Parameters in IR -
OR, PEI, TOR, SFC & SEC
By Nageswara Rao, 9492432160
O.R. - Operating Ratio
" What cannot be measured, cannot be managed" By Peter Drucker/ Deming
"If you cannot measure it, you can’t improve it" By Lord Kelvin
Questions:
1. What is Operating Ratio? How it is calculated?
2. Computation of the Operating Ratio from the set of figures given in the problem.
3. Is the OR, the best financial ratio to show the performance of Railways? If the answer is No, what is the reason and which one is the alternative one?
4. Can we extend the O.R to the Divisions in replacement of PEI (Performance Efficiency Index)? If so what are the mechanisms and the benefits that accrue to Railways?
Now let's check the answers:
1. What is the Operating Ratio? How it is calculated?
Codal provisions - Para 308 & 434 of I.Rly.Finance Code.
It is regarded as one of the Most Important financial statistics/ratios and has frequently been used as an Index of the operating efficiency of the Railways.
Definition of O.R.: Percentage of Gross Working Expenses to Gross Earnings of any accounting year.
In simple terms, the Operating ratio is the number of rupees spent to earn every 100 Rupees.
If O.R. is less than 100 = Organisation is in profits.
If O.R. is more than 100 = Organisation is at loss.
Definition of Gross Working Expenses (GWE): Ordinary Working Expenses-OWE (erstwhile Demands 3 to 13) plus Appropriations to DRF-Depreciation Reserve Fund and Pension Fund.
Note: True expenses in an accounting period whether or not actually disbursed. That means excludes Suspense. That is Accrued expenses.
Definition of Gross Earnings: Coaching Earnings (Abstract X) + Goods Earnings (Abstract Y) + Sundry other Earnings (Abstract Z)
Note: true or accrued earnings in an accounting period whether or not actually realised. That means excludes Suspense.
Always considered Apportioned Earnings instead of Originating Earnings.
Gross Working Expenses
O.R = _______________________ x 100
Gross Earnings
There is no ideal Operating Ratio for Indian Railways. In the railroad sector, an operating ratio of 80 or lower is considered desirable.
Advantages of Lower OR: Helps in generating internal resources for meeting requirements of Plan Expenditure on Safety (RSF), Amenities to Passengers & Staff (D.F), and other Capital investments such as laying of new lines, acquisition of Rolling Stock, etc (Capital Fund).
In the year 2005, Indian Railways, changed its accounting policy for the lease charges. The lease charges have been broken into two parts - capital and revenue. While revenue has been charged to working expenses (Demand No.9G), the capital portion is separately provided for in the capital budget ( Plan Head 2200-Leased assets - Payment of capital component of lease charges to IRFC, etc.). This has resulted in the reduction of working expenses and the operating ratio.
Measures to be taken to achieve the Lower/efficient O.R. are
Maximizing the traffic earnings inter-alia including rationalization of fare and freight tariff;
Effective marketing strategies to capture more and more traffic;
Creation of additional capacity
Optimum utilization of the existing rail infrastructure.
Contain the expenditure through diverse means including strict economy and austerity measures;
Improved manpower planning;
Inventory management;
Optimizing the fuel consumption.
The Best ever O.R of Indian Railways was 74.7 % in 1963-64.
Last few years O.R. of Indian Railways is
2015-16 - 91.25 %
2016-17 - 90.48 %
2017-18 - 96.5 %
2018-19 - 98.44 %
2019-20 - 97.29 %
2020-21- 98.36 %
2021-22 -98.93 % (Target)
Comparing O.R of Indian Railways with other countries ' railway's systems - Not possible due to different computation methodologies across different countries thus reducing the validity of comparison of such statistical figures.
Glossary - Excerpts from Finance Code Para No.308 - better to understand Operating Ratio and Railway finances.
Net Receipt is nothing but Surplus. (Till 2017-18, Net Receipts minus Dividends is equal to Surplus. From 2017-18 onwards, the Dividend payment is not required due to the merger of the Railway Budget with the General Budget)
Appropriation of Surplus: The surplus will be appropriated to Development Fund, Railway Safety Fund, Capital Fund, RRSK, and latest created fund " Railway Liability Reserve Fund.
Comparing O.R of different Zonal Railways: It is not possible to compare the O R of one Zonal Railway with another Zonal Railway due to several factors such as Floods, Accidents, and other special factors. Hence it is better to compare OR of a particular Zonal Rly on Year - Over - Year (YOY) basis.
