RESPONSE TO RAKESH MOHAN COMMITTEE REPORT

EXECUTIVE SUMMARY

This report is a reaction to chapter-5 of the Rakesh Mohan Committee report. The three major points made by the report are:

a) Railway finances should be reorganised along with the restructuring of the Railway organisational set up.

b) The railway finances have not been separated from general finances as originally envisaged and this has led to continuing reservations over the financial system.

c) The Indian railway accounts format is inadequate and lacks transparency.

The item wise reactions to the above three conclusions by the Committee are as follows:

(a) The organisational restructuring of Indian Railways suggested by the Committee is primarily aimed at institutional separation of role into policy, regulatory and management functions.

In fact a suggestion has been made that Railway Board should be organised on the basis of a Board of Directors of a Corporate Body by Railway Convention Committee.

It is a fact that the Ministry of Railways (Railway Board) perform dual function – one as a Ministry and, another, as an apex professional body controlling, coordinating and running of the Railways from the technical and administrative aspects.

The Convention Committee had recommended that Railway Board should be organised as a small compact body for the feed back of information but at the same time capable of taking most of the policy and coordinating decisions themselves. It is necessary to drastically reduce the strength of the Railway Board. If only, the Railway Ministry had seriously implemented the recommendations of RCC made, as early as in 1980, the Railways would not have come to such a pass. There is vast scope for improvement in the area of delegation of powers, which should be seriously addressed.

The Expert Group has stressed the need for an outward looking, business oriented and customer driven organisation. Ever since Independence, the Railway Board has ushered in dieselization, electrification, modernization of track, rolling stock, signalling and other activities - introduction of air-conditioned trains, faster trains like Rajdhani and Shatabdi etc., which amply demonstrates the commitment of Indian Railways for modernisation and change.

In the opinion of the Expert Group, the time has come to reorganise Railway finances along with the restructuring of the organisation. The link between the two is not very apparent.

The Government of India as the major shareholder has necessarily to shoulder the responsibility for the development of the infrastructure, as Railways have not been able to generate funds for upgrading facilities for improvement and extension. Railways are necessarily to remain the mainstay in a country of the size of India, and, the future vision should be movement of freight and passengers at better speeds consistent with an improved infrastructure.

The Committee, no doubt, is very optimistic about the capacity of the Railway to raise funds from public and other agencies once freed of Government control. This may well turn out to be wishful thinking.

It may thus be concluded that the Organisational Restructuring and Financial Restructuring are not mandatory for achieving strategic high growth scenario, not withstanding the fact that the assumptions about the growth rate are themselves open to question. On the organizational side, a compact Board as recommended by the Convention Committee(1980) with greater devolution of powers would pay rich dividends. Better management and operational practices, with a change in the mind-set, shedding the departmental bias, would be a better answer.

Financial restructuring contemplated presupposes a high growth scenario, requiring large infusion of funds, which would not be forthcoming, unless the finances are restructured.

Some progress has been made in “converting” publicly owned railway companies to private ownership but only by offering inducements, guarantees, and/or financial subsidies to the new owners. This is because the numbers simply do not stack up when it comes to return on investment. In fact, as already mentioned, they rarely add up when it comes to just the cost of day-to-day operations compared with the revenues.

(b) A careful reading of the separation Convention and subsequent reviews would be essential to determine the relationship between Railway and general finances.

The crux of the existing arrangement is a regular return from the Railways to the Central Government on the Capital invested by it. The present arrangement also implies, obviously a continuous infusion of capital from the Central Government to build up Railway infrastructure. While the Government did fund the Railway Plans adequately until about the year 1980, the 8th and 9th Plans, show a substantial reduction in capital support from the General Exchequer.

Railways had responded with the creation of the Indian Railways Financial Corporation to raise resources for the Plan effort and at present IRFC finances not only new acquisitions, of rolling stock, but also a considerable part of replacements. Taking note of the cost of servicing IRFC funds, there has to be a ceiling on this kind of funding.

If Railways are to be accorded due priority as infrastructure, this has to be reflected in the sectoral allocation of funds by the Government. By their very nature Railways are highly capital-intensive and maintenance-intensive (on account of both safety and efficiency consideration); they cannot be expected, consistently with bearable pricing, to generate adequate surpluses for network expansion and modernisation. This has been the experience of Railways the world over, and Government funding for the infrastructure continues to be a cardinal feature of the restructuring efforts that have been initiated.

It must, however, be added that the existing arrangement of the Indian Railways with general finances needs modification to the extent that Government financial support, as accepted worldwide, should be forthcoming without any reservation!

The magnitude of net social obligation has been assessed as Rs.4000 crores for the year 2000-01; stricter methodology of computation and upward revision of passenger tariff could bring down this figure.

(c) The Committee has made a sweeping statement that railways accounts are not transparent and at best translucent. The accounts are not understandable by a trained Chartered Accountant or a Financial Analyst.

The Budget documents, Appropriation Accounts, Audit Report and the Annual Report and Accounts and Year Book contain a fund of information.

