Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

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Railway Reform: Toolkit for Improving Rail Sector Performance 4. Financial Sustainability for Railways There are several steps to analyzing railway traffic. First, identify the main customer and product segments. For example, for a freight carrier, the main product segments could be coal, grain, or intermodal. For a passenger carrier, the product segments could be commuter, regional and interurban (Figure 4.3). Traffic segments are usually a country-specific mix of freight and passengers—no standard optimum composition exists. The second step in analyzing railway traffic is to identify the rail market share of the main traffic segments and assess the competition. This involves examining trends in volume, market share, and traffic mix to understand market characteristics and the services the railways need to offer to be competitive. A final step might be to examine the market for other transport modes such as highways, waterways, or air transport to find out if railways could compete with some of their services. Pricing A second component of railway revenue is pricing, which is governed by three main factors—costs, competition, and regulation. Often, the railway must attempt to manage all three because prices need to cover costs, but revenues may be limited by both the regulator and the market. Nevertheless, railways should price to maximize the contributions of the traffic. 39 This requires the railway to understand how to price its services competitively—low enough to retain customers but high enough to maximize revenues. Also, the railway must understand demand elasticity to know when lowering the price will yield more revenues because traffic volume will increase more than price decreased. Finally, the railway must accurately calculate its variable costs for providing services to ensure that prices are above costs, and to enable it to select the price most likely to maximize contributions above variable costs. Typically, a regulator sets railway prices or the upper price limits for infrastructure providers, and often, for freight and passenger providers too. Therefore, knowledge of the regulatory process and the political forces that influence it are prerequisite to understanding railways’ revenue structure and revenue risks. Sometimes, prices are set in the context of service agreements—governments pay railways to provide specified services at an agreed price. Therefore, it is critical to understand the variables that influence the price that government is willing to pay for these services. Revenue collection Prices established, services provided, the railway must then collect payments. This is not always straightforward, because sometimes clients stop paying. The railway should monitor revenue collection and withhold services from clients that are in arrears. However, governments often intervene in railway service provision, forcing railways to continue providing services in spite of arrears to support sectors that are experiencing economic difficulties. Revenue collection problems will be reflected in the railway’s provision for uncollectable accounts (bad debt expense) or in its accounts receivable (Figure 4.4). The proportion of uncollectable accounts relative to overall revenues will indicate the magnitude of the railways’ revenue collection problem. 39 Contribution = Revenue - Variable Costs The World Bank Page 50
Railway Reform: Toolkit for Improving Rail Sector Performance 4. Financial Sustainability for Railways Government subsidies/service payments Governments compensate railways for providing socially important but commercially unprofitable railway services. Revenue analysis should include these important sources of revenue, their payment structure, and any associated risks and variability. Examples of public service contracts (PSCs) might include passenger operations to remote and sparsely populated areas, or discounted travel privileges for eligible passenger categories such as students, military, and pensioners. The railways’ financial sustainability can be impaired by PSC payments that fail to cover total costs, so it is crucial that the railway ensures adequate compensation for PSC services. Typically, compensation levels rise with the frequency of operations and the extent of the network covered by the PSC. Ratios Ratios that are often used to analyze revenues are shown below. The World Bank Page 51
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Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

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