In simple terms, the Operating Ratio is calculated based on the following glossary terms only
Formulae of OR = Gross Working Expenses \ Gross Earnings x 100
Forget the following Glossary terms of calculation of O.R.
2. Working out the following from the set of figures as given below.
i) Operating Ratio ii) Net Receipts or Surplus/Shortfall
Solution:
i) Operating Ratio
Formulae of OR = Gross Working Expenses / Gross Earnings x 100
Gross Earnings = Gross Receipts minus Suspense
Hence 1400 - 150 = 1250 is Gross Earnings.
Gross Working Expenses = Ordinary Working Expenses(OWE) + App. to DRF & P.F
Ordinary Working Expenses ( OWE) = Actual Expenditure minus Suspense
= 800 - (-) 50 = 850 (Note: Minus of Minus = Plus)
Gross Working Expenses = OWE + App. to DRF & Pension Fund.
Gross Working Expenses = 850 + 65 + 85 = 1000
Hence O.R . = 1000 / 1250 x 100 = 80 %
ii) Net Revenue
Net Revenue = Total Revenue Receipts - Total Revenue Expenditure
Total Revenue Receipts = Gross Receipts + Misc Receipts.
= 1400 + 50 = 1450
Total Revenue Expenditure = Gross Expenditure + Misc. Expenditure
Gross Expenditure = 800 + 65 + 85 = 950 and Misc. Expenditure = 25
Total Revenue Expenditure = 950 + 25 = 975
Net Revenue/Net Receipts/Surplus = Total Revenue Receipts - Total Revenue Expenditure
Net Revenue/Net Receipts/Surplus = 1450 - 975 = 475
Note: Appropriation to Development Fund, Railway Safety Fund & Capital Fund will not be considered for calculation of Operating Ratio/Net Revenue/Surplus.
3. Is OR, best financial ratio to show the performance of Railways ? If the answer is No, what is the reason and which one is the alternative one?
It is true, that the Operating Ratio itself is not a perfect indicator for judging the efficiency of Indian Railways.
Let's see the below hypothetical illustration of two Railways.
Considering the Operating Ratio as an efficient indicator, Railway "A" is more efficient than Railway "B". But taking ROR/ROCE i.e., an indicator of utilization of Capital, Railway "B" is more efficient than Railway "A".
If so, as mentioned in Para 511 of Indian Railways Administration and Finance - An Introduction, Return on Capital i.e., percentage of (revenue) surplus to Capital-at-charge is the true indicator to judge the financial performance of Indian Railways.
Revenue Surplus = Net Receipts (actual basis) after adjusting misc receipts and misc expenditure (item xxi of para 308-Finance Code)
Capital at Charge means "the Central Government's investment in the Railways by way of Loan Capital and value of the assets created therefrom. (item xxii of para 308-Finance Code).. However, it is zero after the merger of the Railway Budget with the General Budget from 2017-18 onwards
To sum up, the combination of the above two Ratios will be considered to evaluate the performance of the Railways instead of the Operating Ratio alone.
Operating Ratio is helpful for comparing the Railways' efficiency of Year-over-year(YOY) as well as evaluating the Inter-Zonal comparison among different Zonal Railways in India.
4. Can we extends the O.R to the Divisions in replacement of PEI (Performance Efficiency Index)? If so what are the mechanisms and the benefits that accrue to Railways?
DIVISIONS and PEI - Performance Efficiency Index
At present, PEI is the performance indicator in the Divisions ( like OR-Operating Ratio for Zonal railways)
As of today, OR is not being calculated for Divisions and thus they cannot be treated as “Profit Centers”.
PEI = a ratio of Demands 3 to 12 and Originating Earnings x 100
That means, unlike Operating Ratio, Appropriation to DRF and Pension Fund will not be considered for calculating PEI. Also Apportioned Earnings not considered for calculating PEI.
Demands 3 to 12
PEI of Division = _______________________ x 100
Originating Earnings
Note: In some Zonal Railways like SCR, D.No.13 is also included for calculating PEI.
