conclusions ..... .... 73 Annexes 1.1 Individual Project Completion Reports Prepared by IR . 75 3.1 Actual and Appraisal Estimates of Project Costs ...... 76 3.2 Disbursement Schedule ..... 77 3.3 Chart: Disbursement Schedule ...... 78 3.4 Chart: Utilization of Category 1.& of the Credit .... 79 3.5 Financing of Project - Actual and Appraisal Estimates.. 80 3.6 Status of Compliance with Principal Covenants ........ 81 4.1 Actual and Forecast Traffic, 1976/77 to 1985/86 ...... 82 4.2 Chart: Freight Traffic, 1976177 to 1985186 ****#see#* 83 4.3 Chart: Passenger Traffic, 1976177 to 1985186 ........ 84 4.4 Selected Operating Statisticaq 1976/77 to 1985/86 .... 85 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. 5.1 Phy;iical Objectives and Achievements ................. 86 5.2 Economic Rate of Return: Appraisal Estimate ......... 89 5.3 Economic Rate of Return: Current Estimate ......... 90 7.1 Summary Income Statement ..*. ........................ ..*. 91 7.2 Source and Application of Funds ...................... 92 7.3 Summary Balance Sheet ........................... 93 PROJECT PERFORMANCE AUDIT REPORT INDIA: RAILWAY MODERNIZATION AND MAINTENANCE PROJECT (CREDIT 844-IN) PREFACE This is the report of the performance audit of the India Railway Modernization and Maintenance Project. The project was partially financed by an IDA Credit of US$190 million and was approved by the Board in August 1978. The Credit was fully disbursed by June 1986. The Project Performance Audit Report (PPAR) consists of: (i) an Evaluation Summary and a Project Performance Audit Memorandum (PPIM), prepared by the Operations Evaluation Department (OED); and (ii) a Project Completion Report (PCR), dated March 19, 1987, prepared by the staff of the South Asia Regional Office. OED has reviewed the PCR against the President's Report, the Staff Appraisal Report (SAR), the Minutes of the Executive Director's Meeting at which the project was approved, and Bank files and documents related to the project. An OED mission visited India in April 1987 to examine facilities and equipment and discuss the project with government officials. Available Bank staff and consultants, who were associated with or knowledgeable about the project, were also interviewed. A copy of the draft audit report was sent to the Borrower on August 7, 1987 for comments. Comments received from the Ministry of Finance, Department of Economic Affairs have been incorporated in the final report and are in- cluded as Attachment I in the audit memorandum. Many of the comments repre- sent useful qualifications and extensions of the PPAM and are accepted as such. With some the audit is in disagreement and notes to this effect are made in the margin of the comments in Attachment I. 「，A》― ズ― … - … 1 1 1 - l 1 … PROJECT -PnJPOMUWZ AUDIT REPORT INDIAt RAILWAY MODERNIZATION AND MAINTENANCE PROJECT (CREDIT 844-IN) BASIC DATA SHEET Key Proiect Data Appraisal Actual/ Item Estimate Forecast Total Project Cost (US$ m1n) 459.0 Unknown.L& Credit Amount (US$ m1n) 190.0 190.0 Disbursed (US$ m1n) 190.0 190.0 Date of Effectiveness 10/78 1179 Date Project Completion 12/83 9/85 Time overrun (%) - 31 Economic Rate of Return (2) 23 Unknown.Lb Cumulative Estimated and Actual Disbursements (US$ million) FY79 FY80 PY81 FY82 FY83 FY84 FYE5 FY86 Estimated 6.0 29.0 81.0 142.0 178.0 188.0 190.0 - Actual 5.2 20.8 41.9 67.2 138.5 159.2 178.4 190.0 Actual/Est.(%) 87 69 52 47 78 85 94 100 /a The project as originally defined was never implemented and cost overruns for well-defined subcomponents were absorbed by reducing certain flexible subcomponents such as spare parts. The project took on many of the characteristics of a modified sector lending operatiou and simply contin- ued until the credit was fully disbursed at which point the "project" was complete. (See PPAR, paras 23-25). ]b The ERR for th-a Wheel and Axle Plant is estimated to be between 4 and 8 percent (See PPAR9 para. 32). The audit holds there is not sufficient information to evaluate the ERR of the workshop modernization component (See PPAR, para. 33). - ，ノグら・― ゃv「― . ・― l Other Proiect Data Item Original Plan Actual or Reestimate First Mention in Files 2176 Appraisal 5177 1178 Negotiations 6/78 6/78 Board Approval 8/78 8/78 Closing 12/84 9/85 Follow-on Projects Credit/Loan 1299-IN/2210-IN, Railway Modernization and Maintenance Project 11, 1982 and Loan 2417-IN, Railway Electrification and Workshop Modernization Project, 1984. Borrower India, acting by its President Executing Agency Same as Borrower Fiscal Year of Borrower April 1-March 31 Staff Input (Staff-Weeks) FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 Total Preappraisal .4 54.0 8.3 3.0 65.7 Appraisal 20.1 106.9 .1 127.1 Negotiations 18.5 7.7 26.2 Supervision 23.3 46.8 9.4 24.8 10.3 152.5 Other .1 4.0 3.0 1.2 .4 10.9 Total .4 74.2 137.7 37.1 46.8 10.7 25.2 10.3 382.5 FY84 FY85 FY86 Preappraisal. Appraisal Negotiations Supervision 12.6 13.2 12.0 Other 2.1 Total 14.7 13.2 12.0 A iv PROJECT PERFORMANCE AUDIT REPORT INDIA: RAILWAY MODERNIZATION AND MAINTENANCE PROJECT (CREDIT 844-IN) EVALUATION SUMMARY Introduction In the last forty years the World Bank has made sixteen loans and credits supporting India Railway's (IR) investment program. This is the audit of the fourteenth lendiag operation. It represents a departure from the first thirteen lending operations, which had sector lending formats, in that it had project-specific subcomponents as well as program componeats. Furthermore, it was the first of three project-specific lending operations that were conceived at the outset as a series and have been made effective as the fourteenth, fifteenth and sixteenth loans and credits for the rail sub-sector. The Audit refers to these three most recent operations as the Modernization Series and designates the separate operations as MODI, MODII, or MODIII. The audit of MODI is placed in the context of the Modernization Series which covers the last ten years of IR operations. An effort is also made to summarize the quite considerable changes that are taking place in IR in the same period and to analyze the underlying forces that have been bringing about these changes. The most unique characteristic of Indian Railways is that most of it's freight traffic is long haul bulk commodities owned by state enterprises or ministries. As such, most of it's traffic is captive and freight rates are subject to negotiations between the Rail Ministry and other government enti- ties. Most private sector and high value manufactured commodities have shift- ed to road transport. With bulk traffic growing at about the rate of growth of the economy, IR has had the security of a steadily growing volume of freight traffic at administered rates to secure it's financial viability. The main threat to continuation of this arrangement has been the growing share of passenger traffic which now accounts for about 55 percent of the traffic units of IR but only 27 percent of total earnings (PPAM, paras. 2-3). IR's labor force of about 1.7 million is about the same as that in the US railways in 1929, the advent of the diesel traction era, and it is currently moving about the same number of traffic units as U.S. railways did at that time. The introduction of new and costly technology in the form of diesel engines and larger wagons and coaches led to the development of a capital intensive and centralized maintenance regime in the U.S. and operating poli- cies that yielded high capital availability and utilization rates. The same forces are currently at work in IR, and the Modernization Series has been supporting the same shifts that took place in North America, Europe and Japan after World War II. The problem with the introduction of these technologies is that while they support the efficient use of capital, they are not labor intensive. The US rail labor force declined steadily from the 1.7 million in 1929 to about 355,000 today with much larger traffic volumes. This shift was extremely difficult and contentious in the U.S. and took a long time. This is V not to suggest the desirability of this shift for IR or its achievement at any particular time; it is merely to indicate the nature, direction and magnitude of the impact of modernization on labor. So far, the captive freight traffic of IR has made it possible to avoid the labor implications of modernization and has, instead, resulted in a serious overmanning problem and a US$2.1 billion annual wage bill (PPAM, para. 34). IR officers have managed the system reasonably well to date and Indian rail freight shippers today do not, on the average, pay higher freight rates than their US counterparts on the efficient US system. IR managers have also achieved quite remarkable improvements in freight wagon productivity. How- ever, locomotive availability has been stagnant or declining and the capital intensive and centralized maintenance system that would raise the availability figures have quite serious implications for labor redundancy. Both sides of the redundant labor coin are now being felt. The first and most obvious is the high wage bill of IR (about 45% of revenues). With IR wage rates, for the last ten years, increasing faster than general inflation and freight traffic growth rates, even with a constant labor force, the financial implications will eventually be unavoidable. The second and less obvious fall out is the overmaintenance of locomotives by a decentralized and labor intensive mainte- nance system that keeps capital tied up in repair shops and unavailable for operational purposes (PPAM, paras. 10-14). Objectives The Modernization Series is a technology transfer operation that includes modern industrial engineering practices as well as state-of-the-art machinery. The basic objective of the series is to improve IR efficiency and reduce costs. Significantly, there is no breakdown of the cost reductions between capital saving and labor saving innovations. The basic units of the MODI operation, which is the subject of this audit, are (i) an R&D support compo- nent, (ii) a new wheel and axle plant, (iii) spare parts and unit ex-change components, and (iv) a workshop modernization and rationalization component. The major contribution of the Bank to the project design was the concept of workshop rationalization and the related concept of unit exchange maintenance. The MODII and MODIII operations included (i) a diesel component plant, (ii) prototype electric locomotives, (iii) high capacity wagons, (iv) a small R&D support component, (v) a large spare parts and unit exchange component, (vi) route electrification, (vii) another workshop modernization and rationali- zation component to supplement that in MODI, and (viii) a small amount of technical assistance (TA) and training. The total amount of lending in the MOD series amounted to US$868 million and, with annual disbursements of about US$40 million, represented about 3 percent of the IR investment plan over a six year period (PPAM, para. 18). IMplementation Experience and Results The R&D components in MODI were not implemented largely because of the lack of an effective R&D institution within IR. The wheel and axle plant was successfully implemented and is a model industrial operation. The workshop modernization experienced has been mixed. The five major workshop moderniza- tions that were prespecified and planned were implemented successfully. The vi implementation results for the large unspecified component, which involved numerous machine tool replacements in facilities all over the country, are not known. The workshop rationalization and related national unit exchange compo- nent have not been implemnnted (PPAM, paras. 24-33).Ic The wheel and axle plant is functioning well but the economics of the investment were not as robust as that anticipated at appraisal. The audit estimates the ERR to be between 4 and 8 percent. The original engineering cost estimates were only half the eventual investment cost partly because they were based on the much smaller wheel diameter of the US factory. Few invest- ments can absorb a doubling in capital costs and remain viable. The quality control, timing, and logistical benefits of producing wheels and axles domes- tically instead of purchasing them internationally have not been included in the benefit stream, but it is unlikely their inclusion would make the invest- mAnt economically viable (PPAM, paras. 36-37 and 39). The audit was unable to assess the economic return on the workshop moder- nization and rationalization component since the benefit stream is based on hypothetical deteriorating rolling stock availability figures that would not take place if the investment were made. Success was then defined as the availability figures not getting any worse than they were in 1977 which, indeed, was the eventual outcome. While this is not an implauaible scenario, there was no documentation for the hypothetical figures which the Audit could examine. The evidence available for the five prespecified workshop elements indicate that this component of the workshop modernization investment was successful and probably justified. The Audit is of the opinion that the program element of the modernization component, in which machine tools were placed in numerous shops around the country that may or may not be viable elements of the maintenance system, probably had a much lower return than those allocated to the prespecified workshops. Findings, Sustainability and Lessons The lack of progress on workshop rationalization and unit exchange main- tenance is related partly to the desire of the nine zonal railways to continue to have independent locomotive overhaul facilities. Centralized facilities to serve the national system are in conflict with this desire. A more serious problem is that of the facilities and jobs rendered redundant by a ration- alized and centralized capital intensive maintenance and overhaul system. Currently, IR has 5 workshops, 25 heavy running sheds, and 25 light running sheds employing about 50,000 staff to service 3100 diesel locomotives. /c The region is of the opinion that "limited progress" in the individual project workshop's unit exchange systems should be recognized and the audit concurs. However, the audit comment refers to a "national" or "central" unit exchange system as set forth in paragraph 35 of the President's Report and subsequently supported in MOD II and MOD III, not the isolated workshop unit exchange systems referred to by the region. For the centralized or national system the audit was unable to find even limited progress. vii The heavy running sheds are near equivalents to the workshops which means there are about 30 facilities capable of locomotive overhaul in India. The Conrail System in the US, by contrast, employs a staff of about 2600 to look after 2600 locomotives with one workshop, 8 light running sheds, and a full unit exchange system. Its locomotive availability is in excess of 90 percent. The audit found that, contrary to the IR rationalization plan, the number of locomotive sheds were expanding rather than contracting. The competition of multiple redundant maintenance facilities for sufficient work has extended the already lengthy programmed maintenance cycle time for diesel locomotives and keeps the locomotive availability figure about 10 points below what can (and has been achieved in isolated cases) be achieved in IR workshops. The capital cost of this phenomena is roughly US$34 million per year (PPAM, para. 38). The primary lesson to be derived from the Modernization Series in general and the MODI operation in particular is that any component of an IR lending operation that is likely to have a substantial impact on the level or deploy- ment of the labor force is going to experience difficulties. There is an underlying unspoken assumption that the railway modernization experience of Japan and the West is both desireable and inevitable for India. The resulting "labor problem" is something for the political system to deal with and will, in any event, take many years to "solve". This is a perfectly defensible position to take if it has been the result of an analysis of the basic dimen- sions of the problem, the possibility of intermediate or "appropriate" techno- logies, an estimate of the real inefficiency costs of the present system, and some strategic analyses as to how a "second best solution" that maximized the benefits of new technology and minimized the labor impact might be imple- mented. The audit was unable to find any discussion of these issues in the preparation and design of the Modernization Series (PPAM, paras. 