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Indian Railways: Analysing the Budget

March 12th, 2018 No comments

Finances of the Railways were presented along with the Union Budget on February 1, 2018 (the Railways Budget was merged with the Union Budget last year).  In the current Budget Session, Lok Sabha is scheduled to discuss the allocation to the Ministry of Railways.  In light of this, we discuss Railways’ finances, and issues that the transporter has been facing with regard to financing.

What are the different sources of revenue for Railways?

Indian Railways has three primary sources of revenue: (i) its own internal resources (revenue from freight and passenger traffic, leasing of railway land, etc.), (ii) budgetary support from the central government, and (iii) extra budgetary resources (such as market borrowings, institutional financing).

Figure 1Railways’ internal revenue for 2018-19 is estimated at Rs 2,01,090 crore which is 7% higher than the revised estimates of 2017-18.  Majority of this revenue comes from traffic (both freight and passenger), and is estimated at Rs 2,00,840 crore.  In the last few years, Railways has been struggling to run its transportation business, and generate its own revenue.  The growth rate of Railways’ earnings from its core business of running freight and passenger trains has been declining.  This is due to a decline in the growth of both freight and passenger traffic (see Figure 1).  Railways is also slowly losing traffic share to other modes of transport such as roads and airlines.  The share of Railways in total freight traffic has declined from 89% in 1950-51 to 30% in 2011-12.

The Committee on Restructuring Railways (2015) had observed that raising revenue for Railways is a challenge because: (i) investment is made in projects that do not have traffic and hence do not generate revenue, (ii) the efficiency improvements do not result in increasing revenue, and (iii) delays in projects results in cost escalation, which makes it difficult to recover costs.  Railways also provides passenger fares that are heavily subsidised, which results in the passenger business facing losses of around Rs 33,000 crore in a year (in 2014-15).  Passenger fares are also cross-subsidised by charging higher rates for freight.  The consequence is that freight rates have been increasing which has resulted in freight traffic moving towards roads.

Figure 2Figure 2 shows the trends in capital outlay over the last decade.  A decline in internal revenue generation has meant that Railways funds its capital expenditure through budgetary support from the central government and external borrowings.  While the support from central government has mostly remained consistent, Railways’ borrowings have been increasing.  Various committees have noted that an increased reliance on borrowings will further exacerbate the financial situation of Railways.

The total proposed capital outlay (or capital expenditure) for 2018-19 is Rs 1,48,528 crore which is a 24% increase from the 2017-18 revised estimates (Rs 1,20,000 crore).  Majority of this capital expenditure will be financed through borrowings (55%), followed by the budgetary support from the central government (37%).  Railways will fund only 8% of its capital expenditure from its own internal resources.

How can Railways raise more money?

The Committee on Restructuring Railways had suggested that Railways can raise more revenue through private participation in the following ways: (i) service and management contracts, (ii) leasing to and from the private sector, (iii) joint ventures, and (iv) private ownership.  However, private participation in Railways has been muted as compared to other sectors such as roads, and airports.

Figure 3One of the key reasons for the failure of private participation in Railways is that policy making, the regulatory function, and operations are all vested within the same organisation, that is, the Ministry of Railways.  Railways’ monopoly also discourages private sector entry into the market.  The Committee on Restructuring Railways had recommended that the three roles must be separated from each other.  It had also recommended setting up an independent regulator for the sector.  The regulator will monitor whether tariffs are market determined and competitive.

Where does Railways spend its money?

The total expenditure for 2018-19 is projected at Rs 1,88,100 crore, which is 4% higher than 2017-18.  Staff wages and pension together comprise more than half of the Railways’ expenditure.  For 2018-19, the expenditure on staff is estimated at Rs 76,452 crore.  Allocation to the Pension Fund is estimated at Rs 47,600 crore.  These constitute about 66% of the Railways’ expenditure in 2018-19.

Railways’ primary expenditure, which is towards the payment of salaries and pension, has been gradually increasing (with a jump of around 15% each year in 2016-17 and 2017-18 due to implementation of the Seventh Pay Commission recommendations).  Further, the pension bill is expected to increase further in the years to come, as about 40% of the Railways staff was above the age of 50 years in 2016-17.

The Committee on Restructuring Railways (2015) had observed that the expenditure on staff is extremely high and unmanageable.  This expense is not under the control of Railways and keeps increasing with each Pay Commission revision.  It has also been observed that employee costs (including pensions) is one of the key components that reduces Railways’ ability to generate surplus, and allocate resources towards operations.

What is the allocation towards depreciation of assets?

Railways maintains a Depreciation Reserve Fund (DRF) to finance the costs of new assets replacing the old ones.  In 2018-19, appropriation to the DRF is estimated at Rs 500 crore, 90% lower than 2017-18 (Rs 5,000 crore).  In the last few years, appropriation to the DRF has decreased significantly from Rs 7,775 crore in 2014-15 to Rs 5,000 crore last year.  Provisioning Rs 500 crore towards depreciation might be an extremely small amount considering the scale of infrastructure managed by the Indian Railways, and the requirement to replace old assets to ensure safety.

The Standing Committee on Railways (2015) had observed that appropriation to the DRF is the residual amount after appropriation to the Pension Fund, instead of the actual requirement for maintenance of assets.  Under-provisioning for the DRF has also been observed as one of the reasons behind the decline in track renewals, and procurement of wagons and coaches.

Is there any provision towards safety?

Last year, the Rashtriya Rail Sanraksha Kosh was created to provide for passenger safety.  It was to have a corpus of one lakh crore rupees over a period of five years (Rs 20,000 crore per year).  The central government was to provide a seed amount of Rs 1,000 crore, and the remaining amount would be raised by the Railways from their own revenues or other sources.

As per the revised estimates of 2017-18, no money was allocated towards this fund.  In 2018-19, Rs 5,000 crore has been allocated for it.  With the Railways struggling to meet its expenditure and declining internal revenues, it is unclear how Railways will fund the remaining amount of Rs 95,000 crore for the Rail Sanraksha Kosh.

What happened to the dividend that was waived off last year?

Railways used to pay a return on the budgetary support it received from the government every year, known as dividend.  The rate of this dividend was about 5% in 2015-16.  From 2016-17, the requirement of paying dividend was waived off.  The last dividend amount paid was Rs 8,722 crore in 2015-16.

The Standing Committee on Railways (2017) had noted that part of the benefit from dividend is being utilised to meet the shortfall in the traffic earnings of Railways.  This defeats the purpose of removing the dividend liabilities since they are not being utilised in creating assets or increasing the net revenue of Railways.

Making Smart Cities

January 23rd, 2018 1 comment

In the last decade, the government has implemented several schemes to address issues related to urbanisation and aid the process of urban development.  One of the schemes is the Smart Cities Mission, which intends to take advantage of the developments in information technology in developing the urban development strategy, across 100 cities.  Last week the government announced the list of 9 new Smart Cities, taking the total to 99.  In light of this, we look at the Smart Cities Mission and a few issues with it.

What is a Smart City?

The primary objective of the Mission is to develop cities that provide core infrastructure and give a decent quality of life to its citizens, a clean and sustainable environment, and apply ‘smart’ solutions.

