## Railway Accounts Department Examinations

Showing posts with label PEI. Show all posts
Showing posts with label PEI. Show all posts

## Friday, May 28, 2021

### Operating Ratio in Indian Railways

O.R.- Operating Ratio in Indian Railways

By NageswaraRao, 9492432160

 Different Parameters in IR Calculation of OR Calculation of Net Revenue / Net Receipts /Surplus OR Practicals Performance Efficiency Index Differences between OR and PEI

What is Ratio?

·         A relationship expressed in mathematical terms between two figures having Cause and Effect relationship or connected in some way or other.

·         An expression of the quantitative relationship that exists between two numbers.

Ratios/Parameters in Indian Railways – Para 510 of IR Admn& Finance Code

1.    Operating Ratio -  Percentage of Gross Working Expenses to Gross Earnings -  It should be as low as possible

2.    Percentage of Net Receipts / Net revenue to Capital at Charge& Investments from Capital Fund  -

This parameter has lost its relevance due to Capital at Charge stands ceased w.e.f 2017-18 due to merger of Railway Budget with General Budget

It should be as high as possible.  Because it is like Rate of Return

3.    Percentage of Surplus to Capital at Charge & Investments from Capital Fund   -

This parameter has lost its relevance due to Capital at Charge stands ceased w.e.f 2017-18 due to merger of Railway Budget with General Budget,

It should be as high as possible.  Because it is like Rate of Return

4.    Current Assets / Current Liabilities

A.   Stores in Stock in terms of Month’s consumption

Example: Closing balance of stock on 30th June – 1000.  Month’s Consumption – 500

= 1000/500  = 2 months consumption is kept as Stock balance.   (It should be as low as possible)

B.   Works in Progress as a percentage of the value in Workshop outturn  (WMS)

= Closing balance / Total Credits

= 60/2000 x 100 = 3%   (It should be as low as possible)

5.    Stores Inventory as percentage of the Total Issue of Stores i.e., TOR – Turn Over Ratio  (with Fuel and Without Fuel)

TOR = Stores in Stock on 31st March / Total Issues during the year x 100

Example:  400 / 2000 x 100 = 20 %

It should be as low as possible

6.    Unrealized earnings at the year-end in terms of number of days and earnings   -  Traffic/Earnings side

= Traffic Suspense on 31st March / Earnings per day

= Earnings per day = Total Earnings / 365 days

Example: Traffic Suspense on 31st March – 200,  Total Earnings in a Financial Year – 3650

Earnings Per Day = 3650 / 365 = 10

= Traffic Suspense/Earnings per day  = 200 / 10 = 20 days

That means average time for collection of Debtors is 20 days.

This should be as low as possible

Operating Ratio:

·         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 general, 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 in losses.

Gross Working Expenses (GWE)

·         O.R  =     _______________________    x  100

Gross Earnings (GE)

·         GWE = OWE  + Appropriation to DRF + Appropriation to Pension Fund

·         OWE = Ordinary Working Expenses (Erstwhile Demands 3 to 13)

·         GE = Coaching Earnings + Goods Earnings + Sundry Earnings

·         Earnings means always Apportioned only.  Not Originating

·         Complying the Commercial Accounts.

