handbook of traffic costing in indian railway

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handbook of traffic costing in indian railway

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handbook of traffic costing in indian railway

handbook of traffic costing in indian railway

ECONOMICS OF RAIL TRANSPORT

901. To remain financially solvent, Indian Railways must earn sufficient revenue to meet the cost of administration, maintenance of assets, operation, the requirement of depreciation and pensionary benefits and liability for payment of dividend as also leave a margin of profit compatible with the nature of the undertaking and sufficient to meet the needs of developmental expenditure. The pricing policy has, therefore, an important bearing on the Railways' financial well-being. At the same time, the Railways cannot be unmindful of their role as a premier public utility concern and the effect that their pricing policy will have en the rail user and the general economic development of the country.

902. Railway Rating policy�Historical Development.�It was stipulated in the agreements of the private Railway Companies contracted at the time of setting up of railway lines in India from 1853 that rates and fares would have to be fixed with the approval of the Government (initially the East India Company) who might order them to be reduced only in the event of. net profits of the Railway exceeding 10 per cent of the Capita! outlay. Apart from this condition, there was no Government regulation of railway rates and fares in the early period.

903. In 1868, maximum rates were fixed and the companies were left free to fix the rates within these maxima. No minimum rate was fixed. Five classes were prescribed for goods other than coal and food-grains, but there was no stipulation as to the class under which each commodity was to be placed. For coal and food grains, separate rates were fixed. In 1880, with the completion of the shorter railway route between Delhi and Bombay, inter-railway competition emerged, leading to rate-cutting. In March 1883, Government enunciated the general principle of fixation of rates and fares viz. that rates would vary between the maximum of what the traffic could bear and the minimum determined by cost of carriage. In 1887, Government fixed certain minimum and maximum rat's for five classes and one special class, based on rough and ready available statistical data.

904. In 1905, a uniform general classification of goods over all railways, subject to certain exceptions, was evolved by the Traffic Simplification Committee set up by the I. R. C. A. and this classification was notified in the tariff of July, 1910. Sanction of the Railway Board was made mandatory for any changes in the classification -of goods or to the classification of any additional commodity. However, determination of rates by the companies on an individual basis and independent of each other continued unaltered within the minimum and the maximum limits laid down for each class. (The principle of telescopic rates for through distances over the entire Railway system was accepted in 1917 only in respect of coal). Special rates continued to be quoted freely by individual railways to capture traffic for their own lines.

905. The need for adjusting railway rates, or quoting special rates, to help the growth of industries in India was highlighted by the Indian Fiscal Commission in 1922. One of the measures taken in ( his respect was that from April I, 1922, the number of classes was increased to 10. After 1923, the new fiscal policy of selective protection to indigenous industries as was adopted and the need for special rates for new industries was stressed. Inter-Railway completion further intensified as each Railway was anxious to help promotion of industry in its own territory. The Indian Tariff Board (1929) on Heavy Chemical Industry urged the need for introducing telescopic rates on a continuous mileage system on the railways and some simplifications of the Railway rate structure. Their report did much to liberalise the attitude of Government towards quotation of promotional rates for indigenous industries. Indeed, many industries such as iron, coal, sugar, cement and paper owed much of their later prosperity to the assistance given by the Railways in the shape of low rat is both raw materials and finished products.

906. Further attempt at the revision of railway rates structure was made with the introduction of a revised classification from May, 1936. Six more classes were interpolated amongst the then existing 10 classes, permitting wider scope for re-grouping. However, some of the inherent defects in the individualistic system of Working of railways were left untouched ; telescopic rates on a continuous mileage basis irrespective of the boundaries of the individual railway units ware still not introduced.

907. With the integration of the railway systems around 1948, the stage was set for evolving a standard rate structure. The railway freight structure was revised from Ist October, 1948 introducing the telescopic principle and withdrawing a large number of "station-to-station" rates as well as the practice of charging inflated mileages. Along with telescopic class rates, wagon-load scales also introduced in replacement of different scheduled rates existing 31 various railways. This was a great step forward in the direction of a rationalised freight structure aimed to serve the interest of the country as a whole. However, very soon voices were raised for introducing concessional and liberal station-to-station rates in the Reports of the Indian Fiscal Committee, 1950 and the Taxation Enquiry Committee (1953-54).