41-43). On the positive side, the audit is reasonably certain that the Modernization Series in general and MODI in particular sharply outlined the real long term problems facing Indian Railways and the constraints the Bank must consider when structuring an IR lending operation. This was not the case with the earlier lending format and is the useful result of a serious attempt to effect specific changes (PPAM, para. 44). 1 PROJECT PERFORMANCE AUDIT MEMORANDUM INDIA: RAILWAY MODERNIZATION AND MAINTENANCE PROJECT (Credit 844-IN) I. Introduction 1. The World Bank has been supporting India Railway's investment program for almost forty years. During that period, sixteen loans and credits have been made. The first thirteen operations were essentially sector or, more proper- ly, subsector lending operations. The last three of the initial thirteen operations were audited.1/ In the 1976 country program exercise it was decided that the long association of the Bank with Indian Railways (IR) should cease on the grounds that the subsector approach had achieved all it could and that other sectors of the economy deserved Bank support. Railway lending was reinstated in the 1977 country program exercise but with a sharp departure from the previous sector lending format. Instead of a Fourteenth Railway Project, the new effort was to be a series of three closely linked project specific lending operations with emphasis on modernization and maintenance. All three of these projects have since been made effective and are hereinafter referred to as MODI, MODII, and MODIII.2/ This audit is concerned with the first of the modernization series, i.e., MODI. However, it will analyze MODI in the context of all three of the MOD operations in order to capture the important interrelations and to give a more reasonable time frame to the audit. Also, a great deal of new analysis, in the railways and the Bank, has been done in recent years incidental to the preparation and implementation of the MOD series. It is the audit's intention to integrate and s-mmarize some of this work at the outset in order to set the stage for what follows. This background is essential to understand the PPAR and will be referred to frequently in the course of the report. 1/ The audit of the final project of the sector lending series, i.e., Railway XIII, was a desk audit without benefit of a field visit. Moreover, the PCR for this project was prepared by IR staff with an eventual supplement by Projects staff (Annex B). The PPAR for this project was released eight years after project completion and is generally neutral on the goodness of the thirteenth lending operation. PPAR, India, Thirteenth Railway Project, Report No. 6055-IN, January 10, 1986. 2/ MODIS A Railway Modernization and Maintenance Project, SAR, July 24, 1978; MODII: Railway Modernization and Maintenance Project II, SAR, Oct 26, 1982 and MODIII: Railway Electrification and Workshop Modernization Prcject, SAR, April 26, 1984. 2 II. Indian Railways 2. Attempts at describing the size and uniqueness of Indian Railways quickly degenerate into a collection of cliches. The essentials are that IR generates annual revenues of about US$5.3 billion, has an annual investment budget of about US$1.5 billion3/, employs a labor force of about 1.7 million and pays them annual cash wages of about US$2.1 billion.4/ Its route network of about 62,000 km is apportioned to nine zonal railroads and, in total, would be comparable to the combined German and French systems. China's network of about 52,000 km is also comparable as is that of the largest of the U.S. privately owned railroads, the Burlington Northern, which has about 46,000 km.51 3. Powerful economic, demographic, and political forces have been operating on Indian Railways since the national system was formed from a collection of regional systems that developed during the time of the British. The main economic force, beyond the long-term growth of the economy at around 3.2-3.5 percent per annum, was the development of a private trucking industry that flourished in spite of numerous institutional obstacles and a generally poor highway system. Though statistics are unreliable, perhaps as much as fifty percent of intercity ton-km, and an even larger share of intercity passenger- km, now moves by road.6/ What is more easily documented is the shift in rail freight traffic to bulk shipments of government-owned freight. In 1950, this accounted for about 58 percent of rail freight tonnage. By 1986 it was roughly 90 percent. Most of this is coal, food-grain, ores, cement, and fertilizer, which is owned by government departments or state enterprises. Freight rates are then subject to negotiations between the Rail Ministry and other government entities and IR has had the security of a steadily growing volume of captive freight traffic moving at administered rates to secure its financial viability. 3/ The World Bank and IDA have lent US$868 million over the last six years with the three MOD operations and have disbursed about US$40 million annually. This accounts for roughly 3 percent of the IR annual invest- ment program. 4/ Unless otherwise noted, the basic data for Indian Rail are taken from the 1985-86 Indian Railway Yearbook and the Indian Railways Annual Statistical Statistical Statement 1985-86, both published by the Railway Board in New Delhi. / Unless otherwise noted, statistics on Chinese Railways are taken from The Railways of China (1949-1984), Ministry of Railways, China. Those on U.S. railways are taken from Railroad Facts, 1985 Edition, Association of American Railroads, Washington, D.C., August 1985. / The evidence for this statement is based on 1978-79 estimates made in the Report of the National Transport Policy Committee, New Delhi, May 1980. The same data are also available in Transport in China: A Comparison of Basic Indicators with Those of Other Countries, World Bank Staff Working Paper No. 723, 1985, page 19 and Table 2.19. 3 The main threat to continuation of this arrangement has been the growing share of passenger traffic which now accounts for about 55 percent of the traffic units (one ton-km equivalent to one pass-km) of IR but only 27 percent of total earnirgs. 4. Indians appear to consume a great deal of passenger transport relative to their income. In 1981 it was estimated that the average Indian travelled 785 km intercity, road and rail. In China, with roughly the same GDP per capita, the figure was 252 km. Koreans, with about seven times the GDP per capita, traveled about 1400 km, less than double the Indian figure. Brazilians, with ten times the GDP per capita are estimated to have travelled about 2000 km.71 This phenomenon has great implications for IR since demographic pressures and rising per capita incomes appear to translate rapidly into demand for rail passenger transport. Smoothed historical growth rates for rail freight and passenger transport show the former growing at about 3.5 percent annually (roughly the rate of growth of the economy) and the latter growing at about 5.0 percent. Yet, IR traffic projections have consistently underestimated passenger demand while overestimating demand for rail freight transport. The commitment to rail freight is easy to understand since it is responsible for the nearly unique nondeficit nature of IR operations among developing country railroads. 5. In India, as in any heterogeneous country with geographic representation in parliament, regional politics are important. It should not be surprising that a rail system with national coverage is influenced by regional politics. The most obvious manifestation of this is the freight equalization scheme that was introduced in 1956 for some bulk commodities. The idea was to achieve regional equity and promote more uniform industrial development by charging the same tariff for a shipment, regardless of the distance to be transported. This undoubtedly had an impact on spatial economics when the railway was a near monopoly in the 1950's. Given the reality of today's trucking competi- tion it would be difficult to assess what impact, if any, remains. Regional pressures to construct low density lines and operate uneconomic services is another reality as is the regional distribution of 1.7 million railway jobs, of which more is said later. 6. In addition to economic, demographic, and political forces impinging on IR there is that of technological change. One of the two big historical technology transfers for IR is the shift out of steam traction into diesel and electric traction. The other is the shift from the 20 ton capacity, 4 wheel, 2 axle, all purpose freight wagon to 40 and 60 ton bogie wagons. Both of these shifts are by no means complete even as a second wave of technological change is being introduced. Current initiatives include a new generation of diesel and electric locomotives, a unit exchange maintenance system, electri- fication of high density lines, better quality rail, mechanized maintenance on high density lines, modern telecommunications, a computerized management information wagon control and passenger reservation system, mechanized loading and unloading of bulk commodities, and some containerization. All of these 7 Transport in China, a Comparison of Basic Indicators with Those of Other Countries, World Bank Staff Working Paper, No. 723, 1985, page 24. 4 technologies have been available and proven effective for years in other railroads of the world. The evidence has shown that it takes IR from 15 to 20 years to adopt and modify these technologies for Indian conditions. Part of this is because of India's previously restrictive policies towards inflows of foreign technologies and its desire to develop appropriate technologies from its own domestic research and development effort.8/ The other explanation for this phenomenon is the enormous upset that the introduction of these technol- ogies has on the established way of doing things in IR, in particular the use and deployment of labor. It is this latter concern that is one of the princi- pal themes of this audit report and appears again and again in the discussion of the modernization series. 7. An industrial complex has developed in India to serve IR and its US$1.5 billion annual investment program. Most of the procurement is from domestic private, public, and public/private firms and about 40 percent is for locomo- tives and rolling stock. IR has integrated vertically and produces and sells to itself major items such as locomotives and passenger coaches. It now manufactures its own wheels and axles at the plant financed under this project and provides the wagon building industry with these components when contracts for freight wagons are awarded. It employs directly, in its own manufacturing operations, about 41,000 workers in four factories, roughly 2.5 percent of its labor force. The relationships between IR and its suppliers are long- established, and important items such as wagon procurement contracts are allocated on the basis of well-established rules understood by all partici- pants. Regional unemployment and economic conditions have been one of the key considerations; the pattern of wagon procurement over time can only be under- stood if regional economic conditions are factored into the decision, not only the physical requirements of the railways. It is not uncommon for these suppliers to hire ex-railwaymen both for their expertise and personal contacts in IR. Thus, the boundaries between IR and their suppliers are not always well-defined and the market relationships are frequently very specialized. 8. Some understanding of the corporate culture of Indian Railways is neces- sary in order to understand its unique system of operation. IR has been described by others as a nearly self-contained state within the larger nation state. If one assumes the 1.7 million employees each support say five depen- dents, then the resulting 10.2 million people comprise a population greater than many borrowing members of the World Bank. This population is spread over the entire nation with representation in nearly every city or town of any importance. The managers of IR units are frequently the senior civil servants in an urban area and have considerable status in the community. Its stations, depots, sheds, and manufacturing facilities are linked together by its own telecommunication system and are policed by a force of 67,000 men. IR pro- vides housing for about 600,000 of its employees and has a network of schools, hospitals, recreation facilities, canteens, and hoiiiay houses to serve its staff. It has a clear and unambiguous primary function of moving a large 8/ Local Development and Exports of Technoloxy The Comparative Advantage of Argentina, Brazil, India, the Republic of Korea, and Mexico, World Bank Staff Working Paper, No. 667, 1984, page 45. 5 share of the nation's passengers and goods by means of a well-defined technol- ogy. Since most of the freight traffic is captive and the passenger traffic is cross subsidized by freight profits, the need to market services and to be sensitive to the needs of the user is not a strong element of corporate ideo- logy. 9. Indian Railways is managed by a corps of about 12,000 Gazetted officers. These men and women9/ are selected by rigorous competitive national exams and are among the best and the brightest of university graduates. A Railway Board with five members and numerous additional members and directorates in New Delhi presides over the coordination of the nine zonal railways and serves as the secretariat of the Minister for Railways. Each sonal railway is a dis- tinct financial and administrative unit with seven layers of managers and administrators headed by a General Manager. The zones are then subdivided into five to seven divisions. It is only at the divisional level that the officers must face the practical need to produce and sell transportation services as the division is directly responsible for the day-to-day running of trains and the maintenance of way and equipment. Below the divisional managers are the supervisors who are considered to be the first line of management and who are usually not Gazetted officers. They actually run the yards, sheds, and depots and are at the interface between management and the ordinary workers. The division is in many ways the key opetational unit of IR and managing one is normally considered a prerequisite to being selected zonal manager and ultimately to the Board. Railway officers at senior levels gener- ally have a good variety of experience and excellent technical qualificatioas. Running a physical system as complicated and dangerous as a railroad riquires serious competent people as the failure to perform may have grave consequences and is generally not difficult to detect, as can be the case in purely admini- strative bureaucracies. There is therefore an underlying set of physical, technocratic constraints that all managers must respond to. Managers are rewarded if trains run on time, derailments are minimized, physical targets are achieved within the budget constraint, and labor is reasonably tranquil. There is also a very strong sense of being public servants and providing an essential service for the economic and social well being of the nation. Few visitors who observe IR in operation fail to be impressed by the energy and intelligence of its officers and workers. Few would deny that it is also a thoroughly non commercial operation and very much a part of a government committed to a philosophy of democratic socialism. 