Dr. Jamaluddin Ahmed

Part-II

2.1.5 Joint costs….

In the railways industry, joint costs are largely associated with train operations and occur when producing one good or service produces another good or service. For example, if the wagon can attract a regular load in both directions then the wagon movement cost is joint between the two traffics. Similarly, if a locomotive and crew is scheduled to haul a container train in one direction and return with an intercity passenger train, these costs are joint between freight and passenger services. Joint costs cannot be attributed unambiguously to each beneficiary service or traffic because reverse movement is still required and costs are incurred even if one service or traffic is no longer operated. Fortunately, joint costs are becoming rare. Now, passenger services are more segmented into service types and fixed-formation trains operate services in both directions. Similarly, a much higher proportion of freight services now operate two-way trainloads of specialized wagons for coal, containers, and oil, among other cargoes. Therefore, joint costs can usually be ignored, except in unusual circumstances. For example, unless costing is undertaken at a micro level such as a specific train, or freight customer movement. Next, the three main uses of traffic costing are discussed here: financial contribution analysis; commercial management; and railway pricing policy. Each is important to the financial sustainability of railways.

2.3 Financial Contribution Analysis: This technique of railway management accounting measures service- or traffic- level financial performance. Total revenue is compared with costs for each service or traffic to establish whether the revenue from the service covers the cost. Three main cost thresholds that are commonly measured and compared with revenue are below. These thresholds are defined in box below, which indicates their significance and primary uses. Short-run variable (avoidable or incremental) avoidable costs Long-run variable (avoidable or incremental) costs. Fully allocated costs (FAC) (sometimes referred to as ‘fully distributed’) The most important of these thresholds for guiding railway commercial service or traffic-level decisions is long-run variable cost because it includes any and all costs relevant to the decision. Long-run variable costs are the costs that should vary de- pending on the decision to be made, which may be related to time period to which that decision relates (such as the duration of a particular traffic contract). The word should is significant because some variable costs are rendered invariant through institutional rigidities. For example, restrictive labor agreements may pre- vent management from matching human resources to demand, or management deficiencies may sustain the mismatch of resources to changing activity levels. Should-be long-term variable cost should always be included in long-run variable cost estimates to avoid the risk that any management rigidities will become self- reinforcing and distort commercial decision making. In some state railways, the short-run variable cost threshold is the standard used in commercial decision making. This leads to a proliferation of services/traffics that make a positive contribution above short-run costs but consistently fail to re- cover their long-run costs. The FAC threshold is a benchmark rather than an actual ‘cost’, as it includes an allocation without basis in cost causality. However, if all individual railway services and traffics cover only long-run variable costs, a revenue shortfall will still occur in total railway costs. Reviewed across all traffics, FAC indicates the overall revenue necessary for the railway service mix to recover total costs. The FAC threshold is useful in certain situations, such as to negotiate government compensation for meeting public service obligations. This begs the question as to how pricing policy should actually ‘allocate’ these costs, a question addressed below.

2.3.1 Commercial Management Actions….

Contribution analysis can improve railway financial sustainability. The long-run variable cost schedule generated by costing and financial contribution analysis can help railway managers identify areas of potential improvement in financial performance. Typically, the analysis contains three types of information: on amount of each resource attributable over the long run to operating the service or traffic (a), unit costs of each resource (b) total cost of each resource used (a*b). Knowing the cost structure of a service or traffic enables railway managers to identify potential cost efficiencies for improving financial performance. The analysis highlights where cost efficiency gains can be achieved by reducing the resources used (a) or reducing unit costs of those resources (b), or some combination of the two. Chapter 11 of the toolkit identifies many of the ways in which railways can seek to improve financial performance through these means. Assuming revenue remains unchanged, management action to reduce the cost will increase the positive financial contribution of profitable services and may turn un- profitable services to profitable. Pricing policies can also influence the contribution from the revenue side.

2.3.2 Railway Pricing: According to pure economic theory, to maximize overall economic welfare for the whole community, the most economically efficient pricing approach would be for prices to equal the marginal social costs of railway services. As a practical matter, no railway in the world does this for the reasons stated here. In economic theory, the concept of ‘margin’ is a very small unit of output, such as a single passenger seat-km, or wagon-km of freight. In practice, the increments of output in which prices can realistically be set are much greater, i.e. for a class of service, a class of trains, a regular commodity movement, or a particular freight shipper; Railway costs that are variable, particularly in the short term, are less than total costs, so that pure marginal cost pricing will lead to financial losses. Even long-run marginal cost pricing is insufficient to recover all railway running costs when all fixed common and joint costs are included. In virtually all countries, railways’ main transport competitors do not include external costs in their prices. This negates the assumption underlying the economic theory—to charge social costs only in the rail sector would create perverse outcomes. Therefore, the pure economic theory has little practical application in railway management. In practice, there is no prescribed or standard form of market-based pricing for railways. Good railway managements adapt pricing practices to their markets, customers, institutional arrangements, pricing regulations, and the social and economic norms in which they operate. Nevertheless, the economic concepts are important in guiding workable principles that can contribute to railway financial sustainability in freight and passenger markets.

2.3.3 Freight pricing: Competition should be the primary determinant of rail freight pricing strategies, not costs. Most railway infrastructure costs are fixed in relation to an individual traffic movement during the currency of rail freight contracts, so any infrastructure cost allocation to individual customers is largely technically arbitrary. More than a century ago, railway economist William Acworth observed:

‘Volumes have been written to show that railway rates ought to be based on the costs of carriage...such a basis is impossible, as no one knows, or can know, what the cost of carriage is. Cost of carriage of a particular item may mean the additional cost of carrying that item; this is normally so small as to be negligible. It may mean the additional cost plus a fair share of the standing costs of the organization... an arbitrarily estimated proportion of a sum that can only be ascertained very roughly (W. Acworth, 1905).

Basic principles of commercially efficient rail freight tariff setting are well established and have been used by competent railway managers since the nineteenth century. The rate set should be the highest that the market will bear, taking account of prices charged by actual or potential competitors, except under special circumstances, such as the need to nurture a new service. This rate should at least cover a price-floor of the long-run variable costs of carrying specific traffic for the duration anticipated.

