Interview with FC: IR may have been conservative about PPP model, but not any longer

The Indian Railways’ size, in terms of its network, passenger traffic and freight loading (it has just entered the 1-billion-tonne club, which hitherto had only three members) is huge, even by global standards. But its infrastructure is almost in a shambles, the services rendered compare poorly with what is deemed to be world-class, and there is a serious question mark over the safety of passengers and goods transported via its 1.15-lakh km network. The enterprise, owned and operated by the state and which avows that profit is hardly its motive, has its finances undermined by populist, unthinking (and corrupt?) political masters who have held the reins when it comes to its policies. The national transporter is now faced with tasks it finds difficult to measure up to, while the attempts, albeit feeble, to involve private funds and enterprise for growth and modernisation have yet to bear fruit. The railways’ finance commissioner Vijaya Kanth answers a few queries around these issues from FE’s KG Narendranath and Rajat Arora. Edited excerpts from the interview:

Q: Roughly two-thirds of the railways’ gross traffic revenue comes from freight. While the share of freight in your traffic receipts might have risen in recent years (thanks to the subsidisation of passenger fares), even freight loading is not increasing at a rate expected of an efficient transporter. Freight loading increased by just 4% last year and 6% the year before, while ideally, this should have increased at 20% more than the GDP growth rate. Why is the railways losing the business of goods traffic to the roads sector and other means of transport? 

A: Freight loading depends on how the economy performs. We can carry more freight but for that the economy has to pick up. We have adequate number of wagons and can cater to the increased demand (if the economy picks up). We couldn’t meet the target of 1,025 million tonnes (mt) for 2012-13 and saw a shortfall of 15 mt because the economy slowed down (the target for this year is 1,047 mt).

We aren’t losing traffic to the road sector in case of most bulk commodities. Some cement traffic did shift to roads but has since come back (to the railways). In the case of many goods, it simply doesn’t suit the producer to use roads as the quantity is very high. The freight moved by roads is more of the unorganised sector.

Q: But that leads you to impose a disproportionate burden on industries like cement, steel and coal which have no option but to use railways for transportation. This creates a cost spiral and hurts the economy.

A: We cannot increase the freight for commodities like fertilisers and foodgrains randomly, as we are constrained by the government policy to avoid inflating the costs of these goods. Last year, when a surcharge was levied on freight, we spared foodgrains from that impost, forgoing revenue of Rs 1,000 crore. The major source of freight revenue for the railways is coal (with around 40% share).  

That said, we aren’t doing that badly on the freight front, having entered the 1 billion (freight loading) club, which previously consisted of the US, China and Russia only. The loading picked up in March. The special freight incentive schemes too are helping in increasing the traffic, although there is still a lag in use of our containers by user-sectors like automobiles. Even if you provide incentives and discounts, the industry might not feel confident in your capacity to deliver, if your finances are not in good shape. That is exactly why we have focused on fiscal consolidation in the 2013-14 budget.

Our operating ratio in 2012-13 was 88.8%; this year it is being projected to be slightly better at 87.8%, and the idea is to reduce the ratio to below 80% by the end of the 12th Plan. We are keen that freight volumes grow fast enough to generate enough revenue for our asset replenishment and capital investment needs. The fuel adjustment component in freight (implemented from April, 2013) doesn’t amount to a hike as it merely neutralises the impact (on us) of any increase in fuel prices. There is still going to be a cross-subsidisation of Rs 25,000 crore of the passenger segment by freight earnings this fiscal.

We are also losing money due to different pricing of commodities – items for domestic consumption get discounts as compared to those meant for exports but there are instances of misuse of this policy as was recently noticed in case of iron ore exporters. But we have made a beginning and we expect to garner Rs 6,500 crore from the fare rationalisation announced in January.

Q: Coal imports are rising steeply because of the widening demand-supply gap, straining the country’s foreign trade balance. Do you have the capacity to meet the increasing demand for imported coal transport?

A: Although we have limited throughput capacity at present, we have by large managed this (rising demand for imported coal transport). Users might have to stagger their coal imports if they want to avoid traffic bottlenecks; if the imports are bunched together, it would indeed stress us.

Q: Your gross revenue has remained at around 1.2% of GDP over the last 10 years, whereas the potential was much higher. And more than three-fourths of the revenue receipts are now used for meeting wage, pension and fuel bills. No wonder the railways’ funds have depleted since 2007-08 (almost drained out now), when their combined closing balance stood at an encouraging Rs 22,279 crore. What are you going to do about this?

A: The Depreciation Reserve Fund and Development Fund are financed through our internal generation. So the more the internal generation is, the more we provide for these two funds. Last year, we had initially estimated to earmark Rs 9,500 crore ( for the DRF) and then the roll-back (of fares) happened and the earnings consequently came down, forcing us to cut down on allocation to this fund by Rs 2,500 crore. But we did provide adequately for the Development Fund last year (Rs 9,984 crore) which is meant for modernisation.

Q: The DRF is for replenishment of existing assets, meaning these are hardly investments to create growth. The Capital Fund, which is meant for creating new revenue-generating assets, had soared to Rs 11,072 crore in 2007-08 but remained exhausted in 2009-10. Appropriations to this fund only marginally exceeded withdrawals in subsequent years and in 2012-13, as against the initial estimate (BE) of a net allocation of Rs 5,000 crore, just Rs 425 crore was provided. How confident are you about the fiscal consolidation effort initiated a few months ago helping you in realising the budget goals for 2013-14 and bolstering the future funds flow for desperately needed new investments?

