Improving Performance: Challenges, opportunities and the way forward for the railway sector

Challenges, opportunities and the way forward for the railway sector

Abhaya K. Agarwal, Partner, Infrastructure and PPP, Government and Transaction Advisory Services

Indian Railways (IR) has witnessed improvements across areas such as safety, cleanliness, capacity and efficiency over the past couple of years. For example, consequential train accidents have reduced from 118 in 2013-14 to 73 in 2017-18 through the adoption of a multipronged approach including an increase in the speed of rail renewals, filling up of vacant safety posts, utilisation of funds from the Rashtriya Rail Sanraksha Kosh, etc.

Electrification of lines increased from 610 route km during 2013-14 to 4,087 route km during 2017-18. The Mumbai-Ahmedabad rail corridor has been sanctioned at an estimated cost of Rs 1.08 trillion. Further, IR is planning to provide facilities such as escalators, lifts, free Wi-Fi, etc. at 68 stations. Despite these efforts, IR needs to drastically improve on two key aspects – financial and operational performance.

As per the revised estimate, IR’s operating ratio (OR) stood at around 96 per cent in 2017-18 as against 93.6 per cent in 2013-14. Such a high figure means that there is almost nothing left from revenue receipts for capital investment. Given the amount of capital investment required, IR should focus on reducing expenditure, increasing revenues and generating other avenues of financing. To increase non-fare revenue, IR has taken initiatives such as out-of-home advertisement, content on demand, branding of trains, the Non-fare Revenue Policy, and the ATM Policy. Land monetisation plans can also bring in additional revenues for IR. Besides, some efforts are being made in terms of improvements in inventory management, energy audit of major load centres, etc. to control working expenses. However, all the above may add to only an insignificant improvement in OR and unless IR is able to generate asset-wise (railway line, trains or zones) profit and loss statements it would be difficult to prepare and implement a strategy to fully optimise the operational expenditure.

Azizul Quadir, Associate VP, EY

In Union Budget 2018-19, Rs 1.48 trillion has been allocated to the railway sector as compared to approximately Rs 1.3 trillion allocated in the previous year’s budget, an increase of around 13.8 per cent. However, it is yet to be seen how the government plans to mobilise financial resources for the planned expenditure, particularly mobilising private sector investment. Private  investment in railways has been affected by a variety of reasons such as the lack of a level playing field due to ambiguities in policies, the absence of an independent regulator in the sector and the lack of a comprehensive public-private partnership (PPP) policy. As per the National Transport Development Policy Committee’s report, private sector investment in railway infrastructure is envisaged to increase to 10 per cent of the total investment during 2018-22, 16 per cent during 2023-27, and 20 per cent during 2028-32.

The Sam Pitrodia Committee’s report on modernisation of IR, released in February 2012, had laid heavy emphasis on the involvement of the private sector in modernisation activities such as stations and terminals, high speed rail corridors, private freight terminals, leasing wagons, loco and coach manufacturing units, captive power generation, etc. A key recommendation was to integrate all the policies related to railways freight stock into a single comprehensive policy with the objective of streamlining the process and approvals, and preventing non-discriminatory access to all private freight terminals and tracks, including railway sidings. Further, IR should adopt the annuity mode of implementation for PPP projects in railways in a programmatic manner in line with the National Highways Development Programme.

Further, IR should consider rolling out a capex and an operating programme similar to that of the national highway regulatory reforms in the UK, which created a government-owned company to deliver the £15 billion investment in England’s motorways and major A roads as per the government’s Road Investment Strategy.

In a historical moment, the railway budget was for the first time merged with the Union Budget in 2017-18. While the merger brings many advantages for IR such as political freedom for the introduction of new trains, relief from dividend payments and better management of revenue deficits, there could be some disadvantages as well. IR may lose its commercial character which would most probably hamper private investments in the sector unless some concrete steps are taken. Therefore, it has become important that monitoring frameworks be developed to assess the performance of IR in totality, as well as segment-or asset-wise. The corporatisation of all existing urban rail projects into separate balance sheets could also be undertaken for better accounting and investments, and seeking viability gap funding or capex support from the centre and state. Unviable branch lines could be leased out under service agreements to private operators from whom IR would purchase the services with a step-wise improvement in them.

There are many recommendations in the Mittal Committee report, which are yet to be implemented fully. One such recommendation is the decentralisation of power. The committee has advocated for the complete delegation of power for expenditure, reappropriation and sanctions within the revenue budget financial outlay to the respective zonal railways, subject to them meeting their proportionate earning target. This would result in effective day-to-day operations, including the maintenance of fixed assets and rolling stock; construction/upgradation of stations and platforms based on traffic demand; addition or removal of trains between routes; monetisation of railway land under their respective jurisdictions, etc.

As a part of the accounting reforms recommended in the Mittal Committee report, IR is planning to roll out accrual-based financial statements by March 2019. This will help determine the precise extent of subsidisation. According to a statement by IR, around 130 chartered accountants have been placed in the field by the Institute of Chartered Accountants of India to assist the roll-out. Besides, there are many other recommendations which are yet to be adopted by the government and IR. The committee recommended the creation of a railway infrastructure company as a government special purpose vehicle (SPV) delinked from IR that owns railway infrastructure.

Further, the committee was of the view that a provision for open access for any new operator be made and an amendment in the Indian Railways Act be allowed for the levy of tariffs by private operators without administered tariff determination. The committee proposed the setting up of the Railway Regulatory Authority of India statutorily with an independent budget, so that it is truly independent of the Ministry of Railways. The committee advised the separation of rail track from rolling stock and unbundling the former and separation and unbundling of non-core as well as peripheral activities to encourage competition. The report also talks about unbundling IR into two independent organisations: one responsible for tracks and infrastructure and the other that will operate trains. The committee proposed the hiving off of suburban railways to respective state governments via the joint venture route.

Punctuality of trains has become a major concern of late. In 2017-18, IR had the worst punctuality performance in three years. According to the booklet on railways and coal, “Punctuality in the short term is impacted due to the priority given to infrastructure and safety works but in the long term this would enable faster and safer train movement.” While this may be partially true, there are other factors such as the number and length of platforms, pit lines, etc., that may have an even bigger effect on the schedule or movement of trains than the condition of railway lines and infrastructure outside the station premises. So, does IR have plans to tackle this problem? In the past couple of years, it has been promoting station modernisation plans, which would provide modern, state-of-the-art amenities to its passengers on the station premises and redesign the existing station facades.

The idea of station modernisation is excellent but there are a few gaps as station modernisation plans currently do not address infrastructural constraints for ensuring timely arrival and departure of trains to/from stations. Around 400 new train services have been introduced in the past four years, but has  infrastructure capacity at stations increased commensurately? Besides the ongoing efforts, IR should earnestly consider putting a brake on the introduction of new train services for at least the next couple of years and planning for a reduction in infrastructural constraints at various stations. Requirements of new rolling stock may get reduced with an increase in the average speed of trains. Hence, there is a need to holistically relook at the strategy to increase the manufacturing capacity of rolling stock. Further, the Mittal Committee proposes that all the existing production units should be placed under a government SPV known as the Indian Railway Manufacturing Company.

IR should strive to implement the key recommendations of the Mittal Committee report to improve its financial and operational performance.