Financing avenues for Indian Railways

The operating ratio of railways has continuously been above 90 per cent. This has, therefore, resulted in the Indian Railways having very little funds left for investing in projects such as new line construction, gauge conversion, doubling, etc.

The Indian Railway Budget for 2015-16 has an ambitious capital expenditure outlay, viz., Rs 1,00,011 crore. This represents a 52 per cent jump as compared to FY 2014-15. In the budget speech, the Railway Minister also announced an investment plan for the period 2015-19, totalling to Rs 8,56,020 crore. The general perception is that railway finances have been in poor shape over the past few years. What are the facts related to Indian Railways´ finances and will Indian Railways be able to meet these ambitious financial investment targets?

Operating Ratio
Operating Ratio is a key parameter that is announced in every Railway Budget. It is the ratio that compares gross working expenses with gross earnings of the Indian Railways. In case, the operating ratio is low, it indicates that the railways has surplus after catering to its expenses and in case the ratio is high, it indicates that railways has limited money left to meet its capital expenditure requirements. The graph below indicates the operating ratio since 2007-08.

As can be seen since 2008-09, the operating ratio has continuously been above 90 per cent. This has, therefore, resulted in the Indian Railways having very little funds left for investing in projects such as new line construction, gauge conversion, doubling, etc.

Sources of funding
Sources of finance for the capital outlay of the railways comprises mainly of budgetary support, internal resources, railway safety fund and extra budgetary resources. As mentioned, the surplus funds that the railways internally generate, have been constrained over the past few years. This has led the railways to rely on other sources of funds. The graph below indicates the proportion of various sources of funds in the annual plan expenditure of the railways.

As per the observations in the graph, proportion of internal resources has been reducing and proportion of budgetary support has been increasing. Budgetary support primarily consists of loans from the Central Government to the Railways. The Ministry of Railways (MoR) has, thus, been depending on the Ministry of Finance (MoF) for funding a major proportion of its construction projects. As per the Corporate Safety Plan of Indian Railways, Railway Safety Fund is financed mainly through receipts from Central Road Fund, which is funded by levying a cess of Re One per litre on diesel and petrol. Money from the Safety Fund is mainly used for eliminating unmanned level crossings. Extra budgetary resources comprise loans through Indian Railway Finance Corporation (IRFC), investments through wagon investment scheme and funds through PPP investment. Funds from IRFC are deployed mainly for acquiring rolling stock which are then leased by IRFC to MoR. As per the Indian Railways Annual Report and Accounts 2013-14, total lease paid by MoR in 2013-14 was Rs 10,770 crore, of which Rs 4,694 crore was capital component and Rs 5,806 crore was allotted as interest component.

Railway Passenger and Freight Earnings
Goods traffic accounts for the lion´s share of the earnings of Indian Railways. The chart below indicates segment- wise earnings as given in a White Paper, ¨Indian Railways – Lifeline of the Nation¨ published by the railways in February 2015. As can be seen, goods traffic accounts for 66 per cent of the total revenues.

Passenger fares are subsidised in India and the fares are among the lowest in the world. On the other hand, goods fares are among the highest in the world. The graph indicates the earnings per passenger kilometer (Pkm) and per net tonne kilometer (NTkm). As indicated in the graph, the per NTkm earnings are four times the per Pkm earnings. Another point to be noted is that while the per Pkm earnings have increased by a CAGR of two per cent over the five year period indicated, the NTkm earnings have increased by a CAGR of 6.2 per cent. The underlying reason may be that a hike in passenger tariffs is a very sensitive issue and there is a general reluctance to hike fares. After no passenger fare hike for a ten-year period, it is only in the last two years that the Indian Railways has increased passenger tariffs. On the other hand, cargo such as coal, iron ore, cement, and steel products are captive to the railway mode of transport and have no choice but to absorb any hike in railway fares. It is interesting to note that in this year´s budget, there has been no announcements of passenger fare hikes, while the freight tariffs have been increased.

Future path: Budget15-16 and alternate financing
As we analyse trends in operating ratio and revenues, it seems evident that internal resources generation is insufficient to take care of capital expenditure. As per this year´s budget, the railways envisages a total investment of Rs 8.56 lakh crore in the next five years. About Rs 3.92 lakh crore (45.8 per cent) has been set aside for network decongestion and expansion. The other major elements of investment are safety related works like track renewal, bridge works, signalling & telecom, etc. (14.84 per cent), rolling stock (11.92 per cent) and station redevelopment (11.68 per cent). Funds to the tune of Rs 0.65 lakh crore (7.59 per cent) have also been allotted for a next generation High Speed Rail and elevated corridor between Mumbai and Ahmedabad.

The Minister, in the Budget, has mentioned that this large quantum of funds will be mobilised from multiple sources such as multi-lateral development banks, pension funds, and insurance funds. It is appreciable to note that immediate action has been taken on this account. Recently, a Memorandum of Understanding (MoU) has been signed between the Ministry of Railways and Life Insurance Corporation (LIC) under which LIC will provide financial assistance with a limit of Rs 1,50,000 crore to the Ministry of Railways and its associated entities in the next five years for implementation of railway projects. There will be a five-year moratorium on interest and loan repayment and the rest of the terms would be negotiated while signing the finance assistance agreement. The Public Private Partnership (PPP) cell at the Railway Board is getting reorganised and the various PPP schemes of the Railways (Liberalised Wagon Investment Scheme, Special Freight Train Operators policy, etc.) are being reviewed. Railway line projects that the Indian Railways plans to construct on a BOT/Annuity basis have been announced. Private sector participation, which is a key source of funds in other infrastructure sectors such as roads and ports, is virtually non-existent in the Railways sector. The steps mentioned are an attempt to kickstart PPP in the industry and are steps in the right direction. World Bank and Japan International Corporation Agency are funding the Eastern and Western Dedicated Freight Corridor projects and more such funding arrangements from multi-lateral agencies for specific projects are also a good strategy to adopt for mobilising funds. Indian Railways is already collaborating with JICA with regard to the high speed railway project between Mumbai and Ahmedabad.

In the past, funding for capital projects of the Indian Railways has been one of the key bottlenecks in timely completion of the projects. With alternate means of financing being proposed in this year´s budget, it is expected that funding woes of the railways sector will get addressed going forward.

This article has been authored by Rajaji Meshram, Director, Transport Sector, KPMG in India. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India.