JULY 20, 2018

By Naresh Minocha, Consulting Editor

THE Railways' cup of financial woes is brimming. It does not expect turnaround in the situation over a couple of years. The merger of Rail budget into Union Budget has not facilitated any operational improvement in its working.

Missed revenue targets, expenditure overshoots and revenue leakages, including digital payment of salaries to ghost employees, have put the Railways Ministry on the edge.

It is also rattled by pension backlogs & excess payments, accounting discrepancies, digital slippages and GST accounting errors. The list of challenges is long and daunting.

Today, even the Railway Board (RB) does not have full grasp over the magnitude and diversity of the problems. Such irritants flow & grow seamlessly through Railways' gargantuan network. In the current financial year, RB has thus embarked on a journey to discover true picture of State of Railways.

To facilitate "truthful reporting of asset failures & train punctuality" by 17 zonal railways (ZRs), RB is treating current financial year as "Zero Year". It means RB would make no comparison of any ZR's performance in 2018-19 with past record of failure indicators such as diesel loco failure, wagon detachment and signal failure. Such failures & safety indicators are specified in the annual memorandum of understanding between RB and ZRs.

As put by RB in an internal communication, "this move should encourage zonal railways to report truthfully and not worry about adverse comparisons with last year's figures. It may be appreciated that until and unless an honest and realistic picture of the present state of affairs prevailing on the system is generated, any kind of improvement will not be possible".

Railways' financial plight in a way mirrors slowdown/modest growth in the manufacturing sector. Add to this the fact that it faces enhanced competition from the roads and aviation sectors.

Railways' deteriorating performance negates Modi Government's claim that it has performed better than UPA Government in all domains. Even jubilations over completion of one year of goods and service tax (GST) require restraint. The Government's first priority should be to resolve GST issues at the Railways and all other entities across India.

RB last month "noted with concern that there are many incidence of wrong ITC (Input tax credit) flagging by Zonal Railways and production units".

A RB member told top finance management of the Railways that "ITC flagging should exclude those items where we are sure that credit is not allowed. PFAs to personally monitor this issue with due diligence and interact with other spending departments".

He added: "Similarly, there should be no omission in feeding of data towards output tax liability. Otherwise this will attract penal provisions. This requires serious review to be done by the nodal GST Cell of each Zonal Railways".

On 26th June, 2018, RB issued detailed instructions on GST data entry modifications. The guidelines say: "Several Railways have sent in request for editing GST related transactions relating to both output services and input procurement. The process for fresh data entry and data modification has been reviewed."

Railways' core problems are apparently not getting requisite attention after the budgets merger. Its challenges earlier attracted more eyeballs when it presented a separate budget. Railway Minister's budget speech used to become an instant hit among all stakeholders right from coolie to bullet train day-dreamers.

RB's immediate challenge is to goad ZRs to strive to achieve revenue earning targets while operating within the budgeted expenditure limits. This is the key to generating surplus and improving operating ratio (OR). It is operating expenses computed as percentage of gross earnings. It is an indicator of the financial health of the Railways.

RB last year brought down OR, which hovered above 100% till February-end to 98.4% with advance freight payment by NTPC for coal to be hauled to its power stations during 2018-19. OR for 2017-18 was first set at 94.57% in Union Budget for 2017-18. In the revised budget estimates, it was fixed at 96%.

It is now faced with the risk of OR again deteriorating to 100% against target of 92.8% for current fiscal 2018-19. At present, earning growth is lower than target on monthly pro rata basis. Same is the case with the revenue expenditure/ordinary working expenditure (OWE).

Some ZRs have pleaded for reduction in their respective earning targets, which are not acceptable to RB. It can consider such demands only if ZRs submit matching reductions in expenditure.

While stressing the need for aggressive marketing to enhance earnings, RB has asked ZRs to opt for expenditure cuts to avoid touching OR lakshman Rekha of 100%.

It is apt to cite Comptroller and Auditor General (CAG) on Railway Finances released during March 2018. According to the Report, OR during 2016-17 had deteriorated to the lowest level of 96.50 per cent since 2000-01 when it was 98.34 per cent.

It says: "When actual expenditure on pension payments is taken into account, the Operating Ratio works out to 99.54 per cent. Since, Operating Ratio is a direct indicator of the working of Railways; the Ministry of Railways should also look into the various innovative ways for revenue generation and closely monitor the expenditure".

The Railways profitability has been on the decline after 2007-08, the year when it attained OR of 75.9 per cent, aided by buoyant economic growth.

As regards capital investments, the pace of expenditure is opposite of OWE. This issue was succinctly dealt by a RB member at a meeting of top finance officials held last month.

He stated "Pace of CAPEX, especially under GBS (gross budget support) and RRSK (Rastriya Rail Sanraksha Kosh) needs to be front-loaded and planned, otherwise like last year GBS may be reduced...Funding out of EBR/IF is very crucial and should be done judiciously, as Railways will have to bear the burden of repayment".

He added: "Nearly 750 indents are pending for wagons and 1/3rd of the funds are provided. This casts doubts on the Railway's capacity to spend". He thus suggested that vetting of intents should be done taking into account the spending capacity of railways.

CAG last year noticed delays in every stage of project planning to project execution in the 36 selected rail electrification projects that it reviewed.

It pointed out that substantial delays in completion of the projects, led to increase in the capital cost of the projects and in the loss of opportunity of cost of money of the capital invested.

