A set of recommendations to reform the accounting system of Indian Railways (IR), in such a way as to better highlight the individual financial and operational performance of its nine broadly key lines of business (LOBs) , is being scrutinised by the Government Accounting Standards Advisory Board (GASAB), the nodal agency for reforms in government accounting.
According to senior railway ministry officials, a pilot project implementing the revised accounting norms is likely to go on stream early in 2011.
This is the outcome of the IR’s Accounting Reforms Project, approved in 2004-05. A consultancy contract to advise the railways on the shape the reforms should take and to make the accounts readable from a commercial point of view was awarded to a consortium of companies in February 2006.
The final report on the proposed restructuring was given to IR last month, the culmination of a process where various draft suggestions were discussed with it by the authors.
The nine identified lines of business whose financial performance are sought to be presented separately include three operational segments regulating freight, passenger and suburban traffic and six individual units that monitor rail infrastructure, rolling stock, internal services, welfare activities and construction works.
A senior official at the ministry said: “The railways is looking at structuring its accounts around these nine identified LOBs. Through this approach, it would become possible to assess the profitability of the different services offered by Indian Railways.”
This would, then, facilitate IR in spinning off identified business ventures as subsidiaries, based on an evaluation of key business segments. An official said, “The revamping of the norms would make it possible for the railways to reorganise the set-up. Professional help would be sought for implementing changes in the organisational structure.”
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The ministry is considering a complete overhaul of the present cost-based accounting system and report revenues and expenses on an accrual basis. Accrual accounting envisages recording of revenues and expenses at the time these are incurred, regardless of when cash transactions take place.
In 2008-09, IR garnered Rs 84,233 crore of gross receipts from traffic, as well as miscellaneous operations, a number which the organisations hopes to more than treble over the next 10 years. Total revenues are projected to touch Rs 90,000 crore by the end of the current financial year, while expenditures (ordinary working expenses, appropriation to Depreciation Reserve Fund, Pension Fund, Railway Safety Fund, dividend payment) are slated to be around Rs 88,000 crore.
The official added, “The accrual accounting system would enable the railways to report its financial status more accurately at a given time. The move would facilitate multilateral lending organisations, investors, consultants appraising projects offered for public private partnership, credit rating agencies and others to gauge our financial condition appropriately and help us to attract resources.”
Public private partnership (PPP) projects in the rail sector have evinced little interest from private sector entities due to lack of a viable policy. Till date in the Eleventh Plan period, IR has been able to draw only Rs 395 crore in private investment against the target of over Rs 60,000 crore for the entire period (2007-12).
Industry experts note that making financial reporting more transparent by maintaining revenue-expenditure statements on an accrual basis along identified LOBs would help private players assess the risks and opportunities in a particular segment.
The ministry is focusing on the need to improve asset accounting and costing in the railways. Major emphasis is being laid on fully computerising accounting in the railways.