Rekindling hope: A Rail Budget of great expectations!
Manish R Sharma February 27, 2015In his maiden budget speech, Railway Minister Suresh Prabhu invoked God given the plethora of challenges before the Indian Railways, and wondered aloud how to find solutions.
Over the next hour, as he unleashed an ambitious agenda, the thought kept reverberating on how this agenda will be delivered.
To his credit, while the long-term agenda was being announced, he appears to have not taken his eyes off from the short-term quick wins that have potential to reduce costs, debottleneck and release system capacity.
The massive jump in allocation for electrification has huge cost-saving implications as electric traction is 40 per cent cheaper than diesel traction.
Another major step is to increase the loading density to 22.5 tonnes axle load, which will enable carriage of more traffic per rake at a marginally increased cost.
At the same time, the Budget is attempting to connect the government with the average citizen with its emphasis on "improving customer experience". With tens of millions of customer interactions daily, even a slight improvement in customer perception will add a halo around the government, which is regarded as a "government that delivers".
Besides a host of passenger-friendly measures, the Indian Railways is continuing its attempt to attract value-added cargo segments by establishing a new PSU for providing "end-to-end logistics solutions".
Whether the PSU will compete with the value-added services being offered by the stressed private container train operators or complement them through partnerships, remains to be seen.
On the operating front, the Indian Railways achieved an operating ratio of 91.3 per cent, and are targeting 88.5 per cent in 2015-16. It will be interesting to watch whether, over the next one year, this improvement in operating ratio is achieved through better cost control, superior handling and efficiency gains, instead of raising tariff on freight commodities.
The budget has stayed away from the populist tendency of announcing new rail projects in remote areas and new passenger trains, and, instead, seems to be focusing on revenue-generating projects. The emphasis on large-scale capacity expansion on congested routes by building double/third and fourth lines (sanction of 77 projects for more than 9,600 kms) has potential to offer significant revenue upsides in the coming years.
The emphasis of the budget has been on creating capacity by expanding the railway infrastructure, which in turn, has the potential to unleash an expenditure cycle critically needed for the economy. However, the key challenge to realising this agenda will be the ability of railways to mobilise extra budgetary sources of finance, as the budgetary support in the coming years will continue to be challenged by the tight fiscal position.
Though the railways is promising to revamp its PPP models and frameworks, the PPP source of finance is currently stressed with the private sector appetite hamstrung by stretched balance sheets and limited appetite of the banking sector for PPPs. While the budget has suggested tapping of pension and insurance funds, the ability to attract these sources of finance depends on the broader financing environment rather than sectoral offerings.
Therefore, the task of realising this ambitious agenda will only be possible through a massive transformation in the manner the railways functions, as well as its ability to mobilise finances.
This budget resembles a statement of policy and intent, which covers largely the entire landscape of improvements and changes desperately needed in the railway system, whether they relate to governance or accounting measures, or service delivery and many more.
However, it is clear that the minister is not looking at the sector in one-year timeslots, rather, he is setting the agenda for the next five years, and probably more.
(The author is Partner - Capital Projects & Infrastructure, PwC India)