A CAG audit has unearthed a scam of `29,236.77 crore in freight movement. Is the railways being derailed?
By Vishwas Kumar
India’s largest public sector em-ployer, the Indian Railways, has been tainted with a scam of `29,236.77 crore which took place between 2008 and 2013. The Comptroller and Auditor General (CAG) has unearthed a freight scam of this humongous amount, thanks to the collusion between senior railway officials and big iron ore manufacturers. The railways earns around 65 percent revenue from freight services.
The scamsters fudged documents to transport iron ore under the category of domestic consumption even when it was being exported. Incidentally, the transportation charges for both are different, with the domestic consumption one being three times less than the other category.
WORST MARGINS
This loss to the exchequer is shocking because the Indian Railways has one of the worst operating margins of `100:94. This means that for every `100 spent, the railways earns just `6. In a bid to overcome this revenue gap, it borrows heavily from the public exchequer each year. In the current financial year, the finance ministry has given the railways a budgetary support of `40,000 crore.
As per the audit report, the Railways follows a dual freight policy. Freight charge for a commodity is based on Goods Classification, wherein a class is assigned to each item. All commodities in that class are charged the same rate.
In May 2008, the railways introduced Dual Freight Policy (DFP). This was done to lower the cost of transportation of iron ore for domestic producers and to keep freight charges for exported iron ore in sync with the rising international market prices to earn proportionate earnings.
Under this policy, transportation of iron ore was categorized into two classes on the basis of end use. They are: Domestic Consumption and Other Than Domestic Consumption. The former was assigned a lower Class 4 and the latter, Class 5. The above classes cover various types of iron ore—lumps, fines, calibrated form, pellets, etc.
MAJOR COMMODITY
Iron ore is an important commodity that is transported by the railways, both in terms of volume of traffic and freight earnings. It is transported for domestic consumption and also for non-domestic consumption such as for sale/export.
The railways is a major transporter of iron ore for domestic consumption and its share from 2007-2008 as well as 2011-12 was between 57 percent and 79 percent, respectively.
Manufacturers of iron and steel, cement and pellets are the authorized customers eligible for booking iron ore at domestic rates as per the rate circulars (RCs), which fix rates of class/categories of goods transported.
CAG’s audit observed that the internal control for implementation of DFP had intrinsic deficiencies and some of the provisions were not incorporated/enforced with due diligence.
Some of the deficiencies noticed were:
- The Railway Board had prescribed six documents for submission by transporters at the time of registration of each indent (requisition of goods). However, the purpose and significance of their submission was not made clear. These documents, apart from proving the bonafide credentials of the consignee (transporter booking consignments) as manufacturers of iron and steel, etc, could also be utilized for ascertaining the manufacturing capacity of the plant (manufacturing units/factory) and actual utilization of iron ore for domestic purposes. However, the Railway Board had not issued any guidelines to make use of the eight mandatory documents including affidavit and forwarding note submitted by the consignee for verification of the end use of the iron ore.
- Excise Returns (ERs) are important documents so far as the end use of material is concerned. The manufacturers are required to submit seven types of ERs to the excise department in a year. Out of these, three ERs (i.e. ER 1, ER 4 and ER 6) are very much relevant/useful in the effective implementation of DFP. ER 1, a monthly return, indicates production of iron and steel and removal of goods from manufacturing units. ER 4, an annual return, depicts stock position, including purchase and consumption of raw materials and ER 6 depicts monthly stock position, including receipt and consumption of raw materials. The actual use of iron ore at manufacturing units and removal of goods from there could be known from these ERs. However, there were no instructions of the Railway Board to compare the quantum of iron ore transported by the railways with the monthly/yearly consumption of iron ore for domestic use as reflected in the ERs.
CAG’s audit observed that the internal control for implementing Dual Freight Policy had intrinsic deficiencies and some of the provisions were not included or enforced with due diligence.
CRUCIAL LAPSES
“Although the requirement of mandatory submission of six documents by consignees to avail transport of iron ore at concessional ‘domestic consumption rates’ was meant to check the end use of the iron ore transported and also assessing the veracity of the information on the basis of which concessional rates were claimed and availed, the railways did not use the documents to verify the end use and allowed the manufacturers to transport iron ore at ‘domestic consumption’ rates. The Railways did not prescribe for initial scrutiny of documents submitted by consignee and such failed to ensure their submission of valid documents during the period May 2008 to September 2013 resulting in freight evasion of `12,722.65 crore,” the audit alleged. It blamed Railway Board members for deliberate lapse in the implementation of DFP.
The loss to the exchequer is shocking because the Railways has one of the worst operating margins of `100:94. For every `100 spent, it earns just `6.
The loss to the exchequer is shocking because the Railways has one of the worst operating margins of `100:94. For every `100 spent, it earns just `6.
Hinting at a collusion between Railway Board officials and iron and steel manufacturers, the audit alleged: “In addition, submission of inaccurate /misleading or false documents by consignee (manufacturers) attracted a penalty of `11,418.16 crore (as per DFP) that could have been levied on various defaulting companies. Though the Railway Board recognized provision of a limit of 25 percent for the generation of iron ore fines, out of total quantity of iron ore booked and transported by rail at freight charged at domestic consumption rate but it did not consider these suggestions while framing the Rate Circular 36 of May 2009.
Non-implementation of this provision on residual/left over quantity of iron ore helped manufacturers to remove large scale iron ore for export or sale.” (Since railways has monopoly in transporting iron ores, any punitive action on their part against manufacturers after detecting violation in DFP would have stopped them from exporting their goods.)
“Railways also did not assess the reasonability of removal of iron ore by manufacturers from companies’ premises and did not fix the permissible limit of removal wherever possible. Railways also failed in noting the details of removal given in the ERs of these consignees to trace out the cases where iron ore transported by rail at ‘domestic consumption’ rate was not put to domestic use.
Auditors assessed a penalty of `5095.97 crore in respect of 61 consignees as a result of short reporting of iron ore in ERs. It means that iron ore was diverted before entering the factory premises and thus not put for ‘domestic use’”.
Slamming the Railway Board for poor supervision, the audit concluded:
“Railways did not lay down adequate internal controls checks and balances for effective implementation of the DFP. There were no orders of the Railway Board for exercising special checks on the transactions relating to ‘Iron ore’ by CIs (Commercial Inspectors) and TIAs (Travelling Inspectors of Accounts). The monitoring mechanism laid down in the form of Appreciation (Evaluation) Reports did not provide for suggestions for improvement in the policy and remedial action on irregularities and deficiencies pointed out by various supervising authorities. These reports were not submitted by most of Zonal Railways. Adequate training was not provided for proper implementation of the policy. Effective enforcement of provisions laid down in the rate circulars was not ensured.”
One hopes that railway minister Suresh Prabhu will take note of the scathing audit findings and plug the loopholes in railway freight services, so that it becomes a money-spinner for the beleaguered railways.