Railway Accounting Reforms to contribute for a fair-and-objective Investment & Pricing related Assessments

NEW DELHI: The recent Union Budget has changed the way we think about Railways, with the Railway Budget subsumed into the General Budget. This is a trigger for structural reforms in the Railways.

A proper transparent accounting system is part of that template of reform. As a commercial operating entity, Indian Railways (IR) has certain obligations. Investors would want to assess the fair state of IR profitability and other key financial parameters before taking investment decisions. As users, the public would like easy access to its costing parameters.

Does AC-3 service really cost IR twice or thrice that of sleeper class? If not, then what should reasonable ticket price differentials between various classes of services be?

Freight users want similar information for various freight classes and distances. What are the returns on an IR project, even if publicly funded? If the union government is going to reimburse IR for social costs that are not commercially-driven, how are these costs computed? Chances are that even IR may not be in a position to furnish this information in a scientific manner. This does not mean that IR does not have any data related to costs and accounts. It does, but there are some serious limitations. The Accounting Reforms (AR) project of IR is intended to address this limitation and more.

In its current form, the AR project comprises three distinct modules. Module 1 involves preparation of financial accounts of IR on ‘Accrual Basis’. This means preparing financial statements such that a transaction is recognised in books as and when it happens. This is in contrast with the current practice, where a transaction is recognised only when cash flows (‘cash-basis’). Outstanding revenues or cost liabilities are hence not shown in accounts in case cash exchange does not take place. Module 2 relates to development of a Performance Costing framework.

This relates to objective assessment of unit costs of various activities (business-wise/service-wise/segment-wise) undertaken by Railways. Module 3 relates to Outcome Budgeting, which links financial outlays to outcomes. Assessing impact of budget outlays on doubling, tripling or new rolling stock technology acquisition to outcomes such as safety and network speed would become possible through this.

That said, what is surprising is that despite a wider concurrence on the urgent need to implement AR, the project hardly moved until recently. AR was first mentioned in the budget speech (February, 2003) by the then Minister of Railways (MR). Following the 2003 announcement, the AR project was sanctioned in the Railways’ works programme 2004-05. IR appointed a consultant in 2006 for undertaking necessary studies.

Though the consultant submitted its report in July 2010, gaps in their output vis-à-vis the terms of reference remained. Things went back and forth and remained stalled over the next few years.

The project witnessed a new push only in December, 2014, when the Ministry of Railways decided to implement accrual accounting pilot (Module 1) in Ajmer division and Ajmer group of workshops. The scope of the Ajmer pilot was subsequently expanded to include North Western Railway.

A similar pilot was also kicked off in RCF Kapurthala. In the February, 2016 budget speech, the Minister of Railways further announced implementing the project on ‘mission mode’. As a result, ‘Mission Beyond book-keeping’ was instituted and a project implementation organisation was created. Accordingly, 2016 saw reasonable progress in AR, and a fresh strategic plan to roll out AR across the Railways was drawn up. A synopsis of this plan is shown in the table.

AR has the potential to transform the decision making framework in IR by making key investment and pricing related assessments fair and objective. Simply put, it would tell IR where it needs to cut costs and where it needs to spend more.

Ability to take organisational decisions through robust costing and accounting frameworks should be a game changer for IR. But then, is a conclusion finally in sight? At least as per IR plans, it looks so. The project has seen serious slippages in the past. Sure there would be challenges. It is therefore critical to ensure that the much needed Mission Mode approach be followed in its true spirit and the project be regularly monitored from the top.

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