908. In June, 1955, the Ministry of Railways appointed the Railway Freight Structure Enquiry Committee to review the then existing railway freight structure and to suggest, among other things, modifications bearing in mind the needs of the developing economy and the necessity for maintaining the financial stability of the Railways. The main recommendations of the Committee consisted of�

(a) radical revision of the pattern of the legs of the telescopic freight structure ;

(b) laying down a wagon-load classification and a " smalls" classification for all commodities ;

© abolition of terminal charges by taking these into consideration in evolving the revised freight structure ;

(d) discontinuance of the separate levy of transhipment /ghat charges ; and

(e) evolution of a percentage system of rates from the lowest class to the highest class to form an integrated scale of rates covering both class rates and wagon-load rates. For this purpose, the Committee recommended a norm or "standard "rate to be called the Class 100 rate, expressing the rates above and below this Class as per percentage of the new Class 100.

Based on the recommendations of this Committee, a revised freight structure was introduced in 1958. Over the years, there were changes in the freight structure with a view to raising additional revenues for meeting the escalation in costs. Similarly, there were changes in the passenger fares and parcel structures. The Public Accounts Committee as well as the Railway Convention Committee had examined the tariffs and had emphasized the need for rationalising the fare and freight structure having due regard to cost of service. Accordingly, a high powered Committee, viz. Rail Tariff Enquiry Committee was set up in 1977. It submitted its report in 1980. The Committee had not only examined the passenger fares, parcels freight structure and other allied matters.

The existing Goods/Passenger and Parcels freight structures, by and large are based on the recommendations of this Committee.

909. Traffic Costing.�The Freight Structure Enquiry Committee (1955-57) had made a general observation that a time had come when the Indian Railways must make a sustained effort to ascertain, as far as possible, the direct cast of service, and take note of this in determining the appropriate rates for individual commodities. The Railways have given a great deal of attention to traffic costing over the last few years in order that it may be used as an effective aid to management mainly In the matter of adjustment in freight structure and for the purpose of financial appraisal of projects. Costing of rail transport is not strictly comparable to the costing of commodities of other services. Rail transport presents many special features which are not present in the case of other commodities and products. For example, transport services are offered at hundreds of stations all over the country and decisions have to be taken on an all-India basis whereas other industries, including road operations, operate only in a limited area with the sole object of maximising profits. There are again a vast number of services produced by the Railways like goods transport of various commodities, carriage of passengers of different classes, luggage, parcels, Rail way Mai I traffic, etc. Further, transportation is a " perishable" commodity In that it cannot be stored. If the wagons are not utilised for loading, they remain idle and the transport capacity during that period is lost for ever. Similarly, if seats on a passenger train are not occupied, the corresponding earning capacity is lost for ever. Another peculiarity of rail operations is that it is highly Capital intensive and its assets hare to be created for a long span of life of (say) 40 to 60 years. There is also the problem of providing suitable manpower In the face of fluctuating demands for rail transport depending on seasonal requirements.

910. While a" efforts must be made to arrive at the cost of service for different operations as accurately as possible, it should be realised that there are no set formulae for costing. Costing is not an exact science, but traffic costing can be an effective aid to management if the technique is soundly based on valid principles and proper identification and collection of appropriate data. It should also be possible to make necessary adjustment as required to reflect changing conditions to suit the particular type of problem. In fact, cost study requires a sound knowledge and basic understanding of all facets of railway working.

911. Analysis of transport costs is a complex problem since railways are essentially a 'Joint Cost Industry'. In fact there are more items of expenditure which are 'joint, costs' than those which can be directly allocated to individual services such as coaching and goods operation. For example, provision and maintenance of railway track, salaries of station staff, maintenance of signalling and telecommunication installations are all joint expenses. Where possible, of course, the expenses are debited direct and in full to coaching service, or goods service but in the case of joint costs, a suitable basis has to be evolved for apportionment and also for further allocation to the sub-divisions concerned in each service, like marshalling, transhipment, etc., for goods services.

912. Computation of costs for individual streams of traffic is necessary to determine whether or not a particular category of traffic is remunerative and to examine the feasibility of quotation of special rates to combat inter-modal competition or to move additional traffic in lighter sections or in empty movement direction, etc. Costing is also essential for making realistic financial appraisal to aid fresh investment decisions whether in respect of new construction projects or major schemes such as change of traction.

913. A beginning in traffic costing on Indian Railways was made in the early 60's with the setting up of traffic costing cell in the Board's office. Similar cells in the zonal railways came up much later, in 1972�73.

