Revamping Financial Processes

Financial Management in Railways
Present Scenario and challenges to transition

1. Vision

Making Railways a self-sustaining and financially viable organization that renders service with a smile.

2. Objective

Maximizing net worth of Railways, which could flow from providing service at a price that results in profits.

3. Introduction

With the marketisation of Indian economy, need for Railways to be sound in terms of profitability has become all the more strong. Railways have to be largely self-sustaining in times to come as budgetary support is dwindling. In these circumstances, sound financial management assumes greater significance.

Financial Management's objectives, thus, need to be sharpened, as these objectives constitute taking care of overall business objectives. Stepping up of rate of internal resource generation would be essential. It could be the result of providing services at a price, which should result in profits. We have to ensure that we keep our net worth intact and also work hard to maximize it.

Also, for implementing changes, it will be essential to look beyond current organizational structures, practices and philosophies. Senior management will have to be provided greater autonomy and a strong support from the staff. A set of benchmarks would have to be developed against whom to assess achievements. The key factors of reforms will have to be transparency and consistency since it is believed that transparency will eliminate unnecessary functions and inefficient processes and emphasize accountabilities.

4. Financial Management in Railways - present scenario

Central Government has so far been the main provider of resources, internal financing being comparatively insignificant. Presently, the Board is expected to determine a reasonable level of working capital, based on past experience and keeping in view special events or requirements that can be foreseen during the period under consideration. Efforts are made to mobilize internal resources to their optimum level. The position is reviewed from time to time during the year to ensure that total investment in working capital is kept as low as possible, without adversely affecting strategic, safety and passenger amenities works besides a few essential developmental works. Even then if the requirement of funds can't be met by internal accruals, the Organization approaches Central Government for enhancement of grants by way of Demands for Grants/Supplementary Grants.

5. Need for change

In Railways, Organization has so far depended more on external resources for financing its assets. The need for change has become urgent in view of:

(i) Intense competition;

(ii) New opportunities;

(iii) Increasingly regulatory and environmental pressures;

(iv) New attitude to quality and service.

Management is under pressure and is wanting financial Managers to be team players and not just reporters and corporate policemen. Finance can no longer remain on sidelines but must play full role in Management. Financial Advisor's role has changed from representing finance staff to representing financial view of the top Management. Job requirements of top finance job today include emphasis on inter- personal relations, project management and leadership skills. Finance is now intimately involved in strategy & planning, importance of management of risk has been recognized.

Earlier when a Financial Advisor was heading finance function, most of his/her activities were confined to control aspect. Now the focus of finance function has widened and embraces significant functions having a bearing on management of investments and financing, as most of the decisions have an indirect/direct bearing on finance.

6. Reasons for higher requirement of resources so far have been

(i) Unfavorable credit management: Bills receivables are on the rise and most of them are almost unrealizable in the current scenario. Absence of motivation to reduce investment in different components is responsible for higher working capital needs.

(ii) Lack of expertise in internal audit has been responsible for unsatisfactory results.

(iii) Variations between budget and actuals are very large. Budget is strong as far as setting of financial targets is concerned but misses on physical accounts.

(iv) Incremental approach to budgeting overshadows the Zero base and program-cum-reference approaches.

(v) Budgeting is not supported by proper back up of MIS.

(vi) Costing and cost control do not receive sufficient attention.

(vii) Raw material consumption norms and optimum inventory norms are not observed.

(viii) Staff costs have gone up tremendously but this feature is not peculiar to Railways only. Still we can rationalize our work force by redeploying and retraining.

(ix) Out-go on account of claims against Railways have gone up due to deficiency at service delivery point and partly due to operator-staff nexus.

7. Suggested Remedies

There is immense scope to economize on fixed assets and working capital. There is great need to strengthen finance & control mechanism, Risk Management and controlling costs are greatest financial challenges and need be focussed.

Way out is to:

(a) Introduce extensive costing systems and install appropriate procedures for operationalisation.

(b) Interface of Finance-Non finance: A healthy interaction between Finance-Non finance executives helps in overall growth of Organization.

(c) Budget should not be a game of numbers; it could be transformed into a document enlisting the support and co-operation of all in the Organization.

(d) Improving policy making: there is strong need for improving policy making since its effect on decisions can make or mar the chances of achieving organizational goals and the cost of producing policy itself is tremendous.

