NDIAN RAILWAYS AND THE MOVE TO FULL ELECTRIFICATION: EXCEEDING THE GLOBAL BENCHMARK In mid-June 2018, the board members of the Indian Railways (IR) found themselves on the brink of a decision that could dramatically change the face of the country's rail network. Covering roughly 69,000 route kilometers (Rkm1)2, the IR network served the entire country, from Srinagar and Baramulla in the north, over 1,500 meters above sea level in the Himalayan foothills, to Kanyakumari at the southern tip of the country. The IR used multiple locomotive technologies and power sources (primarily diesel and electric) 3 to operate its trains and carry passengers and freight to their destinations. It operated as a quasi-social organization and had not raised passenger ticket prices for over a decade. Further, it was only able to raise freight charges in the short run, making it difficult for the organization to endure cost shocks. Thus, it was important for the IR, the nation's largest employer with over 1.35 million employees,4 to carefully manage its capital and operating expenses. In recent years, its input costs and technology improvements had raised the question of whether the railways should convert to more electric locomotives and, perhaps more boldly, whether it should even continue to operate diesel trains at all. The arguments for this idea were gaining favor, especially among high-level politicians, as recent input prices had improved the efficiency of electric powered locomotives, and the board was considering whether to accelerate the IR's conversion to electric, with a target of 100% electrification by the end of 2022. If it did so, the IR would be one of the first railway networks in the world to be fully electrified. This move would require significant investment, which was not assured as the IR barely broke even each year and had shallow operating coffers. 1 Indian Railways. Statistical Summary, Annual Report 2018-2019. http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/Year_Book/Summery%20sheet%20Annual %20Report%20English_2018-19.pdf 2 Annual reports of the Indian Railways. 3 After the introduction of electric and diesel locomotives by the IR, it stopped operating steam locomotives except in heritage sections of the network such as Ooty and Darjeeling. 4 Annual reports of the Indian Railways. Professor Philip C. Zerrillo, Professor David J. Sharp, Samriddhi Mukherjee and Rohit Kumar Kedia prepared this case solely as a basis for class discussion. This case is not intended to serve as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case was developed under the aegis of the Centre for Learning and Management Practice, ISB. Copyright @ 2021 Indian School of Business. The publication may not be digitised, photocopied, or otherwise reproduced, posted or transmitted, without the permission of the Indian School of Business.

THE INDIAN RAILWAYS: BACKGROUND The railway network in India traced its origins back to the mid-19th century, during British colonial rule. It began operating as a private initiative intended to serve the interests of the powerful British-owned East India Company, to aid in the transportation of raw materials, make markets accessible, and accelerate economic growth. In 1853, the first passenger train ran some 40 km from Bombay to Thane, and the passenger line was subsequently expanded by the Great Indian Peninsula Railway (GIPR), eventually covering the entire country. While the original trains were steam locomotives, 1925 witnessed the arrival of the first electric passenger train. After India's independence, the electrification of the Indian railway network continued in earnest from 1953, primarily targeting high- density routes such as the Golden Quadrilateral5, completed in 2009, the Diagonals, and the Assam route, in all seven routes. This High-density Network (HDN) covered 11,295 Rkm. The next focus for electrification was the Highly Utilized Network (HUN), a 13-route network encompassing a further 23,000 Rkm. However, in 1957, diesel locomotives had been introduced to the IR, and, over time, the majority of trains ran on diesel. The IR operated the fourth largest rail network in the world in 2018, transporting 8.26 billion passengers and 1.16 billion tons6 of freight annually. As the country's first, safest, and preferred means of long-distance travel, the IR held a special place in the hearts of many Indians, especially those from lower income groups who could only afford to travel by train, and for residents of remote areas who depended on the railways to connect to the rest of India. However, by 2017, the railways' rate of punctuality had fallen drastically. There was general dissatisfaction among passengers about its poor performance on this