914. General Principles of Railway Rating Policy.�Indian Railways carry a heterogeneous variety of goods; raw materials, finished products, perishables, goods in bulk and in bags, liquids, articles of high and low value, fragile and dangerous goods, building materials of all kinds, medicines, chemicals and drugs, clothing, footwear and essential foodstuffs; and in fact every article and commodity that, either directly or remotely, enters into the daily existence of the average person. To fix the charges for the transportation of these diverse varieties of goods, over different distances and under varying conditions, is clearly a matter of great complexity and cannot obviously be reduced to an exact scheme. There are, however, several broad principles which determine not only the method of charging but also the general level of rates for the various commodities, an understanding of which is indispensable to a study of the Goods Rates Structure of the Indian Railways.

915. One such principle is commonly referred to as charging "what the traffic will bear", i. e. fixing the charge for each variety of goods according to its ability to pay for transportation. This is also called the 'value of service' principle. In this way, goods of high value are made to pay more, so that commodities and articles of low value, including foodstuffs and industrial raw products, may be carried at lower rates. This is eminently equitable and it is from this principle of charging "what the traffic will bear" that the Railways derive sanction for the practice of classifying commodities into different groups, within each of which a sufficient degree of affinity of transportation and economic characteristics can be found to justify the application, to each group, of a different scale of basic rates.

916. Another basic principle of rating which is receiving increasingly greater attention is that of the 'Cost of Service'. Thus, Caking the two principles together, each variety of goods should be charged no more than it can ordinarily afford to pay for transportation and, by and large, no less than it costs to move it. For applying this criterion, duo cognizance has to be taken of the factors affecting the ability of commodity to pay for transport viz. - (a) value in relation to weight, (b) uses, © stage of manufacture, (d) volume of traffic, and also the factors affecting the costs of trans ortation viz. (i) bulk in proportion to weight, (ii) risk of damage, wastage, or deterioration in transit, (iii) speed of transit, and ; (iv) volume of traffic. As stated earlier, Government had laid down as early as 1883 that the 'value of service' was to provide the ceiling and the 'cost of service' the floor in determining the railway rates. With the growth of road transport and its competitive characteristics, the point of substitution of one mode of transport by another, would constitute the effective ceiling on the 'value of service' based rates. The second limitation to the application of the aforesaid twin principle is the legal prohibition against undue preference and undue prejudice.

917. Railways and other modes of transport.�Mechanical Transport consisting mainly of Railways, Road Services, Shipping, Air Lines, Inland waterways and pipelines, in that order, constitutes the infrastructure of India's economic system. Railways and the Road Services together currently provide over 95 per cent of the transport in India, the role of ether services, being relatively minor. It is not without reason, therefore, that rail-road co-ordination has been an important aspect of the transport policy of Government of India. The general objective, of course, is to secure the proper co-ordination of different modes of transport available in the country and to avoid wasteful competition amongst them.

918. The guiding principle for an integrated national transport system has to be that each area and stream of traffic should be dealt with by that mode of transport which, on the whole, is most beneficial to the national economy in terms of the aggregate of real costs and benefits. This objective has already been accepted by the Indian Railways.

919. It has been recognized that the objective of coordinated development of rail and road transport could be achieved to some extent by the Railways acquiring financial interest in the Road Transport Corporations. Accordingly, the Road Transport Corporation Act of 1950 contains a provision in Section 23 thereof that the Central Government and the State Government may provide to a Corporation established by the State Government, in such proportions as may be agreed to by the Corporation, capital for the purpose of carrying on the undertaking. The policy currently followed in this regard is that the Railways, on behalf of the Central Government, contribute capital initially to the extent of 20 per cent of the value of the assets transferred by the State Government to the Corporation at the time of its formation. Thereafter, the Railway's contribution is linked to 33 1/3 per cent of the fresh capital investment, or 50 per cent of the State Government 's share of the fresh Capital investment made from year to year. Railway's representatives at the Boards of Directors of the Road Transport Corporations ensure that the necessary co-ordination in policy is secured. The object of rail-road co-ordination in policy is secured. The object of rail-road co-ordination, including financial participation in the Road Transport Corporations is two-fold, viz., firstly to help maintain a dialogue between the two Most important competing modes of transport so as to eliminate uneconomic competition and, secondly to encourage partnership of the Railways with the competing modes of transport. It is implicit in this arrangement that the loss, if any, which the Railway may sustain due to the competition would, to some extent, be mitigated through joint venture and common financial interest in the road transport.

920. Development of Marketing and Sales Organisation.�-The situation arising from increasing competition from road transport made it necessary for the Railways to revitalise the existing machinery for retaining or capturing high-rated traffic by trying to make the service customer-oriented. The Marketing and Sales Organisation was set up on each Zonal Railway by the middle of 1967 under a senior officer of the Commercial Department, This Organisation keeps a watch on the movement of selected high-rated commodities, analysis the reasons for fall where it occurs and initiated remedial measures. It conducts Market Research, studies the pattern of movement of traffic, convasses additional traffic for Railways and maintains close liaison with trade and industry.