The economic formulation of this practical and already established approach to railway pricing was provided in 1927 by mathematician Frank Ramsey (F. P. Ramsey F.P., 1927). To paraphrase, the railway should mark up its long run variable costs to individual customers in inverse proportion to their price elasticity of demand…. Elasticity of demand is measured as the percent change in the quantity of demand di- vided by the percent change in the price. A customer that is sensitive to the price and will reduce the quantity demanded by more than the change in price has an elasticity of demand greater than 1. A customer that will reduce the quantity demanded by less than the change in price has an elasticity of demand less than 1. So customers with a low elasticity of demand (such as coal producers) will be charged a higher markup than the customers with high elasticity of demand (such as container shippers). Railway marketing managers cannot know the precise elasticity of demand for each customer, but railway marketing staff should have sufficient information on customers and competition to estimate the effect of prices on customer volumes.

The general principle of commercial pricing is to establish a price that will maximize the service’s contribution to railway fixed costs; the corollary is that the railway should not price below long-run variable costs. By contrast, ‘average cost pricing’ also known as fully distributed or fully allocated cost pricing, in rail freight distributes fixed common and joint costs over all traffic. However, average cost pricing can depress demand in some traffic segments, thereby reducing overall traffic and creating higher fixed cost burdens for remaining traffic. In (exceptional) cases, where the railway does have significant market power, the ‘market' may be a regulatory body. The railway freight provider’s general market-based pricing philosophy should still prevail. Typically, the railway will attempt to allocate as many costs as possible, but ultimately, the regulatory body decides on which costs the user industries will bear.

2.3.4 Passenger service pricing:

The so-called ‘Ramsey pricing’ matched to individual customers or commodity groups has practical application in most freight markets, which comprise an identifiable and limited number of customers. However, in passenger markets, railway market pricing aggregates customers by pricing options based on individual features such as service class, travel times, or ticket purchase restrictions, and passengers select for the cheapest prices that fit their traveling needs. Railways can set price offerings by considering load factors for each train and station pair—some- times using airline-style yield management software—and conducting extensive market research to respond to customer demand levels with desirable ticketing packages that maximize revenues from seat sales. Thus, most passenger pricing is highly centralized by the service provider and service offerings are analyzed intensely to determine overall revenue and ridership impacts. However, underlying this very pragmatic system of continuous adjustment, the economic concepts that support financial sustainability in passenger services remain the same: pricing above long run variable costs should be inversely related to demand elasticity, and price-service packages should be tailored to meet customer needs more effectively than competing alternatives. Therefore, railway passenger marketing managers must fully understand the competitive environment and the demand elasticity of passenger sub-markets within market segments. Tariff structures should be designed to maximize overall revenue yield from the seat capacity on offer.

Typically, railway passenger services can be divided into major segments for service planning and management—inter-city, regional (sometimes segmented by sub-region) and suburban services (sometimes segmented by city). Each segment may have a different tariff structure, and within each segment, individual trains may carry passengers travelling at first class premium fares and those travelling in more basic accommodation or with less flexible ticket types at discount or concession fares. To be financially sustainable, the schedule of services for major service segment should aim to recover their long-run variable costs, and collectively, all the segments must recover overall fixed costs allocated to the passenger sector. If this were always feasible, it would be convenient. However, railway passenger financial modelling indicates that it is rare for passenger train services to operate without long-term budgetary support, even at efficient input-cost levels and with optimal pricing circumstances (Amos and Bullock, World Bank, 2007). Inter-city railway passenger services often fail to recover their long-run variable costs (a negative financial contribution) and rarely cover their FAC from the fare-box alone, except on the densest inter-city rail corridors. The cost-recovery challenge is even greater for heavily ‘peaked’ suburban services or less heavily utilized regional services. In many countries, it is impossi- ble for a single passenger railway route to make a positive contribution above long- run variable costs and many barely cover short-run costs. As a result, for most passenger and mixed-use railways in the world, financial sustainability depends on receiving some budgetary support. Chapter 8 of this toolkit discusses effective implementation of government support that is justified or politically necessary for social or other reasons.

2.3.5 Infrastructure network access pricing….

If the railway network owner is separate from the train operator, the railway-pricing paradigm alters somewhat. The paradigm alters even more if competition exists among freight train operators because train operating companies have less opportunity to distribute access charges among customers according to their ability to pay. Competition eliminates the operating company’s ability to mark up the track access charge if customers have a choice of train operating companies, or the ability to run their own trains. Therefore, the economic challenge of recovering railway fixed costs rests entirely on the infrastructure company, for whom most costs are fixed. So-called ‘network access price’ is a misnomer if the network and train operations are separated but under common public ownership without real competition in train operations. The ‘price’ is often simply a politically determined budgetary allocation of the infrastructure company’s costs between freight and passenger sectors; the level and pat- tern of services provided bears no relation to the ‘price’ of access; and if the sectors cannot afford to pay their allocation, it is paid by the government to the companies, or picked up as an infrastructure company deficit by the government.

Infrastructure charges differ by country, but the system is most well developed in the EU where charges are a legal requirement.

Multiple approaches share common components: (i) capacity-utilization based on train path use; (ii) gross-tonnage over the track to reflect infrastructure wear and tear; and (iii) ancillary charges for infrastructure company services such as power supply, stabling, or rescue. Charges usually differ by train type and route standards, generally reflecting cost and market considerations that are difficult to disaggregate. In Germany, for example, passenger and freight train track access is subject to a common basic tariff framework; pricing ‘factors’ result in different tariff rates. DB Netz terms and conditions for network access are published in the German Federal gazette and on the Internet, and include a detailed list of tariffs for train paths and for the other facilities and installations

 (http://www.db.de/site/bahn/en/business/infrastructure__energy/track__infrastructure/prices/prices.html).

The German track access charging policy aims to recover a high proportion of railway infrastructure costs from train operating companies. The train-path tariff system has a three-part modular design: Basic price for route category and utilization level: 12 route categories are grouped by infrastructure performance standard and transport importance. Basic prices are increased by a 20 percent premium on routes with very high utilization. Train path products (product factor): the ‘basic’ price may be multiplied by other factors that depend on whether the company is operating freight or passenger train service or seeking to purchase other service features or levels (that differ for passenger and freight services). Special factors: a series of multiplicative, additive, or regional factors such as those for steam trains, extra heavy freight trains, or tilting passenger train technology. The tariff system imposed by DB Netz and approved by regulatory authorities is designed to reflect the costs of providing and maintaining infrastructure, train path standards for performance levels, degree of utilization, and market differences be- tween passenger and freight trains’ ability to pay. Using the tariff tables above, tariff calculations are straightforward for any train operating company track access for a specific train type or service on a particular route.

