Sources Of Finance
By M.Nageswara Rao, SSO(A)/Ctara
·
Sources of Finance
|
Numerical Code
(First 2 digits in Classification)
|
Source of Finance
|
Remarks
|
|
20
|
Capital
|
|
|
21
|
DRF –
Depreciation Reserve Fund
|
|
|
23, 33,
43 & 53
|
DF I, II,
III & IV respectively
|
|
|
25
|
Capital
Fund
|
|
|
26
|
RSF –
Railway Safety Fund
|
|
|
27
|
SRSF –
Special Railway Safety Fund
|
Not in
operation. It was ceased in the 2008
year.
|
|
28
|
Capital –
Nirbhaya Fund
|
|
|
29
|
RRSK -
Rashtriya Rail Sanrakshak Kosh
|
|
|
84
|
EBR – IF
(Extra Budgetary Resources – Institutional Finance)
|
|
The following Sources of Finance are ceased
|
Numerical Code
|
Description
|
Remarks
|
|
22
|
OLWR – Open Line Works – Revenue
|
Railways proposed to closure of
this source. However formal approval from CGA and CAG is not received.
|
|
24
|
ACSPF – Accident Compensation,
Safety & Passenger Amenities Fund
|
Accident compensation is
transferred to erstwhile Demand No.12 & SMH 10 – Miscellaneous Working
Expenses. Safety is chargeable to DF –
IV. Passenger amenities chargeable to
DF - I
|
RRSK –
Rashtriya Rail Sanraksha Kosh
·
Dedicated fund for Railway Safety.
·
Established in the year 2017-18 (announced in
Budget speech of 2017-18)
·
Based on the recommendations of High Level
Safety Review Committee, 2012 headed by Shri Anil Kakodkar, former chairman of
Atomic Energy Commission.
·
Period – Five years
·
Fund proposed – Rs.1,00,000 Crores
(i.e., Rs.20,000 Crores for every year)
·
Rs.20,000Crores for this year i.e., 2017-18
is proposed to be funded as follows.
|
Central Road Fund
|
Rs.10,000 Crores
|
So far, the amount goes to
SRF.
|
|
Ministry of Finance
|
Rs.5,000 Crores
|
Promised
|
|
Railway Internal Resources
|
Rs.1,000 Crores
|
(from Budget document 2017-18)
|
|
By collecting Cess on
fares ( proposed)
|
Rs.4,000 Crores
|
|
|
Total
|
Rs.20,000 Crores
|
For FY 2017-18
|
·
Objects: 1 ) Strengthen the safety measures
on the Rail Network to prevent accidents in order to accomplish the “ZERO ACCIDENT MISSION”
·
Unique feature of this Fund is Non-lapsable . That means the grant allotted for this Fund
is not lapsed with the completion of financial year.
·
Works falling under this Fund category: -
1.
Track renewals &upgradation
2.
Bridge rehabilitation
3.
Elimination of LC gates on BG routes by
2022
4. Construction of ROBs/RUBs
5.
Replacement & Improvement of Signaling
system.
6.
Improvement & up gradation of Rolling
Stock.
7.
Replacement of Electrical assets
8.
HRD – Human Resources Development.
·
Likely
probability:
SRF – Special
Railway Safety Fund may be merged with the above Fund. This conclusion arrived based on the two
factors. 1) CRF – Central Road Fund – so
far it is a source of finance for existing RSF – Railway Safety Fund. Now it is going to be credited to new Fund
that is NRSF or RRSK. 2 ) LC Gates (Plan
Head 2900) and ROBs/RUBs (Plan Head 3000) so far met from the existing fund
RSF. Now these two objects are included
in the proposed new Fund NRSF or RRSK.
Don’t come to any conclusion. Let’s wait and see for further guidelines
from Railway Board.
!@#$%%$#@!
Debt Service Fund
v Created a new fund in
the year 2013-14 year.
v Object: To meet the liabilities for debt servicing
of Japan International Cooperation Agency and the World Bank loans taken for
the Dedicated Freight Corridor project and obligations of future Pay
Commissions/Awards.
v Credits to the Fund: A) From the
net surplus (Railways' excess of receipts over expenditure) of the Indian
Railways after appropriating the amounts to Development Fund and Capital Fund.
