Why the Indian Railways suffers

Railways minister Suresh Prabhu will present the Railway Budget for 2016-17 on February 25. Hopefully, once again, he will refrain from announcing new trains and new lines and instead continue the focus on completing projects that are in various stages of execution. Hopefully, he will also come up with a plan to prevent further deterioration of Indian Railways' finances. The coming year is set to be more challenging than the past few – the Railways wage bill is set to shoot up again with the implementation of the 7th Pay Commission award.

Staff cost is the biggest component of Railways' revenue expenditure, and it is bound to be due as it is one of the largest employer in the country. Railway Budget 2015-16 had estimated that about 33 per cent of its earnings would be spent on staff wages and welfare and another 17 per cent on pension benefits. Another 19 per cent was forecast to be spent on fuel charges – there may have been some savings there due to fall in diesel prices. That’s about 70 per cent of the Railways' earnings, which essentially means that very little is left for creating new assets or replacing the ageing ones.

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Huge staff cost is only one of the problem ailing the Indian Railways. After all, it employs 1.4 million people, of which about 20 per cent are Group D employees who have little qualifications. The crisis in the railway finances have been caused by years of populism, poor planning of projects and execution of projects without conducting due diligence. These were some problems highlighted by some of the retired chairmen and members of the railway board at an interactive session on Railway Budget organised by industry chamber Assocham.

The Railways is over-dependent on freight to generate revenues, and it uses its freight earnings to subsidise passenger services. But, railways has lost a lot of freight traffic to road transport. It has also lost much of its earnings from transportation of petroleum products to cross-country pipeline network over the last decade. Now, it risks losing a chunk of its mainstay traffic such as coal and minerals. Coal traffic has been affected because a number of power projects are now being set up near the pit-head. Export traffic such as iron ores has also been depressed partly due to slowing of global economy.

In the years ahead, as dedicated freight corridors become operational, the Railways is bound to lose to a lot of its earnings from freight traffic. This is because the Railways has committed to transfer a minimum of 70 per cent of the originating traffic to the Dedicated Freight Corridor Corporation of India - a corporation set up by the railway ministry to develop, construct, maintain and operate the dedicated freight corridors. That could mean more financial problems if the Railways do not find the courage to gradually increase passenger fares and other sources of earnings.

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In any case, the Railways do not make enough money to pay for all the development projects or more renewal and replacement of aged assets. As the result, the Indian Railways survives on borrowed money. And, it is the only department to pay interest, euphemistically referred to as dividend, to the Union government on an annual basis. The transporter would get some relief if this requirement was scrapped. To get around its resource crisis, the Railways has been increasing entrusting priority projects to new corporations and special purpose vehicles set up under the ministry of railways. Dedicated Freight Corridor Corporation is just one of them. High Speed Rail Corporation of India is another. It will be responsible for constructing the high-speed train project between Mumbai and Ahmedabad as well as operating it.

Over the years, the Railways has also been forced to spread thin its resources over multiple projects, particularly new lines, many announced only for political gain. Having announced projects in the Railway Budget, the transporter comes under pressure to make a beginning at implementing it. Many such projects do not make much progress beyond the laying of the foundation stone. But that is only a minor part of the problems affecting the Railways. Projects awarded execution are delayed for multiple reasons. In a few cases, work begins much before geological investigations are carried out – as a result projects run into various hurdles that include tough terrain and the need to shift utilities that fall along the proposed alignment.

In other cases, the fault lies with the contractor who was awarded the project. In a few cases, the contractor meets the eligibility criteria and is awarded the project. But, it turns out the contractor does not have the capacity to execute projects that run into hundreds of crores of rupees. When the project is left unexecuted, the Railways is forced to cancel the contract and award it to another company. This leads to delays of three years or more.

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In other cases, it is found that the contractor employs poor quality managers, people who do not have the capacity to deliver railway projects. Also, many construction companies, executing projects which cost Rs 500-700 crore project, do not adopt modern management systems needed to deliver such projects with the desired quality and within the committed timeframe. Former chairmen and members also complain that Railways sometimes feel cheated by the foreign contractors.

These foreign contractors allow the domestic contractor to use their credentials to win projects but do not either assist the Indian company by training their managers and engineers or provide inputs needed for executing large projects. This also means that Indian managers are not getting trained to manage large projects. The size of railway projects are getting large (Rs 2,000-5,000 crore) but the construction industry is not geared for executing large projects, lament former railway officers.

The Railway Budget cannot possible address the problems with execution of projects, but it can signal changes that will improve the financial health of Indian Railways. It can also signal policy changes the government intends to bring about to improve efficiency in implementation of projects as well as in the functioning of the transporter.