However, the Mission document does not provide one definition of a Smart City.  Instead it allows cities to come up with their own solutions of what they identify as a Smart City.  The guidelines suggest that the core infrastructure elements in a Smart City will include: (i) adequate water supply, (ii) assured electricity supply, (iii) sanitation, including solid waste management, (iv) efficient urban mobility and public transport, (v) affordable housing, (vi) robust IT connectivity, and (vii) good governance.  ‘Smart’ solutions may include (i) energy efficient buildings, (ii) electronic service delivery, (iii) intelligent traffic management, (iv) smart metering, (v) citizen engagement, etc.

How were the Smart Cities selected?

The Mission was introduced in the form of a competition, called the Smart City challenge.  The first stage was in July 2015 when states nominated their cities for the competition.  In August 2015, the Ministry of Urban Development selected 100 of those cities to participate in the competition.  These cities were required to develop their smart city plans (SCPs) and compete against each other.  The SCPs were evaluated on the basis of the solutions, the processes followed, the feasibility and cost effectiveness of the plans, and citizen engagement.  Over the last 2 years, the Ministry has announced winner cities in batches.  So far, 99 cities have been selected under the Mission.

What information do these SCPs contain?

The cities had to prepare their SCPs with two primary strategic components: (i) area-based development, and (ii) pan-city development.  The area-based development would cover a particular area of the city, and could have either a redevelopment model, or be a completely new development.  Pan-city development would envisage application of certain smart solutions across the city to the existing infrastructure.

Each city had to formulate its own concept, vision, mission and plan for a Smart City that was appropriate to its local context and resources.  The Ministry of Urban Development provided technical assistance, through consultancy firms, to cities for helping them prepare these strategic documents.

How will the Mission be implemented?

The Mission will be implemented at the city level by a Special Purpose Vehicle (SPV).  The SPV will plan, approve, release funds, implement, manage, monitor, and evaluate the Smart City development projects.

The SPV will be a limited company incorporated under the Companies Act, 2013 at the city-level.  It will be chaired by the Collector/ Municipal Commissioner of the Urban Development Authority.  The respective state and the Urban Local Body (ULB or municipality) will be the promoters in this company having 50:50 equity shareholding.

How are the Plans getting financed?

The Mission will be operated as a Centrally Sponsored Scheme.  The central government will provide financial support of up to Rs 48,000 crore over five years, that is, an average of Rs 500 crore per city.  The states and ULBs will have to contribute an equal amount.  The central government allocated Rs 4,000 crore towards the Mission in the 2017-18 budget.

Since funding from the government will meet only a part of the funding required, the rest will have to be raised from other sources including: (i) states/ ULBs own resources from collection of user fees, land monetization, etc., (ii) innovative finance mechanisms such as municipal bonds, (iii) leverage borrowings from financial institutions (such as banks), and (iv) the private sector through Public Private Partnerships (PPPs).

The total cost of projects proposed under the various SCPs of the 90 winner cities is Rs 1.9 lakh crore.  About 42% of this amount will come from central and state funding, 23% through private investments and PPPs, and 19% through convergence with other schemes (such as HRIDAY, AMRUT, Swachh Bharat-Urban).  The remaining will be generated by the cities through the levy of local taxes, and user fees.

What are some of the issues to consider?

Financial capacity of cities:  Under the Mission, cities have to generate additional revenue through various sources including market borrowings, PPPs, and land monetization.  The High Powered Expert Committee on Indian Urban Infrastructure and Services (HPEC) had observed that ULBs in India are among the weakest in the world, both in terms of capacity to raise resources and financial autonomy.  Even though ULBs have been getting higher allocations from the centre and states, and tax devolution to them has increased, their own tax bases are narrow.  Further, owing to their poor governance and financial situation, ULBs find it difficult to access external financing.

Such a situation may pose problems when implementing the Mission, where the ULBs have to raise a significant share of the revenue through external sources (PPPs, market borrowings).  For example, the Bhubaneswar Smart City Plan has a total project cost of Rs 4,537 crore (over five years), while the city’s annual budget for 2014-15 was Rs 469 crore.

In order to improve the finances of the ULBs, committees have made various recommendations, which include:

  • State governments make legislative changes to give more taxation powers and autonomy to ULBs for improving their revenue collections.
  • ULBs could raise their own revenue by tapping into land-based financing sources, and introducing reforms to strengthen non-tax revenues (such as water and sewerage charges, parking fees, etc.).
  • Municipal bonds may also be used as a source of revenue for ULBs.

The government has recently introduced a few policies and mechanisms to address municipal financing.  Examples include value capture financing through public investments in infrastructure projects, and a credit rating system for cities.  In June 2017, the Pune Municipal Corporation raised Rs 200 crore by issuing municipal bonds.

Technical capacity of the ULBs:  The Smart Cities Mission seeks to empower ULBs to raise their own revenue, and also lays emphasis on the capacity building of ULBs.  The HPEC had observed that municipal administration has suffered due to: (i) presence of untrained and unskilled manpower, and (ii) shortage of qualified technical staff and managerial supervisors.  It had recommended improving the technical capacity of ULBs by providing technical assistance to state governments, and ULBs in planning, financing, monitoring, and operation of urban programmes.  The central government had allocated Rs 10.5 crore towards the capacity building component of the Mission in 2017-18.

The Ministry of Urban Development has been running several programmes to improve capacity of ULBs.  This includes MoUs with 18 states to conduct training programmes for their ULB staff.

Coverage of the Mission:  The Mission covers 100 cities, of which 99 have been announced as winners so far.   The urban population that will be impacted through the Mission is around 96 million (data for 90 cities excluding the recently announced 9 cities).

As per Census 2011, India’s urban population was 377 million.  The Mission impacts about 25% of this population.  Further, most of the SCPs approved so far focus on area-based development, thus affecting a particular area of the cities.  About 80% of the total project cost proposed is towards this model of development.  In each city, this area-based development will cover up to 50 acres of area.  The remaining 20% of the project cost is towards pan-city development proposals, which provide smart planning solutions for the entire city.  It may be argued that even within the selected cities, the Mission will only impact few selected areas, and not necessarily help with development of the entire city.

Electrification in India: ‘Saubhagya’ scheme

October 5th, 2017 1 comment

Recently, the central government launched the Pradhan Mantri Sahaj Bijli Har Ghar Yojana (or Saubhagya).[i],[ii]  The scheme seeks to ensure universal household electrification (in both rural and urban areas) by providing last mile connectivity.  The scheme is expected to cover three crore households.  Note that currently about four crore households are un-electrified.  A rural electrification scheme has also been under implementation since 2005.  In light of this, we discuss the current situation of, and key issues related to rural electrification in the country.

Regulatory and policy framework

Under the Electricity Act, 2003, the central and state governments have the joint responsibility of providing electricity to rural areas.  The 2003 Act also mandates that the central government should, in consultation with the state governments, provide for a national policy on (i) stand-alone power systems for rural areas (systems that are not connected to the electricity grid), and (ii) electrification and local distribution in rural areas.  Consequently, the Rural Electrification Policy was notified in August 2006.[iii]

The Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), launched in 2005, was the first scheme on rural electrification.  In December 2014, Ministry of Power launched the Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), which subsumed the RGGVY.[iv]  Components of DDUGJY include: (i) separation of agricultural and non-agricultural electricity feeders to improve supply for consumers in rural areas, (ii) improving sub-transmission and distribution infrastructure in rural areas, and (iii) rural electrification by carrying forward targets specified under the RGGVY.

