Shaking up a behemoth

This article dt. 5th Feb in "The Businessline" made interesting reading.

In spite of almost 7000 km of coastline, hardly any water-transport worth it's name exists in India. And inland waterways ( rivers) are practically being ignored. Result? This is putting undue stress on the frail infrastructure of the country in terms of Railways and Roads. Minister Nitin Gadkari is finally changing things for the better, making sea-transport within country attractive. There is no big superpower worth it's name, that does not have good water transport infrastructure. Hence, this is a welcome step.

http://www.thehindubusinessline.com/economy/logistics/cars-from-chennai-take-the-coastal-route-to-gujarat-hyundai-takes-lead/article8199234.ece

I was talking to an old friend of mine, who works in the Rail Bhavan in Chennai.  Some of the facts about the Indian Railways that he shared, were quite revealing:

1. In the past 2 decades, passenger traffic doubled and freight traffic, the roti-and-dal earner for the Railways, tripled. And rail network hardly increased by 5%. It is, therefore, no surprise, that the Railways are bursting at their seams with massive supply constraints. So much so, that many corporates are switching over to road transport, though it is a lot more expensive ( even today, it takes only Rs. 1.38 to move one tonne of freight by a distance of 1 km)

2. So, why cant the Railways spend more on building capacity additions, and invest in much needed rolling stocks, safety equipment etc? The answer is that there simply is no capital available to invest. 2/3rds of the total costs of operation go towards staff costs , and is expected to worsen, with the implementation of the 7th Pay commission recommendations. The Railways are run out of budgetary support, which means every rupee for investment needs to come from taxpayer money, and there simply isn't enough of that left, for the Railways. Alternative ways to raise funds, like privatizing are being stiffly resisted by the uber-unionized workforce. They can, of course, borrow from other countries for modernizing the Railways. But then who will invest? There are enough and more countries willing to extend long term credit, for building new lines, investing in state-of-the art rolling stock and safety equipment. But they don't do it for charity. Which means, the amount has to be repaid. But without proper accounting and accountability, how will repay happen?

This bring focus to the root of the problem. Cash Accounting.

Believe it or not, until recently, the Railways have been doing Accounting using the Cash Accounting methodology, which is based on cash flows, rather than accruals, which is the globally accepted system. Accrual basis is used in most countries and corporates. This renders it impossible to prepare GAAP-compliant balance sheets or P&L statements. Without which, external investors will find it virtually impossible to evaluate key parameters like Return on Capital Employed etc.. and so, private investors will think 10 times before investing. Matters get further compounded with the fact that project-based accounting is non-existent in the Railways. Result? You will never know how much exactly has been invested in a particular project - say, the electrification of railway line in a certain sector. Which is also why, in recent past, separate corporations like Konkan Railways, DMRC, CMRC etc have been created, to circumvent this issue at the project level. Being separate legal entities, booking keeping is mandatory for them, and it is easier to set up accrual-system of accounting there, than changing the behemoth called the Indian Railways.

But hold on!  Railway Minister Suresh Prabhu has undertaken path-breaking measures here too. He has hastened the switch over to the accrual system of accounting. We, the people, go gaga over his new initiatives like cleaner stations, swanky rakes etc... but fail to give him credit where it is really due. To me, this is one of the most important steps towards making Accounting and Accountability in the Railways a top priority, so that future funding of investments becomes smoother.

http://www.financialexpress.com/article/economy/indian-railways-to-hasten-shift-to-new-accounting-system/115792/

The average speed of movement of passengers is 35 kmph, and that of freight is 26 kmph... is which abysmal, by global standards. Which means, a goods train will take upto to a week to go from Chennai to Ahmedabad. No wonder, Hyundai decided to literally ships their cars to Gujarat!

The only way this can be fixed is by massive investments in capacity expansion and fleet modernization. Change in Accounting, to Accrual system is the first step. The bigger challenge lies in shaking up the labour force to become more productive, and involve the private sector wherever possible , something the Trade Unions will oppose tooth and nails. But without these much needed reforms, the Railways could soon become as symbolic as the 1920's steam engine parked outside the Rail Bhavan!