Prabhu toys with a train of thoughts

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Hikes capex by 20 per cent despite Rs 15,744 crore earnings shortfall

Prabhu toys with a train of thoughts
Leaving passenger fares and freight rates untouched, railway minister Suresh Prabhu presented a ‘maintenance’ budget lacking depth, but promising to focus on capacity expansion and customer experience. He also hopes to start new trains and passenger services in his second Rail Budget on Thursday, without knowing from where to source the cash.

The stock market, a universal barometer of investor mood, dismissed the budget, with the benchmark Sensex tanking for a third consecutive day on account of China worries and expiry of forward derivative contracts for the February series. Rail-centric stocks reported mixed outcomes when the market closed for trading (read separate story in this issue).

Prabhu raised the capex for next year by 20 per cent to add new lines and modernise existing ones. This, despite a massive earnings shortfall of Rs 15,744 crore on what he had projected in his last budget. And as if that’s not enough, he also proposed to launch four new types of trains – Humsafar Express, Tejas, Uday Express and Antyodaya Express. In addition, passenger initiatives such as Deen Dayalu coaches, Janani, Sarathi and Sahayak are aimed at delivering better services.

To do all this, Prabhu hopes to tap external sources (read more money from state-owned Life Insurance Corporation which has already committed to provide interest-bearing funds of up to Rs 1,50,000 crore to the railways over five years, but has so far provided only Rs 2,000 crore). Prabhu did not reveal how much he plans to borrow from LIC next fiscal. But railway board chairman AK Mittal later told journalists at the post-budget briefing that the railways expect to generate Rs 12,700 crore next year from its own resources, while Rs 18,000 crore would come from private partners and Rs 23,000 crore from “institutions like Life Insurance Corporation, multilateral lenders and overseas bonds.”

Meanwhile, the state-owned insurer has been busy financing the government’s faltering stake sale plan for public sector companies.

Prabhu also hopes to rope in cash-strapped state governments to participate in some of his ambitious plans.

Critics say the railway minister has largely expressed ‘noble intent’ without actually revealing how he proposes to execute his plan.

On his part, the minister claimed that investment in the rail sector has 5x multiplier effect on the economy.

True, the minister has resisted populist measures. This is understandable as the next general election is still three years away. But he has promised to create employment of about 14 crore mandays in 2018-19, by laying more rail lines. The move, if it happens, will add to the railways wage bill that has already ballooned on account of salary revisions based on seventh pay commission award. Prabhu says his job plan is in line with the government's efforts to boost employment under flagship initiatives like Make-in-India and Skill India.

Prime minister Narendra Modi praised the Rail Budget, insisting that it catered to all sections of society. He said that the railways, under Parbhu, had seen 2.5 times higher investment compared with the plan size of the previous government.

“This budget will be an important tool towards the renovation of the nation,” Modi said after Prabhu presented his budget in Parliament.

Prabhu has pegged the capex for FY17 at Rs 1.21 lakh crore, up 20 per cent over the previous year and sought to raise funds from various sources other than conventional ones. He claimed that bankable railway projects are now assured of funding and could be completed in three-four years.

“This magnitude of investment calls for abandoning the business-as-usual approach and continually innovating to find new ways of sourcing funds and executing projects,” Prabhu said.

“Be it by forming joint ventures with states, developing new frameworks for PPP, scouting international markets for rupee bonds or engaging with multilateral and bilateral agencies, IR (Indian Railways) will be at the forefront of infrastructure growth in the country,” he boasted.

Instead of resorting to tariff hike, Prabhu hopes to monetise railway assets, seek private sector partnerships, earn advertisement revenue and leverage assets of its commercial undertakings, besides tapping others opportunities to fund his modernisation plan. The point is, all successive railway ministers since George Fernandes in the VP Singh government, have touted similar funds mobilisation plans without the desired effect. Railway finances continue to remain precarious since the time of the last railway minister in known memory. Where Prabhu stands out is that he has promised to keep his expenses in check.