·         Glossary of Terms  Para 308 of Finance code volume -1

 Credits Debits Net Commercial (i) Coaching Earnings (less refunds) (x) Ordinary Working Expenses = Expenses booked under final heads, excluding appropriation to DRF & Pension Fund Commercial (ii) Goods Earnings (less refunds) (xi) Appropriation to Depreciation Reserve Fund. (iii) Traffic Earnings = (i)+(ii) (xii) Appropriation to Pension Fund. (iv) Sundry Other Earnings (less refunds)=Other than Traffic Earnings. (v) Gross Earnings = (iii)+(iv) = true or accrued earnings in an accounting period whether or not actually realized. (xiii) Gross Working Expenses = (x)+(xi)+(xii) = True expenses in an accounting period whether or not actually disbursed. (xviii)Net Earnings=(v) - (xiii)   O.R = (Xiii) /(v) x 100 LINK (vi) Suspense (Traffic & DR) (xiv) Suspense.  (DP) Llink Government (vii) Gross Receipts = (v)+(vi) = Earnings actually realized during an accounting period. (xv) Gross Expenditure = (xiii) + (xiv) = Working Expenses actually disbursed during an accounting period. Government (viii)Misc. Receipts = Guarantee recoverable from State Govts. + Other Misc. Receipts, such as Govt. share of surplus profits, sale of  land of subsidized companies, receipts from surcharge on Passenger fares, etc. (xvi) Misc. expenditure = Surveys + Land for subsidized companies; subsidy + other Misc Railway expenditure, Appropriations to Pension Fund relating to Railway Board and Miscc establishments booked under grants 1 & 2 and Accident Compensation, Safety and Passenger Amenities Fund and OLWR expenditure, and payments to worked lines. (ix) Total Revenue Receipts = (vii)+(viii). (xvii) Total Revenue Expenditure = (xv)+(xvi). (xix) Net Revenue / Net Receipts =  (ix) - (xvii).

Simplified Operating Ratio Table -   OR Table

 Earnings/Receipts Amt Expenses/Expenditure Amt Coml Gross Earnings (X +Y +Z) 200 Gross Working Expenses (OWE+DRF+PF) 160 Coml Link Suspense ( + ) 5 Suspense  ( + ) -10 Link Govt Gross Receipts 205 Gross Expenditure 150 Govt Misc Receipts ( + ) 15 Misc Expenditure ( + ) 25 Total Revenue Receipts 220 Total Revenue Expenditure 175

Net Earnings = GE – GWE  = 200 -160  = 40

OR = GWE /GE x 100   = 160/200 x 100 = 80 %

Net Receipts = Total Revenue Receipts – Total Revenue Expenditure

Net Receipts also called as Net Revenue and Surplus

Net Receipt is nothing but Surplus.

Till 2017-18, Net Receipts minus Dividends is equal to Surplus.

From 2017-18 onwards, Dividend payment is not required due to merger of Railway Budget with General Budget

Net Receipts/Net Revenue/Surplus = 220 – 175  = 45

25 will be distributed or appropriated among Development Fund, Safety Fund, Debt Service Fund, RRSK, Capital Fund.

Practicals

I.        Calculate the Operating Ratio and Surplus/Shortfall from the given figures

1.    OWE – 600

2.    Appropriation to DRF – 100

3.    Appropriation to Pension Fund – 200

4.    Coaching Earnings – 300

5.    Goods Earnings –600

6.    Sundry Earnings – 100

7.    Suspense on Earnings side - +25

8.    Suspense on Expenses side -  (-) 10

9.    Misc Expenditure -110

10. Misc Receipts  -  75

Solution:

OR Table

 Earnings/Receipts Amt Expenses/Expenditure Amt Coml Gross Earnings (300+600+100) 1000 Gross Working Expenses (600+100+200) 900 Coml Link Suspense ( + ) 25 Suspense  ( + ) -10 Link Govt Gross Receipts 1025 Gross Expenditure 890 Govt Misc Receipts ( + ) 75 Misc Expenditure ( + ) 110 Total Revenue Receipts 1100 Total Revenue Expenditure 1000

OR = GWE /GE x 100   = 900/1000 x 100 = 90 %

Net Receipts = Total Revenue Receipts – Total Revenue Expenditure

Net Receipts also called as Net Revenue and Surplus

Net Receipts/Net Revenue/Surplus = 1100 - 1000  = 100

II.        Calculate the Operating Ratio and Surplus/Shortfall from the given figures

1.    Gross Receipts – 210

2.    Gross Expenditure – 150

3.    Suspense on Earnings side -  +10

4.    Suspense on Expenses side -  (-) 10

5.    Misc Expenditure - 75

6.    Misc Receipts  -   10

Solution:

