The signal for long-haul reforms

Print edition : September 15, 2001

The approaches suggested in the report of an Expert Group on Indian Railways to tackle the deep-seated problems facing the organisation are unlikely to find uniform and ready acceptance from every quarter.

THE polished corridors of Rail Bhavan in New Delhi are stirring with a new restiveness. A high-level internal team of the Railway Board is engaged in a minute study of the report of an Expert Group on Indian Railways submitted early in August. The professional cadre of engineers that manages the Indian Railways has already given expression to its dissent over specific recommendations, particularly those that threaten to dilute its autonomy such as it is. Railway workers' unions are perturbed by suggestions that the broad range of welfare activities of the department should be drastically pruned. And where the Railways management and unions have found scope for agreeing with the recommendations, the government is expected to have serious reservations.

Minister for Railways Nitish Kumar.-SHANKER CHAKRAVARTY

Constituted during Nitish Kumar's first term as Railway Minister, the Expert Group, also known as the Rakesh Mohan committee after its chairman, suffered a period of eclipse when Mamata Banerjee assumed charge in 1999; an interim report submitted in February was effectively mothballed. Mamata Banerjee preferred to bring in Sam Pitroda, technology czar in the Rajiv Gandhi dispensation, to draft a fresh set of proposals on improving performance in the Railways through the application of information technology, without any drastic changes in organisational structure or manpower deployment levels.

Mamata Baner-jee's exit from the Railway Ministry shortly after she presented her budget for the year, signalled the resurrection of the Rakesh Mohan committee and the silent banishment of Pitroda. And after all the elaborate politics had been played out, the Rakesh Mohan committee has submitted its final report, reaffirming the recommendations that were clearly foretold in the interim report.

The symptoms of the deep-seated malaise in the Railways have been variously commented upon, and the Expert Group provides a useful summary of how the situation arose. Beginning with the boom in road transportation in the early-1980s, the Railways steadily began losing its share in aggregate national freight movement. Constrained by an unstated political directive that passenger fares should be held down at moderate levels, the Railways sought to redress the pressure on earnings by increasing freight rates. This hastened the migration of freight traffic towards the roadways. Today, the Railways is in a trap of decreasing returns - increasing freight rates further will only mean falling revenues, while the option of hiking passenger fares continues to be frowned upon.

In 1992, the Railways management devised the new approach of gauge conversion to tackle the problem of declining yield. By eliminating costs of trans-shipment between different gauges and rationalising the costs of maintaining rolling stock, this programme was expected to provide a major boost to productivity levels in the Railways. Things have not quite worked out that way. The Rakesh Mohan committee reserves a strong indictment for the unigauge programme, without quite elaborating on its deficiencies. But senior officers are willing to concede that the short-term disruptions caused by gauge conversion have accelerated the migration of freight traffic towards the road sector. And even though services have been resumed in most instances after a short break, the switch in preference towards the road has not been reversed.

The 1990s also brought, as an unwelcome concomitant of political instability, rapid fluctuations in planning priorities in the Railways. Outlays were sanctioned in particular years for ambitious network expansion programmes, but not sustained in succeeding years. The outcome has been an accumulation of half-completed investments which have failed to yield returns. The Railways management has, with some justification, been arguing that the politically induced investment decisions should be specifically provided for through the general exchequer. But this plea has won few converts in the Finance Ministry, which has been struggling to cope with a fiscal crunch of an infinitely larger magnitude.

All the operational problems were compounded with the implementation of the new pay scales laid down by the Fifth Pay Commission. From 41 per cent, the share of employee wages and pensions in total revenue earnings increased to 53 per cent in 1998-99. This ratio is likely to remain high as pension liabilities are expected to mount.

A consequence of these multiple pressures has been the curtailment of the Railways' dividend payment to the Union government for two years in a row. In 2001-02, the dividend has been cut to 7 per cent from the recommended level of 7.5 per cent. The total accumulations under the Railways' "deferred dividend liability" now amount to Rs.2,500 crores. Without some rather serious revenue raising measures - which have been conspicuously absent in the last two budgets - it is difficult to see this liability being discharged in the foreseeable future.

The parlous state of the Railways' reserve funds underlines the seriousness of the problem. The Depreciation Reserve Fund (DRF), for instance, ended the year 2000-01 at the precarious level of Rs.50.81 crores. This was even lower than the budgeted figure of Rs.76.72 crores. The rate of depletion has been rapid, since the Railways ended the year 1997-98 with Rs.1,434 crores in the DRF. In the two succeeding years, investments were financed out of the DRF without the normal precaution of replenishing it through revenue earnings. In 2000-01, just enough was appropriated to the DRF to meet planned withdrawals - and in the event, this figure was below the budgeted level. The situation is expected to be the same in 2001-02.

The obvious preference of the Expert Group is for a "strategic high growth" mode, which will involve improvement in infrastructure with additions to rolling stock, among other things.-K. BHAGYA PRAKASH

The situation in the other main internal sources of investment funds for the Railways - the Capital Fund and the Railway Development Fund - is similar. The most striking is the case of the Capital Fund, which was established in 1992-93 and until as recently as 1997-98 showed a healthy balance of Rs.1,200 crores. The year 2000-01 will close with no more than Rs.21.13 crores in this reserve. And the net accretion in 2001-02, if all goes according to budgetary calculations, will be negligible. Considering the tenuous state of the Railways' revenue and investment calculations, the most likely eventuality would be a further depletion in the size of this reserve.

