Staff costs can derail finances

Repeating the same action and expecting a different outcome each time is one definition of insanity. The build-up to the Railway Budget and public expectations each year reflect this irrational behaviour.

Sure enough, as in the previous years, the Rail Budget 2011-12 had all the usual ingredients: New lines, new surveys, new trains, extension of services of existing trains, more concessions and, of course, the icing on the cake — no increase in passenger fares. But will the outcome be different? Amidst frantic attempts to woo the aam aadmi , are substantive issues being ignored? Are we missing the wood for the trees?

OBFUSCATING RATIO

The Railway Minister, while reviewing the Indian Railways' (IR) financial performance, made the following observations: “In fact, if we do not take the Pay Commission arrears into consideration, which rightfully are the liabilities of previous financial years, the operating ratio would have been 84 per cent, even with payment of higher salaries. If the salaries and pension are also kept at the earlier levels, the operating ratio comes down even further, to 74.1 per cent”.

What is the nature of this financial performance index called Operating Ratio (OR) that seems to hold such a fascination at the highest levels? It is the single index that reflects the financial viability of the Railways and is defined as the ratio of the Total Working Expenses (TWE) to Total Earnings (TE).

It is normally expected that the ratio should be as low as possible, in any case less than 1. A lower ratio reflects higher profitability of the system. But the devil is in the detail. Under TWE, apart from the obvious expenditure on staff, fuel/energy, materials etc., two more items are included — appropriations to the Depreciation Reserve Fund (DRF) and the Pension Fund (PF).

The Railways are expected to provide for the replacement of their assets by setting aside a part of their earnings each year in the Depreciation Reserve Fund (DRF).

Appropriations to the Pension Fund are set aside to meet the pension payments to retired employees and have to reflect the actual pension outgo as closely as possible, whereas appropriations to the DRF can vary over a rather wide range (as there are no laid down norms and a lower appropriation has no immediate consequences) and is usually dictated by the need to present as low an OR as possible. The trend of DRF appropriations and OR over the last 15 years is shown in the Chart.

The strong correlation between the DRF and the OR and a marked dip in the appropriations to the DRF after the implementation of the Pay Commission recommendations are evident. As a percentage of the capital-at-charge, the appropriations ranged from a high of 12.86 per cent (2006-07) to a low of 2.61 per cent (2009-10), with little relevance to the expanding asset base.

A recent example of the ‘adjustment' of DRF pertains to 2009-10, when the appropriation declined from Rs 5,425 crore at the Budget stage to an actual Rs 2,287 crore — a fall of more than Rs 3000 crore. The ‘excess' (surplus) that year was a nominal Rs 0.75 crore. It is obvious that a ratio in which the numerator (TWE) can be ‘tweaked' by as much as Rs 3,000 crore to arrive at a lower (more acceptable) OR is not a reliable index of financial performance.

LURKING HOT POTATO

What should, however, be a matter of concern is that even as the Total Earnings have risen steadily over the years, the Railways' ability to generate resources internally (IRG) is severely constrained by the burgeoning wage bill (See Chart).

The biggest component of the Railways' expenditure consists of pay and allowances to staff (wage bill), making up more than 40 per cent of the working expenses and, together with pension payments, forms almost 60 per cent of the total expenditure. There has been a steady increase in this component over the years and a particularly sharp rise after the Sixth Pay Commission, accompanied by a steep fall in IRG.

There is, therefore, an urgent need to rein in staff costs. Unfortunately, the subject is taboo and no rail budget touches this political hot potato. On the contrary, it would seem that the organisation is determined to move exactly in the opposite direction, as is evident from this pronouncement in the budget speech: “.…after the new recruitment policy announced last year, the recruitment process has already been set in motion for filling up vacancies of 1.75 lakh in Group C and Group D posts. Steps have already been taken to fill up about 13,000 posts in the Railway Protection Force”

One wished that, as in the case of the Operating Ratio, a little thought experiment could have been indulged in to see what happens if all these posts were filled up on date. At an average annual cost of Rs 3.8 lakh per employee, this translates to an additional annual expenditure of more than Rs 7,100 crore, fully wiping out the projected ‘excess' of Rs 5,258 crore in 2011-12, even with the budgeted record incremental loading of 69 million tonnes, landing the Railways squarely in the red.

POLICY FOR ALL SEASONS

A single-minded focus on filling up “vacancies”, while no doubt earning short-term popularity, is a sure recipe for financial disaster. It is nobody's case that essential posts need not be manned. But a wholesale filling up of the so-called vacancies has to be preceded by a rigorous examination of the need for each and every post, weeding out posts that can be given up due to operational improvements, system changes, mechanization, computerisation, change in technology, and so on.

The Railways have an excellent tradition of exercising such self-restraint. It would be extremely short-sighted to abandon this policy. It needs to be remembered that, compared to world standards, the Railways' productivity levels are still very low, even excluding the staff in production units, medical and security departments.

Emergency palliatives, such as enhanced loading of wagons, have exhausted their potential to boost earnings. The next major thrust in earnings may be expected with the commissioning of the two Dedicated Freight Corridors, still a few years away from being fully operational.

Despite such inputs, unpredictables such as an economic recession and certainties such as pay commissions are bound to affect Railway finances in the future. A tight control on staffing levels is, therefore, a wise policy, now and always.

(The author is a former Member, Staff, Railway Board. > blfeedback@thehindu.co.in )

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