The Australian Rail Track Corporation (ARTC) publishes a list of reference tariffs for track access on each of its routes. The reference tariffs are based on a fixed component (referred to as a ‘flagfall’) per train for each route, plus a variable element that depends on the gross ton-km of the train. Since the fixed element reflects route length, it is distance-related rather than a true ‘flagfall’. As in Germany, this distance-based component is affected by train speed. The fixed component is for a reserved train path and is payable by the customer regardless of whether they use the train path. The reference tariffs relate to a specified service performance standard. Individual customers can negotiate for specific needs or service characteristics that vary from the reference assumptions on axle loads, speed, train length, origin/destination, stops, and operating timetables. However, ARTC has committed to the Australian Competition and Consumer Commission that it will not charge different prices to different clients for similar service characteristics; or if applicants operate within the same end-market. ARTC agrees not to discriminate pricing between privately owned or government owned train operators. All negotiated tariffs are published.

While there are many models to choose from, this toolkit generally supports the simplest system that is compatible with a country’s aims and circumstances. Some fundamental questions are: how much to collect from railway users and how much from budgetary support; how much of the fixed infrastructure cost burden should be borne by the freight sector as opposed to the passenger sector without creating an effective tax on one sector to support the other; whether the parts of the network being priced are operating at or near capacity; how far to impose ‘take-or-pay’ on train paths that are reserved but not used; and how to design charges for international train movements so that each country involved obtains a fair share of the overall access charge and avoid creating incentives for each country to maximize its position and so collectively to discourage international traffic (Louis S Thompson, 2004).

2.3.6 Principles of Ramsey pricing

In theory, the economic benefits of Ramsey pricing apply to a separated rail infrastructure company as much as to a vertically integrated railway. But, the practicality of Ramsey pricing is greatly reduced with a separate infrastructure company. Infrastructure companies deal with train operating companies not freight customers, and are remote from the detailed market information that would allow managers to price to market. Moreover, Ramsey pricing may also now be less acceptable. Most separated railway infrastructure companies do not apply Ramsey pricing in any substantive form. In other words, a freight train hauling same number of gross tons of coal or general freight on a given train path often pays exactly the same, even though demand elasticity with regard to track access prices is likely to be much lower for coal than for container trains. Indeed, since marginal cost to the infrastructure company is so similar, it is unclear whether regulatory authorities would permit differentiated charges. Further- more, using Ramsey pricing, the price-to-cost ratio in less elastic markets would be much greater for infrastructure than in an integrated company because track- access charges are a fraction of total freight charges. Where economists may see justifiable price differentiation, regulators may see price discrimination.

Therefore, the venerable principle of Ramsey pricing may be weakened by placing its full burden on rail infrastructure charges rather than the total freight rate. If so, and other things being equal, vertical separation may have made it more difficult to maximize infrastructure utilization and to recover infrastructure fixed costs. Countries that pursued vertical separation are hoping that separation allied to greater competition in rail service will generate greater use and revenue for the railway network. Will potential economic benefits from competition in services outweigh the dilution of economic benefits from Ramsey price differentiation and the transaction costs of separation. This remains to be seen.

2.3.7 Cost and Contribution of the Rail Sector-

Study on the Cost and Contribution of the Rail Sector (2015) European Commission Directorate General for Mobility and Transport, Final Report, European Commission]. The rail sector makes a substantial contribution to the European Union (EU) economy, directly employing 577,000 people across passenger and freight operations and the provision of track [(Statistical Pocketbook 2015 (European Commission)] and station infrastructure. Some estimates suggest that, once the entire supply chain for rail services is taken into account (e.g. including train manufacturing, catering services etc.), the economic footprint of the rail sector in Europe extends to 2.3 million employees and €143 [The Economic Footprint of Railway Transport in Europe (CER, 2014)] billion of Gross Value Added (some 1.1% of the total) . It is also critical to the EU strategy for improving economic and social cohesion and connectivity within and between Member States, including through the further development of the TEN-T rail corridors, and is expected to play a major role in the reduction of carbon and other emissions from transport. The development of the sector has been encouraged over a period of more than 20 years through the implementation of an extensive legislative framework, including three major packages of legislation, and a fourth package currently being considered by the European Council and Parliament.

3.0 White Paper (2011), Roadmap to a Single European Transport Area….

Towards a competitive and resource efficient transport system, envisages much greater use of rail transport in the future. More specifically, the White Paper includes a number of rail-related objectives supporting a more efficient and sustainable transport system for the EU, in particular: 30% of road freight over 300km shifting to other modes by 2030, and 50% by 2050; Completion of the European high speed rail network by 2050, and maintaining a dense rail network in all Member States; By 2050 the majority of medium-distance passenger transport should go by rail; A fully functional TEN-T core network by 2030, with a high quality/capacity network by 2050; Connection of all core network airports to the rail network (ideally the high speed network) by 2050; Deployment of the European Rail Traffic Management System (ERTMS); The establishment of the framework for a European multimodal information, management and payment system by 2020; and Full application of user pays/polluter pays principles in transport. However, while the rail sector has achieved significant volume growth in recent years, rail’s modal share remains below expectations, accounting for only 6.6% of passenger km and 10.8% [(Statistical Pocket book, 2015 (European Commission)] of tonne-km within the EU28 in 2012. These average shares reflect a wide range of experience in different Member States, but are generally considered symptomatic of an overall lack of competitiveness driven by insufficient investment and inadequate customer- focused innovation across the EU (notwithstanding that the sector also absorbs at least €36 billion of public funds annually, some €80 for every European citizen [Fourth Report on Monitoring Development of the Rail Market (European Commission, 2014)]. As a result of these and other factors, rail has failed to challenge the dominance of road in both freight and passenger transport and, despite the considerable growth of high speed networks, has been unable to arrest the small but steady increase in the share of short to medium distance passenger transport taken by aviation since the mid-1990s. Moreover, ongoing constraints on the availability of public funds following the financial crisis are expected to reduce the traditional resources available for rail investment in a number of Member States.