score, and the IR realized that it must act quickly to boost rail line productivity and resolve the existing issues. DECISION FOR ELECTRIFICATION The risks associated with the electrification project were great, as were the potential gains. A large amount of funding would be required for total electrification to be possible. Moreover, attempting to become 100% electrified was very ambitiousSwitzerland was the only country in the world with a completely electrified rail network. With numerous facets of the project to consider, the board had a steep task to reach a decision quickly. With increasing exposure to the outside world and international transport networks, 21st century Indian citizens had begun to feel dissatisfied with the performance of the IR, both in terms of punctuality and speed. Over the years, as air transport gained popularity, higher income travelers had begun to opt for flights rather than trains, primarily because it saved travel time. The slow decline in the number of people who had once preferred rail transport led to a troubling drop in occupancy in passenger trains. The IR board, while examining the problem, found that converting to a 100% electrical rail network would result in a marked improvement in train speed, in part because trains would not have to change locomotives when entering non-electrified tracks. It would also increase track capacity by 10%, and in what was very welcome news to the IR, would also cut operating costs. According to 2017-2018 5 The Golden Quadrilateral refers to a major highway network in India connecting the four major metropolitan cities of the country: Delhi, Kolkata, Mumbai, and Chennai. 6 Indian Railways. Statistical Summary, Annual Report 2017-18. http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/downloads/IRSP-2017- 18/Summery%20sheet%20Annual%20Report%20English_2017-18.pdf Indian Railways and the Move to Full Electrification: Exceeding the Global Benchmark | 2

estimates,7 the IR would end up saving INR 116 (USD 1.78)/1,000 gross ton kilometer (GTKM)8 for freight transport and INR 1429 (USD 2.18)/1,000 GTKM10 for passenger transport if it switched to an all-electric operation. The difference between diesel and electric locomotives in energy savings is shown in Exhibit 1 and the overall difference in fuel expenditure is shown in Exhibit 2. The cost of the track electrification project had been pegged at approximately INR 350 billion11 or about INR 10 million per km, (approximately USD 4.9 billion), a significant investment for the IR, which had a high operating ratio of 98.5%12 in 2017, and hence had very little surplus available for such a mammoth capital project. Moreover, there was a risk of cost overrun of up to 10% on the project if it was delayed more than 12 months. Operations post-electrification could save an estimated 50% of the current operating cost, amounting to about INR 135.1 billion (USD 1.9 billion)13 worth of savings per year, which would be a massive relief to the IR. Given that 35,000 crew employees would have to undergo training for a period of 56 calendar days and the average salary cost to the company of each employee was around INR 1.473 million (USD 21042) per annum, IR would have to put aside a sum of INR 8 billion (USD 114 million) 14 for employee training. However, there would be minimal retrenchment and severance, and training of the existing workforce would allow the IR to absorb most of its crew in the new electric locomotive section while 15% would remain dedicated to the small fleet of diesel locomotives and trucks that would be retained for maintenance purposes.15 With concerns over operating costs removed, the IR would be able to focus on improving other aspects of rail travel, such as seats and berths, lighting, fans, and air conditioning. It had always maintained that serving more travelers at the same subsidized ticket pricing was an unstated but driving principle. In terms of the logistics to support 100% electrification, the IR already had a few provisions in place. It had decided to repurpose 85% of the existing fuel depots to avoid disuse and retain the remainder for maintenance. The cost of converting these depots would not be significant. The IR had not seriously considered 100% electrification before 2018 due to a shortage of electrical power. Although the IR was able to run its existing electrified networks smoothly most of the time, occasional grid failures would occur and disrupt the entire network until power was restored. As of 7 Indian Railways. Statistical Summary, Annual Report 2017-18. 8 Gross ton kilometer or GTKM is a unit of measurement denoting train movement via two components, distance, and weight. GTKM is useful for comparing different kinds of movement (such as movement by locomotives, wagons and coaches). 