B) Interest on closing balance of the Fund.
v Debits to the Fund: A) to meet committed liabilities of debt
servicing for World Bank and JICA- Japan International Cooperation Agency loans
for DFC B) Other future liabilities arise due to implementation of future Pay
Commissions/Awards etc.
v
v Importance:
A) Railways finances were burdened so much in the years
2008-09 and 2009-10 years due to implementation of 6th Pay Commission
recommendations retrospectively from the year 01.01.2006 onwards. Also JICA and
World Bank financing on very big scale the ambitious project of DFC - Dedicated
Freight Corridor which is expecting the cost of Rs. 95,836 Crores.
B) Western DFC (1,499 km) is
being funded by loan from Japan International Cooperation Agency (JICA) to the
extent of 77% of the project cost. Out of 1,839 km of Eastern DFC, 1,183 km of
Ludhiana-Khurja-Dadri-Kanpur-Mughalsarai section is being funded through loan
from World Bank to the extent of 66% of the project cost.
C) Unless contributing annually from the
surpluses, the repayment of loans to the JICA and World Bank and meeting the
7th Pay commission obligations will be a major burden on the Railway
Finances. In order to prevent the huge
burden on Railway finances, this Fund is created and planned to allocate the
contributions from the excess of Receipts over Expenditure from 2013-14 year
onwards.
v During
the year 2016-17 , Rs.3000 Crores from the Fund balances were utilised to meet
7th Pay commission arrears. To accountal
this, separate Classification/Allocation was enabled under all Demands (i.e.,
Demand No.4 to 13) - Sub Head 990 under Credits & Recoveries- Amount met from
Railway Debt Service Fund Link is ACS 128 to Finance
Code II
v Upto 2015-16, around Rs.5000crs (including interest
earned on the fund) was earmarked in DSF.
v
Out
of this, SCR was allotted Rs.211.38 crs in 2016-17 and another Rs.56.54crs was
allotted in 2017-18. Thus, Rs.267.92crs of SCR’s pay commission expenditure was
offset from DSF. THIS FUND IS ALMOST EMPTY.
*&*&*&
EBR (IF) – Extra Budgetary Resources
(Institutional Financing)
Ø New
source of finance for funding CAPEX-Capital Expenditure in Indian Railways in
addition to the existing sources of finance.
Ø Existing/traditional
sources of finance in Indian Railways are 1) Loan Capital 2) Depreciation
Reserve Fund 3) Development Fund 4) Railway Safety Fund 5) Capital Fund 6) EBR
– Extra Budgetary Resources like IRFC, RVNL, PPP.
A. Railways
expansion (Works Budget) has suffered very much due to shortage of resources
either by insufficient support from Ministry of Finance (General Revenues) in
the form of Loan Capital or unable to generate internal resources due to not
increasing passenger fares to match cost recovery.
B. Large
shelf of projects could not be completed due to insufficient funds.
C. Result
is “time over runs” and “cost over runs”. Also non realization of
revenue/income for the period of delay.
D. To
overcome the shortage of funds for works programme, Railway Ministry decided to
borrow funds from INSTITUTIONS, so as to ensure the completion of crucial
railway projects for generation of revenue.
Ø Utilised
for only priority works such as New Lines, Gauge Conversion, Doubling, Traffic
Facilities, Railway Electrification, S&T etc. - Object is to
enhancing throughput on the congested corridors.
Ø One more
condition for employing these funds are " Should be utilised in such a
manner either completion of projects in the same year or first quarter of the
following year".
Ø As of
now, LIC funding is the main source of EBR(IF). In this regard an MOU
between IR and LIC was signed on 11.3.2015. LIC has agreed to fund
1.5 lakh crores over next five years. This is just beginning of new era
of funding Railway CAPEX.
Ø In
future, several institutions including foreign pension funds may funding the
Railway projects through this mechanism.
Ø Mechanism
of LIC funding Railway projects is a interesting one. IRFC issued to BONDS to
the LIC.
A. The
funds which recd through BONDS , will be provided to the Indian Railways for
completion of crucial projects by IRFC.
B. IR
develops/constructs the projects (behalf of IRFC) by entering "DEVELOPMENT
AGENCY AGREEMENT" with IRFC.
C. The
required land for development or construction of such projects is licensed to
the IRFC by IR duly entering "LICENSING AGREEMENT".
