New Delhi: In recent times, the Indian Railways has been able to raise funds at costs lower than the government through its fund-raising arm, the Indian Railway Finance Corporation (IRFC), which enjoys the same credit rating as the government. This is because the IRFC is backed by the revenues of Railways’ rolling stock, such as the engines, wagons and coaches.
But, as the public enterprise gets into project financing for the Railways, the cost of funds for the Railways is likely to increase. However, according to Sanjoy Mookerjee, Financial Commissioner, Indian Railways, the Railways is taking this route to make cost of funds cheaper for the nation. S.Mookerjee shares how Railways has controlled costs and discussions with Finance Ministry on dividend payout. Excerpts:
Q: How has the Railways controlled costs?
A: Traditionally, fuel was considered a fixed cost for the Railways. But, through inventory management and better efficiency, this has now become a variable cost. We are also reviewing the electricity contracts keeping in mind that lower average peak load should give us a substantial reduction. In our colonies, we are going for renewable energy and pre-paid card-based payments which are lowering costs. For all renewable energy usage on such projects, we also get rebates of up to 40 per cent from the Ministry of Renewable Energy.
We will save on diesel in Rajdhanis and Shatabdis by drawing energy directly from engines instead of generator power cars. The power cars can be replaced with two coaches, which will generate revenue. The Railways also saved some fuel on account of drop in net tonne kilometre and gross tonne kilometre, which count railways’ distance and loading productivity.
So, in 2015-16, the Railways saved ₹3,500 crore in fuel account. It also saved over ₹10,000 crore over the Budget estimates by controlling staff allowances. We had a shortfall of almost ₹15,000 crore in revenues, but through these savings, we were able to reduce our fall to ₹5,000 crore.
Q: Staff and pension costs are your largest fixed cost. Will the government share your pension costs?
A: Staff cost is in two parts: first is salary and dearness allowance and pension, which are the fixed costs; second is the variable or staff allowances. Staff allowance has been tackled. Till now, we mostly do cash-based accounting. As regards pension, we manage it through a fund that is credited from our internal revenues every year, based on the number of pensioners and the statistics that we get from banks. We do not or cannot formulate a fund that will pay for itself through its investments.
The National Pension Scheme is a contributory scheme for those who joined after 2004. So, accrual accounting is required to find out the liability for the next 20 years.
What we see is that around 2020-21, there will be a peaking, and then it will start falling. So, we are working on the accounting reforms project, which will take another year to roll out. I don’t think we can have a dialogue with the Centre or any pension fund till the accounting reforms project is complete.
Q: With IRFC now funding infrastructure, will the Railways’ cost of funds be impacted?
A: We are going for a little bit of international funding with due hedging. Tax-free bonds give us a rate of 7.2-7.8 per cent, which is cheaper than what the government borrows from international market. For the tax-free bonds, the weighted average cost to the Railways is 7.37 per cent with an average tenure of 13.51 years.
Now, Life Insurance Corp funds, which cost about 7.98 per cent for 30 years with a five-year moratorium, are exclusively for infrastructure project finance.
The question is do I go to the government, ask for more gross budgetary support and the government borrows money to pay us? This route may be cheaper for the Railways, but will be more expensive for the nation. India wants to reduce its fiscal deficit to 3 per cent. If this is done, India’s rating will go up. As a government department, it is our endeavour to help the government in this effort.
Q: Will there be a change in the proportion of IRFC funds deployed for rolling stock and infrastructure?
A: Very little, we are doing something like ₹20,000 crore annually. With the enlargement of the freight basket, we will need more wagons from IRFC. This will help the coal industry to some extent.
Also, we are going for shipping and ports. So, coastal shipping and rail bridging has become a reality. Ports and companies are investing in mechanised loading and unloading on rail wagons and rakes are moving out from ports. This is a new phenomenon.
Q: On the dividend payment by the Railways to the Centre, has there been any breakthrough?
A: Government of India is our owner. We are duty-bound to pay them dividend. Decision on dividend is based on two factors — what is the market cost of the capital and the recommendation of the Railway Convention Committee.
When the market is down and cost of capital is less, obviously dividend will fall. But for the Railways, the final recommendation comes from the committee, which is then taken up by the Cabinet and finally approved by the Parliament after due consultations with the Finance Ministry.
For example, the recommendation for 2015-16 has been made for 4 per cent, which is one of the lowest. We hope the Cabinet and Parliament approve this.
But, non-dividend bearing funds have also been assigned to us. Of the gross budgetary support of ₹45,000 crore, the Centre has provided ₹10,780 crore, which is from the Central Road Fund or the diesel cess. This is a four-fold increase from the Budgetary support. Last year, we could get only get ₹2,661 crore.
We also hope to get something from the Swachh Bharat Fund for our bio-toilets. This is also a safety issue since human waste and water corrode our steel tracks and bridge girders.
Right now, the Railways are using own funds, such as depreciation reserve fund (DRF), to make this a success as it is a replacement for existing toilets. DRF can be saved, if the government could provide funds.