Therefore it is opportune to look in depth at how different national rail systems have performed over recent years, and to learn from the best how to improve the efficiency of railways. Efficiency gap analysis….This section describes our approach to comparing the efficiency of national rail systems and presents our findings. First, it describes the analytical framework that we have used to assess the relative efficiency of different systems. It then explains how the analysis was applied in practice, and the approach taken to refining the selection of rail industry inputs and outputs subsequently used to define the core efficiency scenario selected for assessment. Finally, the chapter presents a summary of results for the most relevant combinations of inputs and outputs. From a national perspective, an efficient railway is one which maximises outputs and minimises inputs while providing the desired level of service. Within a cluster it should therefore, in theory, be possible for Member States to influence the drivers of costs and/or revenues such that individual railway systems deliver the same level of efficiency as the ‘best in cluster’. Example which shows a stylised relationship between output and efficiency. In this example economic entities a and b (which could be different national rail industries) are producing the same level of output, albeit with different levels of capital and staff productivity. Entity c, on the other hand, is able to combine inputs more efficiently and is therefore able to generate a greater level of output for a given level of inputs. It operates on the efficiency frontier, which defines the level of output that can be achieved by ‘best in class’ railway systems using different combinations of input (given the available technology).

In this example, and throughout the remainder of this section, the efficiency frontier is defined relative to the observed levels of output relative to input for the Member States included within the analysis. It may be the case, however, that the observed efficiency frontier from our sample of Member States is not the efficiency frontier for the wider population of rail systems across the world. This may arise, for example, due to missing observations in the efficiency analysis e.g. by including additional countries we may observe that EU Member States still have room for improvement. The results of this exercise, therefore, represent the scope for relative efficiency improvement compared to observed efficiency within the sample of EU Member States. Further efficiency gains may be achievable which are not captured in this study. Various techniques are available to assess the comparative efficiency of national rail systems…. For the purposes of this article, we used data envelopment analysis (DEA), a non-parametric technique that relies on linear programming analysis. Given a set of inputs (e.g. rolling stock units, track-km) and outputs (e.g. passenger-km, tonne-km), DEA fits an efficiency frontier which envelops the data. In comparison with other techniques, DEA has the advantage that it does not assume a functional form for the efficiency frontier, nor a distributional form for the data. It therefore avoids the potential bias of selecting the wrong functional form or distributional assumptions.

DEA can compute the efficiency frontier either as output-orientated (maximising outputs for a given level of inputs), input-orientated (minimising inputs for a given level of outputs) or through mixed approaches called ‘graph measures of efficiency’. EU Study on the Cost and Contribution of the Rail Sector Final Report have carried out our analysis under input-orientated settings, as this mirrors the logic used to build the scenarios (Merkert et al, 2010, p.40) identified for assessment. Once the efficiency frontier is determined, we calculate the inefficiency score as the distance between each data point and the frontier, with Member States on the frontier assigned a score of unity. In addition to measuring efficiency under an assumption of constant returns to scale (CRS), we have also provided estimates using a variable returns to scale (VRS) approach. The later method allowed us to isolate the impact of size on efficiency and thus extract a measure of ‘pure’ technical efficiency irrespective of the size of Member State being considered. VRS has been chosen as our preferred approach, and the measure of technical efficiency reported is broken down into two components - “pure” technical efficiency and the effect of scale.

3.1 Total capital productivity….

A developed two DEA models to explore the characteristics of total capital productivity (defined as including both track, freight train and passenger train related inputs simultaneously within a single data envelopment model). The first was a static model which only took account of the relative performance of Member States in 2012. The rationale behind this model was to understand how well Member States are able to combine both track infrastructure and rolling stock assets to deliver both passenger and freight outputs. Under an assumption of variable returns to scale, half of the Member States included were considered to be on the efficiency frontier. This is a function of the large number of both inputs and outputs that are included within the analysis and the fact that individual observations are therefore more likely to be captured by the efficiency frontier (which is expressed in a large number of dimensions). As can be seen with the exception of Poland, Member States in cluster C appear to perform particularly poorly against this specification of inputs and outputs. A second DEA model was developed using identical input and output measures, but which included observations from 2010 to 2012, chain-linked using a Malmquist Index . The purpose of this test was to examine the stability of technical efficiency coefficients through time. In-line with a number of modelled but un-reported DEA assessments (considering both three and six-year time horizons), the results of this model showed that coefficients were largely static through time and could not be used to discern efficiency trajectories.

3.2 Passenger efficiency….

Examined passenger efficiency by limiting the input measures used to track kilometres and passenger rolling stock, and the output measures to passenger kilometres. While the results are broadly as expected, with primarily higher-income western European Member States dominating the efficiency frontier, the presence of Estonia on the frontier was surprising. Upon inspection of the results generated under an assumption of constant returns to scale, we observed that Estonia is the least efficient Member State. It is likely, therefore, that the very small size of the Estonian passenger network (delivering just 235m passenger kilometres in 2012) means that scale effects are having a significant (and potentially spurious) impact upon the technical efficiency score for the country under an assumption of variable returns to scale.

3.3 Freight efficiency… The freight efficiency model is a direct parallel to the passenger efficiency model in that the inputs are track kilometres and freight wagons, and the only output is tonne kilometres. As shown in Figure 5.4, the best performing Member States are all relatively small, Northern European countries and, given the dominance of Russian transit freight it is unsurprising to see two Baltic States represented. There is no discernible trend in freight technical efficiency by cluster, although Member States in clusters B and C perform less well than those in clusters A and D.

3.4 Track utilisation…. Out of five of the six Member States on the efficient frontier generated by this model are higher-income western European countries, all of which procure a large proportion of their passenger services through public service contracts (this proportion is lower in Luxembourg due to the importance of international services). It is, therefore, unsurprising that they demonstrate high levels of track utilisation. The presence of Latvia on the efficient frontier is notable since we might expect this to be a result of the scaling process when considering variable returns to scale. However, under constant returns to scale both Latvia and the Netherlands are on the efficient frontier. This result is highly likely to be the result of the intensity with which freight traffic uses the rail network in Latvia. Despite having the third most disperse network in the European Union (measured by rail network length per capita), the Latvian rail network conveys more than double the quantity of freight per capita than its nearest rival Lithuania, and twenty times that of France.

