PPT on Earnings - By Shri Sundar Ram, Retd Member/Technical/RCT/SC

Earnings Write up by Shri Sundar Ram, Member/RCT(Retd) from Nageswara Rao M

Earnings write up

Earnings – Write up

By Shri Sundar Ram, Retd Member(Technical)/RCT/SC

Importance of Earnings:

Why are earnings important? Earnings are important to generate “Surplus” (Profit).

So why is “Surplus” important? It is the surplus which allows us to spend money onexpansion of lines, purchase of rolling stock, and to meet all kinds of Capital Expenditure, especially because of the paucity of budgetary support. “Surplus” gives us money to replace assets (DRF), carry out Research and Development (RDSO!)

Surplus = Earnings –Expenditure = Earnings – (Fixed Costs* + Variable Costs)

* Here we are talking about money spent on Revenue expenditure and not Capital Expenditure. Fixed Costs (FC) are costs which do not vary with PKM and NTKM (such as Salaries, Depreciation etc.)

In contrast Variable costs (VC) vary directly in proportion to scale of operations (i.e. PKM and NTKM)

In railways conventionally we measure “Operating Ratio” (OR)

- Operating Ratio = (Expenditure/Earnings)X 100

- Operating Ratio is an indicator of how much railway spends for earning Rs100 and hence gives an indication of Surplus.

- To improve OR--We can increase the Earning or decrease Expenditure. Earnings can be increased with increase of Fixed Costs (FC) or without increasing Fixed Costs (by increasing PKM and NTKM with consequent increase of only Variable Cost (VC).

Concept of Contribution:

- Total revenue increases with each PKM or NTKM of traffic carried and similarly total VC also increases with each PKM and NTKM.

- Contribution per unit of traffic carried = Revenue per unit of traffic carried – variable cost per unit of traffic carried

- Total contribution = number of units of traffic carried X contribution per unit

- Total contribution is the fund generated to meet fixed costs and if total contribution is more than the total fixed cost for that year, we will generate “surplus”

- Surplus (S) = Total revenue (TR) – Total cost (TC) = TR-TC

                                                                                          =TR- (FC+VC) = (TR-VC) –FC                                                                                                                                                                                                                                                                                                                                                           

                                                                                          =Total Contribution –FC

                                                                                          = (Contribution per unit x No. of units) –FC

Please note that: Contribution per unit = Sale price per unit- Variable Cost per unit

The concept of “contribution” is very important for railway finances because there are many situations where Surplus can be increased by increasing the volume of traffic carried without spending additional funds on incurring fixed costs. This is called “playing on volume”. For example we are said to be playing on volume, when we are trying to increase occupancy of a coach or even when we add extra coach to a train.

When we “play on Volume”, we reduce Total cost per unit since more NTKM or PKM will reduce Fixed Cost per unit-since the fixed cost is spread over more units of output (PKM or NTKM)

Please note that contribution is different for different products. For example the contribution for an AC 3-tier berth is much higher than unreserved seat in passenger train. So if we want more profit we need to sell more PKM on AC 3-tier. Similarly we get more contribution when we sell Tatkal berth.

Can you think of other cases of “playing on volume”?

Heads of earnings on IR:

Passenger Earning: This constitutes about 27% of Total Revenue (TR) of IR. These earnings are by and large linked to PKM (Passenger Kilo meter). To improve PKM without increasing FC

- increase fare per PKM (be careful-demand may reduce- people may move to flights) or increase    PKM (reduce idling of coaches – improve rake links)

- We have to find where there is unmet demand

- If unmet demand is in upper classes revenue generated is more since contribution is higher

- Where demand is less, move coach to train with higher demand

- Tatkal quota

- Move special coaches

- Dynamic fares (when demand is high charge more , when demand is less give discount – please note that an unoccupied berth does not give any earning, so we can sell such berth even at a very low price – remember your fruit merchant, he sells fruits at throw away prices when they are likely to get spoiled.

Freight Earnings: This constitutes about 64% of Total Revenue of IR and is considered as “bread and butter” of IR. These earnings are by and large linked to NTKM (Net Tonne Kilo Meters)

- To increase the freight earnings either we increase Freight per NTKM or we try to boost the NTKMs.

- Today we mostly carry Coal, Cement, Mineral and metal ores, POL, Food grains and Fertilizers – all low value goods so their capacity to pay revenue per NTKM is low.

- The total freight traffic carried by IR has come down from 89% of total goods traffic carried in the country to 40%- POL went to pipelines- Cement, Food grains etc are increasingly going to road. Even Coastal Shipping is taking away Cement Power sector allocation of Coal is rationalized to avoid cross traffic.

- Non availability of wagons to meet peak demand and surplus wagons in low demand season.

