cid report

8/20/2019 Cid Report

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Case SummaryThis case is about financial decision-making in government enterprises and the

concepts of financial and economic rates of return. It is based on actual

electrification projects being undertaken by Indian Railways, one of the largest

government organizations in the world. lectrification projects re!uire large capital

outlays with significant financial and welfare implications. The case analysis involves

"i# estimating incremental cash flows under alternative scenarios, "ii# calculating the

financial rate of return, and "iii# conducting a sensitivity analysis to identify the key

value drivers. It also provides opportunities to discuss nominal vs. real cash flows,

differences between internal rate of return and net present value, and the choice of

different discount rates .it is also about the feasibility analysis report on the

electrification of the $aini-Itrasi railway line. This railway track covered a distance of

%&' route-kilometers "R()# connecting $aini in the state of *ttar +radesh to Itrasi in

the state of )adhay +radesh. The Indian Railways "IR# started operations in pril

'/, and in 0&& covered more than %/,&&& R() in India. ll the engines used in

railway operations have been either diesel 1powered or electric powered .Trends

suggest greater emphasis on electrification across the world. lectrical locomotiveswere very powerful and had high top speed. This features implies that fewer

locomotives were needed in big passenger trains or heavy haul freight trains,

resulting in lower maintenance cost and consumption of energy is also less and

electrical locomotives are also environment 1friendly by generating less fumes and

noises than diesel locomotives.

The key motive for the e2tensive electrification drive in India was the perceived

savings in fuel costs which constituted almost 0&3 of the working e2pense of the

IR .the cost saving was considered significant enough- so much so that electrification

was not limited just to high 1density routes, but also undertaken for other routes

.consumption cost comprised two parts 4 the rate of consumption and the cost of fuel.

The rate consumption fuel depends on what type of train it is passenger train or

goods train. +assenger trains consumed higher energy than goods train owing to

multiple reasons. The cost of fuel is the second factor that determined the

consumption cost.



Total impact of electrification on energy costs can be found by studying the ratio of

the cost of diesel traction to the cost of electric traction per ,&&& 5(T).

This railway comprised in two parts $aini to )anikpur to itrasi under $orthern central

Railway of *ttar +radesh and western central Railway in )adhya +radesh. The

line is considered important because of its business.

The electrification project involved significant initial capital e2penditure associated

with electrical engineering, signalling, telecom, and civil engineering. This

e2penditure was to be incurred over the ne2t ' years and the electrification project

would be functional for the entire line in the si2th year. +ost electrification, the post

electrification would not re!uire any major capital e2penditures. The government of

India mandated a sensitivity analysis for time and cost overruns in project appraisals

and based on the past e2perience, the cost overrun was likely to be &3 and the

ma2imum that a project e2ceeded the budgeted cost was 0&3. The project life is

assumed to be /& years .Traffic was assumed to remain constant for the first ' years

post electrification, then increase in the % th year, again remain in same level until & th

year, increasing again in th year and remain the same beyond that. +assenger

traffic was e2pected to increase by 03 and goods traffic by 0&3 in the % th year as

well as in the th year.

The change from diesel 1 based to electrification 1based engines would lead to

change in the type o fuel and energy consumed and the !uantity of lubricants

re!uired for operating trains. 6uel consumption depends on types of train.

The stocking depot at )anikpur had diesel locomotive spare parts purchased at a

cost of rupee 7.0 million and at the end of the ' years of construction , a stock of 0

million was e2pected to be left unutilized which later can be utilized or can be sold at

.' million Rupees.

6easibility analysis report which has been prepared by using all these information its

shows that economic rate of return of 73 which is higher than the government

03.



Analysis of the Environment:

8e have analyzed the environment of the project by using porter five forces modelas

shown below4

1. Bargaining power of suppliers4

The supplier of rail transportation in India is the Indian Railways "IR#, a vertically

integrated monopoly service provider owned by the government. Run as a

departmental undertaking, it is one of world9s largest railways with over %/,&&& route-

km and just under .' million employees "5overnment of India 0&&%a#. arly in 0&&',

there was a policy announcement of allowing competition in the intermodal sector.

2. Threat of New Entrants:

The criteria allows entry in the intermodal train operations by Indian public:private

sector agencies including Indian registered companies of foreign entities either

individually or in joint venture. These companies should have e2perience in transportrelated activities. The e2perience criteria are !uite liberal so as to include virtually



any organization. There is a minimum revenue or net worth re!uirement of Rupees

&&& million. It is re!uired that entrants should have access to an I;<. Recognizing

that this may be a constraint for the new entrants, the operator may have a

)emorandum of *nderstanding ")=*# with an e2isting operator for using its

facilities or give an undertaking that it will develop its own rail facility within a period

of three years from the date of grant of permission to operate.

3. Threat of substitutes:

In our case electrification is substitute for diesel. >o in near future any substitution

for electricity might be used. >olar energy might be used as substitute for

electrification and that might be cost saving than electrification.

4. Bargaining powers of buyers:

+eople might use another type of transpiration mode rather than using train in future.

>ubstitute for train can be bus, airplane and private car.

5. Industry i!alry:

Indian railway is government owned. +rivate sector in India is not >trong enough to

give tough competition in this sector. Till now this sector does not have any rival.

"roble# $tate#ent:

The main problem is that whether the railway should be electrified or not. There was

a huge amount of capital e2penditures and also the amount of cost savings. >o it is

difficult to decide whether the project should be accepted just by viewing the

amounts of the capital e2penditure and the cost savings. s a result it is re!uired tomake a capital budgeting analysis.

%nalysis&E!aluation of the alternati!es:

ccording to our analysis, the $+? of the project is @07%A%, &,B&0.B0. This states

the electrification is feasible. s IRR is 7&3, it conveys that the project will save

huge energy and fuel maintenance cost to justify the initial capital e2penditure.



The sensitivity analysis has been done to see what $+? and IRR the project yields

when the costs are increased by &3 or 0&3 and when the project is delayed 0

years or 7 years.

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