RDA to enable Railways garner more Money to spend on Safety and Capex

Indian Railways have to get back in the high value freight game and charge halfway rational prices for passenger services, and stop wasting whatever resources they have if they are to survive. Hope RDA shall emerge as the biggest game changer. However, it should not be forgotten for a dispensation that promised ‘minimum government and maximum governance’; more government and more confusion in governance should not arise at any cost!

NEW DELHI: One of the biggest reforms in the history of Indian Railways was on Wednesday quietly cleared by the Cabinet to create an independent railway regulator called Rail Development Authority (RDA), with an initial corpus of Rs 50 crore.

The need for a regulatory authority has been long felt and was first proposed by the Rakesh Mohan Committee in 2001. But the credit for implementing it has to be given to the Railway Minister Suresh Prabhu who was willing to release the Railways from political shackles.

Prabhu had earlier let go of the privilege of announcing a railway budget in Parliament by asking the finance minister to merge it with the regular budget, and now he has taken the politics out of deciding rail fares.

The reason for the pathetic state of the Railways is that it does not have the money to spend on safety and upgradation. This is because fares for the passenger segment have been increased just twice in the past decade-and-a-half. Passenger traffic accounts for nearly 30 percent of the revenue but absorbs a large portion of the expenses.

In order to cross-subsidise passenger fares, the Railways ended up charging extra for commercial freight. This resulted in freight traffic moving away from Railways to roadways. The only way the catch-22 situation could be avoided was to increase passenger fares. This was a tricky subject and one that is considered a political hot potato. West Bengal chief minister Mamata Banerjee made her party colleague Dinesh Trivedi resign from the post of Railway Minister when he increased passenger fares.

However, the present government decided to use the route which it had implemented in the oil sector. Earlier, the government used to set prices of petrol, diesel, kerosene, LPG and aviation fuel. But within months of taking office, the Narendra Modi government freed control on these prices and allowed market forces to decide the price. All increases and decreases in prices from thereon in were decided by oil refiners and the matter was out of the political purview.

In a similar move, the Railways have passed on the decision-making on fares to the RDA. Apart from fixing tariff, RDA will also be responsible for protecting consumer interests, enhancing non-fare revenue, promoting private sector participation, suggesting measures for absorption of new technologies and developing human resource. The RDA will be an independent body with a separate budget.

The Railways under Prabhu has created new records. In FY17 it has touched a record revenue at Rs 1.68 lakh crore, with passenger revenue contributing Rs 48,000 crore and freight at Rs 1.09 lakh crore. Railways hauled a record 1.107 billion tonnes of goods despite losing 20 million tonnes in coal due to low demand.

What is creditable is that the above revenue has been achieved with an operating ratio of 95 percent as compared to 94 percent last year. Though this numbers look bad, it needs to be pointed out that the above numbers have been achieved absorbing higher employee costs on account of implementation of the seventh Pay Commission. Retirement benefits comprise nearly one-third of total expense for Railways.

The only way to reduce the impact of high employee cost was to increase revenue and this could only be done in the freight segment. Recognising this, Prabhu reduced tariff rates for commercial freight and realigned commodity rates. This resulted in a sharp jump in commercial freight in the last quarter. This year, freight numbers are expected to be much better.

While the banking system is flush with funds, the Railways has been crying out for more. As compared to an average historic expenditure of Rs 30,000 crore, Prabhu has been spending Rs 1 lakh crore and the only thing preventing him from spending more is a lack of funds and not ideas.

By giving Railways the freedom to fix fares, it will now be able to garner more money to spend on much-needed safety measures and capital expenditure. Prabhu has presented an Rs 8.56 lakh crore five-year capital expenditure plan to the government. By freeing the political control on fares, the government has given him a new canvas on which to paint.

This should be positive for companies catering to Railways like Texmaco Rail, BEML, Titagarh Wagons, Simplex Casting, Kernex Micro and Stone India in the medium to long term.

However, if one considers a critical infrastructure sector populated by multiple service providers from the private and/or the public sector, it can be seen the need for a state regulator to set broad policy directions, oversee performance, regulate pricing and generally look after public interest.

The telecom sector, as it has evolved in India, comes immediately to mind in this context, but a state monopoly like IR does not. Let’s reiterate the obvious, because it appears to have been forgotten: IR is owned and operated by the Government of India and regulated by a ministry headed by a minister of cabinet rank. The system is huge and complex and one more advisory body to ‘recommend’ pricing policy and set performance benchmarks appears redundant at best. And if the powers-that-be are visualising a Thatcherite transformation of IR, a very different sort of regulator will be called for and the proposed RDA would be grossly inadequate.

The functioning of IR has been governed by a fundamental contradiction – the need to be a ‘commercially viable’ provider of transport services, and simultaneously bear the burden of ‘social costs’ in the form of subsidised ‘below cost’ passenger fares and financially unviable but politically ‘required’ investments in new lines and other infrastructure.

Short-term political compulsions have always won the day, and the natural result has been a distorted fare and freight structure, gross undercapitalisation, inadequate capacity creation and a stressed system in danger of being marginalised in the economically most significant area of its functioning – the movement of freight over long distances, especially high value freight traffic.

The problem has been and remains fundamentally one of policy being determined by populist politics, where short-term political gains outweigh the requirements of long-term development of a viable transport infrastructure.

The spectre of global warming only adds to the pressing need for a strong high capacity rail network for long distance haulage of people and goods, and road for short distance movements.

Furthermore, transport networks have to be geared to actual traffic requirements, not to the requirements of constituency building.

The problem of the Railways being a milch cow for a short sighted and needy political establishment is not a new one, and therein lies the tragedy.

Over decades, limited resources, wasteful use of a great deal of available resources, unviable passenger fares, distorted freight rates, inadequate financial support from governments and political establishments that expect ‘expedient’ pricing but are not prepared to pay for it, and the resulting resource crunch have become a vicious circle that has crippled railway finances.

Spreading resources thin – also politically motivated – aggravates the impact of resource scarcity and negatively affects returns on investment, where these are otherwise positive. Market borrowings are no solution either, as loans are at market rates but rail pricing is not, and no amount of rational advice from a regulator – assuming such advice is at all forthcoming – can overcome the ultimately political determination of pricing and investment decisions.

A quick look at IR revenues is revealing – approximately 92% of revenue comes from freight (65.6%) and passenger (26.1%) traffic, but public pronouncements dismiss the declining trend in incremental freight loading, and talk about new sources of revenue like monetising land resources.

Exploiting railway land has been on the agenda for years, but there has been little to show for it, despite all the brave words. When we remember that railway revenues are in the neighborhood of Rs 1.6 lakh crore (INR 1,57,071 crore in 2014-15), any new source of revenue will have to show very large numbers to make a serious contribution to IR finances. And that hasn’t happened yet. The railways have to focus on their basics – everything else can, at best, be the cherry on the cake.

One response to harsh realities is to hide one’s head in the sand and descend into dreamland, but that doesn’t help when the lion is coming at you. The railways have to get back in the high value freight game and charge halfway rational prices for passenger services, and stop wasting whatever resources they have if they are to survive.

The problems facing IR are critical, and an ‘advisory’ regulator, while certainly creating additional posts and perhaps providing more high level post-retirement employment opportunities for superannuating bureaucrats, will do little to help the railways dig themselves out of the black hole they are descending into.