Strategies to Improve Freight Earnings:

Operating Strategies:

-Increase of CC of wagons (reduce tare- increase height)

-increase length of train (run long goods trains)

- improve speed limits of goods trains

-generate line capacity

-Improve loading unloading facilities

-Encourage customers to mechanize loading and unloading (to improve wagon turnaround)

Commercial Strategies:

´  Offer Mini rakes, two point rakes, multi-point rakes

´  Empty direction traffic generation

´  Cargo aggregation

        -     Concessions to loyal customers

´  Facilities such as Rail side warehousing,  private freight terminals

´  Schemes like Engine on load, wagon investment scheme

´  Connectivity to ports

´  Container Terminals and Multi-modal facilities

´  Dynamic Freight charges

´  Install accurate in-motion weigh bridges.

´  Develop strategies to re-attract wagon load traffic

Other Coaching Earnings

This constitutes other than earnings on account of PKMs

Parcel Traffic:

- Good for recapturing lost wagon load and smalls traffic

- For High value commodities

- Quick ad assured transit(no lorry can reach your goods to Delhi in 24hours like our Telangana Express)

- Leasing of VPU space (we fail in this because of poor contract management)

- VPU trains

-Use of room availability on coaching trains

- Use of SLR capacity (many SLRs are still going vacant)

-Refrigerated vans and terminals (our country loses perishables due to lack of refrigerated storage and transport)

Sundry Earnings

- World over Non-fare revenue of railways is 10 to 20% (In Hyderabad metro the non-fare revenue is far higher than Fare revenue)

- IR non-fare revenue peaked 6% in 2016-2017

- Difficult to increase fares for political reasons and elasticity of demand

- Non-fare revenue can be increased to any extant- but creativity is needed.

- Traditional sources- Catering, Book stalls, Telephone booths, Medicine Shops etc, advertising, sale of scrap, Luxury Tourist trains

- Modern sources- Internet Kiosks, Commercial exploitation of real estate, on train magazine shops, water ATMs, sale of organic food

5.0 Conclusion: Earnings should be improved as far as possible without incurring higher fixed costs, since this leads to higher margins. This requires improvement in asset utilisation like wagon Km/Wagon day, Engine Km per Engine day, line capacity utilisation. Only after these saturate we should go for higher fixed cost options like adding of new lines, new wagons etc.

                                                     &&&&

Video Lesson - Allocations - Practical examples

Letter of Credit - Most Important Question

LC - Letter of Credit

(Most important question for Expenditure and Stores optional)

·         New initiative in Indian Railways

·         With effect from - 01.04.2018

·          Applicable for supplies/ works, including all service and maintenance contracts

·         letter of credit (LC)  - mode of payment as an option in supply/works contracts to improve transparency and the ease of doing business.

·         Apply for tenders having an estimated value of or above Rs. 10 Lakhs

·         Shall include in tender conditions an option for the contractors to take payment from railways through LC arrangements

·         The incidental costs towards issue and operation of LC shall be borne by the supplier /contractor.

·         SBI - State Bank of India - to assess the value of LC and terms and conditions of LC.

·         The DA - Document of Authorisation will be issued against each bill submitted for payment by supplier/ contractor after exercising laid down checks as per Railway codes and manuals in executive and accounts offices .

·          Accounts Officer responsible for passing claim will issue the DA. issue of they will be captured in IPAS and IREPS to ensure that there is no duplicate payment against the said bill.

·         The introduction of the Letter of Credit (LC) payment method for supply/work contracts will significantly increase transparency and improve the ease of doing business.

·         The Sellers should bear a cost of 0.15 %

oo   How it works:  Flow of Letter of Credit transactions:

1.      SBI issues LC to a Seller

2.      Railways will issue DA - Document of Authorisation to the supplier/contractor for completed work

3.      The supplier /contractor will present the DA to his banker for necessary payment

4.      After release of payment to the supplier/contractor, the banker will send this DA to the Railways' banker (SBI) for release of payment to them

5.      The Railways banker (SBI) will reimburse the supplier/contractor bank, against the original DA issued by railway and the bill of exchange issued by the supplier/ contractor, after verifying the signatures.

$$$$$

Composition Scheme in GST

Composition Scheme

ü  Opted by any Taxpayer whose turnover is less than Rs. 1.5 Crores  (Rs.75 Lakhs in case of North Eastern States).

ü  A simple and easy scheme under GST for taxpayers.

ü  Taxpayers who opted Composition scheme can get rid of tedious GST formalities

ü  Pay GST at a fixed rate of turnover.

ü  Service Providers are not eligible for Composition Scheme.  But Restaurants are eligible.

ü  GST rates under Composition scheme are as follows.

Type of Business	CGST	SGST	Total
Manufacturer and Trader	0.5 %	0.5%	1 %
Restaurants	2.5%	2.5%	5 %

Who cannot opt for Composition Scheme

ü  Supplier of services

ü  Manufacturer of ice cream, pan masala, or tobacco

ü  Businesses which supply goods through an e-commerce operator

ü  A dealer, who carrying out Inter-State transactions.

Advantages:

ü  Lesser compliance i.e., returns, maintaining books of record, Issuance of invoices.

