Railways short on long-term strategies

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Monday , March 24, 2008 at 2157 hrs Continuing the turnaround story, the minister of railways has presented a surplus Budget without hiking rates. He asserts that the railways have not only offered dreams to passengers but also turned them into a reality. In doing so, the railways bettered most of the Fortune 500 companies in the world. Indeed, the results are impressive: a cumulative gross cash surplus of Rs 68,778 crore in just four years; a dividend payment of Rs 15,898 crore; investment worth Rs 13,665 crore in infrastructure; and increasing fund balances by Rs 20,483 crore. All these were achieved without an all-round hike in the charges. In 2007-08, the surplus reached Rs 25,065 crore, a very big jump from Rs 9,000 crore in 2005. The operating ratio dipped to 76% and the return on capital reached an all-time high of 21%.

Broadly, the policies that helped in this turnaround are: The incremental loading of 233 MT; yielding Rs 14,000 crore of freight earnings; lean season discounts and a peak season surcharge adding Rs 2,000 crore to the kitty, elongating passenger trains with 3,000 coaches; yielding Rs 2,000 crore; enhanced utilisation of assets with increased productivity, giving priority in investment policy to low-cost high-return projects; adopting strategic alliances with erstwhile competitors like shipping and transport companies to make them partners by granting them licence to run container trains; playing on volumes, driving down unit cost, reducing tariffs and increasing market share to achieve record profits; and the focus ‘on increasing yield per train rather than increasing tariffs per passenger or per ton’.

However, a cautious approach is evident in the next fiscal. The projections show that the cash surplus is down to Rs 24,782 crore, the operating rises to 81.4% and the ratio of net revenue to capital down to 15.8%. There is an unexplained doubling of sundry earnings from Rs 2,637 crore to Rs 5,000 crore. Expenditure is raised by 20%, earnings, however, grow only by 13 % raising doubts about sustainability of good results. The ratio of net revenue to capital, however, does not bring out the correct picture. It completely ignores the capital cost of rolling stock assets worth Rs 35,379 crore leased to the railways by IRFC up to 31st March 2006. Unlike in the General Budget, in which the impact of changes is indicated as revenue neutral, loss of revenue, and gain in revenue, as the case may be, there is no indication of the financial impact of the concessions proposed in the railway budget.

The annual Plan outlay is set at Rs 37,500 crore, with a moderate budgetary support from a general revenue of Rs 7,874 crore (a 21% share), Rs 20,600 crore (54.93%) from the railways’ internal resources, Rs 1,300 crore from the safety fund, borrowings by IRFC, Rs 6,907 crore (18.4%), RVNL, Rs 293 crore, and the PPP through wagon investment and others, Rs 1,300 crore.

A Railway Vision 2025 is promised in six months. This would call for mind-boggling amounts of money. Even for the next five years, the estimated requirement is Rs 2,50,000 crore, of which Rs 1,00,000 crore are expected through PPP. In 2008-09 itself, Rs 25,000 crore are expected to be invested on stations, loco and coach factory, logistics parks and so on, but the Plan provides for only Rs 1,300 crore! PPP is inevitable for increasing capacity, which alone can be a long-term solution, but international experience does not encourage undue reliance on this method. A recent study by TERA International revealed that in a 15-year period to the end of 2004, only 85 railway projects valued at $ 27.8 billion in 28 developing countries had reached financial closure. Thereafter, there was a steady decline, and it has returned to the level of the 1990s of solitary projects of moderate value. This is indeed a cause for concern.

In India, too, experience has not been very encouraging. Port connectivity projects seem to be the preferred category. Some examples are the port connectivity projects to Pipavav Port, Kandla and Mundra ports, and the private port of Mundra. Private sector participation appears more feasible and attractive in telecom and energy sectors, but least attractive in the transport sector. Even within the transport sector, it is attracted more to road development. PPP should be adopted with critical examination. A difficult task is in designing a model contracting agreement to attain the levels envisaged in the railways’ corporate vision.

A full-page in the budget speech was devoted to accounting reforms. Capital restructuring to make it conform to commercial accounting practices, by annual writing down of capital value to the extent of depreciation suffered, in short to avoid the charge of carrying a ‘fictional and notional’” capital structure, adopting a viable debt-equity ratio, revamping the costing system and making use of the end-results for pricing and evaluation of projects and so on are the crying needs which were recognised at that time, but everything seems to have been forgotten since then.

And there is a crying need for setting up a fare and freight enquiry committee to recommend valid tariff structures to restore confidence amongst the rail users. The last such committee had submitted its report 15 years back.