The total financial outlay for DDUGJY over the implementation period (until 2021-22) is Rs 82,300 crore which includes budgetary support of Rs 68,900 crore.  The central government provides 60% of the project cost as grant, the state power distribution companies (discoms) raise 10% of the funds, and 30% is borrowed from financial institutions and banks.

Status of rural electrification

As of August 2017, about 1% of the villages in India remain un-electrified (3,146 villages).  However, with regard to households, around 23% (4.1 crore households) are yet to be electrified.  Table 1 at the end of this post shows the status of rural electrification across all states.

Issues with rural electrification

Definition of an electrified village

An electrified village is defined as one that has the following: (i) provision of basic infrastructure such as distribution transformers and lines in the inhabited locality, (ii) provision of electricity in public places like schools, panchayat office, health centers, dispensaries, and community centers, and (iii) at least 10% of the total number of households in the village are electrified.[iv]

Therefore, a village is considered to be electrified if 10% of the total number of households in the village have been electrified.  This is apart from the basic infrastructure and electrification of certain public centers in the village.  The Standing Committee on Energy (2013) had observed that according to this definition, a village would be called electrified even if up to 90% of households in it do not have an electricity connection.[v]  It also noted that the infrastructure being provided under the scheme is highly inadequate, unreliable and unsustainable.  The Committee recommended that the actual electrification requirement of villages must be assessed, and it should be ensured that the state discoms provide electricity to the remaining households in the village.

Supply of electricity

The Standing Committee had also noted that while the rural electrification scheme looks at creating infrastructure, the actual supply of electricity to households rests with the state discoms.[v]  These discoms are already facing huge financial losses and hence are unable to supply electricity to the villages.  Discoms continue to supply subsidised power to agricultural and residential consumers, resulting in revenue losses.  Further, the average technical and commercial losses (theft and pilferage of electricity) (AT&C losses) are at around 25%.  While the Ujjwal Discom Assurance Yojana (UDAY) has eased off some of the financial losses of the discoms, it remains to be seen whether discoms are able to reduce the cost-tariff gap and AT&C losses in the future.

It has been recommended that generation capacity should be augmented so that states can meet the additional demand under the rural electrification schemes. Further, the assistance to financially weaker states should be increased so that they can better implement the scheme.[v]

Electricity to below poverty line (BPL) households

Under the rural electrification scheme, the cost for providing free electricity connection per BPL household is Rs 3,000.  It has been observed that this cost per household may be inadequate.[v]  Due to the low cost, the quantity and the quality of work has been getting compromised leading to poor implementation of the scheme.  It has been recommended that the Ministry should revisit the cost provided under the scheme.[v]

The new electrification scheme: Pradhan Mantri Sahaj Bijli Har Ghar Yojana (or Saubhagya)

The new scheme, Saubhagya, seeks to ensure universal household electrification, that is, in both rural and urban areas.  Under Saubhagya, beneficiaries will be identified using the Socio Economic and Caste Census (SECC) 2011 data.  The identified poor households will get free electricity connections.  Other households not covered under the SECC, will be provided electricity connections at a cost of Rs 500.  This amount will be collected by the electricity distribution companies in 10 instalments.

The total outlay of the scheme will be Rs 16,320 crore, of which the central government will provide Rs 12,320 crore.  The outlay for the rural households will be Rs 14,025 crore, of which the centre will provide Rs 10,588 crore.  For urban households the outlay will be Rs 2,295 crore of which the centre will provide Rs. 1,733 crore.

The state discoms will execute the electrification works through contractors or other suitable agencies.  Information technology (mobile apps, web portals) will be used to organise camps in villages to identify beneficiaries.  In order to accelerate the process, applications for electricity connections will be completed on the spot.

So far the focus of electrification schemes has been on rural areas, where typically last mile connectivity has been difficult to provide.  Saubhagya extends the ambit of electrification projects to urban areas as well.  While DDUGJY has focused on the village as the principal unit to measure electrification, the new scheme shifts the targets to household electrification.  While the target for ensuring electricity connection in each household will be a significant step towards ensuring 24×7 power, the question of continuous and quality supply to these households will still rest on the ability of the discoms to provide electricity.  Further, while the scheme provides for free connections, the ability of these households to pay for the electricity they consume may be a concern.

Table 1: Status of rural electrification across states (as of August 2017)

Fig 1 edit

* all villages in Telangana were declared electrified before the bifurcation of the state.
Sources:  Ministry of Power; PRS.

 

[i] “PM launches Pradhan Mantri Sahaj Bijli Har Ghar Yojana “Saubhagya””, Press Information Bureau, Ministry of Power, September 25, 2017.

[ii] “FAQs on Pradhan Mantri Sahaj Bijli Har Ghar Yojana “Saubhagya””, Press Information Bureau, Ministry of Power, September 27, 2017.

[iii].  Rural Electrification Policy, Ministry of Power, August 23, 2006, http://powermin.nic.in/sites/default/files/uploads/RE%20Policy_1.pdf.

[iv].  “Office memorandum: Deendayal Upadhyaya Gram Jyoti Yojana”, Ministry of Power, December 3, 2014, http://powermin.nic.in/rural_electrification/pdf/Deendayal_Upadhyaya_Gram_Jyoti_Yojana.pdf.

[v].  “41st Report: Implementation of Rajiv Gandhi Grameen Vidyutikaran Yojana”, Standing Committee on Energy, December 13, 2013, http://164.100.47.134/lsscommittee/Energy/15_Energy_41.pdf.

Safety in Indian Railways

August 24th, 2017 No comments

Safety has been one of the biggest concerns in the Indian Railways system.  While the number of accidents have gone down over the last few years, the number still remains over 100 accidents a year.  In light of the recent train accidents in Uttar Pradesh (UP), we present some details around accidents and safety in the Indian Railways.

Causes of rail accidents

The number of rail accidents has declined from 325 in 2003-04 to 106 in 2015-16.[1]  The number of rail accidents as per the cause are shown in the graph below.  In 2015-16, majority of the accidents were caused due to derailments (60%), followed by accidents at level crossings (33%).1  In the last decade, accidents caused due to both these causes have reduced by about half.  According to news reports, the recent railway accidents in UP were caused due to derailment of coaches.

