Advance Earnings from Big Freight Players helps Railways tide over Operating Ratio Crisis

Under the new freight advance policy, the railways had hoped to get Rs 14,000-15,000 crore before the end of 2018-2019 fiscal.

NEW DELHI: Just before the end of the 2018-2019 financial year, the Indian Railways has engaged in a spot of financial engineering to help rein in its dismal operating ratio.

Facing a tough scenario on the finances front, the national transporter on March 9 came out with a freight advance scheme – a policy that asks major freight customers to avail a tariff freeze for a year against advance payment to the railways.

Customers who agree to pay a freight advance in the last quarter of a financial year – to cover their estimated freight up to the end of the next financial year – will have the benefit of a fixed base rate till the end of the next fiscal, the new policy circular stated.

In the Interim Budget speech, railway minister Piyush Goyal, who as the acting finance minister in the absence of Arun Jaitley, had announced in the Lok Sabha that the Indian Railways would aim to hit a fiscal operating ratio (OR) of 96.2% for 2018-19.

Since the ratio – a metric that describes an organisation’s expenses as a percentage of revenue – is a measure of its financial health, the improved target was welcome news.

However, the prevailing scenario is far from normal with OR hovering above 100%. With the 2018-19 fiscal year coming to an end, the railways needed at least Rs 15,000 crore to keep the operating ratio under the 100%-mark and present a decent picture of the fiscal situation, sources in the Railways’ Financial Directorate told The Wire.

The railways aimed to improve OR from 98.4% in 2017-18 to 96.2% in 2018-19 and to 95% in 2019-20. The new freight policy envisages that customers should have minimum annual freight revenue of Rs 500 crore to avail the scheme. Consequently, there are nearly 50 eligible entities including state-run firms like NTPC and SAIL and railways PSUs such as CONCOR.

According to sources, railways is aiming to get Rs 10,000 crore from NTPC and Rs 4,500 crore from CONCOR. It has received Rs 3,000 crore as on March 26 from CONCOR and is expecting the rest in due course. NTPC was also in the process of bailing out railways with a bulk advance payment before the current financial year came to an end on Monday (April 1)

According to the Financial Directorate, the railways had initiated similar special measures last year as well in order to earn revenue in advance from NTPC and IRCON – a railway PSU – to make the operating ratio presentable.

This year though, on March 9, the national transporter came out with a concrete policy to make this practice a regular business rule.

The practice of advance revenue earnings is also prevalent in the passenger business as railways earns a significant revenue through advance ticket bookings (up to 120 days before the journey).

The operating ratio had touched the 110.83% mark by the end of December 2018, and improved to 105.4% by the end of January 2019, according to review prepared by the national transporter’s financial wing. Since the operating ratio was still above the promised mark, the only option left was to carry out financial engineering by showing next year’s earning as the current financial year earning, sources added.

The operating ratio is a gauge of operational efficiency that measures expenses as a proportion of revenue. Besides working expenses, there are other expenditures – including pension liability, expenditure of the Railway Board and railway institutions which far exceeds earnings.

A higher ratio also indicates less ability to generate surplus funds that could be used for capital investments such as laying new lines and manufacturing more coaches. Despite many new services like Tejas, Humsafar and the recently-introduced Vande Bharat Express, the loss in the passenger business is about Rs 30,000 crore.

Non-fare revenue from the station redevelopment project and advertisements have also not met expectations. Goyal made the highest ever capital-expenditure allocation of Rs 1.58 lakh crore for the railways in the Interim Budget while leaving passenger fares and freight rates unchanged ahead of the general elections this year.

He allocated Rs 7,255 crore for construction of new lines, Rs 2,200 crore for gauge conversion, Rs 700 crore for doubling of tracks, Rs 6,114.82 crore for rolling stock and Rs 1,750 crore for signalling and telecom.

The capital support from the Budget for the railways is proposed to be Rs 64,587 crore in 2019-20. The gross budget estimates under revenue for the year 2019-20 is Rs 2,72,705.68 crore, recording an increase of Rs 22,854.67 crore over the revised estimates for 2018-19.