D. IRFC
will own the project on pro rata basis (to the extent of funding by IRFC)
E. Such
owned assets will be leased to the IR by IRFC duly entering the "LEASE
AGREEMENT"
F. Based
on Lease Agreement, IR will pay the Lease charges to the IRFC during the lease
period. Usually Lease charges contain i) Capital component chargeable to
New Allocation 2231(projects) & 2232(Rolling stock) under Minor Head 2200
i.e., Plan Head 2200 under Demand No.16 and ii) Interest component chargeable
to Demand No.09 - Operating Expenses - Traffic ( 09-791 (Projects) & 09-792
(Rolling stock)
G. IRFC
will use these lease charges for redemption of bonds (issued to LIC) and
arrange payments to the LIC.
H. Thus
the account has come to an end.
Ø The
flow chart is enables to explain this mechanism clearly.
Ø LIC
(subscribed the bonds issued by IRFC) -------> IRFC (provided loan
amount to IR on pre-lease disbursement)--------------> Indian Railways (will
execute the projects) --------> IRFC (will lease the
developed projects to the Indian Railways to the extent it is funded.) ---------->Indian
Railways (will pay the Lease charges to the IRFC)-----------> IRFC (On
maturity of bonds, IRFC use these lease charges paid by IR for payment to
LIC) -------------------->LIC ( Get back their amount by redemption of
Bonds to the IRFC)
Example:
·
ü Construction
of New line of 100 Kms between Stations A and B. LIC funds (through IRFC)
were utilised to the extent of 25 Kms (out of 100 Kms).
·
ü IRFC will
own the project assets i.e., 25 Kms (on pro rata basis) and the lease the same
25 Kms to the Indian Railways on LEASE basis.
COMPARISON OF IRFC FUNDING ROLLING STOCK AND
PRESENT FUNDING BY LIC
· More
or less, EBR (IF) is similar to funding of Rolling stock so far by IRFC by
issuing bonds to the public/institutions since 1986.
· In
both cases, IRFC is leasing assets to the IR and in lieu of Lease charges.
· However
the good sign is coming forward of Institutions such as LIC for helping CAPEX
of Railways.
· But
Railway has to bear the interest rate around 8 to 10 % in case of EBR(IF) instead
of traditional funding by Loan Capital at the rate of 4 % dividend (
effectively it was 2.5 % only considering the subsidies/reliefs)
SOME MORE FACTS ABOUT EBR(IF)
v
·
IRFC will
raise funds from LIC against BONDS periodically based on IRs requirements.
·
Deposit
-IF account is maintained by PAO/RB/Northern Railway (similar to the IRFC
Deposit a/c for rolling stock funding).
·
PAO/RB
will transfer the funds to the Zonal Railways on requirement basis.
·
EBR-IF
funds drawn for a project will be NON-LAPSABLE and any amount unspent for
unavoidable reasons shall be carry forward as Opening Balance for Next year.
·
EBR-IF
funded projects would be treated like 'DEPOSIT WORKS" for accounting of
fund flows. However no departmental charges i.e., 12.5 %
shall be applicable for works funded from EBR(IF). (Because departmental
charges are levied for Deposit works, but the works which are proposed were
purely Railway ones)
·
Repayment
of Loan through Lease charges by IR to IRFC is as follows. Period of payment is
30 years.
|
1-5 years
|
6-10years
|
11-30 years
|
|
Interest component
|
Interest component
|
Capital component
|
|
Though Interest, but it is capitalised and
charged to Demand NO.16 (PH 2200)
|
Charged to Demand No.09-790
|
Charged to Demand No.16(PH 2200)
|
RSF-Railway Safety Fund
Ø
Objects:
1. Conversion of Unmanned LC gates into manned LC gates 2. Conversion of
busy manned LC Gates into Grade Separator i.e., ROB/RUB/ROB/LHS
Since
inception of Railways, there has been policy to provide unmanned level
crossings where Train Vehicle Units (TVU) are low and manned if expected TVU is
on higher side.
·
Road Over Bridge can be build
over level crossings with Train Vehicle Unit (TVU) more than one lakh provided
state government or local body is agreed to share 50 percent cost of the project.
s on
01.04.2013, Indian Railways have 31,254 level crossings out of which,18,672
(60%) are manned and balance 12,582 (40%) are unmanned. These unmanned
level crossings account for maximum number of consequential train accidents.
Ø
RSF created w.e.f., 01.04.2001.
created
based on the recommendations of RCC - Railway Convention Committee, 1999.
