Railway Accounts Department Examinations: November 2019

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 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.

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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.

Ø Context/backdrop of initiating EBR (IF):

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)

· 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.

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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.

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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)

Subject	Secured Marks (Out of 100)
Advanced Book Keeping (ABK)	94
General Rules & Procedures (GRP)	61
General Expenditure Optional (with Books)	63
General Expenditure Optional (without Books)	56
Books & Budget Optional (with Books)	62
Books & Budget Optional (without Books)	49
Grand Total (out of 600 Marks)	385

Railway Accounts Department Examinations

Pages

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Sources of Finance - Capital expenditure segment of Demand No. 82 (Ministry of Railways)