“Prabhu's theme remains the same -- focus on 2020 than on short-term goals and populist measures. He has given big plans. But the challenge of limited resources is expected to continue,’ said Vishwas Udgirkar senior director at global consultancy Deloitte. He said that high wage bills alone would result in further erosion of railways’ operating ratio by 4 per cent.

Operating ratio is a key metric to gauge the efficiency of the railways. Lower ratio indicates greater efficiency and availability of more resources for investment from internal earnings. For 2016-17, the railways have estimated an operating ratio of 92 per cent, factoring in the pay commision’s impact.

In the revised estimate for 2015-16, the railways have reported lower gross traffic receipts by Rs 15,744 crore due to tepid demand. Bullish on freight earnings last year, Prabhu had estimated gross revenue for FY16 at Rs 1,83,578 crore. In the coming fiscal, the railways expects gross traffic receipts at Rs 1,84,820 crore. It hopes to ferry incremental freight traffic of 50 million tonnes.

The railway minister proposed a national rail plan (NRP-2030) to provide long-term perspective to planning for augmenting the railway network in consultation with various stakeholders. Several long-term plans prepared under both popular and populist ministers previous dispensations, particularly Mamata Banerjee and Lalu Prasad Yadav, have long turned musty in Rail Bhawan cabinets.

Given the political cost, successive railway ministers have refrained from raising passenger fares in the past, and have only tinkered with them under extreme circumstances. Instead, they have repeatedly raised freight charges, resulting in falling traffic. Prabhu too, had raised freight charges last year to bolster earnings, but has been wise not to risk it a second time.

"We want to change that (raising freight rates) and challenge our conventional thinking on freight policies to win back our share in the transportation sector. We will exploit new sources of revenue so that every asset, tangible or non-tangible, gets optimally monetised,” Prabhu stated.

From 62 per cent in 1980, railways' share in the country's total freight movement dropped to 36 per cent in 2012. As the public sector transporter generates two-thirds of its revenue from freight, any further shift of cargo to other modes of transport could hit it hard. The emphasis on capacity expansion by laying second and third lines parallel to high-density routes is aimed at recapturing the lost market share and boost revenue.

“There are three coal lines languishing in Odisha. If these projects are completed then railways will get 100 to 300 million tonnes of coal. Assuming that it ferries 300 million additional freight it could bring Rs 20,000 crore of revenue,” former railways financial commissioner R Sivadasan said.

Besides according top priority to completing the dedicated freight corridor (DFC) project to free up capacity from existing lines, the railway minister has proposed to take up three more freight corridors - North-South connecting Delhi to Chennai, East-West connecting Kharagpur to Mumbai and East Coast connecting Kharagpur to Vijayawada.

Over the next five years, the railways plans to invest Rs 8.56 lakh crore in DFC, electrification, doubling of rail tracks, track renewal and rolling stock. This huge plan outlay is expected to benefit private developers and construction companies, besides setting the investment cycle rolling.

“It’s positive for companies associated with infrastructure sector,” said Sandeep Upadhyay, managing director and CEO (investment banking) at Centrum Infrastructure Advisory.

Shifting from earlier approach of dribbling funds on a large number of projects, the railways have now identified remunerative projects to provide full funding for them. In order to expedite project execution, the railway ministry has delegated the tendering power to zonal managers. As a result, projects are now sanctioned within six to eight months, against more than two years earlier.

Further, it is planning to switch over to paperless contract management system where not only the bids are invited online, but the entire process leading to award of a tender is also done electronically.

Acting on long-pending proposal to restructure the railway board along business lines instead of operational lines, Prabhu said that the organisation would have separate directorates for various functions like non-fare revenues, speed enhancement, motive power and information technology.

“We will explore the possibility of unifying cadres for fresh recruitment of officers. We will also strengthen the PPP cell to improve ease of doing business with IR,” he claimed.

nirbhaykumar@mydigitalfc.com

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