O.R. - Operating
Ratio in Indian Railways
Likely 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 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 ?
4. Can we
extends the O.R to the Divisions in replacement of PEI (Performance Efficiency
Index) ? If so what is the mechanism and the benefits accrue to Railways ?
Now let's check the answers:
1. What is Operating Ratio ? How it is calculated ?
ü Codal provisions - Para 308 & 434 of I.Rly.Finance Code.
ü 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.
ü If O.R. is
less than 100 = Organisation is in profits.
ü If O.R. is more
than 100 = Organisation is in losses.
ü Definition of Gross Working Expenses (GWE): Ordinary Working
Expenses-OWE (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.
ü 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.
ü Always
considered Apportioned Earnings instead of Originating Earnings.
Gross Working Expenses
ü O.R = _______________________ x 100
Gross Earnings
ü Important Note:
ü Gross Expenditure (Working Expenses actually
disbursed during an accounting period) =
Gross Working Expenses + Suspense
ü Gross Receipts (Earnings actually realised during
an accounting period)
= Gross Earnings + Suspense.
ü That means :-
Gross
Receipts - Always includes Suspense
Gross Earnings - Always
excludes Suspense. It is denominator for
O.R. formulae.
Similarly
Gross expenditure
- includes Suspense.
Gross Working
Expenses -excludes Suspense. It is
numerator for O.R. formulae.
ü In the examinations, if Gross Expenditure figure
given, deduct Suspense from that in order to arrive Gross Working
Expenses. Similarly deduct Suspense from
Gross Receipts to arrive Gross Earnings.
ü Assumption is Suspense on Expenditure side is Debit
balance i.e., plus figure and Suspense on Earnings side is Credit balance i.e.,
plus figure.
ü In case of confusion, what you presume is
clearly spelt out at the end of solution in the Examination. (by way of Notes). In that case, examiner will award marks in
spite of incorrect answer. Because
Examiner will take into consideration whether you understand and expressed the
concept or not.
ü There is no ideal Operating Ratio for Indian
Railways. In rail road sector,
an operating ratio of 80 or lower is considered desirable. However lower
O.R. helps in generating internal resources for meeting requirement 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).
ü 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), 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.
ü Measures to be taken to achieve the Lower/efficient
O.R. are
A) maximizing the traffic earnings
inter-alia include rationalization of fare and freight tariff; effective
marketing strategies to capture more and more traffic; creation of additional
capacity and optimum utilization of the existing rail infrastructure.
B) contain the expenditure through
diverse means including strict economy and austerity measures; improved
man-power planning; better asset utilization and inventory management;
optimizing the fuel consumption etc.
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
2009-10 - 94.7
%
2010-11 - 92.3
%
2011-12 - 94.9
%
2012-13 - 88.8
% (against the target of 84.9%)
ü Target O.R of 2013-14 - 87.8
%
ü Target O.R of 2016-17 - 74 %
ü 2016-17 i.e., terminal year of 12th Five Year Plan
(2012-17) target O.R. is 74 % ( to equal the best ever O.R. of Indian Railways
in 1963-64 - 74.7 %)
ü Comparing O.R of Indian Railways with other countries
' railways systems - Not possible due to
different computation methodologies across different countries thus reducing
validity of comparison of such statistical figures.
Glossary - Excerpts from Finance Code Para No.308 - better to understand Operating Ratio and
Railway finances.
|
Credit
Side |
Debit
Side |
Net
of Credit & Debit |
|
(i) Coaching
Earnings (less refunds) |
(x)
Ordinary Working Expenses = Expenses booked under final heads, excluding
appropriation to DRF & Pension Fund |
|
|
(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 |
|
(vi) Suspense. |
(xiv) Suspense. |
|
|
(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.
|
|
|
(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 Miscc
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 Receipts = (ix) - (xvii). |
|
(xix) Net Receipts = (ix) - (xvii). |
(xx)
Payment to General Revenues (Dividend) |
(xxi) Surplus = (xix) - (xx) (shortfall if the figure is negative) |
Appropriation of Surplus: The surplus will be
appropriated to Development Fund, Railway Safety Fund, Capital Fund and latest
created fund " Railway Liability Reserve Fund.
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.