OR Table

 Earnings/Receipts Amt Expenses/Expenditure Amt Coml Gross Earnings 200 Gross Working Expenses 160 Coml Link Suspense ( + ) 10 Suspense  ( + ) -10 Link Govt Gross Receipts 210 Gross Expenditure 150 Govt Misc Receipts ( + ) 10 Misc Expenditure ( + ) 75 Total Revenue Receipts 220 Total Revenue Expenditure 225

OR = GWE /GE x 100   = 160/200 x 100 = 80 %

Net Receipts = Total Revenue Receipts – Total Revenue Expenditure

Net Receipts also called as Net Revenue and Surplus

Net Receipts/Net Revenue/Surplus = 220 – 225  = (-) 5

Hence Shortfall = 5

ü  There is no ideal Operating Ratio for Indian Railways.

ü  In rail road sector, an operating ratio of 80 or lower is considered desirable.

ü  However lower O.R. helps in generating internal resources for meeting requirement of Plan Expenditure on Safety (SF), Amenities to Passengers & Staff (D.F) and other Capital investments such as laying of new lines, acquisition of Rolling Stock etc (Capital Fund).

ü  Landmark Year – 2005

ü  Prior to 2005 year – Entire Lease charges debited to erstwhile D.N. 09

ü  After 2005 year  (after Audit objected the treatment of Lease charges)

Ø  Capital Component – Newly created Plan Head 2200 (Leased Assets) erstwhile Demand No. 16

Ø  Interest Component to erstwhile Demand No.09 – Operating Expenses – Traffic

Ø  This has resulted in the reduction of working expenses and improved the operating ratio.

Measures to be taken to achieve the Lower/efficient O.R. are

A)   Maximizing the traffic earnings

B)   Rationalization of fare and freight tariff

C)   Effective marketing strategies to capture more and more traffic

E)   Optimum utilization of the existing rail infrastructure.

F)   Generating more NFR – Non Fare Revenue

G)   COE – Control Over Expenditure, Economy & Austerity Measures

H)   Improved man-power planning

I)     Inventory management

J)    Optimizing the fuel consumption

ü  The Best ever O.R of Indian Railways was 74.7 % in 1963-64.

ü  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  -96.28 %  (Target)

2021-22  -96.08  % (Target)

2020-21 Railway Revenue Budget - Financials

 SN Receipts Amount (Rs. in Crores) % SN Expenditure Amount (Rs. in Crores) % 1 Coaching Earnings 67500 30 % 1 Ordinary Working Expenses 163157.17 75 % 2 Goods Earnings 147000 65 % 2 Appropriation to DRF 800 1 % 3 Sundry Earnings 11013 5 % 3 Appropriation to Pension Fund 53160 24 % 4 Gross Earnings (1+2+3) 225513 100 % 4 Gross Working Expenses (1+2+3) 217,117.17 100 % 5 Suspense 100 5 Suspense - 404.17 6 Gross Receipts (4+5) 225613 6 Gross Expenditure (4+5) 216713 7 Misc Receipts 300 7 Misc. Expenditure 2700 8 Total Revenue Receipts (6+7) 225913 8 Total Revenue Expenditure 219413

Net Revenue = Total Revenue Receipts – Total Revenue Expenditure

Net Revenue = 225913 - 219413

Net Revenue = 6500

Rs. 6500 Crores Net Revenue is appropriated to

1.       Development Fund - Rs. 1500 Crores

2.       RRSK - Rashtriya Rail SanrakshaKosh - Rs. 5000 Crores

Nil appropriations to Capital Fund and RSF - Railway Safety Fund

Operating Ratio = Gross Working Expenses / Gross Earnings x 100

Operating Ratio = 217117.17 / 225513 x 100

Operating Ratio = 96.28 %

Highest & Lowest Operating Ratio of Zonal Railways 2020-21

 Zonal Railway OR % Rank Metro Railway, Kolkata 250.3 Highest Eastern Railway, Kolkata 171.1 Second Highest East Coast Railway, Bhubaneswar 50.9 Lowest South East Central Railway, Bilaspur 52.3 Second Lowest

ü  Comparing O.R of Indian Railways with other countries ' Railwayssystems  - Not possible due to different computation methodologies across different countries thus reducing validity of comparison of such statistical figures.