10. The question of efficiency is difficult to answer with Indian Railways. Generally speaking, survival and growth in a competitive environment is the acid test. In this sense, IR is certainly less efficient than Indian private truckers for most manufactured goods and high value commodities, but this fits the conventional transport economics nostrum that, for these commodities, service is more important than freight tariffs and trucking is inherently able to offer a higher quality service than rail. The fact that IR does not run a large deficit, as do many public-owned railroads, is frequently pointed to as proof of efficiency. Given the captive traffic, the administered rate system, 91 Approximately 395 of the officer corps are women of which 309 are em- ployed as medical personnel. 6 and the lack of a commercial cost accounting system on which to base rate hearings, lack of a deficit is not sufficient evidence since the steel or coal ministries may simply be paying rates that cover inefficiencies. There really is no way to approach this question with IR except through international comparisons. The uniqueness of the IR operation and the problems of ex..hange rate determination make such comparisons hazardous, but with that qualifi- cation in mind it is worth examining, at this stage, some of the macro system measures of costs and productivity and compare these with large railway sys- tems in other countries. For this exercise the audit has chosen Chinese Railways, the U.S. Class I Railways as a system, and the Burlington Northern, the largest of the U.S. Class I railways.10/ 11. One of the easiest comparisons is that of the revenues per ton-km of IR and that of the Class I U.S. railroads and the Burlington Northern. For 1985- 86 simple division of IR freight revenues by freight ton-km and conversion to US $ at 12.2 Rs/$ yields a unit freight revenue of .017 $/ton-km. For Class I railroads for 1984, conversion to metric tons and kilometers yields .021 $/ton-km. For the Burlington Northern the figure is .014 $/ton-km. U.S. railways, rationalized by bankruptcy and deregulation, and squeezed competi- tively between long haul trucking and inland waterways, can be considered to be pretty efficient. The implication that the major rail shippers of India are not paying more for transport, on the average, than U. S. shippers is noteworthy. It does not however address the question of rail costs, since unquantified capital subsidies to IR might be supporting the relatively low tariff structure. 12. Another useful comparison is that for freight wagon productivity. If the total freight ton-km for a year are divided by the total wagon capacity, a simple measure of output per ton of capacity results. For IR in 1985-86 the computation yields a figure of 18,800 ton-km/ton capacity. For U.S. Class I railways in 1984 the figure is 12,400 ton-km/ton capacity. Without factoring in quality of service differences, it is apparent that Indian Railways util- izes its freight wagons much more intensively than the average U.S. Class I railway and this is with an average freight haul of 760 km as opposed to the Class I average haul of 1075 km. China Railways recorded a figure of 46,600 ton-km/ton, an extraordinary figure for an average freight haul of only 597 km. The Burlington Northern was even higher with 53,000 ton-km/ton, but this is with average hauls of 1392 km and 80 ton average capacity freight wagons. IR still has an average freight wagon capacity of only 31.5 tons, while China Railways is up to 53.3 tons. An interesting characteristic of the IR statis- tic is that the total capacity of the wagon fleet grew rapidly until 1973-74-- it has not increased since that time. Replacement of the old IR four-wheelers 10/ A similar attempt was apparently made in the audit of the Thirteenth Railway Project. Evidence of this is the official comment of the Indian Railways to the draft audit report in which they are obviously responding to such an analysis. The analysis was deleted from the final audit report and the files of this earlier audit were not available for scrutiny by the audit. See Annex D, PPAR India, Thirteenth Railway Project, Report No. 6055-IN, January 10, 1986. 7 with 54 ton capacity eight-wheelers has been taking place and with: heavier specialized trains, segregating eight-wheelers from four-wheelers, an increas- ing share of bulk commodities, mechanized loading and unloading, higher wagon load factors, and longer average hauls, the wagon productivity statistics have increased 76 percent since 1973-74 and are currently well above European and average US levels - in a class with the world's top performers. This is in spite of a large (55%) and conflicting passenger operation, which is not the case in the US and less so in China (22%). This considerable achievement also took place in the face of rapidly declining shares of the national investment budget going to IR, starting in the early 1970's. Indeed, this may well have been the stimulus to effect the productivity improvements. 13. In passenger coach utilization, both Indian and Chinese Railways have almost identical coach utilization rates, about 12 million passenger-km per coach per year, assuming equal average coach capacities. The nature of the passenger traffic on the two systems was quite different however. IR caters to much short haul suburban traffic and has an average haul of only 70 km for all its passenger operation. Chinese Railways, on the other hand, handles longer haul traffic, averaging 182 km per trip. 14. A final comparison related to labor productivity is also useful. By adding ton-km and passenger-km into traffic units and dividing by the total labor force, a measure of output per year per man results. International comparisons are particularly difficult here because of the differing degrees of vertical integration in the three countries. The Chinese railways are fully integrated with a very large industrial base and an even larger con- struction industry. US railways are at the other extreme, purchasing all their inputs and services from the private sector and concentrating on bein& transportation enterprises. IR is somewhere between these two extremes. Adjustments are then made in estimating the transportation labor forces in the two railways by deleting the industrial, construction and medical workers from the IR total and by deleting the industrial, construction and other category from Chinese Railways. For IR, with 1.5 million transport workers, this exercise yields 298,000 traffic units per man in 1985-86. For Chinese Railways with 1.8 million transport workers, this yields a productivity figure of 515,000 traffic units per staff in 1984, about 70 percent above IR levels. For US Class I railways, with a labor force of only 343,700; the exercise yields 4,063,000 traffic units (all freight ton-km) per man. For the Burlington Northern, which employs only 39,800 staff, the number soars to 7,640,000 traffic units per man per year. This implies that U.S. rail labor is from fifteen to twenty times as productive asn Indian rail labor if a passenger-km is roughly equivalent to a ton-km, a point on which even reasonable men can disagree. Nevertheless, no reasonable assumption about equivalencies changes the fact that IR uses between ten and twenty times as much labor per unit of output as the US railroads and substantially more than that of Chinese Railroads. Since there is little evidence to support the contention that IR is badly managed or operated, it is difficult to escape the conclusion that it is heavily overmanned. This conclusion is further supported in analyzing the experience with the Bank-financed modernization series. 8 III. Project Objectives, Definition and Design 15. The modernization series evolved out of a decision not to lend to Indian Rail any longer under a sector format and to concentrate much more on specific improvements in the railway. There were a host of seemingly obvious technology related shortcomings that needed attention: IR was using thirty year old locomotive designs when more powerful and efficient locomotives could be purchased off the shelf in the world market. Wagons were too small, far too heavy and the wheel diameter used added to the weight and cost. Braking and coupling systems needed to be replaced with updated designs. Maintenance procedures dated from the steam era and called for adjustments to the diesel and electric era. The comunications and computer revolution, which had revolutionized the railways of the developed world, had hardly touched IR. Applying these technologies and the hard learned lessons of the developed world to IR would lead to lywer cost, more efficient rail services that would stimulate economic growth and assure the survival of rail technology in the face of a new, competitive twentieth century technology: road transport. There was much to be done that was not being done under the sector lending format. The problem was to find a focus for the new lending series. 16. The initial decision was to focus attention on the industrial complex serving IR (see para. 7), and the new project was called the India Railways Industries Project. The feeliag was that this was the key to introducing new technologies. Transfer of proven technology together with the application of modern industrial engineering approaches to manufacturing would be the vehicle to bring the needed changes to IR. Approximately 78 man-weeks were invested in preparing the project through appraisal and some of the best technical expertise available in the world was brought to bear on what Bank staff, at that time, considered to be the issues. The basic analytical effort to emerge from the identification and preappraisal stage was a report rating eight of the major manufacturing and maintenance facilities serving IR.11/ Three of the eight were considered to be world class operations capable of competing successfully on world markets. Two of these, the Integral Coach Factory and the Kharagpur Workshop, were part of Indian Railways. The third, TEXMACO, was a privately-owned producer of freight wagons and had already been successful in exporting production. The report concluded that only passenger coaches and freight wagons had a clear export potential and t:iat wheels and axles could be produced at an internationally competitive price. It also recommended that Indian Railway manufacturing units be incorporated under a management separate from that of Indian Railways.12/ At this point the project was seen as 11/ India, Supplementary Preappraisal of a Proposed Fourteenth Railway Project, Renamed India Railways Industries Project, Transportation Division, South Asia Projects Department, April 15, 1977. 12/ This position was not accepted by IR or the Government and the issue was dropped. 9 ...material, parts, components, and machinery for the manufacture and main- tenance of diesel and electric locomotives and rolling stock as well as necessary technical expertise." 17. The fourteenth lending operation eventually underwent another name change and was implemented as a Railway Modernization and Maintenance Project. As the title suggests, the emphasis shifted away from manufacturing and into modernization and especially maintenance. The early enthusiasm of Bank staff was for the design and manufacture of the next generation of efficient diesel and electric locomotives and for the rationalization of the wagon building industry. All of these tasks turned out to be of a much longer term nature than expected, and the first operation was constrained to those elements that could be prepared in the time frame allowed. It was, however, an important first step and, if viewed in the context of the two lending operations that followed it in quick succession, it made a great deal of sense. 18. The modernization series was conceived of at the outset as ar integrated series of lending operations and is both unusual and innovative in this sense. The preappraisal of MODI led to a project that was simply too large and too ambitious to be a single lending operation. It was then broken up into the three feasible packages based on loan size, time constraints, and degree of preparation. The basic elements, in terms of Loan/Credit allocations, are presented below.13/ Loan/Credit Allocations for the Modernization Series (US$ millions) Item MODT MODII MODIII Total Workshop Modernization 95.0 ----- 131.0 226.0 Spare Parte and Unit Exchange 45.0 138.5 ----- 183.5 Wheel and Axle Plant 38.0 ----- ----- 38.0 Diesel Component Plant ---- 55.0 ----- 55.0 Prototype Electric Locomotives ---- 45.0 ----- 45.0 High Capacity Wagons ---- 145.0 ----- 145.0 Electrification ---- 143.0 143.0 R & D Support 10.0 3.0 ----- 13.0 T.A. and Training 2.0 10.5 7.0 19.5 Totals 190.0 397.0 281.0 868.0 When examined ten years later as three interlinked operations, it is remark- able how many of the original objectives of the new approach to lending were, in fact, addressed. Two new manufacturing plants were financed. The next generation of electric locomotives are being financed under MODII as are the next generation of high capacity wagons. Only the electrification component of MODIII was unanticipated. Elements that could not be included under MODI spilled over into MODII, e.g., prototype electric locomotives. Follow-on support to MODI elements that were not completed by MODII appraisal could be 13/ The cost breakdown of the MODI operation is given in Annex 3.1 of the PCR. The cost breakdowns of MODII and MODIII can be obtained from the SARs. 10 included in MODIII, e.g., workshop modernization. Thus, between 1978 and :984, three lending operations were prepared spanning an implementation period of almost ten years. Given the nature of the changes supported and the long gestation period for making changes in Indian Rail, it was a sensible way to structure Bank support. 