Productivity, as commonly understood, measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. For an industry it is a key source of growth and competitiveness, and is basic information for comparison, both in domestic and international markets. It is also used for analysing capacity utilisation and for planning future business strategies.
Indian Railways had introduced the system of Productivity Linked Bonus (PLB) for its employees in 1979. The index, defined as the ratio of railways output (measured by the total freight tonne kilometres and a proportion of passenger kilometres) and input (measured by the total number of non-gazetted staff), determines the quantum of PLB payable for a year. A PLB of 78 days for 2010-11 was announced recently.
The PLB, in its present form, is based entirely on physical parameters without any reference to the financial viability of the system. For example, the Railways paid PLB of 59 and 78 days respectively to its employees for the years 2001-02 and 2010-11 respectively. This may lead one to believe that the productivity of Indian Railways, and by implication its level of efficiency, improved by almost 30 per cent during this period. But, its operating ratios (reflecting the percentage of expenditure to revenue earned) for the two years, recorded distressingly high levels of 96% and 94.6% respectively, revealing that financially Indian Railways had continued to perform poorly, being neither better nor worse off in the two years compared.
Should the productivity index, which fails to reflect the cost effectiveness of resources used, then be accepted as the true measure of Railways’ well-being? No doubt, outputs and public benefits are of high importance, yet minimisation of costs is equally critical. For any given output, the efficiency of a railway should, more appropriately, be judged in the context of the moneys spent on operating, maintaining and renewing its assets. Given the asset-intensive nature of the industry, a high utilisation of its assets (rolling stock and track) leads to more efficient railways. Studies have shown that higher utilisation of assets, especially through freight operations, has a positive impact on the efficiency of a railway system. Countries like China and USA are rated as the strongest performers in terms of utilisation, while the majority of European railways, Indian Railways and Japan Railways have recorded much lower levels.
The current formula for calculation of PLB also suffers from the infirmity of not giving due weightage to productivity of capital. For, while it is true that nearly 40 per cent of a railways’ annual operating expenses are accounted for by personnel costs, it must be recognised that changes in physical output are the result of additional capital investments as much as that of labour productivity. If the staff strength remains unchanged, an improvement in the input-output ratio can rightly be attributed to labour. But if it is also accompanied by a large dose of capital infusion the credit for higher output can’t be claimed by workers alone. In the Indian Railways during 2001-02 to 2010-11 there was very little change in the number of its employees, but the total capital investment rose significantly from ` 36,757 crore to ` 104,544 crore. The period also witnessed a growth in freight traffic from 473MT to 921MT. It will be a safe assumption that this increase in railways’ traffic output was substantially contributed by acquisition of new capital assets and technology upgrades. Analysing the performance of the European railway sector (1990-2005), Heike Wetzel of University of Cologne had also reached a finding that technological improvements were the most important driver of productivity growth.
Taking note of the inherent flaws in the formula being currently employed in calculating the productivity index of Indian Railways, the Sixth Pay Commission had recommended adoption of the Performance-Related Incentive Scheme (PRIS) by all central government ministries, including the Railways. Under PRIS, the performance of a government department is to be viewed as its ability to put the acquired resources to their most efficient use and to achieve the desired outputs and outcome goals. PRIS, therefore, marks a shift from mere physical outputs to social goals and final deliverables to the users and the stakeholders. A performance-related incentive may be defined as the variable part of pay that is awarded each year depending on performance of the organisation and employees during the period under consideration. A unique feature of the proposed PRIS is that the department has to attain a performance rating of over 70% on its Results Framework Document to qualify for financial incentives, implying that it must not only reduce costs compared to the previous year but also achieve excellence in the delivery of services and other performance commitments. More critically, the incentive sum to be distributed has to come from savings achieved in the non-plan expenditure for the year.
The pay panel has opined that in case the ministry is not able to implement PRIS immediately, it should in the interim devise a new formula for PLB based on financial parameters where profit is computed according to established principles of commercial accounting, with appropriate adjustments for capital investment, element of subsidy, etc. The new formula will, thus, have a direct nexus with the increased profitability/productivity under well-defined financial parameters. The pay commission has also suggested a PLB formula which the railways can adopt till the regular PRIS is implemented.
Even though the new approach of the panel to link incentives and performance is more pragmatic, the rail ministry will have to initiate a fresh round of talks with unions to convince them of the logic of adopting and implementing the new system. There will always be a resistance to break the status quo, and the railwaymen’s federation has already voiced its opposition to either a revision in the PLB formula or introducing PRIS. One only hopes that the railway administration can convince the workers of recognising the merits of the new proposals designed to motivate them to raise productivity. This will be in the larger interest of railways and our economy.
The author is a former MD of Railway Finance Corporation.