921. It is significant that the concept of integrated total transportation is not new to the Railways. The first step in this direction was taken many years ago when out-agencies were set up in the hinterland, followed by city booking offices/agencies and street collection and delivery services in important cities. Mainly from the point of vie-w of providing a complete door-to-door service, a beginning was made in early 1966 with the introduction of Container Services on the Indian Railway between Bombay and Ahmedabad. An incidental objective was to attract high-rated road-borne traffic for rail movement in containers. The service has been gradually expanded and apart from being popular with trade and industry it has been remunerative to the Railways.

922. Another important step towards providing an efficient door-to-door service is the- Freight Forwarder Service. Under this scheme, the Freight Forwarder collects 'smalls' consignments from customers and offers them a a wagon load for transport between specified pairs of stations at fixed lump sum rates. The collection and delivery of the consignments at the booking and delivery stations is done by the Freight Forwarder with his own resources. The Freight Forwarder is not an agent or contractor of the Railway but is an independent entrepreneur, who offers traffic as a 'consignor' to the Railways. This service was first introduced for goods traffic in July, 1969 between Bombay and Madras and Calcutta and Madras. The service soon became popular and has been gradually extended to other routes. To reduce the transit time of parcels and ensure better utilisation of parcel vans, a similar service for parcels traffic was first introduced in April. 1972 between Calcutta and Vijayawada and Calcutta and Madras, and has been gradually extended to cover other routes. The General Managers of the Zonal Railways have been authorised to sanction the introduction of Freight Forwarder Services.

923. In order to provide fast and assured transport between important cities, Railways are running 'super express' goods trains which by-pass most of the intermediate yards and run to fixed schedules. Also Quick Transit Service (QTS) has been provided between a number of important points. Under this service, goods are carried within specified schedules on payment of a small extra charge which is refunded in case the consignments are not made available for delivery according to the prescribed schedule.

924. Un-remunerative Branch Lines.�Apart from taking measures to increase the earnings, it is incumbent on the Railways to see that uneconomic services are reduced to the minimum extent consistent with their social and commercial obligations. It is in this context that the policy regarding un-remunerative branch lines needs to be stated here. For the purpose of this section, branch lines are�

(i) such of the Bread Gauge and Metre Gauge lines as are joined to the main system at one end only; and

(ii) all Narrow Gauge lines.

The case of each branch line or a section of a branch line (other than a worked line), the earnings of which are less than the working expenses, should be specially brought to the notice of the General Manager by the Financial Adviser and Chief Accounts Officer so that a report may be made to the Railway Board for consideration of the question of closing the line, partially or totally, if its retention is not considered necessary. A branch line should be considered as a whole, and only if the whole branch line is found to be uneconomic should an end section of such a-branch line be considered separately. General Manager should, while forwarding the review made by the Financial Adviser and Chief Accounts Officers, also comment on the economic purpose served by branch line in an area. The branch line should not be looked at in isolation but as part of an integrated railway system.

925. The Review of the Financial Adviser and Chief Accounts Officer should indicate not only the savings in working expenses that can be expected by the various departments on the closing of the branch line and also on account of fall in traffic on the main line but also the losses involved in closing the line. In making an estimate of the loss, the element of interest on Capital should be ignored. In arriving at the expenses of a branch line by pro-rata calculations based on expenses of the Zonal Railway /section concerned, expenditure not relevant to the branch line should be excluded as far as possible but such expenditure as may be incurred solely on account of the Branch Line should be wholly debited to its account.

926. For the purpose of assessing the savings and working expenses on the dosing of a branch line, the annual contribution to the Depreciation Reserve Fund in respect of the branch line, or such lower figure as the conditions of traffic working on the branch line may warrant, should be taken as an item of saving provided that when a figure less than the annual contribution to the Depreciation Reserve Fund is taken full justification for the figure adopted should be given.

927. In assessing the losses involved in closing a branch, account should be taken not only of the gross earnings of the branch proper but also the probable loss of earnings on the main line, which should be estimated carefully with reference to the circumstances of each branch. In this connection, it should be borne in mind that all the interchanged traffic is not lost to the main line when a branch is closed, although it may be anticipated that some traffic, having to take to roads to reach the main line rail-head, will be diverted to destination by road transport.