19. What evolved then was a straight technology transfer operation, in which the proven technologies and industrial engineering techniques of Europe&n, Japanese and North American railroads were to be introduced to one of the largest and most complicated transportation and industrial systems in the developing world. It needs, however, to be emphasized that IR staff were hardly unaware of what was going on in the developed world. Nor, did they lack examples of industrial engineering techniques applied successfully to manufacturing operatioas, as the excellence of their operations at the Integrated Coach Factory and the Kharagpur Workshop attest. There was very little anyone could teach them about passenger operations, and their fteight wagon productivity figures were already moving to developed country levels. They had their own plans for change and the enthusiasm of Bank staff for introducing new changes rapidly was tempered by IR ataff knowledge of what such change could imply for the system, what it could mean for individual careers, the impact it might have on labor, and the absorptive capacity of an institution with a great deal of built in inertia.14/ 20. The final form of the MOD1 lending operation was largely determined by Indian Rail. The Wheel and Axle Plant was a scheme that had been under prepa- ration for years. The technology and foreign partner had already been selec- ted as had the location. The Ministry of Finance had approved the scheme so the finances were secure as far as IR was concerned. A great deal of Ban preparation and app:-aisal effort went into the examination of wheel and axle plant proposal before it was included in the project. It was already clear to IR technocrats that a second generation of locomotives was needed to replace the obsolete designs of the 1950's. They were pleased to have the import of electric prototypes in MODI, but this was deleted at the last minute by a political decision at the highest level. The idea conflicted with the na- tional policy for indigenous development of technology and the export of IR manufactured locomotives to other developing countries.13/ This component was 14/ There is considerable evidence that IR management and the Indian Government are well aware of the strategic issues facing then. The IP corporate planning exercise is quite comprehensive in its treatment of all but the labor issue. A far more self critical exercise is the final report of the Railways Reform Committee which is said to deal explicitly with the problem of overmanning along with virtually every issue raised in this audit. Unfortunately, the reports of the Reform Committee are confidential and the audit has learned of its findings and recommenda- tions only through published reports and private discussions. 151/ After a change in government, this decision was reversed and the compo- nent was included in the MODII project, IR is importing diesel locomo- tive prototypes with its own funds. 11 then replaced with the ill-fated R&D Support component in which the IR re- search and development organization (RDSO) was to be assisted in adapting thyristor control technology to existing electric locomotive designs.161 The large spare parts component was a continuation of the sort of support given under previous sector lending operations. Even the workshop modernization component was largely based on the existing plans for improving selected workshops in the IR system. It could hardly be otherwise for the first pro- ject specific lending operation, given the sophistication and experience of IR technical staff and the inertia of the system. What, then, was the Bank contribution to project design? 21. In the audit's opinion, the Bank made a single fundamental contribution to the design of MODI, and this was done (at least in presentation terms) almost as an afterthought to the workshop modernization component. This was the introduction of the concept of workshop rationalization and the related concept of the unit-exchange maintenance system. The locomotive and rolling stock maintenance facilities of 1'. w.. -e still based on a decentralized system that was defined during the era :2 kieam and autonomous regional railways. This meant many small maintenance e.d repair facilities, capable of dismant- ling and repairing almost any meci.h.nical component, scattered all over the country. Typically these facilities were also able to manufacture commonly required spare parts. This made sense in the steam era when the technology was simple and the distance a locomotive could travel was determined by its refueling requirements (about 100 miles). Diesel locomotives have no effec- tive limit on how far they can travel without refueling, and are vastly more complicated and sophisticated pieces of machinery than steam engines. The concept of rationalization then followed the European and North American experience when the switch to diesel and electric traction took place. Such expensive pieces of capital equipment needed to be utilized intensively, and a unit-exchange maintenance system allows the maintenance facilities to simply replace a worn or broken mechanical subassembly with a good one from the unit exchange pool and quickly get the locomotive back into operation. The worn or broken subassembly can then be overhauled or repaired at leisure and returned to the pool later.171/ Since the overhaul and repair of subassemblies for diesel and electric locomotives requires expensive and specialized machine tools and, frequently, special working environments and quality control, logic and economics calls for fewer, more centralized facilities that can benefit from economies of scale. This is what happened in the West after World War II. Steam sheds were closed down and locomotive (and wagon) maintenance centralized. After the era of bankruptcies and rationalizations of the 1960's and 1970s in the U.S. when different systems and parts of systems were com- bined, another wave of maintenance facility rationalization took place. Maintenance shops became ever more capital intensive and worked round the 16/ Thyristors are semiconductor devices that act as electric switches, rectifiers and voltage regulators. 171 The concept had been tested on a pilot basis in the Kharagpur workshop. It showed that locomotive maintenance down time could be reduced by 50 percent. See SAR MODII, October 26, 1982, para 3.22, page 25. 12 clock. Locomotive availability rose to 90 percent and above. What logic and rail management could not achieve was effected by bankruptcy judges. 22. In the case of Indian Rail, it was recognized that no comprehensive plan to rationalize IR locomotive and rolling stock maintenance was extant. There were only plans to modernize existing facilities. The Bank then agreed to finance the beginning of selected modernization of workshop and maintenance facilities but then went after the system benefits of rationalization by specifying that a rationalization plan should be prepared.181 This was reflected in the legal agreement with the following covenant. "The Borrower shall carry out the workshop m,dernization and rationalization program refer- red to in Part A of the Project in accordance with the Plan of Action agreed upon between the Borrower and the Association."19/ At that point an agree- ment was made to eventually agree on something mutually acceptable. It was considered to be the first step in a long process and US$30 million of the proceeds of the Credit were allocated for financing a unit-exchange system pool of components. 23. At the time of project preparation the basic macro economic projections called for a 4.7 percent annual growth rate in GDP over the period 1977/78- 1982/83. Rail freight traffic is highly correlated with economic performance and was projected to grow at 5 percent per annum over the same period. Passenger traffic was projected to grow at 4 percent. Considerable effort went into analyzing the various key commodities, principally coal and steel. Nothing was said about the basis for passenger projections.20/ The "Economy" section of the President's Report points out that a principal objective of the draft national plan was to remove unemployment and significant underemploy- ment. It also pointed out that while the labor force had been growing at 2.5 percent, employment in the organized sector had been growing at only 2.2 percent for the previous ten years and that all of this hbd been in the public sector. Organized private sector employment had not grown at all since 1966. The project was then prepared when there was some hope that the Indian economy could break out of a long term growth rate pattern of 3.0-3.5 percent per year to a much more desirable and technically feasible growth rate of around 5.0 percent per year. Whatever the strategy for reducing unemployment, it was clear that the public sector would have to play an important role. Indian Railways, as the largest public sector employer in the country, would presum- ably have to do its share. 18/ SAR, A Railway Modernization and Maintenance Project, July 24, 1978, para. 3.09, page 23. 19/ DCA, Credit 844-IN, November 13, 1978, Section 3.01(c). 20/ Macro economic assumptions are extracted from the President's Report for the project under audit, pages 1 through 7. Traffic projections are extracted from the Staff Appraisal Report pages 15 through 17. 13 IV. Project Implementation 24. There were a number of important deviations in actual practice from the macro economic assumptions. Instead of a 4.7 percent annual growth rate in GDP over the five-year period, the economy performed at it*s usual long term growth rate of 3.2 percent per annum between 1977/78 and 1982/83. Freight traffic over the same period grew at an average rate of 2.2 percent instead of the 5.0 percent expected. Passenger traffic, on the other hand, grew at 5.1 percent annually instead of the projected 4.0 percent. In the organized sector of the economy, employment grew at about 2.5 percent per annum. Private sector employment grew at about 1.4 percent while public sector employment grew at over 3.0 percent per year.211 Employment by IR during the same period increased at an annual rate of about 1.0 percent per annum. Thus, IR was becoming less of a freight railway and more of a passenger railway during project implementation, a fact that has been highlighted earlier. The slow growth of the IR labor force in the face of rapid public sector employment growth is noteworthy. Given the growth in IR output, it is safe to assume that the physical productivity of labor improved over the period. 25. Set forth below is a revised version of the table in para. 19 in which the reallocations that took place in MODI, and those that have already taken place in MODII, are reflected. Revised Loan/Credit Allocations for the Modernization Series (US$ million) Item MODI MODII MODIII Total Workshop Modernization 89.8 -- 131.0 220.8 Spare Parts and Unit Exchange 43.0 203.5 -- 246.5 Wheel and Axle Plant 55.6 -- -- 55.6 Diesel Component Plant -- 55.0 -- 55.0 Prototype Electric Locomotives -- 45.0 -- 45.0 High Capacity Wagons -- 80.0 -- 80.0 Electrification -- -- 143.0 143.0 R & D Support 1.6 3.0 -- 4.6 T. A. and Training 2.0 10.5 7.0 19.5 Totals 190.0 397.0 281.0 868.0 The MODI redistribution is consistent with that in para. 3.05 of the PCR and indicates that there was a large cost overrun in the wheel and axle plant that was partially covered by deleting most of the R & D component, some of the machine tools for workshop modernization and a small amount of spare parts. The major shift so far in MODII is a US$65 million reduction in the high capacity wagon component that was added to the spare part and unit exchange component. Thus, workshop modernization and spare parts, which were initially 47 percent of the loan/credit allocations for the three lending operations, have increased to 54 percent of the revised allocation. These are pretty 21/ India: Economic Situation and Development Prospects, World Bank Report No. 6090-IN, May 9, 1986, Volume II, Table 1.6. 14 flexible project loans and have taken on many of the characteristics of a sector lending operation in that each lending operation has a large allocation for either spare parts, machine tools, or wagons that can be expanded or contracted to suit the requirements of the well-defined components within the bounds of the overall loan amount. While flexibility and reallocation can be carried to the point where project lending becomes, ex post, a line of credit; it is the audit's opinion that it has been used prudently and effectively so far in the modernization series. 26. The deletion of most of the R & D support in MODI may appear surprising, given the technology transfer emphasis of the loan/credit and the policy of the Indian Government to develop appropriate technologies domestically. The still smaller amount of R&D support in MODII, and the absence of any in MODIII, is equally surprising. The problem here was basically one of a limited absorptive capacity on the part of the Research, Designs, and Standards Organization (RDSO) that is supposed to undertake R&D for Indian Rail. RDSO has not been on the high road to promotion and bureaucratic success in the IR corporate structure. It has been used as a holding ground for officers des- tined elsewhere and has suffered from an extraordinarily high turnover rate. In addition, most of the semi permanent staff have been only marginally quali- fied to undertake serious R&D work. The small amount that was budgeted from MODI and MODII has had the beneficial effect of exposing the shortcomings of this institution. IR now seems determined to remedy the situation, though it will be a long and difficult process, starting from scratch and rearranging important elements of the present corporate incentive system. In this sense the inclusion of these elements early in the series has been a success and the Bank should be ready to support feasible initiatives in this area under future lending operations. 27. The wheel and axle plant is a model industrial operation, and the story of how this technology was transferred from Iowa to Bangalore and how the initial difficulties were systematically overcome is a tribute to the staff of Indian Railways, the foreign owner of the process, and Bank supervisory staff. One not so happy note is the fact that the capital cost of the plant was seriously underestimated by the project engineers. When complete, the cost was roughly double that initially expected, even with the normal price and physical contingencies included in the initial cost estimate. According to IR analysts, about 42 percent of the cost overrun was due to "cost escala- tion", i.e., beyond the 7 percent annual price escalation in the estimate. Another 27 percent was due to "changes in the scope and specifications of the project", i.e., in excess of the 10 percent physical contingency in the origi- nal cost estimate.22/ The changes in scope were due to the fact that the larger and heavier wheel used by IR required plant design modifications that were not anticipated in the original cost estimate. This, of course, affects greatly the retrospective economics of the project but, even more important, it affected the initial economics and the decision to go ahead with the pro- ject. 221/ Wheel and Axle Plant - Nature and Origin of Cost Increase, COFMOW, April 1987. 