It is
Non-Interest bearing Fund.
SOURCES:
1. Surplus after meeting the dividend liability
in Railway Revenues. 2. Transfer of funds from CRF - Central Road Fund
(12.5 % of CRF - to Railways) by the Central Government. 3. The present
contribution 20 % out of the Dividends payable to RSWF - Railway Safety Works
fund (operated in the books of Ministry of Finance)
New
Plan Head 2900 - for conversion of unmanned level crossings into manned level
crossings.
New Plan
head 3000 - construction of ROB/RUBs in place of manned level crossings.
&&&&
IRFC - Indian Railways
Finance Corporation
Established
in the year 1986 as a Public Limited Company under the Companies Act, 1956.
o
IRFC borrowing arm of
Indian Railways
o
Leases assets to MOR • Borrowing targets
provided in the Budget
o
Charges a margin of 0.5% over the average
borrowing rate in a year
A
Govt. of India enterprise and a dedicated financing arm of the Ministry of
Railways. The Chairman of IRFC is FC-Financial Commissioner of Railways.
IRFC's
share capital has been wholly provided by Govt. of India. Under the new
companies Act, 2013, IRFC is a "Government Company" (being more than
51 % of share capital contributed by Govt.)
The
one and only major client is Indian Railways.
The
entire organization is managed by a lean team of just 19 personnel. The
Overhead to Turnover ratio is 0.12 %, which is perhaps the lowest for any
company the world over.
IRFC
raises market borrowings which constitute the Extra Budgetary Resource for
Railway Plan Investment.
Need
for set up of IRFC -
a) The
Budgetary support from Ministry of Finance is dwindling and insufficient
internal resources to meet the rising needs of Traffic. To cope up the
increasing traffic needs, Indian Railways has no other option, but to depend on
mobilizing resources from Public.
b) No Ministry , (except
Ministry of Finance) has right to mobilize the funds by issue of bonds to
the Public. So Indian Railways has floated a company i.e., IRFC for
raising resources from Public through issue of Bonds.
Business
of IRFC is :-
1. To
mobilize resources through market borrowings from Domestic as well as Overseas
Capital Markets at most competitive rates.
2. Funding
for acquisition of Rolling Stock Assets and leased to Railways.
3. IRFC
also gives loans (Rs.3,046 Crores) to RVNL-Rail Vikas Nigam Ltd &Railtel
Corporation of India ltd towards viable and bankable projects being executed by
them.
IRFC
- Lease terms: -
A. The lease
period is 30 years.
B. IRFC leases the assets from the month of
acquisition to IR based on a standard leasing agreement. Cost of borrowing in 2013-14 to Railways is around
8.4%. (Where as Cost to IRFC
is 7.9 % with a margin of 0.50 %)
C. Indian Railways pays lease
rentals to the IRFC every half year.
D. After 30 years, Rolling
stock assets may be sold to the Indian Railways for a nominal price.
Role
of IRFC in Indian Railways infrastructure:
I. IRFC
has funded acquisition of Rolling Stock Assets approximately valued at Rs.1.15
Lakh Crores as on 31.03.2014.
II. Share
of IRFC in Indian Railways Plan outlay is 24 % ( during the period from 1996-97
to 2014-15).
III. Two
thirds ( 68 % ) of revenue earning rolling stock assets operating on the
Indian Railways network is funded by IRFC.
IV. Rs.
17,276 Crores (out of Rs.1,00,011 Crores) - Target for IRFC funding in
the 2015-16 Annual programme of Demand No.16.
V. Brief
particulars furnished in the following table shows the significant part of IRFC
in the Railways Infrastructure.
Share of IRFC in Total Rolling Stock of Indian
Railways as on 31.03.2014
|
Rolling Stock
|
Total Holdings of Railways
|
Leased by IRFC
|
% of IRFC share
|
|
Locomotives
|
11802
|
7289
|
62 %
|
|
Coaches
|
54432
|
41432
|
76 %
|
|
Wagons
(freight cars)
|
278612
|
185362
|
67%
|
|
Total units
|
344846
|
234083
|
68 %
|
IRFC's
Leasing Charges - Accounting policy
1) Before
2005 year, entire Leasing charges (both Principal & Interest) paid to IRFC
has been charged to Revenue i.e., Demand No.09 - Abstract G - Operating
Expenses - Traffic.
