FINANCIAL JUSTIFICATION
A general list of points, which affects almost all proposals are:
1. Quantum of Investment.
2. Period of completion.
3. Involvement of Interest Burden (If allocated to Capital).
4. Return on Investment.
5. Scope for flexibility.
In addition to the above certain proposals require some points for consideration, which are
unique to these proposals.
1. DOUBLING OF LINES
a. Need for such doubling.
b. Availability of Land.
c. Method of acquiring such land.
d. Density of traffic improvement projected.
e. Nature of traffic such as seasonal, permanent or circumstantial.
f. Annual maintenance cost of such doubling.
g. Future traffic prospects.
2. Electrification of a route presently under Diesel.
a. Cost per kilometer.
b. Cost of conversion from diesel to electric.
c. Comparitive advantages.
d. Availability of uninterrupted power supply.
e. Availability of electric locos.
f. Saving on account of detention.
g. Comparison of Diesel per E. k.m. and electricity per E. k.m.
h. Advantage of speed factor.
i. Cost of repairs and maintenance.
j. Capital cost and returns on investment.
3. Lengthening of Loops
a. Density of traffic.
b. Need for such a loop.
c. Generation of additional traffic and revenues.
d. Flexibility of such loops to accommodate diesel and electric trains..
Since lengthening of loops do not result in direct increase in traffic such proposals should be
examined whether it is highly important to undertake such projects. Proposals of loops should be
undertaken only where they result in good increase in indirect benefits. Moreover, loops enable
operational convenience and improvement of efficiency in running of trains. Hence, projects
should be decided in the light of indirect benefits that will accrue in the long run.
4. Construction of Quarters at a cost of Rs. 30 lakhs.
a. No. of quarters to be constructed.
b. Availability of space.
c. No. of employees eligible
d. Annual maintenance cost.
e. Break even point i.e. Rs. 30 lakhs + interest + maintenance at present value.
f. Comparitive analysis of HRA paid and Rent to be recovered.
g. Decision should be made on a long term basis.
5. Setting up of a new workshop for carrying out POH.
a. No. of coaches/locos that will be POHed during a year.
b. Economic benefits on setting up such a workshop.
c. Periodical intervals at which Locos/Carriages will be POHed.
d. Flexibility for other repairs and maintenance to avoid capital mismanagement.
e. Skilled/Semi-skilled personnel available for utilization of machinery.
f. Cost of training staff for handling machinery.
What is performance budgeting? What are its elements? Why was it found necessary to
introduce it in the Railways? Has the objective been achieved?
Answer
a) Introduction: The performance budgeting came into effect in Railways in 1979-80 and
has been gradually stabilizing for the purposes of management control over the costs in relation
to the physical activity.
b) Necessity: The form in which the Railway Budget was presented to Parliament till 1979-
80 provided for the appropriation of funds for certain items of expenditure falling under each
demand without correlating expenditure to the quantum of service to be rendered with the aid of
the funds sanctioned.
Defects in the old budgeting system:
For all the practical purposes the budget was a portrayal or record of cash transaction and
their anticipations; it did not serve as a tool for management or as a device to evaluate
performance.
The conventional budget was more appropriation oriented than performance oriented.
The budget had little relevance to performance.
There were in all 22 demands for grants not strictly representing homogenous functional
groups or activities though the demand for grants are supposed to basically represent the
estimated expenditure in single or homogenous group of functions.
The accounts head under the detailed heads of accounts did not correlate with the budget
heads. The expenditure under the demands had to be collected from different revenue abstracts.
When the parliament sanctioned the budget, it was not aware of the quantum of services
that would be rendered in the various aspects of Railway activities.
Based on the recommendation of the Task Force appointed for the purpose the demands for
grants have been restructured with the approval of the Estimates committee. It was therefore
necessary that the budget as a document must be capable of fulfilling the following objectives:
To present more clearly the purpose and objectives for which funds are sought and to
bring out the programmes and accomplishment in financial and physical terms.
To help in the better understanding and review of the budget.
To improve the formulation of the budget and to aid the process of decision making at all
levels of Government.
To incorporate an element of accountability.
c) Definition: Performance budgeting therefore implies fixing in advance performance,
targets under each activity in acceptable and feasible measures of output, fixing corresponding
finance outlay for achieving these physical outputs, monitoring and comparing actual
performance both in physical and financial terms.
The steps involved in performance budgeting are identification of functions, programmes
and activities. In order to achieve the objectives of performance budget the demand for
grants have been restructured to spell out the functions, activities and objects. Each
demand has 3 sub divisions.
Sub heads of demand representing major functions.
Detailed heads representing further break-up of the activity classification i.e identifying
‘Why’ the expenditure is incurred.
