Friday, February 25, 2011

The Railways budget: Looks like a comedy show but is really the biggest scam?!

No one really understands this. Half the time, it appears to be a comedy show on TV. At other times, it appears to be the biggest scam going around. It sure looks like a scam. It’s the one occasion that promises can be made and fully broken. Where financial prudence is not even expected. Where blatant politics is allowed with no questions asked. And where the mixing of business and socialism is freely permitted! This is the mother of all scams....or is it the biggest one really knows!

The Railways budget points out many things that in the corporate world would have caused a massive earthquake:

1)      The operating ratio is some 91%. This means that only about 9% is left over to be counted as operating margin (the equivalent of EBITDA I suppose). It’s not adequately explained; but I suppose all finance (interest payments) and amortization and depreciation charges come below the operating margin. So at PBT (Profit before tax) level, the Railways must be making a loss. This is 64 years after independence. Can you think of one private sector company like this?!
2)      Staff cost is 42% of total expenditure. Now this would be understandable in a few services like banking and consultancies.....which are heavily people dependent....but in a hardcore old-economy business like the Railways, staff costs should be in the region of 10-12% of expenditure. Since there is no private railway company, I’ve looked at the data of an airline company. For Jet Airways, the staff cost is indeed 11% of expenditure!
3)      To understand staff costs better, let’s look at head-count. The Railways has a turnover of Rs 90,000 crores and it employs 14 lac people or so. The Tata group in comparison has a turnover of Rs 1,50,000 crores and it has a total of  only about 1.8 lac people! Take also the example of another industrial conglomerate. Reliance Industries Ltd has a turnover of Rs 1,50,000 crores and has only 12500 people on its roll (staff cost surprising low at 3% of expenditure)! See the difference!
4)      As if this was not high enough, the Railways plan to fill up 1.75 lac more jobs this year. Wow! Further.....there is a guaranteed job for the son/daughter of any railway employee who is above 50 in age and ill. Now do you see the scam?!
5)      Very routinely (almost appreciatively), the Railway minister is allowed to favor his or her home state. So Laloo did everything with Bihar in focus and Mamta with WB. If this rule were to apply to me, a poor private sector CEO, I should be allowed to splurge money into Gujarat! No such luck though!
6)      Since the Railways does not make enough monies (9% of revenues at an operating level), it needs financial support to make investments. So the citizens of India (through the Union budget) provide the Railways Rs 20000 crores this year. Clean money with no questions asked and no accountability! Further, an additional Rs 20000 crores is borrowed from the market but since no one would lend to the Railways, the government gives the Railway bonds a “tax-free” status. So people invest not to get the returns, but to get the tax savings! Only a small portion of the investment plan is supported by internal accruals. Think of any private sector company that enjoys such privileges?!

I could go on and on but I want to make a different point here. Why am I calling it a scam? Because the Railways is a 100% government owned corporation and so it belongs to each one of us. There is a financial rape going on and we need to stop it. If the Railways were to focus on giving better service to the citizens......and not to its own employees.....then we would see better facilities being provided; better trains; better railway stations; more safety. Instead, the Railways prefers to don the socialist mask and mix up issues: Is it a corporation which runs a business or is it an extended arm of the government? Let the government make the populist schemes....the Railways must run as a corporation.

I cannot end without repeating my earlier demand. That the Railways must be privatized in the long run. If the Indian Railway Corporation cannot be privatized least private players must be allowed to enter the space. They could provide private train services at a higher cost to passengers.....and use the infrastructure of the Indian Railways by paying fees. Just like in the Airlines sector. This way, the Railways would earn more fees; and it would be able to focus on its social sector obligations.

The real truth is that the Railways is the biggest scam that India has seen since independence. No one cares for efficiency; for financial returns; for service standards; or even a modicum of intellectual honesty. In spite of being the biggest scam, it hardly gets anyone’s attention. It’s almost like a humor capsule on TV which you are supposed to see and forget!

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