This is a distinctly unpleasant prospect for the management. Years of under-investment in vital operational areas have begun to take their toll. Plan investment in 2000-01 amounted to no more than Rs.10,002 crores against a budgeted figure of Rs.11,000 crores. The Plan investment budgeted for 2001-02 is Rs.11,090 crores, though there is no reason to suppose, given the philosophical aversion to rate increases, that this target will be met.

The worst of the resource crunch is being borne by vital operational areas. Investments in safety, signalling and telecommunications and track renewals have all been under pressure. The backlog of track renewals has grown from just over 3,000 km to over 12,000 km in the space of a decade, posing a clear safety hazard. And yet the pressure to target higher levels of public fulfilment has been unrelenting. Recent Railway budgets, in seeming defiance of the fundamentals of a system under enormous strain, have granted a multiplicity of new services and launched preparatory work on new tracks that will not for long years be commercially viable.

THE Expert Group has drawn up three alternative approaches towards tackling this multitude of problems. The first proceeds on the assumption that the current funding constraints will persist, keeping investment on additional capacity to a minimum. Provision would only be made for "unavoidable investments in safety, normal replacements and overdue replacements." For obvious reasons, the Expert Group refers to this scenario as the "low growth" option.

In the "medium growth" option, all the investments envisaged in the first scenario would be permitted. But the funding constraint would be relatively less acute, permitting the management to continue with its investment decisions in accordance with "internal" planning processes. Crucially, this scenario builds in a possible infusion of funds from the general exchequer, though it does not allow for the concomitant intrusion of political pressures.

The obvious preference of the Expert Group is for the "strategic high growth" scenario, which envisages a "break" with the Railways' long-term planning approach. The key ingredients of this approach would be an improvement in infrastructure with additions to rolling stock, the harnessing of technology in a manner that improves productivity and a structural change in the system of management of the organisation. The outcome would be the complete modernisation of the system and a quantum leap in speed and quality of service over 15 years.

The low growth scenario would require a funding requirement of Rs.129,000 crores over a 15-year plan horizon. The medium growth scenario would be met with Rs.161,000 crores over the same period, while the "strategic high growth" strategy would involve an outlay of Rs.200,000 crores. The investment needs would be met to the maximum extent possible through internal resources. Of the gap that remains, 40 per cent would be met through government financing and 60 per cent through market borrowings.

The low growth scenario, which proceeds on business-as-usual assumptions and does not embrace any extra effort either to increase the Railways' share of freight traffic or evolve a new balance between fares and rates, has been proven by a series of simulations to be unviable. The Railways would fail to generate sufficient revenues to sustain operations over 15 years, debt servicing and dividend payments would impose a massive burden on revenues and the system would fall into a spiral of declining yields and growing funding gaps.

In the medium growth scenario, the freight revenue is expected to increase at the current rate of around 3 per cent in the initial years, and then shift gear to a trend rate of 5 per cent growth. Other assumptions remain broadly akin to those of the low growth scenario. Again, the situation in the long term would be unviable, with the Railways becoming increasingly dependent upon various forms of infusions from the government. If 60 per cent of the pension liability, for instance, were to devolve on the government, then the Railways would just barely limp along.

In the strategic high growth scenario, the Railways would target a freight traffic increase in the range of 7 per cent annually, beginning with the fifth year. After the tenth year of the programme, the rate of increase would settle down to a stable and sustained 6 per cent. Of course this requires a competitive shift in freight rates and a major overhaul of the network in terms of technology and organisation - providing, for instance, for multi-modal operation and an active marketing effort by the Railways. Passenger fares would again be adjusted in order to eliminate the hidden subsidies. After the fresh balances between the various rates are worked out, tariffs and services would be regulated by an autonomous board, which would ensure that the monopoly status of the Railways does not engender an insensitivity towards consumer needs.

There would concurrently be a reorganisation of the Railways into four business units, dealing respectively with passenger movement, freight, suburban traffic and infrastructure. The Railways itself would be reorganised as a corporation, governed by an Executive Board recruited from a wide pool of talent. The non-essential services of the Railways, such as health care, security and education would be hived off. Production units, like the Diesel Loco Shed, the Chittaranjan Loco Works and the Integral Coach Factory, would be spun off as autonomous units.

An initial transitional period of seven years is built into the 15-year planning horizon for the strategic high growth scenario. The basic groundwork would be accomplished in this period, to be followed by the major organisational changes in the subsequent periods. The requirement for external financing from the government would be high in the initial seven years, but following the full 15-year programme, returns would be assured. Reorganisation as a corporation is expected, in the committee's projects, to open the door to large infusions of debt financing. As a large infrastructural enterprise, the Railways, the committee has said, is likely to be attractive to pension funds and insurance companies, which set much store by security and stability, rather than high returns.

WITH all these projections, the Expert Group has not quite been able to win the necessary number of converts within the organisation. One of its principal recommendations is that the worker and officer unions should be involved in the process right from the start, so that the discord and acrimony that accompanied railway reorganisation in various European countries could be avoided.

In mid-September, all the unions and associations of the Railways, together with the managements at the headquarters and zonal levels, are scheduled to take up an intensive series of discussions on the Expert Group report in Vadodara. Their preliminary reaction is to endorse the Expert Group's diagnosis of the malaise afflicting the organisation. Few yet have endorsed the main strategic options outlined. The internal committee of the Railway Board is expected to submit its own set of responses to the report by the end of October. The chances are that it would strongly endorse the suggestions that the Railways be allowed the flexibility to fix tariffs in a manner that would safeguard its commercial interests.

But this is precisely where the government is likely to baulk. In this contention involving the economic reforms lobby, the Railways unions and management, and the government, the stalemate is likely to persist for some years still.

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