15 28. All three lending operations have been deeply involved with the moderni- zation and rationalization of maintenance of locomotives and rolling stock. MODI commenced with a locomotive workshop modernization component which in- cluded a requirement for a workshop rationalization plan. This was supple- mented with spare parts and an investment in unit exchange componente. MODII supports the construction of a new Diese. Component Plant at Patiala in the Punjab. It is supposed to centralize the remanufacture of diesel locomotives and unit exchange components for roughly half the rail system and provide some spare parts for the entire system. Finally, MODIII supports the modernization of the major carriage and wagon workshops. If all were to go smoothly, IR would eventually develop an integrated rolling stock maintenance and repair network on a national basis.231/ This has been a major innovation of the three lending operations and it has not gone well. 29. The first difficulty was to obtain from IR a modernization plan that included the concept of rationalization. Under the MODI operation the newly- created Central Organization for Modernization of Workshops (COFMOW) was to prepare such a master plan. The February 1981 supervision Aide Memoire ex- pressed gratification with overall project progress but had this to say about early attempts at a master plan: "....the basic problem with the report is that it indirectly advocates maintaining the self-sufficiency approach to maintenance of equipment and, in some instances, to decentralize even further." Eventually, a master plan with some explicit rationalization was prepared and served as the basis for the modernization component of the MODIII op%ration. Under this plan "...the number of workshops in the IR system would be reduced from 47 to 37 by the year 2000. Out of the 37 remaining, 28 would deal with a single POH activity."24/ The basis for some rationalization was set. 30. The audit made an attempt to obtain a comprehensive listing of all rol- ling stock maintenance facilities of IR but was unable to obtain one. Various maps were made available showing literally hundreds of the more "important" facilities. Part of the problem is that continuous change is taking place with rolling stock maintenance facilities especially as the phase out from steam traction continues. Typically, a facility that was dedicated to steam locomotive maintenance is not closed down but is converted to wagon or coach maintenance. The managers of these facilities look around for other tasks to undertake to keep the redundant labor occupied and small scale production of simple spare parts, such as cast iron brake shoes, is frequently undertaken. A few used machine tools are found and other tasks are undertaken. Keeping up with such a system is not easy, even for IR planners. Language is part of the difficulty. There are "workshops", "depots", "sheds", "manufacturing units", and "remanufacturing units" and all imply some specialized activity. In fact there is a great deal of overlap in the functions of these facilities. As a specific example, IR has five major locomotive workshops, 25 heavy ranning sheds and 25 light running sheds to service 3100 locomotives. The heavy running sheds are major facilities that, for repair purposes, function at 23/ SAR Railway Electrification and Workshop Modernization Project, April 26, 1984, Report No. 4940-IN, paragraph 3.25, page 23. 24/ SAR, MODIII, April 26, 1984, para. 4.19, page 37. 16 almost the same level as the five major workshops. Thus, there are 30 facili- ties carrying out major overhauls of diesel locomotives in India. In the fully "rationalized" developed world an equivalent railway with an equivalent locomotive fleet would have, at most, three workshops specializing in locomo- tive overhaul and remanufacture and a dozen light running sheds capable of running repairs and replacement of subassemblies under a functioning unit exchange system. The Audit was able to obtain an up-to-date inventory of the 45 diesel sheds on the system and discovered that not only was the number not declining, as planned, but eight more sheds were either sanctioned or under construction. The statement of the 1981 supervision mission (para. 29) seems to remain an appropriate one, at least as far as diesel sheds are concerned. 31. The "rationalized" workshop model of the developed countries is not being achieved very rapidly, if at all. There are good reasons why this is the case and the audit found broad agreement within IR as to why the fully rationalized system probably cannot be achieved. The reasons are basically the residual power of the zonal railways and the problem of surplus labor. The nine zonal railways are powerful administrative entities and wish to have control over all aspects of their operation. An important element of this control is the ability to maintain and repair all of their locomotives. A fully rationalized system would make at least six of the zones dependent on facilities not under their control. The feeling is that, for both logistical and bureaucratic reasons, centralized unit exchange repair facilities, such as that planned at Patiala, will not work well and that the dependent zonal railways will suffer under such a system. Thus, every zone today has either a workshop or one or more upgraded sheds under its control in spite of the official commitment to integration and centralization. The implication for the Bank-financed locomo- tive remanufacturing facility at Patiala, under MODII, is not good.25/ 32. The problem of surplus labor is more fundamental and intractable. The situation in the IR Mechanical Engineering Department is illustrative. It is the largest of the eight departments in IR and employs about 490,000 workers. This staff is deployed throughout the national system of sheds, depots, work- shops and manufacturing facilities varying in size from 15,000 down to 150 employees in a facility. The diesel sheds and workshops mentioned above are part of this network. They care for the fleet of about 3100 diesel locomo- tives currently operating on IR. On average, IR uses 16 men to maintain one diesel locomotive, 6 in the workshops and 10 in the sheds. Thus, approxi- mately 50,000 men look after the IR diesel locomotive fleet. In North America, an equivalent locomotive fleet would require between one and two workers per locomotive, perhaps 4500 men. Since North American labor costs are about twenty times those of India, the fact that it takes only eleven times as much labor to maintain a locomotive in India implies that the resultant Indian total labor costs are still very low and that overmanning in diesel maintenance has not progressed to the stage where all of the benefits of low cost labor are lost. There are, however, other implications. Centralizing locomotive maintenance into three major workshops and a dozen light running sheds would, 25/ Slow progress is being made with the integration of the zonal railways. Wagons move freely between the zonal systems and some locomotives travel between zones and receive some maintenance outside their home sheds. 17 at current IR manning ratios, lead to a labor force of about 13,000 men looking after 1000 locomotives in each workshop. This is one of the reasons rationalization cannot go very far very fast. Thirteen thousand employees under one roof is a big managerial and labor relations problem. It would also create major p>litical problems to pull this many skilled jobs out of other regions and concentrate them in three "favored" regions. IR managers generally do not like seeing the labor force at one facility exceed two to three thousand. Beyond this size, control is difficult and the impact of a larger facility experiencing labor problems can be quite severe for the system as a whole. 33. The audit visited the diesel shed at Tughlakabad, outside New Delhi, and found it a larger than average facility.26/ This is the home shed for a fleet of 111 diesel locomotives and employs a work force of 1200. It was moderni- zed under MODI and has its own partial system of unit exchange in effect. It operates only one and a half shifts for major maintenance cycles and takes about 10-12 days to complete an annual locomotive overhaul. With a full unit exchange system in effect it is estimated the overhaul would take about 6 days. If rn additional shift were to operate (two and one half in all) it would take about 4 days, roughly equivalent to the developed country experi- ence. In addition, IR locomotives are being overhauled on an annual basis rather than the norm of about once in three years so the question of the quality of the overhaul must be raised.27/ It is quite clear that the manage- ment, skills and equipment at the facility are very good and that it could be much more productive under a "rationalized" system. This however would lead to many redundant facilities and much redundant labor and this is the diffi- cult problem facing IR management. It wishes to have a high locomotive avail- ability but must spread the work around in many relatively inefficient shops that all need something, i.e. a locomotive, to work on. A system that could release the locomotive in four days now takes at least 10-12 days to complete the overhaul and does it every year instead of once every three years.28/ 34. The analysis of labor productivity in para. 14 implies that Indian Railways, as an institution, is seriously overmanned. The subsequent analysis of the diesel shed productivities supports the larger analysis. No one seriously disagrees that IR, with it's trained and experienced management, 26/ Diesel Locomotive Shed, Tughlakabad, Northern Railway, April 1987. 27/ Part of the problem here is the use of indigenous materials and spare parts that are not always state-of-the art. 28/ This has been referred to as the "Conrail phenomenon" and was discovered in the U.S. when the Conrail system was put together from a number of disparate components. Low locomotive availability (about the same as that of IR) was the symptom of the problem. The amount of locomotives under repair and out of service was approximately equal to the number of repair berths. Reducing the number of repair berths to that actually required to do the work increased availability (currently about 92 percent) by about 80 percent of the berth reduction without reduction in the quality of maintenance. 18 could eventually operate the railway, probably even more efficiently, with less than half the existing staff, saving the government a very large sum of money every year in wage costs. In 1929, the US Class I railways employed roughly 1.7 million workers, about the same as the IR work force today, and moved about the same traffic volume as IR is today. By 1985 this was down to about 355,000 staff carrying much more traffic. This was the underlying model that drove the rationalization component of the MOD series though it was never inade explicit. The audit has been unable to find any analysis of the general IR labor problem or any statement of the labor saving benefits of the proposed rationalization. The technology transfer assumptions that dominated the design of the lending operations failed to transfer the labor implications and this is probably the major criticism the audit has of the modernization series. What is completely clear to the audit is that there is no reward to any level of IR management for achieving efficiencies based on labor savings. The sort of "successes" claimed for the transportation deregulation initiative in the U.S. in which rail labor was cut from 500,000 to 353,000 in four years, and the real wages of some airline employees were cut from US$37,000 to US$23,000 in one year are the goals of profit oriented privately-owned companies and are not the sort of objectives pursued by public sector institutions anywhere.29/ This is not a particularly new insight, but the audit is of the opinion that it should have entered explicitly into the design of the modernization series.30/ V. Project Economics and Sustainability 35. The fact that the wheel and axle plant is run well does not guarantee its economic viability. At appraisal, the facility was expected to yield a 19 percent IRR. A fifteen percent increase in project costs, all other things being equal, was to have reduced the IRR to 15 percent.31/ A fifty percent increase in pvoject costs would presumably yield an IRR of roughly 7 percent, and the 100 percent increase that eventually took place would have made it impossible for the Bank to support the project. The PCR, in it's revised economic analysis, finds the revised IRR to be about 4 percent. This low rate of return is primarily due to the capital cost overruns but also arises from the various assumptions made about the value of wheel and axle production (the benefit stream) in the economic analysis. This number has been based on the CIF import price of wheels and axles, which is what IR would have to pay if they did not have the plant. In the 1978 appraisal report this is estimated 291 For a good description of the US experience and the benefits claimed for it see: TLansport Deregulation...and All That, a speech given by Alfred E. Kahn at the World Bank Transport and Structural Adjustment Symposium, Baltimore, Md., May 6-8, 1987. 30/ For a recent treatment of the subject in the Indian industrial sector see: India: Economic Situation and Development Prospects, World Bank Economic Report No. 6090-IN, May 9, 1986, pages 116-124, especially para. 4.62. 11/ SAR, July 24, 1978, para. 4.12, page 36. 19 at about US$1030 per set (an axle and two wheels).32/ Two years later, when wheels and axles were being procured with Bank financing, the price had risen to about US$3000 per set largely because the demand by US railroads was un- usually high. By 1987, when the new plant was near peak production, the US demand had collapsed and world market prices had fallen to about US$1200 per set, roughly comparable to appraisal estimates in real terms. The revised economic analysis in the PCR then incorporates a scenario that assumes that prices will rise again to about US$1600 per set as the slump in wheel and axle prices works back to levels that are consistent with costs of production. The audit's market analysis confirms that in the late 1970's this market was greatly influenced by the demand from U.S. freight car makers. In the peak year of 1979, US manufacturers produced 96,500 new freight wagons, up from 53,000 in 1976. By 1981 the output of new wagons in the US was down to 47,100. Since that time the annual production of new wagons has stabilized at about 13,000. The sources the audit consulted feel that recovery of any kind, even slow recovery, to the unusual supply-demand situation of 1980 is extremely unlikely and that US$1800 per wheel set would be the upper limit of any rebound. Too many newly industrializing countries are willing to subsidize their steel industries and too much capacity is already in place. The audit believes the US$1800 per set price scenario with a resulting 8 percent IRR is as likely as the US$1600 scenario with a 4 percent IRR. This would make the 8 percent IRR an upper boundary for the eventual outcome and something like 6 percent the more likely estimate. If IR can resist overmanning the plant to the extent that IR workshops are overmanned, then the nonquantified benefits of vertical integration would help the economics of the project.33/ Should the smaller diameter wheel that all agree (except the civil engineering department) should be used by IR ever be adopted, then the plant economics would, again, look better. Even with these qualifications it is difficult to escape the conclusion that the Wheel and Axle investment would have been much better spent in other areas of the railroad or the economy.34/ 36. The economics of the workshop modernization component is based on events that d;d not take place. It was assumed that without this investment rolling stock availability would deteriorate to levels never before registered in IR. With the investment it was assumed that rolling stock availability for the system as a whole would stay about the same as 1977 levels. The first phase of modernization was, therefore, a holding operation. The second phase, undertaken in the MODIII operation, was presumably designed to effect actual improvements in availability as the systems rationalization and unit exchange benefits began to accrue, though these target availability statistics are not 32/ SAR, July 24, 1978, para. 2.27, page 14. 33/ At appraisal the Wheel and Axle Plant was expected to employ about 1200 workers. In 1987 the plant employed about 1500. 34/ The 1985/86 Comptroller and Auditor General (CAG) Report on Railways, published by the Government of India in June 1987, has similar findings concerning the Wheel and Axle Plant. 