8. Methodology

8.1 Monitoring ROI: Around 25% of the total expenditure of Railways is Capital expenditure and yet we hardly have any effective review methods to check profitability of investments. When a project is formulated and 'Return on investment' is projected (without generally conducting proper surveys) and paying scant regard to business environment factors, achievement of 'projected ROI' remains an exercise in futility. This is what leads to considerable time and money being wasted on non-priority areas whereas items that ought to have been done on priority keep gathering dust.

Even though in cases of Construction of New Lines provision exists for Productivity Tests to adjudge profitability of the New Lines, experience shows that (a) Productivity Tests are not conducted at given duration; and (b) actual return on investment normally does not match projected return on investment.

Way out could be to have monitoring cells constituted on the pattern of present day Tender Committees viz. having two officers, one from Finance, and one from concerned department, to monitor variation of actual return from projected return on a continual basis. It would facilitate achievement of targeted Return on investment as corrective steps to improve return could be taken.

8.2 The concept of Accountability also need be applied here strictly. A person who makes wrong projections regarding return on investment due to wrong assumptions and makes Railways invest more money than due, should be held personally responsible for his mistakes/deliberate over-optimum. A system of administrative action against individuals in such cases could also be developed.

8.3 The principle of tightening of internal audit requirements also flows from it. Internal audit needs to be strengthened. Internal audit team should comprise of expert economists, engineers, management experts and finance personnel who should be on the permanent roll of Accounts Department, as is being done by Railway Security Commissioner. This will ensure their independence in working and free them from fear of harassment once they are back in their parent Departments, after their tenures with Audit teams.

This would help unearthing of wasteful investment having been made in heavy machinery/plant that was not required or over-capacities having been created and then allowed to remain idle. It would also help in checking wasteful raw material consumption and bringing down costs.

8.4 Present system of purchases, at times, leads to uneconomic purchases. The system needs to be revamped. A pertinent case of purchases being made at higher than market rates would be purchase of PCs and peripherals etc. on rate-contract basis. Rate contracts could be entered into for purchase of items where cost is likely to go up especially during times when inflation is rising. Now that it had become evident during the last 2/3 years that prices of PCs will just move in one direction i.e. downwards, the wisdom of entering into rate-contracts for these items is questionable. An item that the vendor finds hard to sell in the market for around Rs. 40,000/- with a lot of add-ons (and there are hardly any buyers), is handed over a buy-order for same PC by the Railways for around rupees one lakh because the Organization at sometime, in distant past, had placed the financial limit for purchase of a PC at around one lakh. Due to such decisions Railways loses out on a lot of money.

Thus, for items where rates are likely to go down, Rate Contracts should not be entered into. This will help in cut costs.

8.5 We can also work at cutting staff costs by way of offering a Voluntary Retirement Scheme (it should be voluntary in real sense of the term) where persons in all categories of staff could avail of the facility, if they think it would do them good individually, as also to the Organization. We could explore the possibility of agencies like World Bank to fund these one-time activities to make the organization healthier. Since most of the expenditure on salaries is committed expenditure and can not be curbed/controlled in any other manner except by bringing down the work force in a phased manner, without causing hardship to staff.

8.6 Instead of leasing out surplus railway land, as is being currently thought of by the Management, it could be disposed of on sale basis straight away. Suggestion is being made because past experience shows that Railways have not been able to recover land given out on long leases. Presence of private buildings in Railway colonies, in Mazagaon, occupation of Railway land by Campa Cola factory in Delhi and a host of such other cases, are examples of non-vacation of leased Railway land.

8.7 Trying to get private finances by letting private companies purchase railway assets and then lease them to the Railways;

8.8 Minimizing operating and construction risks by binding suppliers/builders with severe penalties for non-fulfillment of contracts;

8.9 Approaching Government to provide Railways the same facility that has been extended to National Highways Authority of India viz. providing hassle free land. This will bring down the cost of Railway projects tremendously as it will reduce legal hassles leading to avoidance of time and resultant cost over-runs.

8.10 Aim at putting in place a system of rules and regulations which would specify each one's area very clearly and definitely, cutting out the possibility of functioning on individual whims and fancies, and putting rule of law in supreme position in order to eliminate duplication of work, non fulfilling of obligations and enhancement of staff morale.

Effective use of financial information is the doorway to success and trained finance specialists can unlock value. New emphasis needs to be laid on asset-liabilities management. Change has to be brought about from control bias to support service. There is an extremely urgent need for paradigm shift in present roles and responsibilities of Finance Managers.

Contributed by Smt. Chander Kanta, FA&CAO/NWR/JP