Railway minister Sadananda Gowda has presented his Budget. And media reaction has been generally positive. He acknowledged the parlous state of the finances of the Indian Railways—out of every rupee it earns, only a meagre 6 paise is available for investment. He avoided announcing scores of new trains and new zonal headquarters. Instead he opted to complete as fast as possible all the important projects already in the pipeline, many of which were proposed by the previous UPA governments. He bravely admitted many of the problems besetting the railways (some of which I mentioned in my 7 July column on this site) and his budget speech spoke of a long-term vision. However, the two ideas that appear to form the lynchpins of his vision—high-speed passenger trains (including bullet trains), and private investment (including foreign direct investment)—come with a lot of baggage. In the first case, the National Democratic Alliance (NDA) government is looking at the issue the wrong way, and in the second, as things stand, it’s not going to happen. First, the bullet train dream. Bullet trains, travelling faster than 250 kmph, are, well, a seductive concept, but the fact is that only two lines in the world—one in Paris and the other in Japan—actually break even. Bullet trains that China has invested in run up staggering losses. The upfront investment is too high, and there is a limit to what passengers will pay for their tickets, so recovering costs may take decades, if they are recovered at all. The railway minister himself admitted in his speech that the investment would be “Rs.60,000 crore for introducing one bullet train alone”. Rs.60,000 crore! And this when, “(The Railways’) surplus, after paying obligatory dividend and lease charges, was…Rs.602 crore in the current financial year.” But, of course, as Gowda put it, “it is the wish and dream of every Indian that India runs a bullet train as early as possible.” Ok, now for the bullet trains’ slower cousins—the high-speed trains (160-200 kmph). Gowda wants to introduce them in nine sectors. Fair enough. But he misses the most economical and smartest way to do it. Let’s go back to the basics. The Indian Railways makes its profits from transporting freight, and these profits are used to subsidise the passenger business. Yet, freight trains get stepmotherly treatment from the Railways. They are not timetable trains and spend possibly 50% of their travel time hanging around for the lines to clear. No wonder 70% of freight traffic has shifted to roads, even though road transport is more expensive and less environment-friendly. Hence the concept of Dedicated Freight Corridors (DFCs), railway lines only for freight trains, connecting important commercial centres of India. This is the most crucial project that the Indian Railways are working on right now, yet Gowda mentioned it only once in his speech. Two of the six corridors planned—the Western DFC (Delhi-Mumbai) and the Eastern DFC (Ludhiana-Kolkata)—are targeted to be commissioned by March 2017. The ports in the Western region covering Maharashtra and Gujarat will be efficiently linked to the northern hinterland, and coal would move rapidly to the power plants in the north, and steel to the industries. The DFCs will have a massive impact on the Railways’ profitability, and the entire Indian economy. The average speed of freight trains will go up from 25 kmph to 70 kmph which will reduce the transit time from the present levels. At the same time, DFCs will allow higher axle loads per carriage and much longer trains. And the beauty of it is that the project will pay for itself because of the obvious advantages it would offer. So what does all this have to do with high-speed trains? As pointed out by the National Transport Development Policy Committee (NTDPC), whose report I mentioned in my 7 July piece, with the construction and commissioning of DFCs, freight trains would get substantially diverted to the new freight corridors. This would present an opportunity to increase the maximum permissible speed of passenger trains on the existing corridors to 160-200 kmph (at present the maximum permissible speed for passenger trains is 150 kmph for a few trains and the average commercial speed is in the range of 70 kmph). This would, in turn, enable operation of overnight inter-city services in the distance range of 1,000-1,500 km, as also help connect cities within distance of 500-700 km with high-speed day services. Increasing speeds to 160-200 kmph would need inputs by way of removal of speed restrictions, yard remodelling, fencing, improved signalling, easing of sharp curves and so on. The most opportune time would be to commence the exercise and implement the scheme when any section of the DFC gets commissioned, relieving the pressure of operating freight trains on an existing congested section. For instance, as the NTDPC has calculated, with trains travelling at these speeds, one would be able to travel from Delhi to Mumbai in 11.5 hours instead of the current 16 (Rajdhani Express), Chennai to Delhi in 18 hours instead of the current 28 (Rajdhani), and from Mumbai to Ahmedabad in four hours (as opposed to the three hours envisaged for the first proposed bullet train). Until the DFCs are complete (and they are, as I said, the most vital railway project for the economy), passenger trains travelling at this speed will slow down freight traffic and other passenger trains even more, and congest the network even further. This is the smartest way to build the high-speed rail network. Focus on the DFCs and piggyback the high-speed passenger trains on them. Of course, this means we will have to wait a bit, but in the long term, this will be the best for the railways and the economy. And, yes, please forget about the bullet train! Now for private investment in the railways. Public-private partnerships (PPP) have not taken off at all in this sector. The simple reason is that Indian Railways is owner, regulator, judge, jury, arbiter, all rolled into one. Unless an independent Railway Regulatory Authority is set up, which, among other responsibilities (including tariff determination on an economically rational basis), will also ensure fairness in dealings between Indian Railways and PPP participants in projects, the better class of private sector companies would not be interested. Gowda is willing to allow foreign direct investment (FDI) upto 100% in railways, other than operations. But which foreign firm will invest in an entity which has no credible accounting standards? The accounting system of the Indian Railways is organised to cater to government budget and control functions and does not follow accounting norms as prescribed in the Companies Act. The financial results of the Indian Railways, as presented to Parliament and for public information, include a Statement of Revenue Receipts and Expenditure (Profit and Loss account) and a Balance Sheet, but the contents of these documents depart substantially from the disclosure standards that are expected of going concern entities. In other words, the Indian Railways’ accounts are not available in a format that is readily interpretable by lenders and investors. The present system of accounting does not give a true and fair financial picture. For example, the balance sheet does not show depreciation provisions and as a result it is impossible to ascertain the net block. Similarly, there is a no clear separation between revenue and capital, or between ‘top of the line’ and ‘below the line’, and the data is presented in a way in which one cannot ascertain labour productivity or employee cost. This actually funny! Neither the government nor the Railway Board has any clue how the organisation would fare if its accounts were presented as per the Indian GAAP (Generally Accepted Accounting Principles) followed by companies incorporated under the Companies Act. Would you invest in such an entity? According to the NTDPC report, “The need for Accounting Reform has been recognised and accepted in the Railway Board. An Accounting Reform project was initiated and sanctioned in 2004-05. However, the work has made a tardy progress and the final results are far off yet.” Unless the Railways undertake sweeping accounting reform, no one is going to risk putting money into it. FDI will remain a pipe dream. The NDA’s first Railway Budget has much to recommend it. Most of all, it has defied all tradition and refused to go the gravy train route. But now the government must get down to serious hard-nosed restructuring. That is the only hope for the Indian Railways, not bullet-train dreams. Sudheer Paidi
Posted on: Wed, 09 Jul 2014 14:57:06 +0000
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