20 specified in the MODIII Appraisal Report. Since the actual 1985/86 availabil- ity statistics stayed pretty much at 1977 levels, this component is consider- ed, in the PCR, to be well-justified economically.35/ There is no discussion in the SAR, and thus the PCR, of how the "without the project" availability statistics were determined, nor why the "with the project" statistics were appropriate. Without this rationale, it i dlfficult to make a judgement about the real economic impact of the investment. 37. The MODI appraisal report did set specific performance improvement tar- gets for the single manufacturing unit and four workshops that received most of the attention under the workshop modernization component, and the PCR summarizes the experience.36/ The experience for locomotive overhauls is examined here because of the audit's familiarity with the subject, both in India and elsewhere. At the Kancharapara Workshop the objective was to reduce the cycle time for periodic overhauls (POH) of electric locomotives from 35 to 30 days. The 1985 actual cycle time was 31.4 days, an improvement of 10.3 percent. At the Kharagpur Workshop the objective was to reduce the POH cycle time for diesel locomotives from 21 to 15 days, and this was achi.vf,d for an improvement of 28.6 percent. These are certainly substantial impr<vements, but leave the facilities operating well beyond the cycle times that tre pos- sible with the equipment and quality of labor and management avoilable. Kharagpur, which was already a world class facility according to t.l earlier industrial ranking exercise (para. 16), has now got its POH cycle tt!es for diesel locomotives down to the level that the Tughlakabad Diesel Lo.omrotive Shed (para. 33) has achieved for its three-year POH. This is about t1%; best that can be done with a one and a half shift operation and no unit e. ::hange system. To go beyond this, which is certainly technically feaslble. would begin to lead to the redundancies mentioned in para. 33. The audiL does not wish in any way to downgrade the efficiency improvements achieved a der the project, it simply wishes to point out the suboptimal nature of the adjust- ments and the limiting boundary the improvements are approaching. 'he audit is reasonably certain that what can be demonstrated to be the case fot locomo- tive maintenance is also true for wagons and coaches. The overmanninF; is a general characteristic of the system which leads not only to higher wage costs, but also higher capital requirements as wagons, coaches, and locomo- tives are tied up in a maintenance system that requires long POH cycle times. It also requires large numbers of machine tools that are underutilized.37/ 38. The conflict between locomotive POH cycle times and locomotive availabil- ity is most apparent in the national statistics. While virtually all other 35/ PCR, pp. 15-16, paras 5.04 and 5.05. 26/ PCR; Annex 5.1, pp. 34-35. 37/ During the audit's visit to Calcutta it was discovered that there were three under-floor wheel lathes operating at about 25 percent utilization rates within a 10 km radius. These are highly specialized and costly pieces of equipment costing about US$1.25 million each. The reason for not sharing a single lathe was the zonal rail boundary and the require- ments of the separate suburban service. 21 productivity figures for IR have been increasing substantially since the early 1970's, locomotive availability has been stagnant or declining. The current figure of 81.3 percent availability for broad gauge diesel locos is respec- table for most developing country systems, but not for a world class operation such as IR is. Most systems in this class have availability figures well in excess of 90 percent. A more detailed look at the IR standard maintenance cycle times indicates that if the locomotive is unavailable only because of the programmed maintenance then its maximum availability would be about 91.4 percent. The analysis of out-of-service time for unanticipated road failures indicates a very low figure, comparable to that found on the best U.S. rail- roads. The unexplained 10 percent of non-availability is because actual programmed maintenance takes much longer than the standard times. The fact that the Tughlakabad facility has managed to approach the 90 percent avail- ability figure for its locomotives indicates what is possible even with the relatively long IR programmed maintenance cycle times. The audit therefore concludes that the low locomotive availability for the system as a whole is a manifestation of the "Conrail phenomena" treated in footnote 28. It is pos- sible to estimate this element of the cost of the present rolling stock main- tenance system as roughly 10 percent of the locomotive fleet (the difference between an 81.3 percent availability and one of 91.3 percent). That would be about 366 broad gauge diesel and electric locomotives at US$1 million each, roughly US$366 million, about US$36 million per year in opportunity cost. This is a minor amount when compared to the annual redundant labor bill, but probably becones substantial when coaching, wagons, and excess machine tool costs are included. 39. The audit holds the opinion that the Bank-financed machine tools in the five major facilities were probably economically justified based on the speci- fic improvements in cycle times in the specific shops and not on the fact that rolling stock availability figures for the system were stagnant or declining. There is little evidence of any rationalization benefits accruing yet and the prospect, based on progress to date, is not good. For the Bank-financed machine tools that went out to all other elements of the system, many of which have no current relevance to a rationalized system, it is possible, and even likely, that their productivity does not justify their costs.38/ Supervising this element of the project has been virtually impossible, given the complex- ity of the well-defined elements, the staff availability constraints, and the near continuous preparation efforts for succeeding lending operations. 40. Sustainability is not a problem with Indian Railways. Whatever is learned and incorporated into the system is likely to remain for a long time. This is both a great strength and a weakness of the organization. It changes very 38/ An example of such a facility visited by the audit is the Central Workshop in Mysore. It is a classic case of a facility that exists primarily for historical reasons. Its staff of 2300 are engaged in a great variety of tasks, many of which are at a cottage industry level of production and organization. Yet, in 1986, when about 70 staff retired, over 60 new staff were recruited, many of whom are the sons of railway workers. Intergenerational "rights" to a job are an added complexity to the overmanning problem. 22 slowly and deliberately and only after years of preparation and experience. It is for this reason, among others, that Bank lending operations must take the long view, and why the audit, with qualifications, has a generally favorable view of the MOD series. It took the staff beyond treatment of general symptoms of the system and brought it to grips with the real problems of the organization. VI. Lessons Learned 41. The primary lesson to be derived from the MOD series in general and the MODI operation in particular is that any component of a lending operation that is likely to have a substantial impact on the level or deployment of the labor force is going to experience difficulties. Conversely, any component that is neutral in this respect is likely to proceed relatively smoothly. 42. It is possible now to characterize the subcomponents of a project-speci- fic lending operation as being either benign or not benign in terms of its labor impact. The benign subcomponents are those that have little impact on labor other than a numerical increase. The best example of this is the wheel and axle plant which not only allowed for an increase in IR employment but substituted local production for imports. The current favorite in this cate- gory is route electrification which has little impact on labor as it is sub- stituting electric traction for diesel-electric traction.39/ It supp-rts import substitution by utilizing coal-generated electric power rather than imported petroleum products.40/ Both of these components have figured promi- nently in the MOD series and provide stability to the lending operations. Rail renewal is another relatively benign investment that is being promoted as the centerpiece of the forthcoming MODIV operation. Other examples of rela- tively benign initiatives are: introduction of second generation diesel and electric locomotives, introduction of improved bogie wagons, modernization and replacement of machine tools, and air brakes and center buffer couplings. 43. Examples of nonbenign initiatives are: the displacement of steam with diesel and electric traction, rationalization and centralization of locomotive and rolling stock maintenance, a computerized real time operations information 19/ This is not entirely accurate as one of the benefits claimed for electri- fication is that electric locomotives are simpler and easier to maintain than diesel-electric locomotives and, therefore, require less labor. 40/ Such initiatives can have their own unanticipated side effects. The wheel and axle plant competes for scarce and costiy electric power and now imports its principal raw material, scrap steel, which is in short supply in India and currently selling domestically at about double the world market price. Electrified railways will be a new high priority user of scarce domestic power supplies. 23 system4ll, computerized passenger reservation systems, and mechanized bulk loading and unloading. IR management is supporting all these initiatives because it wishes to have the capital efficiency benefits that other railroads around the world have obtained from their introduction. It would, however, like to avoid the labor implications, if possible, in the short and medium run. IR has been able to avoid confrontation with the problem of overmanning by operating effectively within this constraint and by having sufficient captive freight traffic and rate bargaining power to avoid the financial implications that usually accompany such operations. The gradual shift to predominant passenger operations and the continued growth and efficiency of trucking will eventually change this picture but, for the moment, the labor surplus situation must be accepted as part of the environment that cannot and will not be changed. This is the situation with most public sector industrial and service operatioi,s in India and is surely a major topic of discussion at the macro economic level when the issue of the distribution of public savings between public investment and private consumption is raised. 44. If the labor situation is to be accepted as part of the environment then it makes sense to take it into consideration explicitly when designing a lending operation. Clearly, it makes no sense to have a noxibenign component as the centerpiece of a lending operation. It took almost 60 years for the U.S. railroads to reach a more nearly rational system of labor levels and deployment and this was forced on them by competition and bankruptcy as much as thoughtful analysis. Progress on this front will be slow, if at all, and not at all measureable in the normal time frame the Bank considers in it's operations. This then raises the question as to whether the rationalization initiative should have been undertaken at all. It is the audit's opinion that, like the failed RDSO research component, the failure of the workshop rationalization component has sharply outlined the real long term problems of Indian Rail and the constraints the Bank must consider when structuring an IR lending operation. Neither of these lessons would have been learned under the previous lending format and are the useful results of a serious attempt to effect specific changes. The true usefulness of these lessons will depend, however, on how they influence ongoing and future lending operations. 41/ While the OIS initiative is being promoted on the basis of the quite substantial capital savings experience of the west, it will have an impact on the clerical labor force of IR which is currently engaged in the manual collection and manipulation of OIS type data. The audit confirmed this view in discussions at the zonal level where it is also clear that the OIS initiative is likely to be perceived as a threat to the desire for zonal autonomy. l Attachment I -25 - PageL1 BORROWER'S COMMENTS D.O.No. 6/3/87-?B.VI ' -nt IIITU9r post Iamediate SUMIT BOSE frnh DY.SECRETARY wTRw rT fkvr TELs 3011+11+0 amvermn at hndia (Bbamt 8ar) swim%* Ministry at FiSn (Vitta MantraIya) Department at Zomomic Affairs (Arthlk Karya Vibbag) (wt f/N9wD*M,. the 5th Oct9 87. Dear rN &JjWVA' Re: PPAR on Railway Modernisation & Maintenance Proiet(Cr.844-IN) I enclose herewith parawise comments on tie above PPAR for transmissio. to the Bank by fascimile. 2. Mr. Graham Donaldson of OED has agreed to await our comments on the PFAR upto 5-10-7 and to send the report to the Board on 8.10.87. WIt Kind regards, You sinerely, (JU MT BOSE) Mr .Bentjerodt, NDO, World Bank, New Delhi. 31cl: as above. ! ，侈如＇ 一 - l - ■ Att&ChWmt ja ge r i e f cam,-lentr- on the 'Jorld Bi;nkls Project Parfcz-nnnce ,kudit an India Railway Modernisation --nd Mnin7 anance- Project (Credit 044-1h) Para No. gist of observ4tion Remarks of "%udit Eiiss'an PIFAM 2-3 Most of its traffic is captive and T e assartion t-at freight rates aze subject to freight rates ire subject to negaw tiations bat-,een the Railway Hinistat negotiation between the Rail Ministry and other and other Govt. entities. With bulk traffic growi-g at about th& grovith Govt. entities, is not correct. The Iresent frailit of econa.my N% --is had the security of a stsady growing volume of freight structure on the Indinn Railways was Introduced traffic at adn-ni3tered rates to secure its fin;ncial viability. The w.e f. 1-4-1983 as a result of the r ecammendations -main tf reat tc continuation .-f this arrangement has been the growing share of Ahe Rail Tariff Enquiry Committee, %ho did afi in- of-passetiqer traffic .+'i2ch now accounts for about 35% -.raffic units of IR but de-ith study of the fare & freight structitre keor-ing only 27% of its total earning-s.' in view the need for making the railway system Since most of zhe freight traffic is -captive and the passenger traffic in financially viable an the one hand and tne need of cross subsidized by the freight profits, the need to mer;cat services and to be development of economy an the other." ftwight .sensitive to the needs of the user is ftot as trang a-ament of corpbrats rates are based an t -a time tested prisciplef ideology. Few would deny that it is also a thoroughly non-cvmmer6ial of cost of service Cnd Value of service and also operation and vary much a part of a. Govt. cam-,iitted to a philosophy of, taking into consideration what freight a commodity democratic socialism. can bear. .