3.5 Train utilisation….. As seen it is notable that a very large number of Member States are on the efficiency frontier in the train utilisation model. In the case of some Member States, this is because the variable returns to scale assumption identifies the cost minimising size of rail systems and then limits the comparison between Member States to those within a similar distance from the optimum. In contrast to many of the other models, however, in this case many large Member States are perceived to be operating at a level of output beyond the cost efficient level and therefore exhibit decreasing returns to scale. If their operations were smaller, i.e. they delivered fewer train kilometres, they would be able to operate more efficiently. Under an assumption of constant returns to scale, only smaller Member States (Denmark, Sweden, Netherlands, Latvia and Lithuania) can be found on the efficient frontier.

This result suggests that further work to investigate the optimal size of rail networks may provide insights on the mechanisms and policy levers through which greater efficiency can be achieved. In the presence of diseconomies of scale there may be a case for horizontal and/or vertical separation. It is notable, however, that the UK rail network in aggregate exhibits diseconomies of scale despite considerable horizontal separation. The observed outcome may, therefore, be a feature of co-ordination failure, coupled with extensive public service obligations that require the provision of services on sparsely utilised sections of the network.

The findings of the data envelopment analysis have extended our understanding of the performance measures obtained through the analysis of KPIs. They provide an estimate of the efficiency gap between best and worst performing Member States (both across the entire dataset and within clusters) across a range of scenarios. As discussed further in Chapter 6, the ‘total capital productivity’ model discussed here will be used to define the core scenario used in the scenario assessment exercise. They also support the rationale for selecting those Member States that are used to estimate output and employment multipliers. Further details are provided in the following.

3.6 The Need for Recasting Accounts….

Currently BR does not follow the commercial principles of preparing the Financial Statements in line with the best practices applied in the State-Owned Enterprises. The methodology used by BR to do its accounts has served well as a government entity so long as government earned sufficient tax revenue to provide for a socially desirable service such as railways, especially to passengers, under a monopolistic transportation market. The accounting procedures were well understood within the organisation but translucent to the outside world. Lenders and investors from whom BR has to raise funds now and in the future require financial statements in line with standard procedures laid down by the Institute of CA Bangladesh. Railways all over the world have been considered an important element of infrastructure, and governments of the day have played important roles in the organisation of railways. In recent times competitive forces from other modes of transport have diminished their distinctiveness but not their importance as essential modes of transport. If government had enough money, it could continue to run railways in the same way as it has done in the past 50 years i.e. providing grants and subsidised loans from the Consolidated Fund of Bangladesh. But today, the problem faced by BR is two fold. First, the government itself is in a financial bind. Second, BR needs a large amount of investment urgently to keep going because it has lived on borrowed time in the last decade by under-providing for capital stock. Misallocation of investment in the second half of the 1990s as described in the last chapter is hampering operations, which makes it imperative for BR to source funds from other than government sources. If railways have to attract funds from external sources, accounts need to be in the format that is understood by lenders and investors. Moreover, advantages of a standard set of accounts are that they serve as tools: (a) for monitoring by management, (b) for the owner to ensure that his investment is performing and (c) for outside capital providers to evaluate efficiency of capital. The key for all stakeholders is to provide a time tested mechanism which will allow them to compare IR with other enterprises i.e. the same standards that the rest of the world uses.

Apart from this, other reasons to recast BR’s accounts according to the provisions of Bangladesh GAAP are: First, the existing system of accounts does not give a true and fair financial picture of IR: one that could be easily understood by a trained chartered accountant or a financial analyst. To give an obvious example: in the absence of depreciation provisions in the balance sheet, nobody can ascertain the net block of BR. Similarly, the data are not presented in a way in which one can ascertain labour productivity or employee cost. Equally, there is no clear separation between revenue and capital, or between top of the line and below the line. These and many other reasons make IR’s accounts unintelligible to anyone other than those in the BR and in the ministry. Second, for any organisation of the size of BR, there has to be tight financial discipline and targeting. The present accounting system precludes that. For instance, the accounts do not allow managers to set revenue and other operational targets whose returns can then be measured against the corresponding cost of capital. In this system it is difficult to set up cost and profit centres that would then communicate the right incentives down the line. Third, it is important for BR and the Railway Board to know how the organisation would fare if its accounts were presented as per the Indian GAAP followed by companies incorporated under the Companies Act. Finally, BR’s survival as a provider of transport services to the growing Indian economy depends upon substantial infusion of investments. These cannot be financed out of the organisation’s surplus. Moreover, they are far greater than what the fiscally hamstrung GoB can provide as annual additions to ‘capital-at-charge’ year-after-year in perpetuity. Hence, it is imperative for BR to source funds in addition to the annual allocations from the central budget. Unfortunately, no outside investor will be willing to commit funds on the strength of BR’s balance sheet without knowing the expected return on capital. For that, investors will insist on a transparent, readily interpretable set of accounts. Even to access capital in the medium-term future, when IR has to borrow funds from outside, it must have accounts that lenders can understand.

It is worth emphasising that none of these reasons has anything to do with privatisation. Nor is it being claimed that recasting accounts according to Bangladesh or international GAAP is a prelude to privatisation. The rationale for recasting is quite different. BR operates entirely in the nature of commercial going concern. Therefore, its accounts should reflect that reality in a manner which is readily understandable by the financial and investing community. Recasting is driven by the need for greater financial transparency, for the shareholder to know how efficiently money is being spent, and for being used as a dynamic managerial tool. This indeed has been the objective of various reviews of BR finances since at least 1924. The existing system has been found deficient by all official review committees. Whether BR is privatised or remains perpetually in the hands of GoB is irrelevant to the need for injecting transparency in the way in which financial statements of BR are exhibited.

4.0 Status of Technology and Availability of Resources

The areas considered for discussion with regards to the status and availability of technology, include, High Speed Operation, Heavy Haul, Signalling and Traffic Management System, Safety-related, Security related, and Passenger Comfort-related.

