It is being widely speculated that a special rail safety fund, on lines similar to the one that was set up ten years ago, is under active consideration of the government. This was earlier mooted by C.P. Joshi while he was holding charge of the ministry, and is now being given the push by the present minister. The size of the proposed fund is stated to be Rs 40, 000 crore.
It may be recalled that the Railway Safety Review Committee, headed by Justice Khanna, had recommended that the central government should provide a one-time grant to the railways to help wipe out the then accumulated arrears of renewal of over-aged assets such as tracks, bridges, signaling gear and rolling stock within a fixed time frame. A non- lapsable Special Railway Safety Fund of Rs 17, 000 crore was set up in 2001. The Finance Ministry agreed to contribute Rs 12, 000 crore, and the balance Rs 5, 000 crore was collected through a safety surcharge on passenger fares.
The ministry is reportedly planning to raise the required amount by tapping several sources: bond issues by Indian Railway Finance Corporation (IRFC), a dividend-free grant by the finance ministry, contribution from the Central Road Fund, and a safety cess on railway tickets. However, in the context of various constraints faced by the railways and the central government, none of these options appear to be workable.
It must be recognised that IRFC cannot be asked to bite more than it can chew. In the year 2011-12 it was asked to arrange market borrowings of Rs 20,594 crore, which was more than double the amount it could raise in the preceding year. Later, realising that borrowing on such a large scale may not be feasible, the amount was brought down to Rs 14, 800 crore. This in itself was a tall order, and to the credit of IRFC it must be said that it did manage to achieve this target. But in doing so it had to pull out all the stops: tax-free and taxable bonds, external commercial borrowings, and even term loans from the banks.
The six-fold increase in its annual borrowings over the last ten years has, however, placed IRFC’s gearing under severe stress. Repeated equity infusions by the government are also not possible. Its mandate to raise Rs 10,000 crore through tax-free bonds in the current fiscal is in itself is a daunting task because the Ministry of Finance has set a target of Rs 60,000 crore for tax-free bonds, by allowing several other financial institutions, besides IRFC, to raise this amount. This would mean more competition for the IRFC bonds. A dividend-free grant from the finance ministry is unlikely since it flies in face of government’s proclaimed objective of cutting down the level of subsidies.
It is also not going to bring much relief to the railways, since the last time it received a similar grant the amount got adjusted within the gross budgetary support to the railway ministry for the Tenth Plan period, resulting in reduced provision for other developmental works.
Levying a safety cess on passenger fares — even if this forms part of recommendations made by Kakodkar Committee on rail safety — may lead to a public outcry. Many may not be aware that the safety surcharge that was discontinued from April 1, 2007 gave no benefit to the passengers since it was subsumed in passenger fares “on as is where is basis” and re-named as Development Charge to fund the Dedicated Freight Corridor. More recently, passengers travelling in air-conditioned classes have also been made to bear an additional burden of a 3 per cent service tax from October this year. Besides, the railway minister has made no secret of his intentions to increase passenger fares in order to garner additional resources for the railways. The levy of a safety cess can prove to be the proverbial last straw on the camel’s back.
As most of the arrears of replacement of over-aged assets were liquidated by 2008, the railways were expected to finance all future renewals through withdrawals from the Depreciation Reserve Fund (DRF), to which appropriations from railway revenues are being made each year. It is surprising, therefore, that another special railway safety fund, more than twice the size of the one set up previously, is being re-introduced.
If the proposal fructifies, it may create moral hazard for the railways, easing pressure on it to set apart funds for this purpose from its own resources, and encouraging it to become overly dependent on a similar largesse from the government every time that the arrears of renewals pile up. The government auditors had, in fact, made an observation nearly two years ago that unless a minimum amount is put aside (in DRF) for timely execution of renewals and replacements, the accumulation of arrears may, at a later stage, necessitate the creation of another fund similar to the Special Railway Safety Fund of 2001. If the government’s objective is to ensure that Indian Railways stands on its own feet, by improving its level of efficiency and managing its finances prudently, the setting up of the proposed special rail safety fund needs to be firmly discouraged.
At best, higher allocations may be made to the Railway Safety Fund (that gets financed from the Central Road Fund), used for safety related works such as conversion of unmanned level crossings and construction of railway over and under bridges, etc.
The railways would do well to channelise all future expenditure on renewals and replacements only through DRF. Also, it is important that appropriations to DRF in future are made, not on a need-cum-availability basis, but in a more scientific manner, duly considering the historical cost and the expected useful and residual life of an asset. Only then will the Indian Railways be financially self-sustainable.
S N Mathur is former MD, Indian Railways Finance Corporation.