9 Indian Railways. Statistical Summary, Annual Report 2017-18. 10 The INR-USD exchange rate used here is the average exchange rate of USD 1 = INR 65.09 in 2017. The rest of the figures in the case are based on the average INR-USD exchange rate in 2018 of USD 1 = INR 70.09. 11Arora, R. (2017, October 27). Railways targets full electrification with Rs 35,000-crore plan. The Economic Times. https://economictimes.indiatimes.com/industry/transportation/railways/railways-targets-full- electrification-with-rs-35000-crore-plan/articleshow/61252930.cms?from=mdr 12Jha, S. (2020, 15 January). Modi govt wants 100% rail electrification but doesn't know what to do with diesel engines. The Print. https://theprint.in/india/modi-govt-wants-100-rail-electrification-but-doesnt-know-what-to-do-with-diesel- engines/349339/ 13 Annual reports of the Indian Railways. 14 Indian Railways. Statistical Statements 2017-2018. http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/downloads/IRSP-2017- 18/Statistical_Statements/40_II.pdf 15 Indian Railways. High level committee report on disaster management. http://www.indianrailways.gov.in/railwayboard/uploads/directorate/safety/downloads/Final_report_on_DM.pdf Indian Railways and the Move to Full Electrification: Exceeding the Global Benchmark | 3

ISB278 2018, the IR consumed about 17 billion units16 (kilowatt-hours or kWh) at a cost of about INR 3 per unit17 of electricity annually to operate the electrified lines. It would require an additional 10 billion units to operate the entire network once electrified. Once apprehensive about its ability to source such quantities of power, the IR had steadily grown more confident that this would be possible as its power generation capacity was on the rise. The IR had already built a power generation plant with 1000MW capacity in Bihar in collaboration with the government-owned electric utility company NTPC Limited. This plant was expected to serve as a good supplement to the rest of the IR's sources of electricity. Disruption in power flow was previously a minor concern, but the IR currently sourced its electricity from local state boards, with substations every 50-80 km18 transmitting electricity to ensure that complete grid failure never occurred. Further, disruption of power due to grid failure was increasingly a rare occurrence, the last outage having taken place in 2012. Another issue for the IR was the slowly but steadily rising price of diesel. As of 2018, the IR consumed 2.7 billion liters of diesel per annum19 for traction purposes, and as the cost of diesel crept higher and higher with each passing year, the prospect of having to spend only about half of what it did currently on diesel came as a relief. Further, the overall cost of refurbishing and servicing electric locomotives was lower than that of diesel locomotives because electric locomotives had fewer moving parts. The maintenance cost of diesel locomotives was INR 32.84/1,000 GTKM (USD 0.43/GTKM) while that of electric locomotives was only about INR 16.45/1000 GTKM (USD 0.21/GTKM).20 Technical and financial reasons aside, the IR had a more personal motivation for the move to electrification. A 100% electrified railway network for India would be nothing less than a major milestone for the country and a matter of immense national pride for its citizens. It would make India the largest nation with a completely electrified railway network and a pioneer in this respect. Moreover, technological improvements in electric locomotives were outpacing those in diesel, and the IR would have the opportunity to gain scale and efficiency in the technology. As a 100% electric operator, it would likely have opportunities to act as a global leader from whom other nations would seek aid and expertise. Future power savings were projected from the rapidly evolving technology as well. In the proposed project, the IR could save as much as 50% of its total expenditure on energy, and with the use of regenerative braking that was on the near horizon, a further annual saving of up to INR 20 billion (USD 285 million) on energy could also be expected. This would amount to 15% savings for locomotives and 30% for the electric multiple units (EMUs) used in the suburban railways. 16 Indian Railways. Statistical Summary, Annual Report 2017-18. http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/downloads/IRSP-2017- 18/Summery%20sheet%20Annual%20Report%20English_2017-18.pdf 17 Sengupta, D. (2019, August 19). India is APAC's cheapest power producer. The Economic Times. https://economictimes.indiatimes.com/industry/energy/power/india-is-apacs-cheapest-power- producer/articleshow/70735458.cms?from=mdr 18 Jain, M. K. (2013, August 31). 