1

Derailments

Between 2003-04 and 2015-16, derailments were the second highest reason for casualties.2  The Standing Committee on Railways, when examining the safety in railways, had noted that one of the reasons for derailments is defect in the track or coaches.  Of the total track length of 1,14,907 kms in the country, 4,500 kms should be renewed annually.2  However, in 2015-16, of the 5,000 km of track length due for renewal, only 2,700 km was targeted to be renewed.2  The Committee had recommended that Indian Railways should switch completely to the Linke Hoffman Busch (LHB) coaches as they do not pile upon each other during derailments and hence cause lesser casualties.2

Un-manned level crossings

Un-manned level crossings (UMLCs) continue to be the biggest cause of casualties in rail accidents.  Currently there are 14,440 UMLCs in the railway network.  In 2014-15, about 40% of the accidents occurred at UMLCs, and in 2015-16, about 28%.2  Between 2010 and 2013, the Ministry fell short of meeting their annual targets to eliminate UMLCs.  Further, the target of eliminating 1,352 UMLCs was reduced by about 50% to 730 in 2014-15, and 820 in 2015-16.2  Implementation of audio-visual warnings at level crossings has been recommended to warn road users about approaching trains.2  These may include Approaching Train Warning Systems, and Train Actuated Warning Systems.2  The Union Budget 2017-18 proposes to eliminate all unmanned level crossings on broad gauge lines by 2020.

Casualties and compensation

In the last few years, Railways has paid an average compensation of Rs 3.03 crore every year for accidents (see figure below).[2]

2

Note: Compensation paid during a year relates to the cases settled and not to accidents/casualties during that year.

Consequential train accidents

Accidents in railways may or may not have a significant impact on the overall system.  Consequential train accidents are those which have serious repercussions in terms of loss of human life or injury, damage to railway property or interruption to rail traffic.  These include collisions, derailments, fire in trains, and similar accidents that have serious repercussions in terms of casualties and damage to property.  These exclude cases of trespassing at unmanned railway crossings.

As seen in the figure below, the share of failure of railways staff is the biggest cause of consequential rail accidents.  The number of rail accidents due to failure of reasons other than the railway staff (sabotage) has increased in the last few years.

3

Accidents due to failure of railway staff

It has been noted that more than half of the accidents are due to lapses on the part of railway staff.2  Such lapses include carelessness in working, poor maintenance, adoption of short-cuts, and non-observance of laid down safety rules and procedures.  To address these issues, conducting a regular refresher course for each category of railway staff has been recommended.2

Accidents due to loco-pilots2,[3]

Accidents also occur due to signalling errors for which loco-pilots (train-operators) are responsible.  With rail traffic increasing, loco-pilots encounter a signal every few kilometres and have to constantly be on high alert.  Further, currently no technological support is available to the loco-pilots and they have to keep a vigilant watch on the signal and control the train accordingly.2  These Loco-pilots are over-worked as they have to be on duty beyond their stipulated working hours.  This work stress and fatigue puts the life of thousands of commuters at risk and affects the safety of train operations.2  It has been recommended that loco-pilots and other related running staff should be provided with sound working conditions, better medical facilities and other amenities to improve their performance.2

Actions taken by Railways with regard to the recent train accident

According to news reports, the recent accident of Utkal Express in UP resulted in 22 casualties and over 150 injuries.[4]  It has also been reported that following this incident, the Railways Ministry initiated action against certain officials (including a senior divisional engineer), and three senior officers (including a General Manager and a Railway Board Member).

The Committee on Restructuring of Railways had noted that currently each Railway zone (headed by a General Manager) is responsible for operation, management, and development of the railway system under its jurisdiction.[5]  However, the power to make financial decisions does not rest with the zones and hence they do not possess enough autonomy to generate their own revenue, or take independent decisions.5

While the zones prepare their annual budget, the Railway Board provides the annual financial budget outlay for each of them.  As a result of such budgetary control, the GM’s powers have been reduced leaving them with little independence in planning their operations.5

The Committee recommended that the General Managers must be fully empowered to take all necessary decisions independent of the Railway Board.5  Zonal Railways should also have full power for expenditure and re-appropriations and sanctions.  This will make each Zonal Railway accountable for its transport output, profitability and safety under its jurisdiction.

Under-investment in railways leading to accidents

In 2012, a Committee headed by Mr. Anil Kakodkar had estimated that the total financial cost of implementing safety measures over the five-year period (2012-17) was likely be around Rs one lakh crore.  In the Union Budget 2017-18, the creation of a Rashtriya Rail Sanraksha Kosh was proposed for passenger safety.  It will have a corpus of Rs one lakh crore, which will be built over a five-year period (Rs 20,000 crore per year).

The Standing Committee on Railways had noted that slow expansion of rail network has put undue burden on the existing infrastructure leading to severe congestion and safety compromises.2  Since independence, while the rail network has increased by 23%, passenger and freight traffic over this network has increased by 1,344% and 1,642% respectively.2  This suggests that railway lines are severely congested.  Further, under-investment in the sector has resulted in congested routes, inability to add new trains, reduction of train speeds, and more rail accidents.2  Therefore, avoiding such accidents in the future would also require significant investments towards capital and maintenance of rail infrastructure.2

Tags: railways, safety, accidents, finances, derailment, casualty, passengers, train

[1] Railways Year Book 2015-16, Ministry of Railways, http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/IRSP_2015-16/Year_Book_Eng/8.pdf.

[2] “12th Report: Safety and security in Railways”, Standing Committee on Railways, December 14, 2016, http://164.100.47.193/lsscommittee/Railways/16_Railways_12.pdf.

[3] Report of High Level Safety Review Committee, Ministry of Railways, February 17, 2012.

[4] “Utkal Express derailment: Four railway officials suspended as death toll rises to 22”, The Indian Express, August 20, 2017, http://indianexpress.com/article/india/utkal-express-train-derailment-four-railway-officers-suspended-suresh-prabhu-muzaffarnagar-22-dead-4805532/.

[5] Report of the Committee for Mobilization of Resources for Major Railway Projects and Restructuring of Railway Ministry and Railway Board, Ministry of Railways, June 2015, http://www.indianrailways.gov.in/railwayboard/uploads/directorate/HLSRC/FINAL_FILE_Final.pdf.

Financing urban development

June 30th, 2017 No comments

India’s urban population has grown by 32% from 2001 to 2011 as compared to 18% growth in total population of the country.[1]  As per Census 2011, 31% of the country’s population (377 million people) live in cities, and contribute to 63% of the country’s GDP.[2]  The urban population is projected to grow up to 600 million by 2031.2  With increasing urban population, the need for providing better infrastructure and services in cities is increasing.[3]  The government has introduced several schemes to address different urban issues.  These include the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Smart Cities Mission, Heritage City Development and Augmentation Yojana (HRIDAY), Pradhan Mantri Awas Yojana – Housing for All (Urban) (PMAY-U), and Swachh Bharat Mission (Urban).

Last week the Ministry of Urban Development released the next batch of winners under the Smart Cities Mission.[4]  This takes the number of smart cities to 90.  The government has also announced a few policies and released data indicators to help with the implementation of the urban schemes.  In light of all this, we discuss how the new schemes are changing the mandate of urban development, the fiscal challenge of implementing such schemes, and the policies that are trying to address some of these challenges.

Urbanisation in India

The Jawaharlal Nehru National Urban Renewal Mission (JnNURM), launched in 2005, was one of the first urban development schemes implemented by the central government.  Under JnNURM, the central government specified certain mandatory and optional reforms for cities, and provided assistance to the state governments and cities that were linked to the implementation of these reforms.  JnNURM focused on improving urban infrastructure and service delivery, community participation, and accountability of city governments towards citizens.

