"> Nigeria: With Operating Deficit of N7-10 billion, Railways Can’t Repay Loans Without Reforms - Sahel Standard
September 22, 2020
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Nigeria: With Operating Deficit of N7-10 billion, Railways Can’t Repay Loans Without Reforms

Amidst fears of debt trap due to railway borrowing, a London-based international strategic railway delivery specialist, Rowland Ocholi Ataguba has faulted the present financial state of the Nigerian Railway Corporation, positing that the railway operation cannot repay the Chinese loans in its present form.

In his reaction to a statement credited to the NRC management on contribution to the repayment of the loan, Ataguba noted that the existing operating deficit of between N7-10b requires that the corporation be run on business costing with economic sustainability as a focus.

We run the full Commentary below:

“The NRC management is right that we seem to harp on more about the commercial viability of the railway over its economic impacts. The reason is simply about sustainability as it needs first to be alive to be of benefit to anyone including itself.

“So it is about perspectives. Civil servants tend to expect that govt will always fund their discretions no matter what whereas, a private sector operator knows that his enterprise will survive only if it can pay it’s way. Indeed the question to ask here is whether the NRC is a govt company that runs the railways or if it is a railway company owned by govt.

“This difference in perspective is at the heart of the historic underperformance of the NRC. It explains the apparent absence of an incentive to perform, to compete, to survive.

“With the bulk of govt revenues now going to debt service, the NRC’s future survival will depend on its ability to generate enough revenues to cover its operations than on handouts from the FMF.

“For the last 55 years, the NRC has been unable to cover its cost of operations by itself, even going bust twice, while receiving large amounts of public funds and it is not looking like its about to stop doing so. It is also still failing to protect its revenues with ticket racketeering continuing unabated.

“It is indeed a no brainer to exclude its personnel costs from its operating expenses as this is the most significant component of the opex especially when running passenger services. So saying of Abuja-Kaduna that “the average monthly running cost minus salaries is N100m” is meaningless especially if your total monthly salary bill is around N400m and this is your main operation. It is also unlikely that the aggregate operating deficit on Abuja-Kaduna was N20m a month at any point in time as this would appear a gross underestimate.

“Reserving the salary bill to be met by the FMF in the annual budget round while proposing to make a relatively piddling $1m a year contribution towards repaying a $500m interest bearing debt which has a 20 year tenor is unnecessarily convoluted and doesn’t make sense. This annual appropriation is what the economists would call a subsidy or what railway economists may classify as a public service obligation. A subsidy that govt pays to a railway operator for running unprofitable services because passenger services hardly make money.

“The NRC is a going concern declaring railway revenues of about N3bn per annum but it’s personnel costs alone are currently about N5bn a year. Some of it’s variable operating expenses such as fuel, lube etc may amount to some N2.5bn approx. per annum. That’s a deficit of N4.5bn already! In a few months, the 5 year free maintenance period on the new infrastructure would elapse adding more costs to the opex. This is around the point from which you can expect to start to deal with significant maintenance issues as wear and tear starts to take its toll.

“The older infrastructure, buildings and rolling stock will also contribute to costs in maintenance as will workshop, depot and recovery equipment.

“We have also not accounted for other fixed costs such as depreciation of capital assets nor amortized any borrowings, insurance premiums, utilities, taxes, rent etc. Neither have we considered the cost of the Minister’s office and his substantial railway directorate involved in railway development and operations. It is of course always easy to assume that money from the exchequer belongs to no one and is an entitlement but it has an opportunity cost.

“So in the final analysis, the NRC’s operating deficit may be as much as N7-10bn per annum and it’s operating ratio perhaps around 23%. The optimal ratio for an efficient railway operator being around 75%.

“So to suggest that it can make any contribution towards redeeming the FG’s railway debt on current form may be rather optimistic.

“We have not even considered about $8bn of further loans yet to be received from China for Ibadan-Kano SGR and Calabar- PH SGR nor the $1.2bn already drawn down for Lagos-Ibadan SGR.

“Recall that in 2008, a loan of some $75m or so to acquire 25no. GE locomotives was given the NRC by Yar’Adua’s govt. The loan likely remains outstanding and the GE locos which should ordinarily have a life of 35 years are now on their last legs due to misuse and some engines probably sold off as scrap with the proceeds consumed.

“In sum, to suggest that each year the NRC could pay N400m to the FMF with the left hand while collecting N5bn or more from the same FMF with the right hand is like gaming the system. It is like pulling wool over one’s eyes.

“What may be prudent is for the NRC to now focus on how it can fund its annual recurrent and capital budget of N10-20bn without recourse to the exchequer which is already up to its eyes with paying off the FG’s pile of debts among which are railway borrowings.

“What it should do if it is so sure of its cash position is to request a measured reduction in its annual appropriation aka subsidy. That would be a more transparent way to go but I doubt that it can live that down.

“With Warri-Itakpe and Lagos-Ibadan soon to commence as passenger only operations with no prospects of a profitable freight business on the horizon, the NRC’s operating deficit may expand further. In the near term, it would need to be creative and flexible if it is to avoid the kind of fate that befell it in the past where resourcing for fuel and lube for operations became a real challenge. Sadly these are not attributes we would normally associate with the NRC but we live in hope and interesting times”, he concluded.

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