So, the drawbacks and their solutions for computing the Operating Ratio of their respective Divisions are
1. Appropriation to DRF -
3. Apportioned Earnings - Right now, based on the proportionate distance of consignment or passenger traveled over the Zonal Railways, the apportioned earnings can be calculated for the Zonal Railways. The same mechanism will apply for calculating apportioned earnings for the Divisions based on distances covered among Divisions within a Zonal Railway. With the help of Computers, it can be a very easy exercise.
If we address the above drawbacks incorrect approach as stated above, Divisions also can able compute Operating Ratio (OR) and became Profit Centers similar to Zonal Railways.
Finally, it is to contemplate, if the calculation of OR is discontinued and calculate PEI for Zonal Railways too, What are the effects and advantages to the Indian Railways.
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Inventory Control
Covers all phases of Inventory right from Indenting to final issues to Works/Operations.
Two kinds - Periodical and Perpetual.
Helps unnecessary accumulation of materials as well as avoids blocking of Capital.
It is needless to emphasize that all inventory is money locked up forms part of Capital Suspense i.e., Stores Suspense 2071.
Pareto principle: 80:20 Rule
Baseline for ABC analysis in Indian Railways.
Also known as Always Better Control.
Fixing A, B & C categories - Based on their Average Annual Consumption in Zonal Railway.
ABC Analysis in SCR
Steps for better Inventory Control:
Continuous and critical reviews of balances should be done while finalizing new purchases
Invoking option clause in the Purchase Orders.
AACs are to be reviewed duly taking the changes in designs & drawings.
Taking advantage of GeM/IREPS, opt for JIT - Just In Time approach.
INVENTORY TURN OVER RATIO
TOR: Ratio of Stores Balances at the end of the financial year to Total issues during the year
TOR formulae = Stores Balances as on 31st March/Total Issues during the year x 100
Stores Balances = Stores in stock + Stores in Transit + Purchase Suspense + Sales Suspense + Stock Adjustment Account
TOR is Efficiency Indicator for Inventory Management
Ratio of Stores Balances at the end of FY divided by Total Issues during the Year.
Expressed in percentage.
Lower the Ratio betters the health of Inventory Management of a Railway or vice versa.
Stores balances mentioned in the calculation of Turnover Ratio comprise of –
Stores in Stock
Stores in Transit
Purchase Suspense
Sales Suspense
Stock Adjustment Account
Practical
1. Calculate Turn Over Ratio of ABC Railway as of 31.03.2022 from the data given below:
Total Issues during the FY 2021-22 = 5000
Stores in Stock as of 31.03.2022 - (Debit) = 700
Stores in Transit as of 31.03.2022 - (Debit)= 5
Purchase Suspense as on 31.03.2022 - (Credit) = 20
Sales Suspense as of 31.03.2022 - (Credit) = 10
Stock Adjustment Account as of 31.03.2022 - (Debit) = 75
Solution:
Turn Over Ratio Formulae
Stores Balances as on 31st March / Total Issues during the year x 100
= 700+5-20-10+75 / 5000 x 100
= 750/5000 x 100 = 15 %
Note:
Normally, TOR in Commercial firms other than Railways is calculated as below
TOR = Total Sales during the year / Average Inventory during the year
Higher the Ratio better the health of Inventory Management of an Organisation or vice versa.
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SFC - Specific Fuel Consumption
Indicator of Fuel economy
Measured in terms of Tonne KMs
Definition: Amount of fuel consumed per unit of work done.
Measured both the Engine and the Total formation of the Train.
Lower the SFC, the Better the Fuel Economy.
Engine:
The unit of SFC for the Engine is Grams/bhp hour. Grams represent Quantity of Fuel, whereas bhp hour (brake horsepower) represents work done. .
At present, the SFC of ALCO Engine is 155 Grams and of GM Engine 150 Grams (Approx.)
ALCO stands for American Locomotive Company
GM stands for General Motors
For the locomotive, the SFC of the engine can be calculated by measuring time to calculate the Horse Power output in terms of BHP.Hr for a specific amount of fuel consumption while the engine is put on load during load box test.
This is more accurate in order to calculate engine efficiency because the output of the engine is measured at the crankshaft, neglecting all other losses of the locomotive.
There is a second method of calculating SFC, in which the amount of work done is measured in terms of Tonne Km. This is more practical because here the total losses incurred in the locomotive/ formation of train are taken into consideration for calculating the SFC.
The unit used is in liters/ 1000 GTKM. (GTKM means KM earned with the gross tonnage hauled including the weight of the locomotive).