The World Bank, Asian Development Bank and other multilateral agencies have not found it difficult to understand the accounts. There cannot be any greater transparency than this. In fact, the costing and financial control procedures on the Railways were examined by a World Bank Team in 1970 and based on their suggestions, a task force set up which included two charted accountants. The acceptance and implementation of the recommendations of the Committee have led to significant improvements in the budgetary process and documentation in Indian Railways. However, there is enough scope for improvement in the area of Traffic Costing which should be attempted in all earnestness and sincerity in a time bound manner.

In regard to the adoption of company format and adherence to GAAP, ‘ the state of development of accounting standards mainly reflected the stage of development, the economy and the capital markets'. In any presentation of accounts, The interpretation is important to get a proper picture of the financial position of a Company, not the mere format. Indian Railways accounts provide sufficient details to inform about the financial status. If at all, a different presentation as suggested by the Expert Group is to be prepared, it may be on a pro forma basis limited to the accounts of IR as a whole;

It is admitted that a proper policy approach as well as practical action in respect of the depreciation of assets is of vital concern in IR’s financial management and the physical health of the railway system for safe and efficient operation.

It is perhaps well within the realm of practical possibility to estimate the arrears, plan for pulling them up within a definite timeframe and place adequate provision in the DRF. This is essentially a matter of prioritisation and focus.

The rationale for the position has in fact been articulated very early, by the 1923-24 Committee on Depreciation Fund - a reserve which will, with a minimum amount of accumulation, facilitate the timely execution of renewals with a view to maintaining the property up to the highest standard of efficiency.

Appropriation to DRF as a percentage of capital at charge as well as total investment would indicate that provision is not all that unrealistic or ad hoc as pointed out by the Committee.

Suggestions on accounting practices:

The accounts of IR are maintained in very great detail and the format that has been devised has not been adopted out of ignorance but included as a deliberate policy. Commercial accounting is based on accrual accounting and care has been taken in the present scheme to provide for accrual accounting. The following suggestions are, however, made.

(i) Transfer pricing to be introduced.

(ii) Clear cut service wise accounting may be done so as to establish the cost of transportation. This is possible with computerization.

(iii) Once service wise data is available, rebalancing of tariff and elimination of cross subsidization can follow.

(iv) Accounting reforms for track renewal and maintenance:

The total expenditure under Demand No.4 works out to as substantial a percentage as 11.5 of all working expenses. On this, 75% is related to track maintenance. Considering that a healthy and safe track is mandatory for any Railway operation and that this is our chief asset, the budget and expenditure on this activity should be available exclusively and without overlap with other activity. A separate revenue demand for track renewal alone may be a solution. This would enable focused attention.

(v) At present sub heads of accounts are available under the following categories for recording earnings:

i) Passenger Original Fare(110)

ii) Passenger Reduced Fare(120)

iii) Military Passenger(130)

In as much as different concessions are granted under varying slabs, additional detailed heads can be opened. This would help in reviewing of decision taken in this regard. Further detailed heads to record slabwise concessions. This would help in review of decisions taken in this regard and act as a brake on further extensions of such concessions. Of course it is to be pointed out that reduction in concession will not lead to corresponding reduction in working expenses as trains are unlikely to be withdrawn or other ancillary expenses reduced. In a way concessional fares may be compared to off season tariffs recommended by the Committee as the concessional fare is likely to be more than the marginal cost.

(vi) Overaged and retired assets can be dropped from books so that a more realistic picture is projected. Poulose Committee’s recommendation highlight the existence of several unproductive and redundant assets generated by technological innovations, operating improvement and policy changes. This has to be dropped from books.

(vii) There is case for seeking relief from the payment of dividend for capital investment up to 1979-80 when the average borrowing rate was lower than the rate of dividend (see statement enclosed). In fact railway reforms committee has worked out a methodology for arriving at the contribution made by the Indian Railways to the general exchequer during the period 1-4-1950 to 31-3-1980 (See annexure).It was calculated that the relief to be sought from the general revenues would be of the order of Rs.500 crores (see methodology). Since this relief would have been available from 1980-81, this contribution should be treated as an excess fund available with the general revenues attracting normal interest as for fund balances. This should be quantified and appropriate reliefs sought from Government of India by preparing appropriate memorandum for submission before the Convention Committees.

(viii) It is the absence of introspection or review that has led to the Railways being forever on the defensive and not able to answer uninformed criticism. The statistics so laboriously collected on traffic are not examined to draw conclusions that are implementable in the following year. This has to attempted on a systematic basis.

(ix) In the absence of continuous internal audit, vigilance and statutory audit have assumed almost the role of a bug bear. What they have found out and more may have been discovered by internal audit much earlier. Accounts department should bring out a compendium of the special studies on the lines of Audit report and executive made responsible to answer the issues raised and take follow-up action as called for.

(x) In regard to pensionary liability, the Expert Group itself has suggested that the Government should bear the liability. This has to be pursued. However, there is an urgent need to evaluate the liability through actuarial process.

To sum up, simple recasting of accounts will not really help. What is more relevant is efficient management of accounting principles, constant review of financial decisions, the will to learn from experience and to prevent a mistake from becoming a misery and to take stock of situations and take decisions not for the year but to reach the common goal over the years in sight.

Financial administration as of now mainly concentrates on accounting both revenue and project, internal audit, budgetary control, financial analysis of investments, funds flow management including accounts receivable/payable. What is required, is a greater role for finance in corporate planning, transportation management and marketing strategies.