A: In 2012-13, our finances improved thanks to the focus on fiscal consolidation. If we had increased fares by 5% every year, we would have accumulated about Rs 1 lakh crore in 10 years, and would have solved many of the problems including depletion of the funds you have referred to. Alas, we could not do that and as a result, our modernisation plan suffered, but safety hasn’t been compromised.

Q: One source of revenue is budgetary support on which you pay a concessional interest. How has this stream been?

A: Last year we paid a dividend (interest paid on capital at charge) of Rs 5,340 crore to the government and for this year, we have budgeted Rs 6,250 crore. As gross budgetary support, we got Rs 26,000 crore for 2013-14 including the allocation for the dedicated freight corridor (DFC), where a lot of spending is required for land acquisition, etc. In fact, we had requested the finance ministry to give funds separately for the DFC, which would now take away Rs 7,000 crore from the GBS. In the 12th Plan period, we should be getting Rs 1.94 lakh crore as GBS and in that, the requirement of DFC would be around Rs 20,000 crore. With these, our plans for doubling of lines, laying new lines and gauge conversion might suffer a bit.

Q: What are the liabilities you are going to meet out of the Debt Service Fund (DSF)?

A: It was created because we realised that we have to start servicing our JICA (Japan International Cooperation Agency) and World Bank debts. We also have to be ready to meet the liabilities to arise from the Seventh Pay Commission. The DSF is a committed fund and has been approved by the finance ministry. The aim is to set apart roughly 20% from our internal generation for this fund. To start with, we have put over Rs 4,000 crore in the DSF this year.

Q: It is only through tariff rationalisation that your revenue can be enhanced. De-politicisation of the tariff determination process is imperative for ensuring timely adjustment of tariffs according to market realities. What exactly would be the mandate of the proposed Tariff Authority?

A: The proposal (to set up the authority) is under inter-ministerial consultations. The views of the law ministry and the Planning Commission are expected on how to structure the authority and what functions are to be assigned to it. But in my view, it should be a statutory body consisting of experienced government servants and economists. Maybe it could begin as an advisory body, and be strengthened later. It could define the threshold below which the tariffs can’t go.

Q: An expert panel led by Sam Pitroda had estimated the cost of modernising the railways at a whopping $120 billion. It had proposed a resource pool, combining the railways’ surplus, private investments, budgetary outlays and borrowings. Mamata Banerjee’s Vision 2020 pegged investments to the tune of Rs 14 lakh crore, close to the size of the Centre’s Budget. Are these what define your medium-term plan?

A: The Vision 2020 is there and we do keep referring to it. The Vision 2020 also includes Prime Minister Railway Vikas Yojana Fund for creation of new lines in backward regions, which is a goal difficult to realise. It’s good that we have the vision but we also need to create the resources to implement it.

Q: The required capacity addition and upgrading and modernisation of the railways demands large amounts of resources – surpluses from accelerated growth in freight and passenger traffic is one revenue avenue, but cost-effective borrowings enabled by the bolstered balance sheet of the transporter and public-private partnership (PPP) ventures are heavily to be relied on. Which are the areas where you think PPP model is desirable and would work?

A: World-class stations, optical fibre cables network, high-speed corridors and dedicated freight corridors are among areas identified for PPP projects. This year we will mobilise Rs 6,000 crore through the PPP model (the target for the whole of the 12th Plan is much higher at Rs 1 lakh crore). Attracting private investment is a daunting task but we are building (the model) with states and PSUs which are investing in railway infrastructure. Station development and land monetisation have PPP elements. We are indeed serious about utilising the potential of PPPs. In port connectivity projects and the doubling of lines, (private) investor interest can be stimulated. These models would be on a revenue-sharing basis, with the railways contributing land and other infrastructure.

Q: There is a need for equitable deployment of railway facilities and services across states. Political patronage has allegedly led to uneven use of the railway resources.

A: Such allegations are bound to be there in a country as vast as ours. We are doing our best to ensure that all regions of the country benefit from rail connectivity. States such as Andhra Pradesh and Karnataka have deposited money with us for implementing PPP projects. Haryana and Chhattisgarh have also come forward to design and implement PPP projects. The “participative policy” we have formulated lists out various PPP models, but its vigorous implementation might take some time. We are also open to FDI in the PPP segment, although the FIPB scrutiny would be required. There has to be risk sharing between the government (railways and PSUs) and the private investors, even as the revenue model has to be attractive for the latter. We have been rather conservative about PPPs but we are indeed opening up. We are giving priority to states which are ready to share 50% of the cost of a project or would provide land free of cost. Of course, there are states which are not in a position to do that and we are keen that all states benefit from the PPP initiatives.

Q: Don’t you need to right-size your workforce?

A: Our pension bill is around 16% of the operational expenses and the wage bill, 37%. These are obviously very high. We have 12 lakh pensioners and 14 lakh employees and we are also recruiting 1.5 lakh more employees. This workforce is not surplus and is needed for ensuring safety and quality of services. We might not go beyond 14 lakh employees which currently is the right size.

Q: You are hesitant to be called a commercial entity which is evident from your accounting principles also. You won’t seek or make profits, but only a “surplus.” Isn’t there a need to dispense with the cash-based system and formally adopt accrual accounting?

A: We are a public utility and are not in the business of making profits. But there is a well-recognised need to revamp the accounting practices. Much of our accounting is already accrual-based. We are working on accounting reforms and the aim is to follow the government accounting standards. We have a separate cell working on this shift and pilot projects are under way. Accrual accounting is the norm for reporting of government finances globally and would indeed help in efficient management of resources.