As train resistance, air resistance and other parasitic loads of locomotive/ train varies at different speed ranges, so SFC of the locomotive is calculated with respect to its service.
Train:
Calculated per 1000 GTKMs
SFC = HSD oil in Liters / 1000 GTKMs
HSD Liters represent Quantity of Fuel, whereas 1000 GTKM represent work done.
HSD stands for High-Speed Diesel
GTKMs -Gross Tonne KMs - KMs earned with the Gross Tonnage hauled (incl: of Weight of Locomotive & Rolling Stock )
NTKMs - KMs earned with the Net tonnage hauled (excl: Weight of Locomotive & Rolling Stock)
Indian Railways -SFC 2018-19
SFC for Shunting services - not calculated
SEC - Specific Energy Consumption
For Traction - SEC - Specific Energy Consumption = Used KWH / 1000 GTKMs
Amount of Electricity (in KWH - Kilowatt hours) consumed per unit work (1000 GTKMs done
Engine: The amount of electricity (in KWH - Kilowatt-Hour) consumed per unit work done.
Over the last few years, Railways have been able to improve upon Specific Energy Consumption (SEC) by about 19% through various energy conservation initiatives.
For electric locomotives, there are mainly 3 modes of service for which GTKM earning is recorded to calculate SFC.
The figures of SECs (Approx), accordingly are:
For every 1000 GTKMs
SEC - for every 1000 GTKMs 2018-19
The figures represented by the electrical department is entirely rhetoric. Because for EMUs for record energy consumption the energy meter is not available with the locomotive and the figures are purely based on assumption.
For passenger and goods service locomotives, although an energy meter is available figures are manipulated.
For locomotives in shunting service GTKM earning can’t be recorded, hence it is not calculated.
Both SFC and SEC units are used in the Fuel budgeting of Diesel and Traction.
Factors that affect SFC
Weak Engine
Other factors P.Way, Signaling, Operating facilities
Vehicle Design
Driving techniques
Steps were taken to bring fuel efficiency
Arresting any leakages.
Application of Fuel Kit
High performance & high capacity turbo supercharger
Improved Air Cooler
Improved Piston and Piston ring
Use of Multigrade oil
Minimum inventory in RCDs - From 15 days to 5 days
Use of B-5 blended HSD - 5 % Bio Diesel
Fuel pattern - Cheaper RCDs are fuelling more to Diesel Locomotives to avoid fuelling at costlier RCDs
Withdrawn overaged WDMs Locomotives from mainline services
DPC - Driving Power Car of DEMU train - Conversion to dual-fuel i.e., Diesel + CNG
Auxiliary Power Unit - introduced in Diesel Locomotives - for automatic shutting down of Diesel Locomotives while standing idle.
CReDI - Common Rail electronic Direct Injection - Developed & Fitted in Diesel Locomotives
Developing alternative fuel systems like Traction, and Solar Power to reduce the consumption of Diesel.
IROAF - Indian Railways Organization of Alternate Fuels, Chennai - Developing the alternative fuel.
The performance of Loco Pilots are being monitored regularly.
Monitoring of idling of Locomotives has been started through REMMLOT - REmote Monitoring and Management of LOcomotive and Trains fitted in Locomotives.
All overaged Broad Guage Diesel Mixed Traffic Engines (WDM2) locomotives have been withdrawn from mainline service.
Retro-fitment of Microprocessor control system in diesel Locomotives has been executed to achieve fuel efficiency.
Miller cycle-based turbochargers and Variable Turbine Geometry (VTG) Turbochargers have been developed for ALCo locomotives to achieve fuel efficiency.
Solar Energy
Indian railways has planned for 1000 MW of solar power plants by 2020-21 with 500 MW at railway rooftops for non-traction use and 500 MW land-based for mostly in traction use.
The solar power from land-based plants shall be mostly used in train operations.
IROAF is implementing the provision of Solar Panels on the rooftop of coaches and Brake Vans of freight trains for taking up part of hotel load (electric lighting and fans load).
In Goods train, Solar Panels on a trial basis have been fitted on the rooftop of 50 Nos. Guard Brake Vans.
In passenger Trains, Solar panels on a trial basis have been fitted on the rooftop of 06 Nos. Trailer Coaches of Diesel Electric Multiple Units (DEMU).
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Ratios in Indian Railways
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