In comparison, the new urban schemes move beyond the mandate that was set by JnNURM.  While AMRUT captures most of the objectives under JnNURM, the other schemes seek to address issues around sanitation (through Swachh Bharat), affordable housing (through PMAY-U), and technology innovation (through Smart Cities).  Further, the new schemes seek to decentralize the planning process to the city and state level, by giving them more decision making powers.2  So, while earlier, majority of the funding came from the central and state governments, now, a significant share of the funding needs to be raised by the cities themselves.

For example, under the Smart Cities Mission, the total cost of projects proposed by the 60 smart cities (winners from the earlier rounds) is Rs 1.3 lakh crore.[5]  About 42% of this amount will come from central and state funding towards the Mission, and the rest will be raised by the cities.[6]

The new schemes suggest that cities may raise these funds through: (i) their own resources such as collection of user fees, land monetization, property taxes, etc., (ii) finance mechanisms such as municipal bonds, (iii) leveraging borrowings from financial institutions, and (iv) the private sector through Public Private Partnerships (PPPs).[7]

In 2011, an Expert Committee on Indian Urban Infrastructure and Services (HPEC) had projected that creation of the required urban infrastructure would translate into an investment of Rs 97,500 crore to Rs 1,95,000 crore annually.[8]  The current urban schemes are investing around Rs 32,500 crore annually.

Financial capacity of cities

Currently, the different sources of revenue that municipal corporations have access to include: (i) tax revenue (property tax, tax on electricity, toll tax, entertainment tax), (ii) non-tax revenue (user charges, building permission fees, sale and hire charges), (iii) grants-in-aid (from state and central governments), and (iv) debt (loans borrowed from financial institutions and banks, and municipal bonds).

While cities are now required to raise more financing for urban projects, they do not have the required fiscal and technical capacity.8,[9]  The HPEC had observed that cities in India are among the weakest in the world, both in terms of capacity to raise resources and financial autonomy.  Even though cities have been getting higher allocations from the centre and states, their own tax bases are narrow.8  Further, several taxes that cities can levy are still mandated by the state government.  Because of their poor governance and financial situation, cities also find it difficult to access external financing.8,7

In order to help cities improve their finances, the government has introduced a few policies, and released a few indicators.  Some of these are discussed below:

Policy proposals and data indicators

Value Capture Financing (VCF):  The VCF policy framework was introduced by the Ministry of Urban Development in February 2017.[10]  VCF is a principle that states that people benefiting from public investments in infrastructure should pay for it.  Currently when governments invest in roads, airports and industries in an area, private property owners in that area benefit from it.  However, governments recover only a limited value from such investments, constraining their ability to make further public investments elsewhere.  VCF helps in capturing a part of the increment in the value of land due to such investments, and use it to fund new infrastructure projects.

The different instruments of VCF include: land value tax, fee for changing land use, betterment levy, development charges, transfer of development rights, and land pooling systems.10  For example, Karnataka uses certain value capture methods to fund its mass transit projects.  The Mumbai Metropolitan Region Development Authority (MMRDA), and City and Industrial Development Corporation Limited (CIDCO) have used betterment levy (tax levied on land that has gained in value because of public infrastructure investments) to finance infrastructure projects.

Municipal bonds:  Municipal bonds are bonds issued by urban local bodies (municipal corporations or entities owned by municipal bodies) to raise money for financing specific projects such as infrastructure projects.  The Securities and Exchange Board of India regulations (2015) regarding municipal bonds provide that, to issue such bonds, municipalities must: (i) not have negative net worth in any of the three preceding financial years, and (ii) not have defaulted in any loan repayments in the last one year.[11]  Therefore, a city’s performance in the bond market depends on its fiscal performance.  One of the ways to determine a city’s financial health is through credit ratings.

Credit rating of cities:  In September 2016, the Ministry of Urban Development started assigning cities with credit ratings.[12]  These credit ratings were assigned based on assets and liabilities of the cities, revenue streams, resources available for capital investments, accounting practices, and other governance practices.

Of the total 20 ratings ranging from AAA to D, BBB is the ‘Investment Grade’ rating and cities rated below BBB need to undertake necessary interventions to improve their ratings for obtaining positive response to the Municipal Bonds to be issued.  By March 2017, 94 cities were assigned credit ratings, 55 of which got ‘investment grade’ ratings.[13]

Credit ratings indicate what projects might be more lucrative for investments.  This, in turn, helps investors decide where to invest and determine the terms of such investments (based on the expected returns).

Earlier this month, the Pune Municipal Corporation raised Rs 200 crore through the sale of municipal bonds, to finance water supply projects under the Smart Cities Mission.[14]  The city had received an AA+ credit rating (second highest rating) in the recent credit rankings assigned by the central government.

Other than credit ratings, the Ministry of Urban Development has also come up with other data indicators around cities such as the Swachh Bharat rankings, and the City Liveability Index (measuring mobility, access to healthcare and education, employment opportunities, etc).  These rankings seek to foster a sense of competition across cities, and also help them map their performances year on year.

Some financing mechanisms, such as municipal bonds, have been around in India for the last two decades, but cities haven’t been able to make much use of them.  It remains to be seen whether the introduction of indicators such as credit ratings helps the municipal bond market take off.  While these mechanisms may improve the finances of cities, the question is would more funding solve the cities’ problems.  Or would it require municipal government to take a different approach to problem solving.

[1] Census of India, 2011.

[2] Mission Statement and Guidelines, Smart Cities, Ministry of Urban Development, June 2015, http://smartcities.gov.in/writereaddata/SmartCityGuidelines.pdf.

[3] Report on Indian Urban Infrastructure and Services, March, 2011, The High Powered Expert Committee for estimating the investment requirements for urban infrastructure services, http://icrier.org/pdf/FinalReport-hpec.pdf.

[4] “30 more smart cities announced; takes the total to 90 so far”, Press Information Bureau, Ministry of Urban Development, June 23, 2017.

[5]  Smart Cities Mission, Ministry of Urban Development, last accessed on June 30, 2017, http://smartcities.gov.in/content/.

[6] Smart City Plans, Last accessed in June 2017.

[7] “Financing of Smart Cities”, Smart Cities Mission, Ministry of Urban Development, http://smartcities.gov.in/upload/uploadfiles/files/Financing%20of%20Smart%20Cities.pdf.

[8] “Report on Indian Urban Infrastructure and Services”, March, 2011, The High Powered Expert Committee for estimating the investment requirements for urban infrastructure services, http://icrier.org/pdf/FinalReport-hpec.pdf.

[9] Fourteenth Finance Commission, Ministry of Finance, February 2015, http://finmin.nic.in/14fincomm/14fcrengVol1.pdf.

[10] Value Capture Finance Policy Framework, Ministry of Urban Development, February 2017, http://smartcities.gov.in/upload/5901982d9e461VCFPolicyFrameworkFINAL.pdf.

[11] Securities and Exchange Board of India (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015, Securities and Exchange Board of India, July 15, 2015, http://www.sebi.gov.in/sebi_data/attachdocs/1436964571729.pdf.

[12] “Credit rating of cities under urban reforms begins”, Press Information Bureau, Ministry of Urban Development, September 6, 2016.