RRSK and GBS require elaboration as they reflect the gap between intend and action in the Government.

Finance Ministry chopped GBS to the Railways by Rs 15000 crore to Rs 40,000 crore under the revised budget estimate for 2017-18. The Ministry rationalized the reduction in Medium Term Fiscal Policy Statement presented as part of Union Budget 2018-19.

As put by the Statement, "it was decided that the Railways would try access the market directly as a start to transition towards greater financial autonomy". RB has, however, cautioned ZRs about projects with extra budgetary resources (EBR) /institutional finance (IF). Only projects that are financially viable should be proposed for EBR/IF financing, it says.

As for RRSK, it came as a budget announcement. Presenting 2017-18 budget, Finance Minister Arun Jaitley stated: "For passenger safety, a Rashtriya Rail Sanraksha Kosh will be created with a corpus of Rs. 1 lakh crores over a period of 5 years. Besides seed capital from the Government, the Railways will arrange the balance resources from their own revenues and other sources. Government will lay down clear cut guidelines and timeline for implementing various safety works to be funded from this Kosh. Unmanned level crossings on Broad Gauge lines will be eliminated by 2020".

A separate accounting head for RRSK was, however, not created during 2017-18 as revealed by Railways internal communication dated 31st March 2018.

As regards pension, RB's comprehensive review of nine parameters related to execution of New Pension Scheme (NPS) yielded shocking findings. As put by the Review, "There are several areas where most of the Railways have slipped in compliance while accounting for subscription of more than 6.8 lakh employees ...."

What perturbed RB during April 2018 was the fact that most of the concerned accounts officials did not regularly access the "Dashboard" to see status of NPS implementation. Central Government introduced NPS in April 2004 in its all wings excluding armed forces.

RB last month thus noted Railways is suffering additional liability due to substantial time gap in NPS remittances.

The situation is perhaps more unsatisfactory in case of old pension scheme whose burden is fully borne by the national exchequer. RB last month reiterated the need for "Spot check of pension payments to rule out the instances of irregular pension payments". One ZR recently detected excess payment of Rs 60 lakh by SBI, Kolkata on account of erroneous payment of age-related additional quantum of pension due to system deficiency under which date of birth of the pensioner was reckoned as the date of birth of the family pensioner also.

RB believes that "Such instances may prevail in other banks also". Mismatch of payments and service record is another cause for big concern in Rail Bhavan.

In a communication dated 30th May 2018 addressed to ZRs, RB pointed out that many pensioners have not got revised pensions for about six months.

In an earlier memo dated 23rd March 2018, RB had voiced grave concern over delays in revision of PPOs of pre-2016 pensioners in keeping with 7th Pay Commission Recommendations. As put by memo, "there are still more than 3.58 lakh PPOs to be revised".

RB's review of current status of issue of electronic-Pension Payment Orders (e-PPOs) to the Banks has revealed that these instructions are not being followed uniformly by all ZRs. "The no of e-PPOs issued by the Railways is very less" it says.

As for revenue leakages, RB's latest headache is fraudulent withdrawal of money from the Railways' kitty through digital transactions. A series of such frauds through payroll as salaries to non-existing staff prompted RB to issue alerts to all ZRs to check whether such frauds have occurred in their respective domains.

The last instance of such fraud shared by RB with ZRs & other rail organizations relate to ghost doctors at Central Hospital, Northern Railway (NR).

According to a memo dated 20th June 2018, the fraudsters created eight accounts of trainee doctors to dupe the Railways of about Rs 2 crore as wages to these non-existing doctors.

Another instance of a similar fraud also occurred at NR. According to RB's dated 27th February 2018, "A fraud by manipulation of Pay Roll Computerised System purportedly by creating ghost employees and false claims of travelling allowance, overtime allowance, night duty allowance and arrear has been brought to the notice of this Ministry by Northern Railway".

Preliminary investigation shows defalcation of Rs 1.5 crore. A similar digital fraud at Southern Railway (SR) was last year mentioned by RB in a communication dated 8th March 2017. The money misappropriated in this case is Rs 1.28 crore.

Another memo of the same date elaborated platform ticketing fraud for defalcation of money at SR.

Are these cases isolated ones or they a tip of the digital frauds iceberg at the Railways? The answer to this question depends on the alacrity and efficiency with which the relevant staff detects the irregularities in digital payments.

All such problems converge to one solution – transparency in railways accounts.

In March 2018, CAG recommended that the Railways should ensure that "Block Accounts and Balance Sheets of Zonal Railways and Production Units reflect the true value of the assets duly supported by Assets Registers".

It added: "Preparation of Assets Registers should be made mandatory for each Zonal Railways and Production Units. Indian Railways should follow the system of disclosing the significant accounting policies forming the basis of preparation of financial statements such as accounting of fixed assets, depreciation, investments etc."

The transparency mantra was also invoked by Bibek Debroy Committee on rail reforms, whose recommendations led to Railways Budget merger with Union Budget.

In its report submitted during June 2015, the Committee recommended "establishment of a responsive and transparent accounting and costing system as the first stepping-stone to a commercially viable railway system".

The Committee also recommended two-year timeframe for implementation of accounting reforms. This period is over now. The responsibility now rests on the Political Executive to act on multi-facet reforms recommended by different committees over the years.