4.1 Technologies related to High Speed Operation:

High-speed operation will need development of many associated technologies, some of which are along with availability of resources. High-speed operation is a technology well proven in Europe and in countries like China and Japan. It involves development of a large number of associated technologies, which can be purchased from proven sources. However, they could be prohibitively costly and may not be sustainable in the long run for maintenance. Initial import followed by indigenous development for long term sustenance, like the strategy adopted by China, is advisable.

4.2 Technologies related to Freight Operation: Heavy haul is considered to be one of the most efficient methods of increasing freight throughput, if proper technology is applied. Under this, many technology areas need to developed, including, wagons with higher payload to tare ratio, use of higher axle load, use of long trains with radio controlled distributed power (RDP), use of long trains with wired distributed power (WDP) and IT enabled freight operations management service with end-to-end wagon tracking system.

4.3 Technologies related to Signalling and Traffic Management System: The type of signalling and traffic management affects the overall efficiency and safety of operation. European railways were the pioneers in evolving a standard for automation in this area–ETCS (European Train Control System)–which involves provisioning in both trackside and on-board the vehicle. Depending upon this provisioning and safety levels, there evolved ETCS levels 0, 1, 2 and 3. ETCS level 3, together with GSM-R evolves ERTMS, which also has levels 1, 2 and 3 depending upon the nature of track to vehicle communication. ERTMS is now a proven technology and would be needed in the future for Indian Railways to achieve the planned objectives. This is complex, involves multi-disciplinary technologies, and needs huge investments. Developing totally indigenous systems would take enormous time, but to sustain in the future, possession of this technology with Bangladesh industries (even with foreign tie-ups) would be essential. To begin with, this technology needs to be bought from proven sources with a phased plan for indigenisation.

4.4 Technologies related to safety….

Coaches with better crashworthiness. Design of coaches with better crash worthiness, which is an area that would need outside support, at least in the form of consultancy. Accidents at level crossings- Highest numbers of fatalities over IR occur due to accidents at unmanned level crossings. In ERTMS (The European Railway Traffic management) territories, interlocking of level crossing would be taken care of as part of the basic requirement. However, many level crossings, due to its low traffic (train vehicle units), are not financially justified. Alternative technologies must be developed in such cases to avert accidents. This can very well be achieved indigenously with available resources. Accidents due to extremism and vandalism-This is a requirement which is very difficult to implement. Suitable technology must be evolved to detect suspicious movements and extremist activities on the track. On the rolling stock side also, suitable surveillance mechanism must evolve to detect carrying of explosives and banned items. This could possibly be developed indigenously with available resources. Accidents due to fire-Better designs to avoid fire and also detection and extinguishing technologies must be evolved.

4.5 Technologies related to security…..

A better surveillance and vigil mechanism is needed to curb crimes in moving trains and station areas. Technological tools like the following should be considered: Development of on-board CCTV surveillance….real-time monitoring is possible by a police squad in a nominated area in every train, for instance in the guard’s van. In such a case, there is no need for police to patrol the entire train in case of vestibule trains. Development of systems that can be enabled by passengers in case of any security issues like terrorism and banditry attacks. These systems can take a snapshot and send to the on-board police control room for quick action; New station designs for better surveillance; New station designs for evacuation of public in the event of disasters caused by terrorists; New yard designs, which prevent access to unauthorised persons and/or facilitate remote monitoring and policing; Systems (intended for installation at railway stations) for detection of explosives, inflammables, etc; Ability of railway coaches to detect the on- board presence of explosives, inflammables, etc; Ability of rolling stock to detect if explosives are planted on tracks or if damage has been inflicted to track by terrorists and transmit warning message to control centres; Ability of railway infrastructure/ inspection cars/ trains to effectively detect and issue advance warning if explosives are planted on tracks or if damage has been inflicted to track by terrorists; Coach design should facilitate efficient evacuation of passengers in event of an explosion/ disaster; Securing transportation of strategic importance e.g. defence supplies, emergency relief consignments, etc. from terrorist strikes; Efficient system for security scanning of freight being received/ booked for movement; Systems for detecting suspicious activities in yards (i.e. planting of explosives on coaches, wagons, etc.); and Tamper-proof design of critical railway systems (e.g. rolling stock, signalling, relays, SCADA, etc.) All the above aspects can be indigenously developed using available resources.

4.6 Toilets and other facilities:

There has not been any improvement in the design of toilets in trains. Efforts were made in the past with some type of bio-friendly toilets and collect-and-discharge type toilets. This environment friendly, low cost and robust technology, jointly owned by IR and DRDO, is the first of its kind in Railway Systems in the world. However because of the nature of traffic, duration and type of logistics used are quite different in railway than in aircrafts, a suitable technology needs to be developed to make toilets as familiar to that of an aircraft. Multi-modal station designs and facilities for persons with disability: Enough has not been done to make the travel of differently-abled and aged persons comfortable. The height difference between the platform and carriage floor in many stations, makes it difficult for aged and disabled persons to enter and exit. A special carriage can be designed and attached with every train and in such a special carriage, a few seats/ berths can be allotted for differently- abled and aged people. Further, coaches can be developed to suit persons travelling across the country for medical treatment. Even moving from one platform to another at short notices, during sudden announcements of platform change, becomes a nightmare.

4.7 Technologies related to energy management and environment issues, Power supply arrangement: The power requirement of a high-speed train is enormous. Each power head may be of the order of 6MW, and for a normal train configuration, 2 to 3 such units may be attached in one train, making the requirement above 12-18MW.The traction substation capacity and spacing needs augmentation. Presently, single phase is used for traction, and this may continue in future as well, till a path breaking technology is developed to make the present scheme obsolete. In order to balance the grid, three phases are staggered and fed to the OHE in successive substations. This requires creation of neutral sections in the OHE segregating different phases. The driver is required to switch off the loco circuit breaker before entering the neutral zone and again switch on after passing the neutral zone. This is becoming difficult even at the present speeds of 130-140 km/h, especially at night with poor visibility. It also adds stress to the driver. For high-speed operation, an automatic mechanism is needed to detect the neutral zone and switch off and switch on the circuit breaker without the intervention of driver. But in this case, there will be loss of power for some time, which may affect the average speed; A better method would be to dynamically shift the neutral section so that there is no need to switch off the locomotive power. Some countries have already developed this technology. India needs to develop and perfect it.