[13] “Credit Rating of Urban Local Bodies gain Momentum”, Press Information Bureau, Ministry of Urban Development, March 26, 2017.

[14] “Pune civic body raises Rs200 crore via municipal bonds”, LiveMint, June 19, 2017, http://www.livemint.com/Money/JOOzaSTKnC6k1EZGeFh8LJ/Pune-civic-body-raises-Rs200-crore-via-municipal-bonds.html.

The financial health of Air India

May 31st, 2017 No comments

Recently there have been news reports about the NITI Aayog submitting its recommendations on improving the financial health of Air India to the Ministry of Finance.[1],[2]  The Civil Aviation Ministers have also mentioned that the Ministry will soon propose a roadmap for the rejuvenation of the national airline.  While the NITI Aayog report is not out in the public domain yet, we present a few details on the financial health of the airline.

Finances of Air India

In 2015-16, Air India earned a revenue of Rs 20,526 crore and registered losses of Rs 3,837 crore.  As of March 31, 2015, the total debt of Air India was at Rs 51,367 crore.[3]  This includes Rs 22,574 crore outstanding on account of aircraft loans.  The figure below shows the losses incurred by Air India in the last few years (2007-16).

image(1)

According to the Ministry of Civil Aviation, reasons for Air India’s losses include: (i) the adverse impact of exchange rate variation due to the weakening of Indian Rupee, (ii) high interest burden, (iii) increase in competition, especially from low cost carriers, and (iv) high fuel prices.[4]  The National Transport Development Policy Committee (NTDPC), in its report in 2013, had observed that with the increase in the number of airlines in the market, Air India has been struggling to make a transition from a monopoly market to a competitive one.[5]  These struggles have been primarily regarding improving its efficiency, and competing with the private airlines.

Turnaround Plan and Financial Restructuring

In order to bail out the company, the government had approved the Turnaround Plan (TAP) and Financial Restructuring Plan (FRP) of Air India in April 2012.[6]  Under the plans, the government would infuse equity into Air India subject to meeting certain milestones such as Pay Load Factor (measures capacity utilisation), on time performance, fleet utilisation, yield factor (average fare paid per mile, per passenger), and rationalisation of the emolument structure of employees.7  The equity infusion included financial support towards the repayment of the principal, as well as the interest payments on the government loans for aircraft acquisition.  Under the TAP/FRP, the central government was to infuse Rs 30,231 crore till 2020-21.  As of 2016-17, the Ministry has infused an equity amount of Rs 24,745 crore.[7]

In 2017-18, the Ministry has allocated Rs 1,800 crore towards Air India which is 67% of the Ministry’s total budget for the year.[8]  However, this amount is 30% lower than the TAP commitment of Rs 2,587 crore.3  In 2016-17, while Air India had sought and equity infusion of Rs 3,901 crore, the government approved Rs 2,465 crore as the equity infusion.[9]  The Standing Committee on Transport, Tourism, and Culture examining the 2017-18 budget estimates noted that reducing the equity infusion in Air India might adversely affect the financial situation of the company.[10]  It recommended that the government must allocate the amount committed under TAP.  The Ministry had also observed that due to reduction of equity infusion, Air India has to arrange funds through borrowing which costs additional amount of interest to be paid by the government.[11]

As per the Ministry, Air India has achieved most of the targets set out in TAP.[12]  Despite running into losses, it achieved an operating profit of Rs 105 crore in FY 2015-16.[13]  Air India’s performance in some of the segments are provided in the table below.

Table 1: Air India’s performance

2011-12 2014-15
Overall Network On Time Performance (measures adherence to time schedule) 68.2% 72.7%
Passenger Load Factor (measures capacity utilisation of the airline) 67.9% 73.7%
Network Yield achieved (in Rs/ RPKM)* 3.74 4.35
Number of Revenue Passengers (in million) 13.4 16.9
Operating Loss (in Rs crore) 5,139 2,171

* Note: RPKM or Revenue Passenger Kilometre performed refers to number of seats for which the carrier has earned revenue.

Sources: Lok Sabha Questions; PRS.

The NTDPC had observed that with its excessive and unproductive manpower, failure to invest in the technology required to keep it competitive, and poor operations, Air India’s future looks risky.  It had also questioned the rationale for a national airline.  It had suggested that the government must frame a decisive policy with regard to Air India, and clarify its future accordingly.5  It had recommended that Air India’s liabilities should be written off and be dealt with separately, and the airline should be run on complete operational and financial autonomy.5

Need for competitive framework in the sector

With the entrance of several private players in the market, the domestic aviation market has grown significantly in the last decade.  The market share of an airline is directly related to its capacity share in the market.  While private carriers have added capacity in the domestic market, the capacity induction (adding more aircrafts) of Air India has not kept up with the private carriers.  This has resulted in decrease in market share of Air India from 17% in 2008-09 to 14% in 2016-17.[14]

The Committee looking at the competitive framework of the civil aviation sector had observed that the national carrier gets preferential treatment through access to government funding, and flying rights.[15]  It had recommended that competitive neutrality should be ensured between private carriers and the national carrier, which could be achieved by removing the regulations that provide such preferential treatment to Air India.  The NTDPC had also noted that the presence of a state-owned enterprise should not distort the market for other private players.6  It had recommended that the Ministry should consider developing regulations that improve the overall financial health of the airline sector.

While Air India’s performance has improved following the TAP, along with the equity infusion from government, its debt still remains high and has been gradually increasing.  In light of this, it remains to be seen what the government will propose with regard to the rejuvenation of the national airline, and ensure a competitive and fair market for all the players in the airline market.

[1] “Govt to prepare Air India revival plan within 3 months, amid calls for privatization”, Livemint, May 31, 2017, http://www.livemint.com/Politics/0koi5Hyidj1gVD3wOWTruM/Govt-says-all-options-open-for-Air-India-revival.html.

[2] “Air India selloff: Fixing airline’s future is more important than past”, Financial Express, May 31, 2017, http://www.financialexpress.com/opinion/why-fixing-air-indias-future-more-important-than-past/693777/.

[3] Lok Sabha Questions, Unstarred question no 382, Ministry of Civil Aviation, February 25, 2016, http://164.100.47.194/Loksabha/Questions/QResult15.aspx?qref=28931&lsno=16.

[4] Lok Sabha Questions, Unstarred question no 353, Ministry of Civil Aviation, November 17, 2016, http://164.100.47.194/Loksabha/Questions/QResult15.aspx?qref=40733&lsno=16.

[5] “Volume 3, Chapter 3: Civil Aviation”, India Transport Report: Moving India to 2032, National Transport Development Policy Committee, June 17, 2014, http://planningcommission.nic.in/sectors/NTDPC/volume3_p1/civil_v3_p1.pdf.

[6] “Government Approves Financial Restructuring and Turn Around Plan of Air India”, Press Information Bureau, Cabinet Committee on Economic Affairs (CCEA), April 12, 2012, http://pib.nic.in/newsite/PrintRelease.aspx?relid=82231.

[7] Lok Sabha Questions, Unstarred question no 472, Ministry of Civil Aviation, April 6, 2017, http://164.100.47.194/Loksabha/Questions/QResult15.aspx?qref=51752&lsno=16.