-4ft Abdit consent on page3 . IR also function as a 'Carrier' andbAs a lCerrie vs Liability', As such It is obli&d to Je carry all ttaffic,.Off Attachment I Page3 PPAU 10 Lack of deficit ip not sufficient :The freight rate per tdane Ko, on IR are very evidence about the viability of favourable compared with the railway freight the system since the steel or coal Ministries may simply be paying rates in many develor4d countries* rates that cover inefficiencies. Tho implication of major rail That passenger traffic is partly subsidised bY shippers of India not paying for transport more than US shippers, freight traffic to correct bVt in a developing does not man much regarding rail. country like India with long distances and low costs since unquantified capital subsidies to IR might be supporting the relatively low taraff structure. kept at levels vAthin the reach of the couLon The captive freight traffic of IR has made it possible to avoid the labour implication of modernisation and has instead, resulted in a serious Oyrasing problem and a $ 2.3. billion hanual wage bill* There I no disagreement over the captive nature of government freight traffic or the fact that deight. revenues cross subsidize passnger traffic. The only disagreement lies in the definition of ,negotiation,. Since the Rail Tariff Inquiry Committee sht tariffs on the basis of cost of service, value of sefvicip the finamciag needs of the railhay,. and the needh of a developing economy - all In the absence of a commercial cost accounting system in IR, there must have been much room for disagreement and subjective judgements. Presumably the rail ministry wac represented on the Committee as veil asIthe industries generating the captive traffic. Resolution of disagreements and the promulgation of subjective judgements requires negotiation. Hence, the audit stands by its statement but accepts the qualification as to hoi and where the negotiations take place. "AttacimT PAM-4 .IR traffic projectione. have In view of scarcity of resources for planned develepow* consistently under-etimated passenger demand while over- the policy consciuusly followed by IR N tIhe resps O estimating demand for tail freight transport, recorded in the VII Plan as belwts *Given the scarcity of resources and priority to be accorded to freight traffic, it will be necessary for the Railways to contain the. demand for passenger traffic with the aid of an appropriate pricing policy. For the 7th Plan, therefore, increase in non-suburban passenget traffic is assumed at 2 per cent per annum only'. The IR.coannt is not Inconsistent with the audit statement. Attacbment I a 6.02 Psincipal weaknesses of IR have been (a) Lack of strategic senge of (a) The comment is unfair and incorrect. IR had Planning; prepared a Corporate Plan in 1979, which spelt out long term strategies which were by and Iarge fulfilla In 1987 IR's 2nd Corporate lan has been issued* This has srelt out strategies for meeting Railays traffic upto 2000 AL. (b) slow decision-making and project (b) Investment decisions and their implementation execution; denend upon availability of resources. Within these limitations decisions are taken with sufficient promptness to ensure execution of -roject in tims g for their requirement. (c) Stowness in mocerni3ing, linked (c)jt is true that IR hav,lagged behind in technology to a reluctance to ::eedily adopt design rade oerseas; as conoa=nd with the developed world. This has been and 2artly 2-: to a diffi.cult avcila3bility of resources for IR's develo7ment needs t.i:- h:s prevailed over the- last 15-20 years. However, ste-s have recently been initiated tow-rds an accelerated progzaimme af modern:saticn ..nd technology u=gradation within the resources avail.Dble. (d) a failure to undertake timely (d) This issue nas :cun somewhat overstated. 5ome replacement ano renewal of overaged assetso backlog of arrears occured durir, the yedrsUT0 to'84. Again thiz; w-s -artly due to ihort3-e of resources. S h2vc 1c- n initinted in 1985 to catch up with all arrea.r: of repl cenent of overaged assets within 5-10 years and these are making satisfactory progress. The audit cannot speak for the views of the Region as expressed in the PCR. *Attachmftt I p age 6 PPAN - 19 IRIS Corporation Planning is this is not quite correct. IR is fully -conscio ethe still Dot comprehensive in its need to contain the labour atzength and improve habow tseatment of its 'labour issue'. productivity. 3m -e- year-ow A Manpower Planabo Cell was specially opened in the IR*ilv7ay Board's Offla, whetU- hay.been on the job ever since. The Corporate Ban laid tbe objectives of containing labour force swould be evident from the extract given below: "Staff cost was 46% of the total working expenses Witb imrroved technology, more efficient metbodsand better trained work force it r-orld be possible fm the Railriys to esrty the '<1itions1 ty-ffic over the ne=t 15 years without any significant increase in steR strength (not more ths.39 per year). ..It is esuadse that with thin meqsure it would be possible to ase staff cos' per unit of traffic by about 20* in real ten over the next 15 years". A)azt from the above objective whiob bas amimed in the chapter oan 'Reduction of Cost' there is do a fUll chapter on Eama Resources Dvelojaent. This obse discusses among othextbings man-power plantag,-ummtant policy, training of staff etc. The IR coimt is a useful qualification and extension of the audit statement. .a ge 7 S7 PPAt* Item Mb.6(Pa 4)s The evide* has It Is Um that Obsarpts asen that IR takes 15 to 20 ears to adopt and modify thes techelo- . of technology frou'abreed as taken 7-10 years gies for Indian conditions. Part of this is because of India's on an average in the past. r*strictive policies towards in- flows of foroign technologies and this was partly due to the Policy of *nc*VX%Ong its desire to develop appropriate technologies from its own domestic development of Indigenous technologY* Howenr research and development -efforts. The other explana"ion for this the policy has recently been shifted od an effort phenomenon is the enrmmous upset that the introduction of these -i under wa to ahieve a JIa in the techw2ogy techmloggs has on the established way of doing things in IR, in level of IR by Importing the latest technology in particular the use and deployment of labour. all major fields from developed countries and to make expeditious arrangments for its absorption. The IR comment is a useful qualification and extension of the auditastatement. Attachment I . ,Page 8 PC83.16 If COFMOW had been given more power Based on the experience gained during Phase-1, the role thereby avoiding length procedures involving multiple approVal/clearance of COFMO has been enlarged. As per this extended role, the to Project Estimatcs, implementation of this Project woulc have proceeded COF101 is now fully involved with modernisation and rationa- better. IR should take a fresh look at its procedures and COFMEW should lisation of all workshop activities. Specific areas where assume full authority for framing and clearing estimates for the units CUFMOW is providing guidance to the Railways are as under: covered in future workshop modernisa- tion programme. (i) Preparation of Project Reports and Estimates for the modernisation project; 000 Technological upgradation and rationalisation of repair practices; (iii) Revision of Shop lay-out for uniflow of material/com- ponents/rolling stock etc.; (iv) Identification of requirement of machinery and plant and equipment and ancillay facilities to suit the w objectives and needs of individual workshops. (v) Identification of Unit Exchange Spares and fixing up of realistic inventory levels to suit the requirements. COFMOW has also been asked to monitor all areas of workshop modernisation and performar-ce of the zepair v.orkshops and issue appropriate technical instructions/directions not having any financial implications. IR do not fuel that any time will be saved or other advantages gained by asking CDFMDW also clear estimates for madernisation of workshops which can be best prepared by the undertakings themselves. The audit cannot speak for the views of the Region as expressed in the PCR. Attachment I P:AM-26 The R&D Comionants is MODI R.S0 h2s dotie -ork in abaor;1tion ind indiqanis2tion of were not im,.iler.nented largely werenot m-'lLe ned ~techoloy -ihich bit itself from the national point of vJew i because of the lack of an effective R&D institution a Sjr--fic!nt achievement. However, it io true t.it R within IR. RDSn has been used as a holding fround for officers destined elsewhere. of ne-, technology. .lecently a Corporate Ian (uryto 2'0 AD) and has suffered from an has been -irepar3d for the future development of RDSO, extrrordinorily hiqh turn. I over rate. In addition most accor-ng to which RD50 is expected to be ram7ed in 311 of tho semipermanent staff as o inve been ri-rginally qualified to un-ertae cont:i:ution to .izrds mod!rnisition of IR. It is however not corre: hat RD 5 has ban used as a holding gouri for officers desti. d elsewhere. The average tenure of an officer in RDSO cmares very favourably with the average tenure of hi counter-art on other Zvnal Railw;qys. Most Of the cohnt is a useful qualification ad extension of the audit statement. The question of turnover rates of Of ficers in RDSO is another matter. The audit does not understand the meaning of the term "counterpart on other zonal railways". If It means R&D counterparts or collaborators on zonal railways, then the audit statement stands. if it mean all other officers on the railway then the audit stands corrected but notes that the audits view was expressed verbally by IR Officers*and World Bank staff. If the audit ntatement is wrong then It is a widely held misconception In and out of IR and deserves to be corrected. Page 10 Pare Gist of observation Comment of Audit Mission PPAM 36-39 Workshop modernisation While the audit is 3isfied with the impiemetation implementation has been a mixed experience. The 5 major workshop modernisation selected units, for the support units portion which that were pre-specified and planned were implemented success- I fully. The implementation results and plant in other repair workshops, sheds and depots, for the larfe unspecified component which involved numerous machine tools t replacements in facilities all-over speead over a large number of units, some of whom may the country are not knowm. The work- shop rationalisation and related unit exchange components have hot been gains from these investments are based on hypothetical implemented. considerations. lso, the rationali:ation plan for The Audit was unable to assess the economic return on workshop modernisa- tion and rationalisation component In this context, it miy be mentioned that: Un since in their opinion the benefit stream is bcsad on hypothetical deter riorating rolling stock availability the five selectec units, the remAining workshops and figures that ..ould n3t take place if the investments were made. The ev&- repair sheds/depcts for the maintenance of rollingstock dence available for the pre-specified could not be overlooked. Failure to do so would have workshop elements indicate that thds component of the workshop modrnisation resulted into the gains of modernisation of the selectt investments was successful and probably units getting more than offset by deterioration in oth, justified. The Auuit is of the opinion that the Programme (M&P) element of the units. MOderci atis eamponent in ii) Provision of need based inputs of machiner- which the macTine tools were placed in numerous shops around the country that may or may not be viable elements of the a necessity to prevent any back sliding in the Fxisting maintenance system; probably had a much lower return than those allocated to the levels of ability und capacity pre-specified workshops. See audit comment on page 13. ii) Shlective investments were mde in thenport uni in line with the overall invetment strategy and the oers ctive plan. These investment were restictedf Attachment I Page 11 cover the inescapable replacements of the obsolete critical equipment. Priorities wer determined after a careful scrutiny, even for these limited replacements on the basis of existing bottlenecks, future growth and product sopbistication. Main emphasis was to set right a fast deteriorating situation, which had a direct impact on the reliability, availability End safety of rolling stock. iv) The benefits derived froth these investments were not hypothetical in nature. The holcings of Robling Stock grew at a faster p ace than that anticipated by 'Aorld Bank in their report. As a result of timely action tz invest in replacement of machinery and plant in support units, it has been possible to contain ineffectives and arrest the deteriorating trend. But for this, it would not have been possible for IR to maintain additional Rollingstack which helped us in carrying *a aftitioDal txnffi other than the five delected units, the maniower producti- vity improved, the details of which have been furnished See audit comment on page 13. * to World Bank in the Project Completion Report(Support Units) in December, 1965 (Annex Attachment I Page 12 VII-A tofor individual workshops). Similarly, due to provision of new high prooucti-itoachines in place of old and obsolete machines in tepair workshops, there were considerable savinas in allowed mn-hours 6nd resultant increase in copacity and productivity. The details of these reductions in allowied timings in individual workshops for different types of machines have also been listed in the Annexures V and VI o. the above Project Completion Report (Support Units) . These are real quantifiable bremfits and not hypothetical ones. v) As for as the rationalisation plan for wdrkshops activity is concerne ., -t may be mentioneo that a broad outline of the plan for rationalisation of POH activities was sent to the World Bank vide our letter No.77/N/(W)/964/ 94 Pt.(B) dated July'81 . This plan forms a part of the workshop modernisation Phase -II Report submitted to World Bank. Considerable proqress has already been made in implementing this plan. which is summarised belows I)AmritAar Workshop, CLMp Kurla Car Shed and Udaipur workshop have been evacuated of rollinostock PDH work. See audit comment on page 13. 2) Jamnagar Workshop has been closed. 3) The work of BG Steam Loco POH has been stopped/topered idown and will be stooeA hv +Ow %*-- M10 Attachment I Page 13 fierambur and Parel Worksh*pe. 4)Tbe work of BG coach POH b--s been stepped at Ralpur r,ck.-he rne trrercO Pc' r r Jhansi workshop with a view to stop it by 1990. 5)The work of BG Wagon POH has been stopped at Kanera, para workshop, and the .:ork of MG -r-gon POE has bees stopped at Gorakbpur workshop. 6)The work of MG Steam Loco FO hs been stopped at I Gozakhpur and Golden Rock -'orkshop. th2 'While taplementi ioalisatiD plan in a Ph-sw manner, certain modifications/adjustments ay become necessary due to changes in circumstances. Recently M/s RITES have submitted a Repcrt on ptoductivity improvement in workshops containing an updated plan forrntionalisation of repair activities in workshops. This R port is presently under conaideration in Boardts office. The IR comments on pages 10 through 13 are a good summary of the needs-based replacement of critical equipment in the system of workshops throughout the entire country and it would not be an inappropriate approach if the system it.self were a rational one in an economic sense. The evidence that the system is not an economically rational one is overwhelming. There is therefore no question that some replacements that make sense in a narrowly constrained replacement analysis that assumes the existing system is rational are entirely inappropriate if the rationality constraint is relaxed. The audit takes the latter point of view while the IR comments are based on the assumption that the system is basically rational. Under these circumstances, disagreement is unavoidable and cannot be reconciled. PPAN 30 Oe audit made on attempt to The audit team during their vi&Lt requested for a attain a comprehensive listing of 41 rolli stock maintenance fe- map showing workshops, production units important ailitiesof IN but was unable to abtain one. sheds and depots. Such a emp was prpsed and made available to them in the fore they desired. The reasan for writing this note inapite of this is not understood. *0 Atts ~t 1 Page 15 PPAM 35 The Wheel & Axle Plant the Audit has stated that WAP Project has been successfully is functioning well but imlemented and is a modal industrial opertion out havt the economics of the investment were not as questioned the returns on the investment as the anticipated robust as that anticipated ERR as per the 'lorld 8ank9s Completion Report As only 4% atthe appraisal. The ;udit estimates the ERR to against 19% as per tht appraisal estimates. In this connectie be between 4 and 8%. * be etwen an 8%it may be menti-oned that the ERR of 4'i as. reflected in the -!CF, The decision to support is with reference to transfer price., which was fixed as pr indigenous production of .heels and axles a. pears in retros-oct to have been in ozder to :::rk off development sus-ense. The cost of economicrlly inadvisable, rduction cf .:,Ocl set from WAP in 1905-86 was 1N. 27,036 onl. 