4.7.1 Energy efficient traction–more regeneration:

Energy efficiency must become the keyword for design of any equipment. Every type of electric traction rolling stock must have regenerative capability and feedback to the grid. The new generation fleet is being produced with regenerative capability. Railways must review the useful life of the old fleet of rolling stock and depending upon the financial viability, develop suitable energy recovery devices. This could involve changeover to a new type of converter for energy recovery.

4.7.2 Captive development of renewable energy sources/alternate fuels for traction:

Although Railways being known as one of the environment friendly mode of transport as compared to roadways, there is a steady increase in the fuel bill. The second largest expenditure of Indian Railways is fuel, both electric and fossil fuels. Hence the need of the hour is to shift towards renewable sources of energy and alternate fuels. Alternate fuels like Bio-diesel, CNG/ LNG are cheaper than diesel and have potential to replace diesel as a preferred choice for traction fuel globally. Suitable IC engines must be developed to take care of the alternate fuels.

4.7.3 Development of Hydrogen fuel cell based locomotives/EMUs is another option:

Next generation vehicles are expected to be working on fuel cells. It would be advisable to initiate a technology development project of hybrid electric-cum-fuel cell locomotives. The initial development can be aimed at low power shunting engine or a rail car. Use of solar power for station lighting and ventilation… Progressively, the station lighting and ventilation must get shifted to solar power. Suitable technology and industries are to be identified for achieving this objective. Smart railway energy grids… The traction power requirement is diverse and varies widely. It is difficult to maintain a constant demand pattern as required by state electricity boards. In future, a separate smart energy grid may be developed, through which, better energy planning and management is possible.

4.7.4 Waste management for trains, stations:

Keeping Bangladesh trains and stations clean is possible only by the use of appropriate technology. Suitable technology needs to be developed and waste must be re-cycled for generating energy. Tapping piezo-electric power (floors) for station energy needs: In busy railway stations like Dhaka, Gazipur, Chittagong, Khulna, Rajshahi and Sylhet, the principle of piezoelectric power can be used for generating part of the station energy requirement. It would be interesting to develop suitable technology to derive piezoelectric power from the floors of station area made of piezoelectric crystals. Simultaneous use of piezo-electric principle for deriving power for level crossings (for audio visual warning) also may be explored. In this case, piezo-electric mats may be kept between rail and sleeper or below the sleeper, allowing energy to get stored during passage of the train. Use of complete renewable sources for station energy requirement… Bangladesh Railways should identify stations, wherein the entire station energy requirement is generated through renewable sources. This can be done by designing a suitable multiple source local energy grid for station applications. The energy sources, which may be connected to the grid, can include solar, wind and biomass (from the waste generated in the trains, station area and surroundings). Computer assisted driving and cruise control…This will bring in energy saving and optimum time of travel.

5.0 Roadmap of Railways Technologies-Capacity Augmentation

Between now and 2031-45, the passenger and freight traffic in Bangladesh is expected to grow by another 40% and 37% respectively. However, while both passenger and freight traffic has shown phenomenal growth, the inputs have not grown at this rate. Though railways have evolved from steam to diesel to electric traction, and also adopted a uniform gauge policy (broad gauge), technological intervention has been rather slow and also out of pace with the global standard of development. Technology intervention is needed in the following key areas – maximum speed and average speeds of passenger trains, average speeds of freight trains and load carrying capacity of wagons.

These above three key enablers will need further technology intervention in many associated disciplines, including- high speed trains with tilting technology, tracks suitable for higher axle load, better payload to tare weight ratio, signalling and communication systems for safe operation, use of energy efficient systems, and other passenger amenities and facilities. One of the following options can be adopted in increasing the throughput of passenger and freight trains: a) Developing an exclusive freight network, connecting major centres of business, originating points of minerals, ores and ports. This will ease out the freight traffic from the existing mixed lines. Augment the existing network for higher speed, which must be used for passenger traffic and freight feeder service only. b) Alternative to the above could be developing exclusive high speed passenger network connecting state capitals, existing major railway junctions, centres of business, and airports. In this scenario, existing network must be used predominantly for freight traffic and for passenger feeder services. Two dedicated freight corridors between Dhaka-Chottogram-Coxes Bazar and Dhaka-Rangpur-Dinajpur, Dhaka-Barisal-Patuakhali-Paira, Dhaka-Jashore-Khulna-Mongla are to be built. In parallel, railways have also set-up another corporation for building a high speed rail corridor (HSRC). However, unless these two agencies plan and build passenger and freight networks with seamless integration and with due coordination of the railway ministry, the future vision will not be fulfilled. The latter option is preferred, as it will cause least disturbance in changing over from the present to the future. Passenger traffic has to be dealt under the three categories can be mentioned as: (i) Long distance travel involving a night or part of a night requiring sleeper facilities; (ii) Medium distance involving four to five hours of travel (example business travel); (iii) Short distance commuting, involving less than two hours of travel and including suburban and urban transport like metro rail. For passenger capacity increment under category (i) and (ii) above, following options are possible: Dedicated high-speed passenger corridor, similar to ICE, TGV and 1 SHINKANSEN connecting state capitals, national capital, import- ant business centres and towns. Feeder services to this high-speed network using the existing rail connectivity or by way of incremental additions. Raising the maximum operating speed to 350 km/h and establish 3 an average speed of at least 300 km/h. Please note that many countries, including China, have already developed this capability. Make the passenger fare different for long distance and medium distance travel to discourage medium distance travellers from using long distance trains. Such variable fare can be linked with availability of seats. During lean periods, if there is excess capacity in long distance travel, the same can be given at a subsidised rate. The above are only suggestive; however, the whole situation should be reviewed considering the socio-political requirement.

6.0 Strategy for Application Technology in Railway Transportation

Various aspects needing attention, while evolving the strategy for rail technology development, especially in Bangladesh context, include but not limited to capacity to be created for the projected traffic (both passenger and freight), transit times, which is directly related with operational speeds (maximum and average), safety of operation, security of passengers and goods, punctuality, passenger comfort during travel and changeovers and intermodal transit facilities.

