The cabinet has approved the restructuring of the railway board. The board will now consist of four members and a chairperson. The existing 8 group services of the railways will be reorganized into a central service and will be called the Indian Railway Management Service. Vinayak Chatterjee, Chairman of Feedback Infra spoke at length about what is the impact, relevance and practicality of application.
Q: What are your thoughts on railway board rejig?
A: It’s certainly a long-overdue step in the right direction – that’s the summary. If you go back in terms of the many deep-dive reports done on the railways whether it was the 2003 Rakesh Mohan Committee report or in this decade the Sam Pitroda report, the Bibek Debroy report – all of them had suggested that the railway board be reorganized and had also mentioned about the unification of cadres. So both these recommendations that have been made across almost 2 decades or longer have finally seen the light of day and I as an independent observer, I think they are very much in the right direction, were overdue and therefore having been made welcome.
The railway board has now provision for independent directors and the unification of cadres, hopefully, will go to remove the silo culture in the railway.I think watchers from outside the system have often blamed a large portion of ills of Indian railways as not just competition between cadres but also the silo mentality that each silo just optimizes its own space and does not integrate with the other functions. So hopefully the combination of the two will lead to a far more professional focused, action-oriented board as well as disintegration of silo culture and the pride of being part of unified Indian railway service.
Q: To complete the point on railways, this year we have seen a lot of data including the report that made headlines – the worst operating ratio in 10 years, touching 98.5 percent etc., with some of these moves coming in -- the only good thing is that we have not had as many passenger deaths so that way this year has been good. On railways whether its expansion, spends or whether it is wagon tender that everyone awaiting. What should we expect in 2020 from the endian railways?
A: Let me touch on the most difficult point first which is the operating ratio that you mentioned. Indian railways the operating ratio measures the economic health of the entity saying where are expense and where is revenue. If expenses are more than revenue you get an operating ratio higher than 100 and as all of us know that with the CAG report and all that it is creeping towards 100 or may even, as per some watchers, have crossed 100. The real issue is the Indian railway is more than an economic entity and I have often argued that the railways has an economic construct, it also has a social obligation construct.
Social obligation looks at the huge subsidy in suburban fares, the unviable lines in remote areas and in certain districts through central India which are red areas. It is required to build and operate a whole lot of lines which are clearly uneconomic, but you cannot withdraw from it. It runs schools, hospitals and it is surprising to note that while the total employees of Indian railways is 1.2 million, the number of pensioners is 1.3.
So it has a huge pension burden with the number of pensioners now exceeding with people who are inactive roles and this rather large increase in salaries in the 7th finance commission has given body blow to the operating ratio, but for a minute to go back to argument of separating the operating ratio from pure commercial activities to social obligation activities, I think the time has come and no better time than the forthcoming budget which also encapsulates within it the railway budget to actually try and separate the wheat from the chaff, the economic measure versus the social obligation spends.
Q: What about the larger infrastructure basket. As of now the National Highways Authority of India (NHAI), the pace of construction has been pretty slow. If you look at what has happened in the first half of the year, about 4,622 km was constructed versus target of 11,000 km for the full year. What are you noticing at the moment, will it be hard for the NHAI to meet its targets? What seems to be the reason for this slowdown?
A: I think we are all with the same frame of reference that the first 6-7 months of this fiscal, April to October was a slow period for NHAI. I think there are different reasons for it. In my view one was the huge level of EPC contracts that were given out prior to the general elections across the months of December-January-February-March – was a major pushing out of EPC contracts.
When you do that as an institution you get burden with a lot of parallel demands on completing land acquisition, utilities etc., so the high pace of EPC awards in the latter part of last fiscal required NHAI to put its bandwidth on making those contracts active on the ground. So a large portion of the bandwidth went there.
The general elections etc., certainly resulted in 2-3-4 months of non-issue of new tenders and activity. There was also a period where the new government took charge of a period of deep introspection that went into details about NHAI’s debt levels, its future course of action, should it be engineering, procurement and construction (EPC), hybrid annuity model (HAM), toll operate transfer (TOT), a whole lot of review of thinking and strategy took place.
What I now understand and through very authoritative sources is that all that is behind us and there is a fresh energy in the system and you can now expect the graph to go up. In NHAI history, if you notice, there have been cycles of high construction and award activity and there have been periods of focus on delivery which have led to lower awards. So this cyclical tendency of the organization to behave is well documented and we have just come out of the down cycle and we are now heading to a very aggressive upcycle once again – that’s my assessment.
Q: What about the health of the construction companies. I am looking at an ICRA report which is pointing out working capital issues saying specifically for the medium to small size players’ working capital cycles have been stretched. In fact, I quote them they go on to say - ‘The working capital situation is not likely to see any major improvement in the near term, many construction entities have faced challenge in meeting their bank guarantee requirement’ – that’s their point of view. What is your assessment of balance sheets in 2020 and the financial aspects of construction?
A: The assessment that you read out is correct and I fully concur with it. The industry continues to face very severe liquidity strains and there are 2 aspects of these liquidity strains. One is that the balance sheets of construction companies anyway were reasonably highly leveraged and banks and NBFCs have become extremely cagey of increasing their exposure for whatever reasons, even if you sit on a good contract.
So the ability to put out 20-25-30 percent margins for bank guarantees which the banks asks, puts a huge strain on the construction companies particularly the smaller ones in bidding for new contracts.
This is something that the banking industry needs to do some introspection and sort out in terms of supporting not just the construction industry and road construction but getting the economy back in gear. Asking for such high margins to my mind is dysfunctional. It should look at other ways and means to protect its security. The other issue is that there is a lot of liquidity stuck with NHAI, Ministry of Road Transport and Highways (MORTH), National Highways & Infrastructure Development Corporation Ltd is (NHIDCL) and not just the highway sector, there is liquidity stuck across many governmental departments both central and state that issue works contracts to construction companies. It is common knowledge now that the payment cycle has got elongated. What was x months few year or two ago is almost 2x now. So the government itself is at fault for not releasing liquidity for invoices submitted. If you take the case of awards at NHAI, it is public knowledge now with the cabinet decision on release of 75 percent that till last month we understand that there were Rs 80,000 crore of awards in the pipeline of which NHAI itself believes about Rs 20,000 crore worth of cash is ready for disbursal or should be disbursed to the private sector.
So you have got pockets of liquidity stuck; unpaid bills, un-cleared arbitration awards across sectors with the union government itself having a liquidity squeeze – that liquidity squeeze and lack of GST then travelling on to the states which themselves are under liquidity stress who themselves are not paying the bills of construction companies that have state government contracts. So all these are coming into play and to cut a long story short the sector still is burdened and stressed with a huge degree of liquidity pressures.