2) However,
In the year 2005, Indian Railways, changed its accounting policy for the Lease
charges paid to IRFC.
3) From 2005 year
onwards , Leasing charges paid to IRFC has bifurcated as follows.
|
Principal component
|
New Plan Head -2200 - Leased Assets (
Demand No.16)
|
|
Interest
component
|
Demand No.09 - Abstract G - Operating
Expenses - Traffic
(OWE - Ordinary Working Expenses) |
4) This has resulted in
the reduction of OWE - Ordinary Working Expenses of
Indian Railways and improved the Operating Ratio.
&&&&&
CAPITAL FUND
Createdw.e.f
1992-93 in pursuance of the recommendation of RCC 1991.
Operated
as a Minor Head under Major Head 8118.
Credits
to the Fund are:
A) Appropriation
of the Revenue Surplus after meeting obligations of
Payment
of Principal as well as Interest on Loan to D.F.
Appropriation
of current year D.F.
Payment
of deferred dividend.
B) Interest
on Capital Fund ( at the rate decided by the RCC)
Debits
to the Fund are:
A) This
Fund is utilized to finance expenditure until now charged to Loan Capital ,
to the extent of balance available under this Head
B) No
separate rules existing for utilizing this Fund usually charged to all Plan
Heads (except Plan Heads 11 & 51).
RATIONALE OF
CREATING CAPITAL FUND:
To
reduce the borrowings from General Revenues (i.e., Loan Capital or Gross
Budgetary Support (GBS) from Government). Because the loan
capital is non -refundable and interest bearing
loan. The Interest is paid in the form of Dividend to General
Revenues. Since Loan Capital is non – refundable, the payment of
dividend also perpetual.
Year
by year, the GBS (Gross Budgetary Support to Railways is declining. During
1975-76, the GBS is around 75 %. Now in the year 2011-12, it came down to
34%.
Plan
Size of the Railways cannot be reduced, since capacity restrictions would
endanger the economic progress of the country. The gap between the
requirements and the availability is to be bridged. The only way is
to increase internal resources, that’s why the creation of Capital Fund.
No
dividend will be paid on the expenditure met from the Capital Fund, as the same
is generated from internal resources ( not borrowing from General
Revenues). On the other hand, Interest is credited to the Capital
Fund on the balance of the Fund at the end of financial year. (Rate
of interest is equal to the Dividend rate and recommended by RCC from time to
time)
·
After merger of
Railway budget with General Budget (from 2017 onwards), there is no relevance
of dividend impact on Railways
OLW(R)
Ø OLW(R) means Open Line
Works-Revenue.
Ø This is not a
fund. The actual amount required is met
from Railway Revenues. That means
Revenue expenditure.
Ø Debits to OLW(R) :Cost of works - whether new,
additions, improvements, replacements or renewals falling within "NEW
MINOR WORKS" limit.
Ø "NEW MINOR
WORKS" limit - 1) Additions:
Estimated to cost not more than Rs.10 lakh are treated as "MINOR
WORKS" and charged to OLW(R). 2)
Replacements: Less than Rs. 10lakh( all works ) are treated as "MINOR
WORKS" and charged to OLW(R). 3)
Replacements: More than Rs. 10 lakh are charged to OLW(R), but the work which
is originally charged to OLW(R)
Ø New Minor Works limit
does not apply to Passenger amenity works and safety works.
Ø Credits to OLW(R) - 1)
Disposal of an asset, without being replaced ( but original cost which has been
charged to OLWR) 2) Amount realised
from disposal of materials released from a work replaced at the cost of OLW(R).
Closure
of OLWR
Ø
Board(FC) has approved
abolition of Allocation Head - OLWR - Open Line Works (Revenue).
Ø
Existing work if any
under OLWR, the same may be transferred to DRF or DF as the case may be.
Ø
As Such there is no
allotment of Grant under OLWR in Demand NO.16 from the year 2015-16 onwards.
Ø
Necessary correction
slip to the Accounts Code will be issued on receipt of approval from CGA -
Controller General of Accounts and C&AG- Comptroller and Auditor General of
India.
Ø
Reason: Insignificant
expenditure under OLWR in Annual Plan of Works Expenditure. For example
in the year 2013-14 - Rs.28 Crores expenditure under OLWR against huge
Budget under Demand No. 16 (approximately around 63,000 Crores)