Railway Budget 2016 -17

Post presenting an impressive medium term “Strategy budget” last year, Suresh Prabhu’s 2^nd railway budget, was “workman like” without any “fare increases” to the delight of the common man. Do not however be surprised if tariff increases become a non - budget feature; premium pricing for select services is a strategy already adopted.

The announced plan to set up a Railway Planning & Investment Organisation (RPIO) for drafting medium (5 years) and long (10 years) term corporate plans & a National Rail Plan’ (NRP-2030) was surprising; wasn’t a “medium term plan” launched last year? Will RPIO plan operationalization of those plans?

“It is an infrastructure-led and employment-generating budget.” said PM Modi while Dinesh Trivedi felt that “It doesn’t have any vision,” Reality, as usual, lies between these two extreme views.

Budget speeches should focus on the macro picture rather than dwell on operational issues on how many bio toilets shall be installed, what food items shall be provided in the menu et al. However, Intention to improve “customer experience” is always welcome.

The Minister avers that Rs1 invested in national railways leads to Rs. 5/- increase in national output; transformation of railways & making it the driver of national growth is therefore a natural corollary.  He will however be constrained by the 7^th pay commission pay-outs & the headwinds of a tepid industrial demand effecting freight receipts. Railway Model share dropping from 46.6% in 1980 to 36% in 2012 is therefore a cause for concern especially when it accounts for about 2/3^rd of revenues.

Railway Revenues.

Against the Budget Estimates (BE) of revenues for the year 2015-16 of Rs. 1.83 Lakh crores, IR has achieved 1.67 lakh crores with BE of freight receipts being Rs. 1.21 Lakh crores & Revised Estimates (RE) 1.11 Lakh Crores.  Freight & passenger revenues were 50% each in the mid 70% & it is prudent to revert to such levels, although analysts would interpret it as political hara-kiri.

However, Prabhu has pegged the revenue target, for 2016-17, at a modest 1.84 lakh crores, freight at 1.17 Lakh crores, Passenger revenue 0.51 lakh crores, coaching Rs. 0.06 lakh crores & sundry receipts Rs. 0.09 lakh crores.

IR though has done well on expense reduction. Against a BE of 1.19 lakh crores on expenses the RE  are Rs 1.10 lakh crores achieved through inventory management & austerity measure which include controlling variable costs &  contingent expenses. Expenses though have been conservatively projected at 1.23 lakh crores with pensions for the 13.79 lakh retirees increasing from 34500 crores to 45500 crores. While Ordinary Working Expenses (OWE) grew by 32.5% in 2008-09 due to the impact of the 6th Pay Commission pay-outs, restricting it to 11.6% for 2016-17 is ambitious; expenses in all likelihood shall be higher leading to a worse operating ratio.

Against a targeted operating ratio of 88%, RE are 90% for the year 2015-16 & are budgeted to deteriorate further to 92% for the year 2016-17, worse than the 2014-15 fig of 91.3%.  Clearly IR is in distress & in deep need to raise the top line. Non - tariff strategies is the long term solution to address railway woes.

Non - tariff strategies

Prabhu plans to increase Non - Tariff revenues from the current 5% of revenues to 10-20% in the medium term by monetizing the traffic on the IRCTC website, exploiting advertising potential of trains, stations & land tracks & also partaking in e-commerce. Catering business of IRCTC is also being strengthened by extending e-catering services from existing 45 large stations to all 408 ‘A-1’ and ‘A’ class stations & segregating food production & distribution. With digitalization of railway land done, monetization through horticulture and tree plantation & solar energy generation is planned which shall also address the problem of encroachment.

Current parcel policies would be revised to open the sector to container train operators to effect a quantum jump in IR’s share of the national CEP (Courier, Express and Parcel) market. IR also plans last mile logistics, perhaps, with an intention to re-deploy some of its excess manpower into a high rise sector especially when retrenchment is a hot potato that no political party can attempt.

IR also plans monetization of data pertaining to passenger preferences, ticketing patterns, commodity flows, train running and information on various services and operations without compromising on customer privacy. However all these are medium term strategies & tariff shall continue to be the short term revenue driver.

Tariff Strategies

Dinesh Trivedi – the Railway Minister during the UPA regime - had critiqued last years’ freight price rise & had advocated a tariff drop to increase model share which the Minister seems to concede now when he says “current tariff structure of IR has led to out-pricing of our services in the freight market.” He has announced rationalization of tariffs, appointment of Key customer managers to liaise with major accounts & “evolve a competitive rate structure vis a vis other modes, permit multi-point loading/unloading and apply differentiated tariffs to increase utilization of alternate routes. The possibility of signing long term tariff contracts with our key freight customers using pre-determined price escalation principles will be explored which would provide predictability of revenues to IR and of costs to our customers.”

For the reserved passenger three select train services – Humsafar, Tejas and UDAY have been announced to ensure cost recovery by way of tariff and non-tariff measures. While Humsafar would be fully air-conditioned third AC service with an optional service for meals, Tejas, will showcase the future of train travel in India. Operating at speeds of 130 kmph and above, it will offer onboard services such as entertainment, local cuisine, Wi-Fi, etc. Overnight trains, Utkrisht DoubleDecker Air-conditioned Yatri (UDAY) Express - with the potential to increase carrying capacity by almost 40% -shall be introduced. Clearly, premium pricing is the route Prabhu is exploring to shore up passenger revenues apart from tightening Tatkal ticketing to remove disintermediation.

