Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

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Railway Reform: Toolkit for Improving Rail Sector Performance Annex 2: Benchmarking The analysis aims to identify which of the benchmark railways’ good practices are responsible for better performance, and then implement these practices in the subject railway. The World Bank Page 230
Railway Reform: Toolkit for Improving Rail Sector Performance Annex 3: Service Costing and Profit Measurement Annex 3 Service Costing and Profit Measurement Systems 1 Use of Service Costing and Profit Measurement Systems Service Costing and Profit Measurement Systems (SCPM) provide detailed cost and profitability information for railways service provision. Typically, railways fixed costs are substantial and shared broadly by all traffic groups. So most SCPMs calculate variable costs, and measure service profitability by how much the service contributes to the railway’s fixed costs (e.g., contribution = revenue - variable costs). Railways use SCPMs to provide information for the following activities: • Commercial pricing • Prioritizing use of scarce resources • Identifying opportunities for cost reduction • Investment analysis The primary purpose of any SCPM system is to support commercial pricing decisions. The general principle of commercial pricing is to maximize profit (the services’ contribution to the railway’s fixed costs), knowing both the costs and the market. This principle is sometimes expressed as “price to the market, not to costs….but price above costs.” Box 1 You Cannot Make It Up On Volume In 1980, during an economic recession, railway pricing in the US was deregulated. Railways were eager to use their new pricing freedom to attract as much traffic as possible to their lines. One railway management decided that their marketing department should not know the service provision costs because, “We want them to price to the market. Even if we lose money on individual movements, we can make it up on volume.” Development of a SCPM model for this railway disproved this approach and provided the marketing staff with tools they needed for market-based pricing decisions to improve the railway’s finances. To make the best pricing decisions, railway marketing staff must know both their customers and their competition—whether, for example, a small price reduction The World Bank Page 231
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Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

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