In simple terms , the
Operating Ratio is calculated based on the following glossary terms only
|
Denominator |
Numerator (Gross Working Expenses) |
|
1.Gross Earnings |
1.OWE - Ordinary Working Expenses i.e., 3 to 13 Demands |
|
|
2. Appropriation to DRF & Pension Fund i.e., D.No.14 |
Formulae of OR = Gross
Working Expenses \ Gross Earnings x 100
Forget the following Glossary
terms of calculation of O.R.
|
Never
taken the following items for calculation of Operating Ratio |
|
|
Earnings Side |
Expenditure side |
|
Suspense |
Suspense |
|
Gross Receipts |
Gross Expenditure |
|
Misc. Receipts |
Misc. Expenditure |
|
|
Dividends paid to Gen. Revenues |
|
|
Appropriation to D.F, Safety Fund, Capital Fund |
Note: Where ever, Gross Receipts and Suspense (Earnings)
were given, simply deduct suspense from Gross Receipts and arrived Gross
Earnings (Denominator) for calculation of Operating Ratio
Similar lines,
Where ever, Gross Expenditure
and Suspense (Expenses) were given, simply deduct suspense from Gross
Expenditure and arrived Gross Working Expenses (Numerator) for calculation of
Operating Ratio.
So, Golden Rule is Suspense on either side will not be
taken for calculation of Operating Ratio.
2. Working out the following from the set of figures as given below.
i) Operating Ratio
ii) Net Receipts iii )
Surplus/Shortfall
|
Details |
Amount(In Crores of Rs.) |
|
1. Gross Receipts |
1400 |
|
2. Suspense - Earnings |
150 |
|
3. Misc. Receipts |
50 |
|
4. Expenditure (Actual basis) |
800 |
|
5. Suspense - expenses |
(- ) 50 |
|
6. Appropriation to DRF |
65 |
|
7.Appropriation to Pension Fund |
85 |
|
8. Misc. Expenditure |
25 |
|
9.Dividends payable |
75 |
|
10. Appropriation to D.F. |
150 |
|
11. Appropriation to R.S.F. |
100 |
|
12. Appropriation to Capital Fund |
150 |
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 = Total Revenue Receipts - Total Revenue Expenditure
Net Revenue = 1450 - 975
= 475
iii)
Surplus/Shortfall
Surplus = Net
Revenue - Dividends Payable
= 475 - 75 = 400
Surplus = 400
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 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.
ü Let's see the below hypothetical illustration of
two Railways.
|
Rly. |
Capital at Charge |
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". But taking ROR/ROCE
i.e., indicator of utilisation of
Capital, Railway "B" is more efficient than Railway "A".
ü 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.
ü Revenue Surplus = Net Receipts (actual basis) after adjusting misc receipts and
misc expenditure and payment of Dividend to General Revenues. (item xxi of para 308-Finance Code)
ü Capital at Charge means "the Central Government's investment in the Railways
by way of Loan Capital and value of the assets created there from. (item xxii of para 308-Finance Code)
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.
4. Can we extends the
O.R to the Divisions in replacement of PEI (Performance
Efficiency Index) ? If so what is the mechanism and the benefits accrue to
Railways ?
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 = a 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 |
|
|
Operating Ratio - O R |
Performance Efficiency Index - PEI |
|
1. D.No. 3 to 13 considered |
1. D.No. 3 to 12 only considered. |
|
2. Taken into the Apportioned Earnings |
2. Taken into the Originating Earnings. |
|
3. Appropriation to DRF & Pension Fund are
considered. |
4. Not taken into the account of appropriation to
DRF & Pension Fund. |
Note: In some Zonal Railways like SCR,
D.No.13 also included for calculating PEI.
So, the drawbacks and their solutions for computing
Operating Ratio of their respective Divisions are
1. Appropriation to DRF -
|
Appropriation
to DRF from the Division can be computed as: Capital
at Charge on the Division / Capital at Charge on the Zone x Appropriation to DRF for the Zone. |
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2. Appropriation to Pension Fund - It
would be possible to calculate the Appropriation to Pension Fund from the
Division based on the Pensionable
employees on Division /Pensionable employees on the Zone x Appropriation to Pension Fund. |
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3. Apportioned Earnings - Right now, based
on the proportionate distance of consignment or passenger travelled over the
Zonal Railways, the apportioned earnings can be calculated for the Zonal
Railways. The same mechanism will apply for calculate of apportioned earnings
for the Divisions based on distances covered among Divisions within a Zonal
Railway. With the help of Computers, it
can be very easy exercise.
- If
we address the above drawbacks in correct approach as stated above, Divisions
also can able compute Operating Ratio (OR) and became Profit Centers similar
to Zonal Railways. Because,
"
What cannot be measured, cannot be managed" By Peter Drucker/ Deming
"If you cannot measure it, you can’t improve it" By Lord Kelvin
Note:
I express special thanks to Shri Hemant B.Godbole, SAG/IRAS of kind
permission for using the excerpts from his
presentation of "Application of Responsibility Centre Approach for
converting Divisions into Profit Centres" .
Click below for full presentation of Shri Hemant B.
Godbole, SAG/IRAS
*****