'espite the high technical standa=d of operation. whereas the t=ansfer drice was fixed at h. 31,000/-. In 1986-07 against the landed irice of a bout P. 29,OCO/- the cost of production of wA? was . v 40/ The raison d tre of settirg u .A? at 2angaore was t- reduce import of whel sets. Producm.a on in thee country in any case has e na ed considerable s viog of foreir prce was fi s lesti fnm the ratiao-t=. l point of view. See audit comheet on page 17. Attachmnent I Page 16 PPAM-35 100 percent increase in project This conclusion hasbeen mainly reached due to huge cost that eventually took place would have made it cost-over-run and time overrun of tis project. These impossible for the bank to support the project. The PCR were however unavoidable as has been mentioned by the in its revised economy analysis, finds that revised IRR to be Audit party itself. 42% of the cost over-run was due about 4%. This low rate of return is primarily to the to cost escalation and another 27% due to changes in the capital cost overruns but also arises from the various scope and specificationsof the project. The changes in assumptions made about the value of wheel and axle scope were due to the fact that larger and heavier wheel production (the benefit stream) in the economic analysis. It used by IR required Plant design modification that were is difficult to escape the, conclusion that the 1&AP not antic.pated in the original cost estimate. investment would have been much better spent in other The time over-run is attributable to unforseen areas of the rail or the economy. circumstances related to the Plant construction and commissioning. Construction was delayed deay six ont by ounusuaoheavy rains in the early months of work Two additional delays of eanly six months each ocued See audit comment on page 17. when suppliers of fumaced experienced labour strikes which delayed delivery of this major eleaen of the Plant. This was followed by an additional delay when the wheel conv er sinyplier could not supply on ime. It would be creciated that all the above delays wcte of unavoidable naturainM not be healp. The atk Attachment I Page 17 have howover, themselves mentioned that once the Plant started production it perfosmed very well end in fact the production rate was much faster than the expected rate, And to sua up, it is wrong to conclude that the investments in VAP were incorrect. The production from this Plan has played a major role in meeting essential infrastructural needs of IR, which has enabled it to carry much more traffic in the recent years. The IR comments on pages 15 through 17 concerning the wheel and axle plant accept the basic fact that the cost of the investment was about double that expected at appraisal. Also, they do not offer an estimate of the ERR of the project that disagrees with that put forth in the audit. There is agreement also that the plant is well run and has reduced the requirements for impetted wheel sets. The IR comments use this information to conclude that the investment was a "correct" one. The audit was not able to draw the same conclusion from these facts. Attachment I Page 18 PPAL-14 It.o No.4 Looonotive-availability has been stagnant Locomotive availability on Indian Railways has been of the or declining and the capital intensive order of 78 to 79- with the target of ineffective percent and centralised maintenance system that would raise the availability fires have age for major repairs being 12,5% and for minor repais quite serious implications for abour being 10%. Action ban been initiated to improve the STSil- redundancy. Both sides of the redundant labour coin are now being felt.Tbe first and most obvious is the high wage bill of parit of the Corpo:ate Plan for diesel loconotivs, TAtOft IR(about 45% of revenues).With I.R. was8 rates, for the last ten years, increasng faster than general inflation and fzeigbt traffic growth rates even with a constant Geffecti9e fpcetge (otal labour foxce the financial implications pjreae ercmn) will eventualy be unavoidable. mpr mio Ite. o A0 (2) re)irs The second and less obvious fall ouk to 113 tar Is the overmaintenance of locomotives by a o decentralised and labouz intensive main- earlie) tenance system that keeps capital tied up in repair shops and unavoidable for G 11.64 6.70 18.34 (- do- operational purposes. It IR not quite correct toasay that labour intensive maintenance systems have leit to over 09101SUDOb of locomotives i bTe maintenance schedules for the oRt diesel fleet were those prescribed by the collaborato*t to match the porevailing te2boloy and working oeaitiUS with modifications based on i s operational requi i-ts The IR coament is a useful quabiication and However,a the maintenance systems of rolling tO c As extension of the audit statement. beingreviewed for all itemsof rolling stock ienlaieg locomotives ad yea6 will be drmin for tei reargaigatioe. I this proIeso, moderniation of maintenance metaods fooliing oomseqent redutio Of labour eteegais brt# kept to vieo. Attachment I Page 19 PPARNP30 In the fully rationalised developed world Rationallaation of workshop overhaul is being an equivalent railway with an equivalent cerried out in stages. In the circumstances, locomotive fleet would have, at most, 3 workshops apeciali4ing in locomotive over- prevailing an Indian Railways Including the haul and romanufacture and a dozen light running sheds capable of running repairs and replacement of assemblies under a profile, reducing the number of workshIps to functioning unit exchange system. The 3 is felt to be Impractical. The minimm audit w&as able to obtain an uptodate inventory of the 45 diesel sheds on the number of workshops with a loo holding of system and discovered that not only was the number not declining, as planned but 8 more sheds were either sanctioned or under around 8. IR are working to mave towards this construction. The statement of the number over the future yars. 1961 Supervision Mission (Para 29) seems to remain an appropriate one at least as far is diesel sheds are concernedn PPAII-31 Every zons today has either a workshop Diesel sheds are provided to cater to day.-te.. or one or more upgraded shede under its maintenance of the Diesel ILoco fleet. With the control in spite of the official commitment to integration and contrali- expansion of the Diesel Loo fleet the number sationo The implication for the o islSesi on og p h me Bankfinanced locomotive manufacturing e s n tu facility at Patialaq under 144.-Il I has to be reviewed in the context of the not good. totality of locomotive fleet in relation to sheds and not in Isolation to one traction/ type of locomotive only. See audit comlents on page 23. Attachment I Page 20 pPA - 33 The Audit visited the diesel shed at aMultiple ohift working for major mittenance schedule is Tugblakabds It operates only one and alre3dy in vogue to some diesel aoes Its GRUiOu a balt abiftt for major maintenance cycles and Lakes about 10-12 days to to 311 diesel sb,de ind -:3rkshops is also UZ complete an annual locomotive overhaulv consideration. With a full unit excho system io effect it is eatieated that the overhaul would take about 6 da. If an additional shift were to operate(two and one half evezy yearp is not cireot. The yearly acb& whioh in al)it would take about 4 days, roughly is carried out in Tugb3ak--m4 shed is differnt to equivalent to the developed country ex- perience. In addition, IR locomotives are lovorhaulle This -.-antion to genez-tO being overhauled on an annual basis.rather than the norm of about once in three year so the question of the q IY of the Dlesel Locos In IR are overhauled in a workdp oG overhaul must be raised. t. A quite clear that the management: skills and equipment at the facility are very good and that it wabul be such more productive umdez *zationalised' system. This bowever, would lead to many redundant facilities and such redundant labour and this io the difficult proble facing IR management. A system that could release the locomotive in four days now takes at least 10-12 days to complete the everbaul and does it every year Instead of once every three deirce See audit comments on page 23. Attachmentr I- Page 21 PPAM-)8 The Audit found that contrary 1. There Is no IR rationallsation Plan for locomotive sh"r to the IR rationalisation Plan, A rationlisation Plan wa madi for worksbopeg which the number of locomotives sheds were expanding rather than carry out periodic overhaul (Pw) of locomotives, c"che contracting. The competition and wagons. For locomotives, POR is done every 6 years of the multiple redundant maintenance facilities for or after completion of 0.6 million kne., whichever Is sufficient work has extended the suffcien wor ba extndedtheearlier. Locomotive sheds carry out all repairs A ar++w already lengthy programed maintenance cycle maintenance necessary in th* intervening period. time for diesel locomotives and keeps the locomotive 2. The maintenance system *n IR is essentially differA availability figure about 10 points below what can be achieved in IR workshops, out repairs to virtually all assemblies and components, w1iich is not the case in the US where sheds do only replacement and repairs are done in backshops. 3. Admittedly, from the point of view of efficiency of investment in maintenance failities and control en the quality of repairs, the backshop arrangement is superior However, under the prevailing conditions of uncertainty about avAilability and unsatisfactory quality of spare See audit co,mm2ents on page 23. partse failure rate of assemblies and components is hig fI this environment, the backshop arrangement would require a very large number of assemblies and components being sent back to backhops. The problem is further compounded by difficult logistic conditions. Attachment I , Page 22 4. On IR, most diesel and electric locomotives are used as a 'single Unit' as against mostly multiple unit operaties on US Railroads. The density of traffic is also such that it is not possible to concentrate a very large number of locomotives in one shed. This would create operational problems in moving locomotives to sheds for repairs and maintenance. 5. Under these conditions, it has so far not been found feasible to base more than about 150 locomotives in a shed. The No. of sheds has therefore, been increasing with increase is holding of locomotives. However, this subject is planned for another review in our future planning. 6. However, with the objective of improving quality of repairs, and thereby reducing the failure rate, proper maintenance facilities are now being developed in PON shops. DCW is also being set up -4 at Patiala, which along with Golden Rock workshop on S. Rly. will provide backshop facilities for major assemblies, like powerpack, traction generators, traction motors, turbo super chargers, etc. 7. Efforts are also being made to improve locomotive availability by improving availability of unit exchange spares in sheds and by See audit coments on page 23. introducing double shift working in heavy repair bays. Attachment I Page 23 PAPM-38 The lack of progress on workshop This Is not factually correct. All plicy issues rationalisation and unit exchange maintenance is related partly to like setting up of maintenance facilities, workshow the desire of the nine zonal railways to continue to have etc. are decided by Railway Board and decisicns are independent locomotive overhaul facilities. Centralised facilities taken keeping in view the overall interest of IR. to serve the national system are in conflict with this desire. The reasons for rot elimin.ting many of the workshops A more serious problem is that of the facilities and jobs rendered so far arose from the large expanse of the IR system redundant by rationdlised and centralised capital intensive making it logisticaily difficult to move locomotives/ maintenance and overhaul system. spare parts over long distances, rather than avoiding reducti6n of jobs/works. The comsents on pages 19 through 23 in many cases support the audit statements or are useful qualifications and extension of an admittedly complicated issue. Much confusion arises from the lack of precise defivitions for the terms "overhaul", "workshop", and "shed". The audit sticks with its contention that, in addition to the five locomotive workshops in the country, there are about 25 heavy running sheds that function as workshops. Thirty facilities are carrying out functions that, by international standards, are overhauls. This is far beyond the requirements of a rationalized system and is, in the audit's opinion, responsible for the relatively low locomotive availability in the country. Attachment I Page 24 - - - - w - - - - - - - - - - - - - - a - - - - - - - - - - Reference ~ama -- - - -- - - -- - - - -- - - - - -- - - --- - - Audit Report ciaring IRIS Opertions 2o aew taken by Antit of IR's operations t With that o U a ad se somewhat distorted Inasauch as a comparison of IR's rinclpal features has been made with the US W alaads to totally different situations and background, which are not really comparable. For instance In para II.14, it has been concluded that an Aerican labourer is 15 to 20 times more productive as compared to his In^ian counterpart. (n the other hand the report has elsewhere acted that American labourer works in an environment which uses the latest teelanalagy available In the world. It is basically incorrect to compare the productivity of the labour force In the two railway systems which work trder such diverse cmditions. Apart from this celike the tEA tIt Is a faet t"at labour In India Is still very cheap as 4 compared to most of tne developed countries, India- therefore, still believes in the repa ur Philosophy, whereas UA and many in the edvanced countries go by the 'replacement' Philosophy because ad very high labour costs there. Another very major bhsic difference between Iw and the The IR coents imply that the IR system was compared in a Us Railroads Is that almost 40% of It's operations mechanistic way with the U.S. rail system without consideration are passenger trafftic sang side fairly heavy of differences in the coAts of labor and in the types of services freight traffic. n the other hand the iS aleads supplied. Comparisons with U.S. railways and Chinese railways are arost entirely devoted to freight movement were made because they are the only systems built to the IR Labour requiremnts ftor freight oriented and mixed scale for which we have data. Qualifications for these railways are very different, passenger tfafflec and other factors were carefully made in the audit in order to stl l.4 bore labour oriente presentph,awhereasiousaandanbalfncededvanwe eIt It Mfortttate that Audit has not taken these major and basis difference Into ecsideration while making the cdtparisons referred to. 。＇\ ‘一× \ × \ 叔 一