25kV traction power supply system. Rail Electrica.https://www.railelectrica.com/traction- distribution/25kv-power-supply- system/#:~:text=Location%20of%20Traction%20Sub%2Dstation%20or%20Feeding%20Post,- Following%20points%20are&text=Norms%20for%20locating%20the%20TSS,between%2027.5%20kV%20(Max.) 19 Indian Railways. Statistical Summary, Annual Report 2017-18. http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/downloads/IRSP-2017- 18/Summery%20sheet%20Annual%20Report%20English_2017-18.pdf 20 Sood, J., & Nanda, P. K. (2018, September 12). Govt approves 100% electrification of railways by 2021-22. Live Mint. https://www.livemint.com/Companies/jD73mHWleU8hnPlvc0WHeI/Govt-approves-100-electrification-of-railways-by- 202122.html Indian Railways and the Move to Full Electrification: Exceeding the Global Benchmark | 4

ISB278 The IR, as a government body, had its own set of duties towards the public, some of which were implied rather than legislated. There were growing concerns about climate change and calls for action, led by environmentalists, to cut down carbon emissions from fossil fuels. As a signatory to the 2016 Paris Agreement along with the US, China, and 186 other countries, India resolved to reduce its carbon footprint by 33% in the next 10 years, and as environmental awareness rose among the Indian people, so did demands for the government to act upon the pledge it had made. The IR, in particular, was called upon time and again by Members of Parliament (MPs) and Members of the Legislative Assembly (MLAs) to reduce the use of diesel in rail operations to make them more eco-friendly. Carbon emissions from the IR's operations stood at 6.7 million tons according to 2014 estimates21, and were expected to decrease by 24% by 2027-28 after total electrification. The price of carbon credits in Europe was highly volatile, varying between INR 210 (EUR 2.80) and INR 2,300 (EUR 30.56) per ton in 2018.22 CHALLENGES BEFORE AND AFTER POTENTIAL ELECTRIFICATION No victory could be achieved without a cost, and the IR would face its fair share of challenges before, during, and after the electrification project, should it decide to go ahead with the venture. The IR had already electrified 29,228 Rkm of track out of its roughly 69000 Rkm network at an average electrification rate of around 1,374 km per year. Therefore, it had to electrify a further 39,707 Rkm of track to complete the process23 (Exhibit 3). Fate of Diesel Locomotives Since the IR operated a large fleet of diesel locomotives, it would have to provide a solution for the use of those locomotives on achieving 100% electrification. Each diesel locomotive had a life span of 36 years and had been manufactured at a cost of INR 120 million24 (USD 1.7 million). The cost of each electric locomotive was around INR 110 million25 (USD 1.5 million). Exhibit 4 shows the number and age range of diesel locomotives owned by the IR. Electric locomotives were clearly different in build to diesel locomotives. Now that total electrification was being considered, the prospect of a large number of previously used diesel locomotives suffering disuse and obsolescence loomed large: 5,500 diesel locomotives would become redundant. One 21 Indian Railway to become world first 'net-zero' carbon emitter by 2030: Piyush Goyal. (2019, October 16). Energy World.com The Economic Times. https://energy.economictimes.indiatimes.com/news/power/indian-railway-to-become- world-first-net-zero-carbon-emitter-by-2030-piyush-goyal/71607333#:~:text=Forum%20CERAWeek%202019.- ,As%20per%20the%20NITI%20Aayog%20data%2C%20Carbon%20Dioxide%20emission%20from,percent%20electrically%20 run%20by%202023 22 Department for Business, Energy & Industrial Strategy. (2019, April). Updated short-term traded carbon values.https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/794186/2018- short-term-traded-carbon-values-for-appraisal-purposes.pdf 23 Indian Railways. Statistical Summary, Annual Report 2018-2019. http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/Year_Book/Summery%20sheet%20Annual %20Report%20English_2018-19.pdf 24 Indian Railways. 25 Mazumdar, R. (2020, April 29). CLW passed EBD trial conducted by Research Design & Standard Organisation. The Economic Times. https://economictimes.indiatimes.com/industry/transportation/railways/clw-passed-ebd-trial-conducted-by-research- design-standard- organisation/articleshow/75454940.cms?from=mdr#:~:text=CLW%20produced%20this%20high%20power,6000HP)%20loc o%20produced%20by%20CLW Indian Railways and the Move to Full Electrification: Exceeding the Global Benchmark | 5

