Sh Lalu Yadav, Indian Railways and a bit of accounting
Stumbled on this while looking for something else on the internet. Apparently there is more to the celebrated Indian Railways’ turn-around story than meets the eye.
From Behind Lalu’s ‘surplus’ claim: A shift in accounting policy (emphasis mine, throughout):
…Railway Minister Lalu Prasad’s proud declaration, made while presenting the Railway Budget this February (2007), that Indian Railways (IR) would generate a cash surplus before dividend of Rs 20,000 crore in 2006-07 has turned out to be inflated.
An investigation by The Indian Express has revealed that the IR ‘earned’ Rs 2,690 crore — or 13.3 per cent of the declared surplus (Rs 20,153.49 crore in 2006-07) — not by transporting more people or goods, but by changing its accounting procedures.
Replying to a right to information (RTI) application made by The Indian Express, the Railway Ministry has conceded that three accounting policy changes made by IR increased its surplus by Rs 2,689.97 crore in 2006-07.
Wait, there is more.
.
The increase in goods earnings for 2005-06 over 2004-05 was Rs 5509 crores, including miscellaneous earnings due to wharfage and demurrrage. Excluding the miscellaneous, the increase was Rs 5482 crores. Exhibit 5 provides an analysis of the commodities through which the increased goods earnings were obtained. The increase in earnings from coal and other goods were largely due to the increased loadings. The increase in earnings from iron ore…was both due to increase in loading and increase in rates by change of classification.
…and apparently the shenanigans go back several years in the past. From Was the Railways really ‘bankrupt’ in 2001?:
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.
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).
…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 authors provide a detailed account of how the Railways increased the freight earnings during Mr Lalu’s regime. 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.
So there you are…
Moral of the Story: There is *always* more to it than meets the eye.
P.S. By the way, the increase in axle loads did have its consequences. As Vijay mentions on his blog:
The increase in axle loading has created increased instances of stress on the rail track.
Media reports state that The East Coast Railway reported a 42 per cent increase in rail fractures, increased instances of wheel slipping and stalling, increase in ‘sick detachment’ (wagons needing repairs), and failure of important equipment in electric locos.
The South Eastern Railway reported increased en route detachment due to wagon body bulging, stalling and wheel burns, and vulnerability of a large number of bridges. Southern Railway reported increase in spring failures and brake beam defects, and in overall sick marking. South Central Railway pointed out stalling of wagons carrying load above their capacity, and also increased rail and weld fractures.
These were the very concerns experts had voiced when the railways decided to increase the axle load without any trials and without the requisite approval of the chief commissioner railway safety.
Related Posts:
Professor Sh. Lalu Yadav, Railway berths and RTI
W’end Links: Sh Lalu Yadav, Women Empowerment and Bravery Awards
Oh well, we should have seen this coming when a guy implicated in fodder scam and jailed for it, is made a minister. The fact that we have no laws preventing people who serve jail time for crimes like theft and murder from holding ministerial positions, says a great deal about our democracy.
Harapriya: Just in case you missed it: Of Criminals and Elections
Shantanu- This is awesome. There is no doubt in my own mind about the long term damage a lalu prasad stewardship of Indian Railways has done.
My hypothesis was/has been based very simply/anecdotally on coal availability/transport economics for power plants in India.
The ironic situation in India today is that we have huge coal reserves (and quite a significant proportion of high quality too) but despite this situation it is actually more economic for coal plants to import coal from Australia or Indonesia on a heating value basis (i.e simply put the price paid for the actual coal plus the transportation cost per unit of energy that would be potentially available from that coal). Historially the problem was that the only coal available for generation plants of the state electricity boards was of relatively poor heating quality, high in moisture and high in sulphur content compared to imported coal. The economics was partially offset by relatively low (often subsidised) freight rates for coal transport.
Last November I was witness to an ignominy in Delhi where the coal minister, the power minister on a common platform argued/urged indian developers to secure international coal via shipping from Australia/Indonesia but not depend on local coal- the real problem: Our Laluji has dis-incentivised whatever little coal transportation that was on going via steep raises in freight rates/ freight versus passenger tradeoffs.
I have my own doubts how successful have the IR actually been in what is commonly called “riding the commodity cycle”- I wonder what all the HBS and other international business schools would now think now that the commodity tide has ebbed and our dear laluji is found to have been swimming naked!
