Suresh Prabhu's Rail Budget Stops Short of The Structural Reforms Railways Urgently Needs

26/02/2016 3:47 PM IST | Updated 15/07/2016 8:26 AM IST
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Indian Member of Parliament Suresh Prabhu waits for his car outside the Indian Parliament in New Delhi, India, Friday, April 27, 2007. Parliament reopened Thursday after a three week recess for the second phase of the Budget session. (AP Photo/Mustafa Quraishi)

Before making any comment on the 2016-17 Railway Budget, it would be useful to define the tasks of the Indian Railways and broadly, the problems it faces. The Niti Aayog released an exhaustive report but most readers will balk at reading 300-odd pages of officialese.

So here goes.

The Indian Railways is a multi-purpose organisation.

At one level, it is a commercial service provider, working for profit to move vast amounts of freight and millions of passengers across a massive network. Freight is the largest revenue earner and also provides the highest share of profits.

The IR provides "social services" as well. It links far-flung parts of India that would otherwise not be on the transport grid; it carries a huge number of commuters at subsidised fares; and it provides a livelihood for many people.

Reconciling all the commercial and social objectives is tough. The commercial services, such as moving freight and high-end, long-distance passengers, have to earn enough to subsidise the social imperatives. What is more, the commercial services face fierce competition.

The railways has seen its share of freight movement being eroded by road-based services and it faces competition from inland water transport and air cargo as well. Long-distance passengers often prefer to take a flight, or a bus. Back in the 1980s, IR carried over 60% of all freight. By 2012, that was down to 36% and it is now probably only about 30-31% of all freight."

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IR has lost freight share (and passengers) over the years because it has hiked fares and charges in the face of competition. It has also lost both passengers and freight due to poorer quality of services. Private freight operators deliver door-to-door within strictly defined schedules; luxury buses are more comfortable and convenient and possess more frequent timings. Airlines have far lower transit times.

The social imperatives are a financial drain. IR is seriously over-staffed. It has to bear huge costs on behalf of its employees. Those costs will increase with the Seventh Pay Commission recommendations coming through. IR cannot really prune its workforce since this is considered politically unacceptable.

The railways also loses money on suburban passengers and it is politically impossible to charge remunerative fares from commuters. Overall, IR’s passenger segment losses will hit Rs30,000 crore in 2015-16. These losses will be subsidised through the freight operations.

Building rail infrastructure in the North East, Kashmir, Konkan, etc., is a massively expensive process and the revenues earned from those regions are not at all commensurate with the cost of building and maintaining the networks.

So much for running operations. There are huge investment needs as well.

The IR has to undergo a constant cycle of upgrades of equipment and existing facilities. It needs to induct new trains, new bogeys and new coaches, running on new tracks.

It needs to build, rebuild and renew its networks in order to massively improve capacity. IR has a number of massive projects on the drawing board, and in various stages of planning and execution. Initiatives such as the Dedicated Freight Corridors and other proposals to build rail-links directly connecting to ports, and to thermal power stations, could help to improve capacity massively and improve speeds for both freight and passenger trains as well.

A number of measures need to be taken to improve safety. This includes civil constructions to eliminate level crossing and build over/under bridges. A massive dose of IT is also required to ensure smooth management of the insane logistics of running 20,000 trains a day and moving the entire population of India around every 7-8 weeks.

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The IR doesn't generate the sort of surplus that would allow it to make those huge investments from internal resources. It cannot ask the central government to produce all the funds it needs--the Centre has other calls on its cash and cannot, or will not, increase "Budgetary support". In fact, there is a huge backlog of projects dependent on Central largesse because central funds are released in dribs and drabs.

This Railways Budget (2016-17) proposes to do the following:

It will hold fares and freight charges at current rates. It cannot increase fares or freight anyhow due to competition from road and air and also because "everyone" knows fuel costs have fallen.

Fuel costs are indeed a significant component of overall costs for IR. But employee costs will be much higher in 2016-17. Out of total expenses, over 50% will be staff costs and only about 25-30% will be fuel and energy costs.

IR will try and improve quality of service for passengers in multiple ways. It will aggressively pursue freight volumes and try and improve the quality of services in its freight handling processes as well.

The railways will continue to build capacity and try to speed up things on the infrastructure front. It will seek to generate revenues from non-traditional sources, such as advertising, land bank development, etc.

The assumption is that the Centre will hold budgetary support at the same levels as last year but there are hopes that IR can push capex up by around 20%, regardless. That money will have to come from other sources.

Part of the funding will come from a low-interest long-term loan from LIC. Japan's agencies will provide a lot of funding for certain specific projects such as the Dedicated Freight Corridors and for the proposed bullet train between Ahmedabad-Mumbai. Multilateral agencies like the World Bank and the ADB will also come up with low-interest long-term loans for specific projects.

In addition, the railways will try and induce private enterprise to contribute cash and knowhow, by creating JVs and Special Purpose Vehicles for specific projects. In fact, IR will do joint ventures with port managements, with state governments, private technology providers, freight operators, etc. The investment focus will be on the completion of current projects, although plenty of new targets have been announced as well.

Some things are clear:

The financial situation will get more stressed in the short-term at least. The revenue projections for 2016-17 are rather optimistic. Passenger fares and freight charges remain unchanged. It is assumed that freight volumes will rise only by 1.1% in 2016-17 (freight volumes rose by 0.9% in 2015-16) and freight charges will not be raised. But it has been assumed that freight revenues will rise by 5.5%. It has been assumed that passenger revenues will grow by 19% (passenger revenue grew around 8% in 2015-16). Those projections are extremely likely to be missed.

The 2016-17 budget assumes that the "operating ratio" (OR) will get worse. The OR is derived by taking operating expenses, which means expenses other than interest costs and investment costs and dividing that by revenues. The lower the ratio, the greater the surplus.

ALSO READ: 2016 Rail Budget Highlights

The operating ratio will rise to 92 per cent of revenues in 2016-17, from 90 per cent in 2015-16. Once interest costs are deducted, there won't be much surplus! The investments Mr Prabhu is seeking will have to come. Or else, the 300-odd projects on the anvil will stall, or slow down. Given a generic economic slowdown, the IR will have to work hard to get those investments.

The IR has been trying to get private enterprise to come in with money and knowhow for a while. It allows private service providers to run container trains, to make engines, coaches, etc. Some JVs have worked--for example, private ports have built their own rail connecters.

But in many cases, private enterprise has been wary of committing resources due to the IR's structure and due to the absence of an independent regulator. In case of disputes, or arguments, there is no independent authority to arbitrate and a JV partner is at the mercy of the IR. Unless such an authority is created, and contracts are clearly designed to allocate risks and rewards fairly, private enterprise will continue to be wary.

Can this Railway Budget deliver what it promises? The minister appears to be sincere. He is a smart, financially savvy man and well aware of what is required. Nevertheless, this Budget sets huge tasks and I suspect the targets will be missed.

Above all, the railways needs to change its internal DNA. It operates right now like a government department (as of course, it is), with the usual government department's disdain for providing quality services. It is also too much of a hierarchy, running from the minister to the Railways board to zonal managers to station masters to what have you. There is no empowerment at the lower levels. Nor are there incentives for taking fast decisions, or generating profits.

Mr Prabhu must look to change those entrenched attitudes and rework those hierarchies. He will have to find ways to do so.

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