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Railways: Accounting for profit March 22, 2009

Posted by reader111 in Indian Companies.
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Was the Railways really ‘bankrupt’ in 2001?.


Mamuni Das


Had the accounting methods that the Indian Railways follows now been followed during Mr Nitish Kumar’s stint as a Railway Minister, the Railways would have had an annual cash surplus of Rs 4,789.5 crore in 2001, Rs 6,286.58 crore in 2002, and Rs 8583.25 crore in 2003. And, please hold your breath — in 2004, the year when Mr Nitish handed over charge to Mr Lalu Prasad, the Railways would have had a cash surplus of Rs 9,552.27 crore!


This startling information is tucked away in Appendix 6 of Sudhir Kumar and Shagun Mehrotra’s lucidly-written book, Bankruptcy to Billions (OUP, 2009, Rs 495). Indeed, it is one of the key takeaways from the book.


So, was the Indian Railways actually not bankrupt in 2001? It is this that has made Mr Lalu Prasad’s tenure seem so wonderful. The readers can take a call on the issue.


Great transformation


The authors also admit that, in 2008, accounting changes helped the Railways reflect an incremental cash surplus of Rs 3,489 crore (14 per cent of Rs 25,006 crore surplus).


Sudhir Kumar, a 1982-batch Bihar IAS officer, is the officer on special duty of Mr Lalu. Shagun Mehrotra, the co-author, is pursuing his doctoral studies at Columbia University and has worked in the World Bank on the infrastructure reforms.


Sudhir Kumar has been instrumental in implementing the profit-making policies for the Railways. He also deserves credit for managing the Minister’s image. A case in point is the sponsored study by IIM-Ahmedabad (where the ‘sponsored’ bit was hidden) on the Railways turnaround.


The first sentence in the first chapter — “How Indian Railways was transformed in four years under Lalu Prasad” — sets the tone for the book. From there, it does not look back and the reader is treated to a nice, long account of the Great Transformation. The Railways was quick to see an opportunity in the booming commodity cycle, and through consecutive freight rate hikes in iron ore for export, freight rates were increased by 400 per cent, say the authors. The Railways earned an additional Rs 9,000 crore in profits from this.


The chapter “Milking the Cow” provides more insights into how they utilised the assets. The authors provide a detailed account of how the Railways increased the freight earnings during Mr Lalu’s regime.


The Railways also increased axle loads. Mr Lalu realised there was rampant overloading in the system. By simply legalising higher axle loads — through some clever interpretation of the laws pertaining to it — the Railways started billing for much higher levels of loads without having to physically chase extra loads.


Thus, by adding six tonnes of load per wagon, the Railways transported 90 tonnes of incremental load each year or Rs 6,000 crore in incremental revenue.


The authors have accorded due credit for this strategy to the former chairman, Mr M. S. Gujral, who, as the Railway Board Chairman in the 1980s, had initiated a similar move. But his attempt was subsequently discarded due to risks associated with it.


The passenger rail business dynamics are extensively explained in the chapter “The Market”. Railways ran longer, faster, high capacity trains on a priority basis in areas with high demand and reduced fares by token amounts of even one rupee. But unlike the details provided regarding the freight business, the authors have not shared much details about how the Railways raised passenger fares by hiking reservation and cancellation charges, levying super-fast charges by converting many trains to super-fast trains.


Similarly, it would have been nice to read up on the Tatkal service that allows passengers to pay extra for securing a reserved ticket. Charges for booking under the Tatkal scheme were increased by Rs 100-150 for nine months of a year, in 2004.


They also do not mention how the Railways subsumed the safety surcharge into fares even after the charge was discontinued in 2007. This, in effect, disallowed a fare reduction for passengers.


Privatising The non-core areas


In the chapter “Political Economy of Reforms”, there is a detailed explanation on how the Railways identified areas for reforms. Mr Lalu Prasad was not against privatisation, say the authors, of non-core railway functions.


So, the Railways did partially try to follow some of the Rakesh Mohan Committee recommendations on privatising non-core functions such as allowing private container train operators, getting private firms to run the Rail Yatri Nivas and inviting private investment in new production units. But not much has come out of it.


Another key point is that under Mr Lalu, the Railways became more responsive to market conditions with a dynamic pricing policy. So through surcharges, freight charges were increased wherever possible and incremental freight was captured with incentives. In effect, he successfully milked the robust system created during Nitish Kumar’s regime.


Ref: http://www.thehindubusinessline.com/2009/03/13/stories/2009031350250900.htm