6.1 Traffic Protection by 2031 and need for Technology Intervention

Railway travel is very quite economical in Bangladesh and normally passenger fares are kept much lower than other modes of transport, thus, making it a preferred mode for most of the low and middle- income groups in India. Being directly under the ministry and its working capital being made available from the consolidated fund of India, it follows an administered tariff. Population rise is one of the important drivers for capacity addition in railways. By 2035, it is expected that population will increase up to about 170 million from current (2015) figure of 200 million. Hence capacity increase is a
must for passenger traffic across all categories– medium-to-long haul, suburban and urban.
This can be achieved only through additional capital investment and adoption of appropriate technologies. Unlike in many developed countries, Indian railways have a mixed traffic, running both passenger and freight trains on the same track. This type of operation drastically reduces the average section speed and through put. The average section speed is directly related to the carrying capacity, be it passenger or freight. This issue can be resolved in two ways – either by reducing the speed differential between passenger and freight trains, or by having dedicated passenger and freight lines. Having dedicated freight and passenger lines should be the ultimate aim. While both passenger and freight traffic have phenomenally increased since 1950, as could be seen from the steep curves, rest of the growth inputs involving capital investment have remained almost stationary. Most importantly, the running track km and route km have remained almost static. This also explains the reason for the present supply-demand crisis and the consequent huge customer dissatisfaction. This supply-demand gap can be addressed only through appropriate growth inputs and technology intervention, both need huge investments.

6.2 Bangladesh vs Global Trends-Present and Future Scenario

There are various parameters which can be measured while comparing the Indian railways with other countries. However, the standard indicator is the length in km, which includes urban/ suburban mass transport system. According to the International Union of Railways (UIC), Indian railways to be counted as one of the best in the world, but still lags behind the developed countries (United States of America (USA), Germany, France and Japan) in terms of route-km per square km or route km per million populations served. United States has over 3,00,000 route km owned by nearly 215 agencies including all types of lines, all 1435 mm standard gauge. China has nearly 1,44,000 route km comprising 3 gauges of 1435 mm (predominant), 1520 mm (Russian gauge) and 1000 mm (metre-gauge) whereas, Russia has 128,000 route km comprising 2 gauges of 1520 mm (predominant) and 1067 mm (cape gauge). India is at the 4th position with 66030 km of route length of predominantly broad gauge (1676 mm),

In terms of originating freight per year, there are only four countries in the world that carry more than 1 billion tonnes of originating freight per year and these are – China, Russia, United States, and India. Various key global technology areas and trends are examined in this section, and compared with the current state of technology in Bangladesh. Rail transport is used widely in many countries.
In Europe and Japan, electricity is a major energy source for rail, while diesel is a major source in North America. Coal is also still used in some developing countries. In India, it is dominated by diesel as major energy source for locomotives; however, just around 33% of BR route km has been electrified so far, on which, around 66.5%of freight and 51% passenger traffic is hauled, the fuel cost on electric traction remaining just 31% of the total fuel cost.

The technology prowess of any railway system is often gauged by their high-speed operation. Japan was one of the pioneers of high speed technology with its (Shinkansen) bullet train, initially running at a commercial speed of about 230 km/h. This was subsequently raised to 300 km/h and 320 km/h, and recently its maglev bullet train has reached a speed of 603 Km/h. French National Railways (SNCF) high- speed train TGV (Train of Grande Vitesse) recorded a test speed of 574.80 km/h, on April 3, 2007. China, who started developments on high speed operation rather late, soon overtook all the players by operating the world’s fastest trains at 380 km/h. France, Germany, Italy, Japan, Korea and China are the countries in the elite high speed club. High speed is a relative term, and today in the global context, commercial speeds of above 300 km/h can be considered as a high-speed operation, though in Indian context, speeds above 200 km/h can be treated as high speed. Recently the Bangladesh Railways reached the maximum operating speed of 160km/h from the earlier maximum speed of 140 Km/h. However, the average speed is 100Km/h, which is quiteless due to mixed passenger and freight traffic on same tracks. Bangladesh Railways is now contemplating adopting high-speed operation by making dedicated high-speed corridors. The speed of operation is expected to increase further up to 250-350 km/h. From the above, it is clear that Indian railways is far behind many developed railways, however, this can be overcome through expanding the capacities of the railways as well through the adaptation and development of new and advanced technologies .

6.2.1 High Speed Passenger Operation……

According to UIC, “High speed rail is not only a technical subject, but encompasses a complex reality involving various technical aspects such as infrastructure, rolling stock and operations and cross-sector issues such as financial, commercial, managerial and training aspects”. In the Bangladesh context, speeds of above 200 km/h can be considered under high speed operation, as it involves various special factors and procedures mentioned above. In railways, the iron wheel translates the rotary motion into linear motion of the train through rail-wheel friction. Till early 1980s, it was believed that the maximum speed that could be achieved through rail-wheel friction is 200 to 250 km/h. In order to break this barrier, development happened in the field of magnetic levitation, in which, the driving force of the train is not transmitted through friction, but through electro-magnetic force available through linear motors, and the train floats on guides while in motion. As the force and power requirements are quite large, needing huge currents, superconductivity is needed for reducing the losses. The pioneering work was done by Japan and experimental models with tests speeds of close to 500 km/h were achieved. However, due to exorbitant cost of track, rolling stock and associated technologies, maglev technology has not proliferated as a mode of rail transportation commercially. This could be the reason for many countries in Europe and also Japan, to do further research in the rail-wheel friction technology, which resulted in increasing the speeds beyond the earlier barriers and reaching 250, 300 and 350 km/h, and France (TGV) ultimately achieving the record test speed of 574.80 km/h in 2007. In view of the above developments, in the Bangladesh context, at least for the present and near future, rail-wheel friction technology would be the feasible solution for high speed commercial operation, though, this too is quite expensive. Use of lightweight materials, designs providing low aerodynamic drag, tracks with very low curvatures, use of onboard mechatronics to reduce the forces while train negotiates curves (like tilting technology, self-steering bogies etc) in order to keep the passenger comfort and derailment coefficient within acceptable limits are some of the mandatory requirements for high speed trains.

Jamaluddin Ahmed PhD FCA is the General Secretary of Bangladesh Economic Association, Former member of Board of Directors of Bangladesh Bank, Former Chairman of the Board of Directors of Janata Bank Limited and Former President of the Institute of Chartered Accountants of Bangladesh.