New Delhi: There is no doubt that the Indian Railways needs a robust investment plan to upgrade creaky tracks, increase capacity and modernise its network. In this context, tying up incremental finances can only be good news. Former Railways Minister Suresh Prabhu had laid out an ambitious investment plan of over Rs 8 lakh crore in five years and his successor Piyush Goyal has spoken of Rs 10 lakh crore. Either which way, a bulk of this money has to come from sundry sources, the Railways won’t be able to generate any significant portion of this internally. So in this context, news that the Life Insurance Corporation of India (LIC) has got the green light to commence its promised Rs 1.5 lakh crore investment in the national transporter can only be good.
LIC had signed an MoU with the Railways in March to make this investment through bonds issued by IRFC but the insurance regulator had raised some objections since such a large investment would exceed 25 percent of IRFC’s net worth. Now, the government has put these doubts to rest, it seems, without having to back the LIC investment with a sovereign guarantee. And the investment can go ahead.
So far, so good. But why does the railways need to raise so much debt? And should LIC be bailing out the Railways, something it has often been accused of doing for many government companies? In fact, there has been enough commentary about the LIC bailing NPA-laden public sector banks and helping the government to a large extent in raising disinvestment proceeds from PSU selloffs.
The Indian Railways has traditionally cross-subsidised passenger fares with freight earnings, in thinking which smacks of socialist ideology, leading to precarious overall financial situation of the state transporter. And over the years, demands on its network have been increasing - the network today now thoroughly congested, leading to a spike in accidents, many of them fatal.
This Reuters report quotes internal documents to say that gross traffic earnings, which make up the bulk of railways revenues, would fall short of the target by over $3 billion in 2016-17. It also said revenues were insufficient to cover expenditure and funding via market borrowing rose to about 22 percent last year from an average of 8 percent between 2010 and 2015. The railways now owe $20 billion, up $7 billion in the last three years.
To add to the railways’ burden, passenger traffic has begun declining and freight earnings have started to weaken as commodities move to the lucrative road sector. Therefore, it is high time that passenger fares are rationalised. This will mean less of a drain on freight and consequently increased ability of the railways to rely on its own resources instead of going for more market borrowings.
But even such a politically inexpedient move will not let the railways emerge from the current mess. Until it undertakes major reforms, including financial ones, its chances of getting any funding from a non-governmental agency are pretty bleak. Put simply, this means only a government backed entity or that which has been nudged by the government and which believes that any default will be covered by the government would agree to lend to the railways. This, of course, means LIC fits the bill in every way – it is owned by the government, has a very large corpus of funds to be invested and can be nudged by the owner to put its money in seemingly risky schemes like bailing out the Railways.
Until railways reforms its finances significantly, its ability to raise commercial capital will remain limited. So LIC will have to come in as a savior, like it has been accused of bailing out other government arms. What choice does it have in the matter, anyway?
Coming to the much needed railways reforms, some of these are:
1) Ring fence some revenue flows. Railways generates only a limited surplus which makes it difficult for private lenders to consider its financing needs. Some surplus should be set aside for specifially servicing debt - this will require self discipline, efforts to increase revenues and simultaneous cost reduction measures.
2) Generate higher revenue either through better pricing or through improved market share or a mix of both. Why lose out to the roads sector in the case of freight, why not selectively increase passenger fares to reduce the cross subsidy?
Manish Agarwal, Infrastructure lead at PwC says "There is a need for a comprehensive turnaround plan (of the Railways) encompassing initiatives to increase revenue, measures to manage costs and to decide on core functions and non-core functions."
There is no doubt that a significant step-up in investments is the need of the hour for the railways. As for LIC’s meek act in following said and unsaid government directives, the agreement with railways is neither the first investment and nor may it be entirely detrimental to LIC’s own financial health in the long run. At least that is what J N Gupta, MD of proxy advisory firm Stakeholder Empowerment Services (SES), thinks.
“It is up to LIC to decide (where to invest) as long as it has taken care of returns versus risk profile and has not taken this decision due to any undue influence. Past decisions show that LIC has been functioning effectively, as can be seen by its leadership position in the insurance industry, which continues even after arrival of many private players,” he said, adding LIC’s investment in PSUs like Nalco and some PSBs to say that its investments have appreciated over the years.
Well, whether LIC wants to invest in government enterprises regardless of such investments generating gains and whether railways should be taking debt to fund its capex – these questions will remain unanswered. In the current scheme of things, the railways cannot eschew raising funds since it is unable to generate adequate resources internally and LIC cannot say no to any nudging by the government precisely because of the size of its corpus – it needs investment avenues and perhaps not enough are available in the corporate sector.
Updated Date: Jan 08, 2018 17:06 PM