ISB278 option was to sell the diesel locomotives for scrap. At scrap value, the IR could expect to get about INR 2.4-2.5 million (USD 35,000) per locomotive. The other option was to refurbish and then export the locomotives. If it chose this route, the IR would have to invest INR 20 million (USD 2.8 million) per locomotive, but would also earn INR 50 million (USD 7.1 million) for each engine, provided it could find a market for them. Ministry sources had expressed doubts about how many locomotives could be sold.26 A third option that the IR had considered was to convert the diesel locomotives into dual locomotives that could run on both diesel and electricity. However, the venture had not yielded much success, and the IR was not keen to pursue this alternative. Funding In 2017, the IR had posted record profits of INR 16.65 billion (USD 237 million).27 The new project would require INR 350 billion (USD 4.9 billion) of new electrification infrastructure. As a government body, the IR would certainly need to have its ducks in a row before taking up such a large-scale project. Funding was a major concern for the IR since internal fund procurement had always been difficult owing to its low income from passenger fares. As a public welfare organization, the IR would probably not be in a position to change ticket pricing in the near future. Raising fares to boost income was simply not an option, and thus, the IR would need to seek external funding. Labor, Resources, and Reorganization To complete this project and electrify the remaining 39,700 Rkm of its network in four years, the railways would need to electrify just over 9,900 Rkm per year for the next four years. This was significantly more than its recent achievement of 1,374 Rkm per year (Exhibit 3). Aside from the cost of electrification, the future-ready workforce would have to undergo specialized training in order to keep up with the new infrastructure and procedures, and this training, in conjunction with the actual project work that had to be completed in only four years, would be a massive challenge. Disruption of Rail Lines Logistically, the project would likely disrupt IR's normal train operations. The electrification of 9,900 km per year would almost certainly impact several routes. The IR would have to ensure that train routes and schedules would not be severely disrupted in regions where the electrification process was underway. THE ROAD AHEAD The IR's board was scheduled to meet later that week. They would need to be prepared to discuss the merits and drawbacks of this bold undertaking and answer a number of critical questions before deciding whether or not give the greenlight to the project. 26 Jha, S. (2020, 15 January). Modi govt wants 100% rail electrification but doesn't know what to do with diesel engines. The Print. https://theprint.in/india/modi-govt-wants-100-rail-electrification-but-doesnt-know-what-to-do-with-diesel- engines/349339/ 27 Indian Railways. Statistical Summary, Annual Report 2018-2019. http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/Year_Book/Summery%20sheet%20Annual %20Report%20English_2018-19.pdf Indian Railways and the Move to Full Electrification: Exceeding the Global Benchmark | 6

ISB278 Exhibit 1 Calculation of Energy Saving in Diesel vs Electric Operating Expenses Specific energy consumption Cost per unit (INR) Running cost/1000GTKM (INR) Savings in running cost (INR) % Savings Passenger Diesel 3.53 liters/1000GTKM 65 229 (229-113.4) =115.6 50.5% Passenger Electric 18.9 kWh/1000GTKM 6 113.4 Goods Diesel 2.72 liters/1000GTKM 65 177 177-35.34 = 141.66 80% Goods Electric 5.89 kWh/1000GTKM 6 35.34 Source: Indian Railways Annual Statistical Statement 2017-18. Exhibit 2 Diesel vs Electric Locomotives: Difference in Expenditure Gross Ton Km (billions) Total (billions GTKm) Percentage Expenditure on fuel (In INR billions) Passenger Diesel 345.3 768.9 40% 180.01Goods Diesel 423.6 Passenger Electric 398.8 1167.5 60% 9,9.9 Goods Electric 768.6 Total 1936.4 279.91 Source: Indian Railways Annual Statistical Statement 2017-18. Indian Railways and the Move to Full Electrification: Exceeding the Global Benchmark | 7

ISB278 Exhibit 3 The IR's Electrification Journey Progress of Railway Electrification Year Electrified per Year (RKM) Cumulative Electrified (RKM) 1951 0 388 1961 36 748 1971 296 3,706 1981 164 5,345 1991 462 9,968 2001 489 14,856 2011 475 19,607 2018 1,374 29,228 2024* 69,000 * Estimated Source: Indian Railways. Summary Sheet of Annual Report & Accounts 2017-18. Exhibit 4 Age Range and Number of Diesel Locomotives Owned by the IR in 2018 Age Range Number of diesel locomotives 0-10 years 2400 10-20 years 2100 20-30 years 1131 30-36 years 250 Total 5881 * Data is indicative. Source: Created by authors based on data obtained from the IR. Indian Railways and the Move to Full Electrification: Exceeding the Global Benchmark | 8