Deflecting attention from a crisis is an acceptable political strategy. No wonder then that railway minister Dinesh Trivedi has found this the right time to discuss bullet trains with a visiting Japanese team. His annual budget is due, he has no funds, nor can he raise them, and he will not want to tell that to Parliament.

Still, he might have checked up with the most professional arm of his ministry, the Indian Railways Finance Corporation (IRFC), before walking into that meeting with the Japanese. The company has been saddled with the job of raising R20,584 crore from heaven and earth to finance 21% of the total expenditure of the Railways for this financial year, 2011-12.

Consequently, it has read the riot act to the ministry. ?It is (our) considered view that it would be absolutely imperative to ensure that the projects selected for funding by IRFC are indisputably viable, and would yield healthy returns with short gestation periods,? IRFC?s latest annual report reads.

At R21,950 crore for a 500 kilometre line like Mumbai to Ahmedabad, the bullet train is neither viable nor has a short gestation period. In plain-speak, IRFC has asked Trivedi to stop chasing such will-o-the-wisps.

What it have not told the minister is that IRFC is also the reason why successive railway ministers have sent the Railways down the tube. A dedicated, professional money-raising arm for a wastrel like the Railways is a deadly combination.

To pay for its sins, the Railways has cocooned IRFC with several layers of safety. This means the company, classified as an infrastructure NBFC by RBI, has a triple A rating from all ratings institutions, making it the darling of the investor public. The finance ministry has helped a bit more this time, classifying its R10,000 crore of debt issue as tax free.

Yet, all the money it raises is poured into the sink hole called the Railways. Railway passengers are therefore sold the placebo that ticket prices will not rise, which is paid for by the Railways through high-cost borrowing from the market. At 2009-10 rates, for instance, the IRFC?s own estimated cost of borrowing was 7.62%. Had fares been raised, the Railways wouldn?t need such large IRFC support.

Not surprisingly, when former road minister Kamal Nath suggested a dedicated financing arm for the sector, the finance ministry turned it down. Yet even this headroom could be gradually coming to an end for the Railways. The IRFC alchemy to turn Railway dross into gold is a leasing scheme.

IRFC uses the money it raises from the markets here and abroad to buy rolling stock for the Railways and participates to some extent in some of the projects. In 2011-12, the Railways planned to buy 18,000 wagons. IRFC comes into the picture in these purchases.

In turn, the stock is leased out to the Railways for an annual lease rental payable half yearly. Since the payments to IRFC rank sixth in the order of priority for the Railways, way above most expenses like allocation to capital reserve fund and pension fund, the market has no hesitation in buying its papers.

This cozy arrangement is now facing headwind created by the mismanagement in the running of Railways? finances. At the end of 2010-11, the rolling stock of the Indian Railways owned by the IRFC was 74%. IRFC accounts showed the moving infrastructure funded by IRFC at 5,567 locomotives, 33,856 passenger coaches and 1,49,030 freight wagons, valued at R69,843 crore. At the end of 2011-12, this will be near 80% after purchasing those wagons that Mamata Banerjee has promised to buy. Since Trivedi wants to finance bullet trains, one can assume the headroom will be over in another budget.

The security element in the IRFC finances has all along stemmed from a) the ownership of the new rolling stock and so the lease rentals that it gets from the railways, and b) the equity support provided by the railways to keep its leverage from shooting up. Both are under massive stress.

The first is the differentiator for IRFC from other public sector financiers like REC and PFC, which too are classified as infra NBFCs. None of them have any ownership of the physical assets of the companies they lend to. Their rights are therefore as common lenders to projects. This is also one of the reasons why the two have been leery about lending to state electricity boards, as in the case of default, they have no recourse except to approach the state governments for recompense.

So it?s a sort of chicken and egg situation now. The IRFC cannot lend more to the railways unless the latter buys the stuff. The railways cannot buy as it has no funds unless IRFC raises the funds from the market. As per public data, the company had raised R8,725 crore by the end of September 2011. The bulk of the remainder is due to hit the market now as R10,000 crore tax-free bonds. If the market remains lukewarm, Trivedi would desperately need the finance ministry to give him some balancing support. The Railways, as per market reports, have not bought many wagons and that creates huge pressure on IRFC.

Simultaneously, high borrowing has consistently raised the leverage pressure on IRFC over the years. Its debt-to-equity, at 9.9 in 2010, threatened to cross 10:1 (RBI frowns at a ratio so high), but was scaled down to 8.9 in April 2011 after the government put in R511 crore as additional share capital in October 2010. But now, with a 110% rise in its borrowing in this fiscal, that comfort has vanished. It plans to ask for permission to raise its paid up capital from the current R1,602 crore.

The lessons are obvious. It is impossible for a derelict organisation?albiet brimming with fine officers?to create an alcove of safety. The bond holders of IRFC would be keen to ask questions that the ministry has glossed over for decades.

subhomoy.bhattacharjee@expressindia.com