ü  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 particular Zonal Rly from Year - Over - Year (YOY) basis.

Ø  Is OR, best financial ratio to show the performance of Railways ? If answer is No, what is the reason and which one is the alternative one ?

ü  It is true, that the Operating Ratio itself is not a perfect indicator for judging the efficiency of Indian Railways/Zonal Railways.

ü  Let's see the below hypothetical illustration of two Railways.

 Rly. Capital Gross Earnings Gross Working expenses O.R. ROR- Rate of Return/ROCE-Return on Capital Employed A 1000 200 150 75 % 5 % i.e., Rs.50 profit on Capital of Rs.1000 B 5000 2000 1600 80 % 8 % i.e., Rs.400 profit on Capital of Rs. 5000

ü  Considering the Operating Ratio as efficient indicator, Railway "A" is more efficient than Railway "B".

ü  But taking ROR/ROCE i.e.,  indicator of utilisation of Capital, Railway "B" is more efficient than Railway "A".

ü  To sum up, the combination of above two Ratios will be considered to evaluate the performance of the Railways instead of Operating Ratio alone.

ü  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.

DIVISIONS and PEI - Performance Efficiency Index

ü  At present, PEI is the performance indicator in the Divisions ( like OR-Operating Ratio for Zonal railways)

ü  As of today, OR is not being calculated for Divisions and thus they cannot be treated as “Profit Centers”.

ü  PEI = Ratio of Demands  3 to 12 and  Originating Earnings .

ü  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

ü  PEI of Division =     _______________________    x  100

Originating Earnings

Differences between OR and PEI

 Operating Ratio – OR Performance Efficiency Index-PEI 1. D.No. 3 to 13 considered 1. D.No. 3 to 12 only considered. 2. Considered Apportioned Earnings 2. Considered  Originating Earnings. 3. Appropriation to DRF & Pension Fund are considered. 3. Appropriation to DRF & Pension Fund are not considered. 4. Calculated for Zonal Railways 4. Calculated for Divisions 5. Formulae = GWE-Gross Working Expenses /Gross Earnings x100. GWE = OWE + Appropriation to DRF & Pension Fund OWE= 03 to 13 Demands. 5. Formulae= Demands 03 to 12/ Originating Earnings x 100

Earnings Vs Revenue

In Indian Railways, we normally use the word Earnings instead of Revenue.

Now we will check the difference between the two and is it correct to use the word Revenue in place of Earnings or not.

Revenue minus Expenditure is equal to Earnings.

The difference between revenue and earnings is that while revenue tracks the total amount of money made in sales, earnings reflect the portion of the revenue the company keeps in profit after every expense is paid.

So Using the word Earnings so far in lieu of Revenue is incorrect.  Because Earnings means profits/surplus after deducting the expenditure from Revenue.

So, here after

Abstract X -  Coaching Revenue

Abstract Y  -  Goods Revenue

Abstract Z - Sundry Revenue

It is high time to modify the Revised Accounting Classification in Finance Code Volume Two accordingly.

Key Takeaways

1.    OR for Indian Railways and Zonal Railways

2.    PEI for Divisions

3.    OR Formulae = GWE/GE x 100

4.    PEI Formulae = Erstwhile Demands 3 to 12 /Originating Earnings x 100

5.    Landmark Year – 2005 – Bifurcation of Lease charges into Capital and Revenue components

6.    OR – Apportioned Earnings

7.    PEI – Originating Earnings

8.    Highest OR – Metro Railway, Kolkata

9.    Commercial  -  Earnings  and Expenses

10. Government – Receipts and Expenditure

11. New name for Earnings  -  Revenue

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