Await more marked developments in iron ore and other commodity prices over the next 2 years- it is still too early to understand the extent of damage his term as railway minister has inflicted.
Looks like accounting adjustments have become a norm… Enron got crap for doing this (and a little more), Kingfisher also did the same thing in 07 and 08. I also read a Business line article stating that the transportation division of GE did that to the tune of $200m.
Excerpts from White Paper shows railways below par during Lalu era:
…The performance of railways was “below par” during 2004-05 to 2008-09 when the RJD chief was at the helm of affairs, the White Paper laid by railway minister Mamata Banerjee claimed.
“Analysis of the overall growth of railways during the period shows that the performance was below par if the normally accepted growth elasticity of 1.25 is reckoned,” the report, tabled amid din, said.
Is the death of RTI neigh ?
Angry Information Commissioner releases minutes of RTI meeting on Act amendments
This is a watershed moment. Most who are in power want the RTI to be defanged.
P.S: Dear Shantanu, I suggest you make a section for corruption / “creative accounting” / RTI, maybe a sub-head under “Governance”. I had to look high and low to find a good place to park this comment.
A: Thanks for the link and good suggestion…I might create that category…Watch this space.
This is what 60+ years of “Socialism” has done to us: taken away the ability to THINK.
Instead of addressng supply gaps, we’re putting in CCTV cameras!
Read about the “new scheme” for Tatkal railway tickets..and wonder whether these bright group of people even understand basic economics…
And don’t forget: “Tatkal or the art of mastering pervasive socialist shortage” http://j.mp/M2cwZY Sigh.
From Railways: Why Suresh Needs to Invoke Political Prabhu by Shankkar Aiyar, 12th April 2015:
..The scale boggles. So does the inefficiency. The Indian Railways runs 21,000 trains that carry 8.4 billion passengers and over a billion tonnes of freight every year. How well does it do? Its trains move slower than those in pre-war times. The faster mail/express trains move at an average speed of 50 km/hr while freight trains average 25 km/hr. Operations cost 93 paise of every rupee earned. Passengers pay an average of 31.5 paise per km—and contribute just 25 per cent of income—while freight pays 137.5 paise per km.
Believe it or not, the Indian Railways has no template for ascertaining profitability of services. It charts revenues earned from a train but doesn’t track what it costs. The Debroy Committee Report says, “One doesn’t quite know how much a train costs… since one doesn’t know how much a specific train costs, one doesn’t know how much of profits a specific train brings in. This is true of both passenger and freight trains.â€
…Over 51 paise of traffic receipts goes to fund wages and pension. Ergo, return on capital is barely 7.42 per cent—less than the rate at which the government borrows money.
…Unsurprisingly, the effect shows. A total of 11,709 projects approved by the Railway Board—with a cost to completion of Rs 4.94 lakh crore—is yet in process. Seven years after it was decided to bring FDI in manufacture of locomotives, the projects in Madhepura and Marhura are languishing. New projects and trains are cleared not on viability but political desirability.
There is then the alphabet soup of PSUs/companies—RITES, IRCON, BSCL, BCL, BWEL, CRIS, IRFC, CONCOR, KRCL, MRVC, RCIL, IRCTC, PRCL, RVNL, RLDA and DFCCIL. The Indian Railways is virtually a do-it-yourself addict. It makes wagons, forges wheels, builds coaches, manufactures electrical units, bottles water etc. DIY was a necessity once, to cope with “market failureâ€. But what explains persisting with it in the age of outsourcing and credit-backed just-in-time supplies?
The seventh largest employer in the world, the Railways also run 168 schools—educating 27,000 children of its employees and 38,000 of others —and 125 hospitals as also 586 health units, employing 2,597 medical officers and 54,000 paramedics. Add security—57,000 RPF personnel and the cost of funding states for GRP.
The Debroy Committee has dealt with the issues and prescribed viable solutions. It has recommended: decentralisation, commercial accounting, cleaner sharing of social costs between Railways and state and Union Government, splitting of policy, regulation and operations, a new cast for the board, a railway regulatory authority, an SPV to host all the PSUs, bifurcation of infrastructure and services, corporatisation, liberalisation to enable private players, service standards, shifting of suburban and metro to state governments as JVs etc. It has also given a time-frame for the migration.
…Since 1947, there have been 20 committees—11 since 2001. Many of these issues have been “solved†by past committees. As many as 144 recommendations by earlier committees languish—in process or on shelves…