[8] Notes on Demands for Grants 2017-18, Demand no 9, Ministry of Civil Aviation, http://indiabudget.nic.in/ub2017-18/eb/sbe9.pdf.

[9] Lok Sabha Questions, Unstarred question no 4809, Ministry of Civil Aviation, March 30, 2017, http://164.100.47.194/Loksabha/Questions/QResult15.aspx?qref=51108&lsno=16.

[10] “244th report: Demand for Grants (2017-18) of Ministry of Civil Aviation”, Standing Committee on Transport, Tourism and Culture, March 17, 2017, http://164.100.47.5/newcommittee/reports/EnglishCommittees/Committee%20on%20Transport,%20Tourism%20and%20Culture/244.pdf.

[11] “218th report: Demand for Grants (2015-16) of Ministry of Civil Aviation”, Standing Committee on Transport, Tourism and Culture, April 28, 2015.

[12] Lok Sabha Questions, Unstarred question no 307, Ministry of Civil Aviation, February 25, 2016, http://164.100.47.190/loksabhaquestions/annex/7/AU307.pdf.

[13] Lok Sabha Questions, Unstarred question no 1566, Ministry of Civil Aviation, March 9, 2017, http://www.loksabha.nic.in/Members/QResult16.aspx?qref=47532.

[14] Lok Sabha Questions, Unstarred question no 312, Ministry of Civil Aviation, March 23, 2017, http://164.100.47.194/Loksabha/Questions/QResult15.aspx?qref=49742&lsno=16.

[15] Report of the Committee Constituted for examination of the recommendations made in the Study Report on Competitive Framework of Civil Aviation Sector in India, Ministry of Civil Aviation, June 2012, http://civilaviation.gov.in/sites/default/files/moca_001870_0.pdf.

Financial health of the Indian Railways

September 21st, 2016 No comments

Earlier today, the Union Cabinet announced the merger of the Railways Budget with the Union Budget.  All proposals under the Railways Budget will now be a part of the Union Budget.  However, to ensure detailed scrutiny, the Ministry’s expenditure will be discussed in Parliament.  Further, Railways will continue to maintain its autonomy and financial decision making powers.  In light of this, this post discusses some of the ways in which Railways is financed, and issues it faces with regard to financing.

Separation of Railways Budget and its financial implications

The Railways Budget was separated from the Union Budget in 1924.  While the Union Budget looks at the overall revenue and expenditure of the central government, the Railways Budget looks at the revenue and expenditure of the Ministry of Railways.  At that time, the proportion of Railways Budget was much higher as compared to the Union Budget.  The separation of the Budgets was done to ensure that the central government receives an assured contribution from the Railways revenues.  However, in the last few years, Railways’ finances have deteriorated and it has been struggling to generate enough surplus to invest in improving its infrastructure.

Indian Railways is primarily financed through budgetary support from the central government, its own internal resources (freight and passenger revenue, leasing of railway land, etc.), and external resources (market borrowings, public private partnerships, joint ventures, or market financing).

Every year, all ministries, except Railways, get support from the central government based on their estimated revenue and expenditure for the year.  The Railways Ministry is provided with a gross budgetary support from the central government in order to expand its network.  However, unlike other Ministries, Railways pays a return on this investment every year, known as dividend.  The rate of this dividend is currently at around 5%, and also includes the interest on government budgetary support received in the previous years.

Various Committees have observed that the system of receiving support from the government and then paying back dividend is counter-productive.  It was recommended that the practice of paying dividend can be avoided until the financial health of Railways improves.  In the announcement made today, the requirement to pay dividend to the central government has been removed.  This would save the Ministry from the liability of paying around Rs 9,700 crore as dividend to the central government every year.  However, Railways will continue to get gross budgetary support from the central government.

Declining internal revenue

In addition to its core business of providing transportation, Railways also has several social obligations such as: (i) providing certain passenger and coaching services at below cost fares, (ii) running uneconomic branch lines (connectivity to remote areas), and (iii) granting concessions to various categories of people (like senior citizens, children, etc.).  All these add up to about Rs 30,000 crore.  Other inelastic expenses of Railways include pension charges, fuel expenses, lease payments, etc.  Such expenses do not leave any financial room for the Railways to make any infrastructure investments.

Railways1

In the last few years, Railways has been struggling due to a decline in its revenue from passenger and freight traffic.  In addition, the support from the central government has broadly remained constant.

In 2015-16, the gross budgetary support and internal revenue saw a decline, while there was some increase in the extra budgetary resources (shown in Figure 1).

 

Railways’ internal revenue primarily comes from freight traffic (about 65%), followed by passenger traffic (about 25%).  About one-third of the passenger revenue comes from first class passenger traffic and the remaining two-third comes from second class passenger traffic.  In 2015-16, Railways passenger traffic decreased by 4% and total passenger revenue decreased by 10% from the budget estimates.  While revenue from second class saw a decrease of 13%, revenue from first class traffic decreased by 3%.  In the last few years, Railways’ internal sources have been declining, primarily due to a decline in both passenger as well as freight traffic.

Freight traffic
Railways2The share of Railways in total freight traffic has declined from 89% to 30% over the last 60 years, with most of the share moving towards roads (see Figure 2).  With regard to freight traffic, Railways generates most of its revenue from the transportation of coal (about 44%), followed by cement (8%), iron ore (7%), and food-grains (7%).  In 2015-16, freight traffic decreased by 10%, and freight earnings reduced by 5% from the budget estimates.

The Railways Budget for 2016-17 estimates an increase of 12% in passenger revenue and a 0.26% increase in passenger traffic.  Achieving a 12% increase in revenue without a corresponding increase in traffic will require an increase in fares.

Flexi fares and passenger traffic

A few days ago, the Ministry of Railways introduced a flexi-fare system for certain categories of trains.  Under this system, the base fare for Rajdhani, Duronto and Shatabdi trains will increase by 10% with every 10% of berths sold, subject to a ceiling of up to 1.5 times the base fare.  While this could also be a way for Railways to improve its revenue, it has raised concerns about train fares becoming more expensive.  Note that the flexi-fare system will apply only to first class passenger traffic, which contributes to about 8% of the total Railways revenue.  It remains to be seen if the new system increases Railways revenue, or further decreases passenger traffic (people choosing other modes of travel, such as airways, if fares increase significantly).

While the Railways is trying to improve revenue by raising fares, this may increase the financial burden on passengers.  In the past, various Parliamentary Committees have observed that the investment planning in Railways from the government’s side is politically driven rather than need driven.  This has resulted in the extension of uneconomic, un-remunerative, yet socially desirable projects in every budget.  It has been recommended that projects based on social and commercial considerations must be categorised separately in the Railways accounts, and funding for the former must come from the central or state governments.  It has also been recommended that Railways should bring in more accuracy in determining its public service obligations.

The decision to merge the Railways Budget with the Union Budget seems to be on the lines of several of these recommendations.  However, it remains to be seen whether merging the Railway Budget with the Union Budget will  improve the transporter’s finances or if it would require bringing in more reforms.