A primary unit identifying ‘What’ the expenditure denotes (objects of expenditure i.e.
salary, allowances, material etc.)
d) Present scenario: For the purpose of managerial control over the cost in relation to the
physical activity, norms of quantities i.e inputs and outputs and standards will have to be fixed
and monitored on the basis of unit costs. At present unit costs can be assessed for few demands
viz: Demand no. 5, 6 and 10. The unit of performance however has been prescribed for all
revenue demands some of them are outlined below.
Demand no Sub head and Main Units of performance
activity
4- Repairs and maintenance 1.Maintenance of P 1. Equated track km
of Way and works way 2. 10 sqm of plinth area
2.Maitenance of service 3. Million litres for 10 m2.
buildings
3. Water supply
10- Expenditure on fuel GTKM and ETKM
11- staff welfare and Number of employees, number of
amenities students, plinth area.
Discuss the advantages and precautions in outsourcing maintenance contracts as against
in- house maintenance? What are the areas where you will prefer in house maintenance?
Explain?
Answer : Outsourcing is subcontracting a process, therefore maintenance outsourcing is
subcontracting maintenance task to a third‐party company. Outsourcing of maintenance is
sometimes considered as an effective method to relief the managers from maintenance
management and to get more focused on the so Maintenance Outsourcing called core
competence to their business. The list below highlights the key advantages and disadvantages of
outsourcing maintenance with particular reference to the following key factors: cost, work
quality, obtaining expertise, tools, equipment and technology, risk reduction and management
focus on core business.
Advantages
Cost savings: Cost control is a driving issue for most industries and a prime motive for
outsourcing. In-house staff wages and benefits (such as pension, medical, vacation) may have
become too costly for the company to subsidize. Cost is also a function of a contractor’s
ability to flex up and down faster than in-house staff; additionally, hiring costs are absorbed
by the contractor. An outsourced contractor assumes the burden of these, and other, financial
liabilities associated with workers.
Staffing flexibility, expertise and work quality: An outsourced contractor can provide
flexibility in delivering the proper staffing level and required skill set quickly, with less cost
and time investment, as well as providing expertise that may not be available, or is
inadequate, within the in-house staff. This expertise will also positively impact the quality of
the work being performed. It provides the flexibility to utilize specialized services as needed,
instead of incurring the cost of developing in-house competencies that are not needed on a
permanent or continuous basis.
Personnel issues: In the majority of instances, when a client completely outsources its
maintenance function, personnel grievances, disciplinary actions and issues become the
responsibility of the contractor. Former in-house activities such as payroll, time keeping,
labor relations, HR, benefits, etc., are handled by the contractor, releasing management from
the responsibility and time requirements of doing so.
Tools, equipment and technology: An out-sourced contractor can provide staffing well-
versed in the usage of the most current technology, without the need of the company to
provide training to the in-house staff in its use, or the cost of acquisition of the
technology/equipment. The same holds true for specialized tools and equipment, in that the
contractor would be required to supply the tools and equipment to perform the work required.
Core business focus: Out-sourcing allows management to concentrate on their core
proficiencies and critical objectives to drive the business.
Disadvantages
Loss of control: Outsourcing the maintenance function may be cost-effective, but there are
restrictions when working with contractors, such as the host company’s inability to directly
manage and instruct the workforce.The client and contractor may have different approaches,
management styles and philosophies, which can lead to conflict.
Staff turnover: In-house employees are inclined to have more years of service at a facility
than employees of a contractor and know the business and its expectations better. This is a
common issue for clients, as outsourced staff do not, as a rule, possess as much allegiance to
the company. As such, the intellectual knowledge they possess in regards to a site’s
maintenance function, equipment and business model is more readily lost if/when they leave,
as their loyalty is more tenuous.
Redundancy in management roles: Roles may be duplicated within a client and contractor
organization, contributing to overall cost. Overlapping roles and responsibilities can lead to
inefficiencies within the maintenance organization and contribute to the appearance of too
many bosses and not enough workers, create conflicting priorities and confusion.
Response time: When dealing with specialty contracts such as PLC’s, refrigeration and
complex compressors, a response time to problems may be handled more rapidly in-house
when compared with a phone call to an offsite vendor. The host company must balance the
needs of the site against the decision to outsource this work and negotiate an acceptable
response time, such as 24 or 72 hours. Since a longer response time equates to more
downtime and lost production, this response time must be clearly defined in the contract, or
the host company may be unable to meet their goals and objectives.
In conclusion, it is up to the end user to determine the cost-effectiveness, control, flexibility and
focus required at their unique site to properly manage their maintenance function within their
particular budgetary constraints. Outsourcing does not mean abdication of management
responsibilities Only with a detailed examination of these factors can it be realistically
established whether outsourcing is a viable option or not.