Additional revenue streams

88% of the current freight receipts are from 10 bulk commodities only & IR, therefore, has decided to expand the freight basket. Rationalising the tariff structure and building terminal capacity apart from creating a rail auto hub in Chennai to capture automobile traffic is planned.

Action plan is to capture traffic through either containerization or new delivery models e.g., Roll-on Roll-off & to run time-tabled freight trains; a time-tabled freight container, parcel and special commodity trains on a pilot basis. Container sector would be opened to all traffic barring coal and specified mineral ores and part-loads would be permitted during the non-peak season & all existing terminals/sheds would be granted access to container traffic, where considered feasible.

10 goods sheds shall be developed by Transport Logistics Company of India, to create a paradigm shift in IRs role as a national logistics provider. This shall have a cascading effect for rail side warehousing would also encourage development of cold storage facilities on vacant land near freight terminals.

Plan size

Against a plan size of 1 lakh crores last year Prabhu has projected a fig of 1.21 lakh crores this year. Unlike a GBS (gross budgetary support) of 0.40 Lakh crore & an actual of 0.32 lakh crores for the year 2015-16, budgetary support for the current year is 0.45 lakh crores. With 1.5 lakh crores promised by the LIC for the next 5 years, we can reasonably expect about 0.30 lakh crores to flow in this year. Expecting actual GBS to be 0.40 lakh crores & combining that with the LIC’s largesse still leaves a gap of 0.5 lakh crores to be filled,  which the Minister has planned through formation of joint ventures with states, development of new frameworks for PPP, scouting international markets for Rupee bonds by multilateral and bilateral agency engagement or co building of assets with the help of Ministry of coal, NTPC SAIL etc.

Partnerships have received in principle approvals from 17 states, out of which 6 MOUs have already been signed & this year 44 new partnership works are indicated covering about 5,300 kms and valuing about Rs. 92,714 crore in the Budget documents.  Assumption that these projects shall be completed in 3 years, adds 0.30 lakhs crore as capital expenditure per annum. With 124 MPs already contributing MPLAD funds & some CSR contributions, it is reasonable to assume that Prabhu shall achieve his target.

Increased Rail speeds & Capacity

Building on the plan announced last year of raising speeds of freight trains to 75 Kmph & empty freight trains to 100 Kmph & passenger trains to 160-200 Kmph, the current budget announces modest target of 50 Kmph & 80 Kmph respectively for the current year; the plan is to eventually double freight speeds & increase passenger train speeds by 25 Kmph in the next 5 years. Surely, Prabhu is realizing what he is up against & advocating a more nuanced strategy of incrementalism.

Increased speeds calls for decongestion of existing high traffic tracks which dedicated freight corridors can address. Prabhu has announced Dedicated Freight Corridor project contracts worth Rs. 24,000 crore on the Delhi - Mumbai & Delhi - Kolkata routes apart from a plan to have additional corridors: North-South connecting Delhi to Chennai, East-West connecting Kharagpur to Mumbai & East Coast connecting Kharagpur to Vijayawada. This is indeed a welcome step although the timelines for closures are humongous when compared to neighbouring China.

Track up-gradation – a costly exercise - & employing a tech innovation of better engines or train sets is the other solution to enhance speeds.  Two locomotive factories are being built in Madhepura and Marhowra in Bihar with GE and Alstom with an order book of Rs 40,000 crore. Locomotives with auxiliary load  now being manufactured by IR will enable elimination of power cars, thereby replacing them with passenger coaches which will enhance the carrying capacity of trains and significantly reduce travel time, noise level, fuel consumption and carbon footprint.

While the last year plan was to have axle load capacity of 22.8T, this has been increased to 25T this year which is welcome with an intention to target 10-20% of traffic this year on such vehicles & increase it to 70% by 2019-20

Corporatization of railways

While the Minister did not specify quite as much, corporatization seems likely with plans to shift to an accrual based accounting from the current cash based one & a transition from single entry to double entry system to make IR accounts transparent. Plans to strengthen the Railway board & to make the Railway board Chairman the virtual head of the company by creating firewalls between the Ministry & IR would enhance efficiency. Consolidating 14 railway companies under one holding company has long term implications especially in making raising of finances easier contingent on a strong balance sheet. Introduction of a KRA system for personnel & signing of MOUs with zones is an attempt to inbreed efficiency.

If all goes as per plan, IR, perhaps, could be listed on the NSE, which will force quarterly results to be announced that shall help the company transform.

Conclusion

Prabhu is known to be an efficient technocrat minister & seems earnestly at work. While the Bibek Debroy committee’s vision was alluded to in the speech, some of the measures suggested like hiving off IR schools to Kendriya Vidyalayas, Hospitals to state hospitals, Railway protection force to CISF etc. to make IR leaner have not been implemented. That would have been truly transformational.

The Budget speech pushed further the govt. pet initiatives like “Swatch Bharat” &“Make in India” Introduction of Antyodaya Express, a long-distance, fully unreserved, superfast train service,  addition of two to four Deen Dayalu coaches in some long distance trains for unreserved travel to enhance carrying capacity for the masses, 33%  reservation benefits for women passengers & additional facilities for the elderly were perhaps an attempt to dry clean the smear of a “suit boot ki sarkar” – a legitimate political act.

Railway budgets have outlived their utility & it is time the ritual of a colonial past is put to rest. Corporatization of Railways & listing on the stock exchanges shall make announcements of quarterly results mandatory that shall help end this antediluvian exercise. Raising the 8.56 lakh crores needed for capital expenditure shall also be easier then, provided the balance sheet is transparent & healthy. Hopefully, the Minister is working on this objective.