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Coal Block Allocations and the 2015 Bill

March 7th, 2015 5 comments

Earlier this week, Lok Sabha passed the Bill that provides for the allocation of coal mines that were cancelled by the Supreme Court last year.  In light of this development, this post looks at the issues surrounding coal block allocations and what the 2015 Bill seeks to achieve.

In September 2014, the Supreme Court cancelled the allocations of 204 coal blocks.  Following the Supreme Court judgement, in October 2014, the government promulgated the Coal Mines (Special Provisions) Ordinance, 2014 for the allocation of the cancelled coal mines.  The Ordinance, which was replaced by the Coal Mines (Special Provisions) Bill, 2014, could not be passed by Parliament in the last winter session, and lapsed. The government then promulgated the Coal Mines (Special Provisions) Second Ordinance, 2014 on December 26, 2014.  The Coal Mines (Special Provisions) Bill, 2015 replaces the second Ordinance and was passed by Lok Sabha on March 4, 2015.

Why is coal considered relevant?

Coal mining in India has primarily been driven by the need for energy domestically.  About 55% of the current commercial energy use is met by coal.  The power sector is the major consumer of coal, using about 80% of domestically produced coal.

As of April 1, 2014, India is estimated to have a cumulative total of 301.56 billion tonnes of coal reserves up to a depth of 1200 meters.  Coal deposits are mainly located in Jharkhand, Odisha, Chhattisgarh, West Bengal, Madhya Pradesh, Andhra Pradesh and Maharashtra.

How is coal regulated?

The Ministry of Coal has the overall responsibility of managing coal reserves in the country.  Coal India Limited, established in 1975, is a public sector undertaking, which looks at the production and marketing of coal in India.  Currently, the sector is regulated by the ministry’s Coal Controller’s Organization.

The Coal Mines (Nationalisation) Act, 1973 (CMN Act) is the primary legislation determining the eligibility for coal mining in India.  The CMN Act allows private Indian companies to mine coal only for captive use.  Captive mining is the coal mined for a specific end-use by the mine owner, but not for open sale in the market.  End-uses currently allowed under the CMN Act include iron and steel production, generation of power, cement production and coal washing.  The central government may notify additional end-uses.

How were coal blocks allocated so far?

Till 1993, there were no specific criteria for the allocation of captive coal blocks.  Captive mining for coal was allowed in 1993 by amendments to the CMN Act.  In 1993, a Screening Committee was set up by the Ministry of Coal to provide recommendations on allocations for captive coal mines.  All allocations to private companies were made through the Screening Committee.  For government companies, allocations for captive mining were made directly by the ministry.  Certain coal blocks were allocated by the Ministry of Power for Ultra Mega Power Projects (UMPP) through tariff based competitive bidding (bidding for coal based on the tariff at which power is sold).  Between 1993 and 2011, 218 coal blocks were allocated to both public and private companies under the CMN Act.

What did the 2014 Supreme Court judgement do?

In August 2012, the Comptroller and Auditor General of India released a report on the coal block allocations. CAG recommended that the allocation process should be made more transparent and objective, and done through competitive bidding.

Following this report, in September 2012, a Public Interest Litigation matter was filed in the Supreme Court against the coal block allocations.  The petition sought to cancel the allotment of the coal blocks in public interest on grounds that it was arbitrary, illegal and unconstitutional.

In September 2014, the Supreme Court declared all allocations of coal blocks, made through the Screening Committee and through Government Dispensation route since 1993, as illegal.  It cancelled the allocation of 204 out of 218 coal blocks.  The allocations were deemed illegal on the grounds that: (i) the allocation procedure followed by the Screening Committee was arbitrary, and (ii) no objective criterion was used to determine the selection of companies.  Further, the allocation procedure was held to be impermissible under the CMN Act.

Among the 218 coal blocks, 40 were under production and six were ready to start production.  Of the 40 blocks under production, 37 were cancelled and of the six ready to produce blocks, five were cancelled.  However, the allocation to Ultra Mega Power Projects, which was done via competitive bidding for lowest tariffs, was not declared illegal.

What does the 2015 Bill seek to do?

Following the cancellation of the coal blocks, concerns were raised about further shortage in the supply of coal, resulting in more power supply disruptions.  The 2015 Bill primarily seeks to allocate the coal mines that were declared illegal by the Supreme Court.  It provides details for the auction process, compensation for the prior allottees, the process for transfer of mines and details of authorities that would conduct the auction.  In December 2014, the ministry notified the Coal Mines (Special Provisions) Rules, 2014.  The Rules provide further guidelines in relation to the eligibility and compensation for prior allottees.

How is the allocation of coal blocks to be carried out through the 2015 Bill?

The Bill creates three categories of mines, Schedule I, II and III.  Schedule I consists of all the 204 mines that were cancelled by the Supreme Court.  Of these mines, Schedule II consists of all the 42 mines that are under production and Schedule III consists of 32 mines that have a specified end-use such as power, iron and steel, cement and coal washing.

Schedule I mines can be allocated by way of either public auction or allocation.  For the public auction route any government, private or joint venture company can bid for the coal blocks.  They can use the coal mined from these blocks for their own consumption, sale or for any other purpose as specified in their mining lease.  The government may also choose to allot Schedule I mines to any government company or any company that was awarded a power plant project through competitive bidding.  In such a case, a government company can use the coal mined for own consumption or sale.  However, the Bill does not provide clarity on the purpose for which private companies can use the coal.

Schedule II and III mines are to be allocated by way of public auction, and the auctions have to be completed by March 31, 2015.  Any government company, private company or a joint venture with a specified end-use is eligible to bid for these mines.

In addition, the Bill also provides details on authorities that would conduct the auction and allotment and the compensation for prior allottees.  Prior allottees are not eligible to participate in the auction process if: (i) they have not paid the additional levy imposed by the Supreme Court; or (ii) if they are convicted of an offence related to coal block allocation and sentenced to imprisonment of more than three years.

What are some of the issues to consider in the 2015 Bill?

One of the major policy shifts the 2015 Bill seeks to achieve is to enable private companies to mine coal in the future, in order to improve the supply of coal in the market.  Currently, the coal sector is regulated by the Coal Controller’s Organization, which is under the Ministry of Coal.  The Bill does not establish an independent regulator to ensure a level playing field for both private and government companies bidding for auction of mines to conduct coal mining operations.   In the past, when other sectors have opened up to the private sector, an independent regulatory body has been established beforehand.  For example, the Telecom Regulatory Authority of India, an independent regulatory body, was established when the telecom sector was opened up for private service providers.  The Bill also does not specify any guidelines on the monitoring of mining activities by the new allottees.

While the Bill provides broad details of the process of auction and allotment, the actual results with regards to money coming in to the states, will depend more on specific details, such as the tender documents and floor price.  It is also to be seen whether the new allotment process ensures equitable distribution of coal blocks among the companies and creates a fair, level-playing field for them.  In the past, the functioning of coal mines has been delayed due to delays in land acquisition and environmental clearances.  This Bill does not address these issues.  The auctioning of coal blocks resulting in improving the supply of coal, and in turn addressing the problem of power shortage in the country, will also depend on the efficient functioning of the mines,  in addition to factors such as transparent allocations.

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