ü  Limited tax liability.

ü  High liquidity as taxes are at a lower rate i.e., 5% or 1%.

Disadvantages:

ü  A limited territory of business. The dealer is barred from carrying out inter-state transactions

ü  No Input Tax Credit available to composition dealers

ü  The taxpayer will not be eligible to supply exempt goods or  goods through an e-commerce portal.

&&&&

ITC - Input Tax Credit

Input Tax Credit

·         What is Input Tax Credit ? 

Ans:  Input Tax Credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.

Example: A is a manufacturer.  Tax payable on the manufactured product is Rs. 200 /-.  However he already paid tax Rs. 75/- at the time of purchase of Raw materials.  So he can pay balance tax Rs. 125/- (i.e., Rs. 200 - Rs.75/-). duly availing the Input Tax Credit to the extent of Rs. 75/-.  Otherwise, he would be liable to pay the tax two times i.e., at the time of purchasing Raw Materials and Selling of manufactured product.

Event	Tax	Remarks
On manufacture of goods	Rs.200/-	Tax liability
On purchase of Raw materials	Rs. 75 /-	Already paid.
Balance Tax to be paid	Rs. 125/-	To be paid (duly availing Rs.75/- as ITC)

·         ITC is one of the fundamental features of GST

·         Seamless flow of input credit across the chain (from the manufacture of goods till it is consumed) and across the country.

·         A person registered under composition scheme in GST cannot claim ITC.

ü  ITC can be claimed only for business purposes. ITC will not be available for goods or services exclusively used for: a. Personal use b. Exempt supplies c. Supplies for which ITC is specifically not available

ü   

*****

Social Service Obligations /Social costs in Indian Railways and CSR in India

Social Service Obligations /Social costs in Indian Railways

ü  What is social service Obligation or Social cost ?

Ans: To carry out certain transport activities  which are essentially uneconomic in nature, but in the larger interest of the economically disadvantaged sections of the society. Losses incurred on this account fall under Social Service Obligations of IR.

ü  Losses incurred on this account fall under Social Service Obligation of IR.

ü  Social Service Obligations by IR - 2016-17  - Approx  29,600 Crores.

The main elements of Social Service Obligation in IR are losses relating to:

(i) Essential Commodities carried below cost;

(ii) Passenger and Other Coaching services;

(iii) Operation of Uneconomic Branch Lines;

(iv) New Lines opened for Traffic during the last 15 years.

1.    Losses on transportation of Essential Commodities carried below cost:

ü  As part of the Railways’ Social Service Obligation, certain essential commodities of mass consumption like fruits and vegetables, sugarcane, paper, charcoal, bamboos, cotton raw pressed etc. are carried below cost of operation in order to contain their market prices.

ü   Approximately 42 crore in 2016-17. 

2.    Losses on Passenger and Other Coaching services:

ü  Analysis of the profitability of Coaching Services in 2016-17 has revealed an overall loss of ` 39500 crore. Out of which, Net suburban losses in Chennai, Kolkata, Mumbai & Secunderabad – Rs.5,389 Crores

ü  Low Second class ordinary fares (sub & non sub) constitutes 79 % of total traffic but provide only 17% of total passenger earnings.

ü  Season tickets – Non suburban constitutes 23 % of Total Non suburban traffic But provides only 1 % of Earnings

ü  Season tickets – Suburban constitutes 61 % of total traffic but provide only meager 40 % of total passenger earnings.

ü  Commuters availing concession Monthly and Quarterly Season Tickets on Suburban Sections of Chennai, Kolkata, Mumbai and Secunderabad.

ü  (iv) Concessions in Fare extended to various categories such as (i) Recipients of gallantry awards (ii) National sports awards (iii) Participants in National and State sports tournaments (iv) Teachers honored with National awards (v) Shram awardees (vi) War widows (vii) Patients suffering from cancer, tuberculosis and other serious diseases (viii) Handicapped persons (ix) Press correspondents (x) Film technicians etc. (v) Concessions are also extended to (i) Military traffic (ii)Postal traffic (iii) Transportation of registered newspapers & magazines etc. and (iv) Traffic to the North East.

ü   IR also steps in to provide emergency relief by transporting materials like food, water, fodder etc. to areas affected by natural disasters like drought, cyclone, earthquake etc.

3.    Operation of Uneconomic branch lines

ü  Despite concerted efforts to enhance earnings on branch lines, most of these lines remain commercially unviable.

ü  The Railway Reforms Committee recommended closure of 40 such lines but due to stiff public resistance and opposition by State Governments towards withdrawal of such services, only 15 lines have been closed permanently by the Railways.

ü  As on date 99 uneconomic branch lines existed

ü  On an original investment of Rs.4,476Crores on Uneconomic Branch lines, the losses during the year 2016-17 amounted to Rs. 1,855 crore.

4.    New lines opened for traffic during the last 15 years:

ü  The Railway Convention Committee (RCC) in its 9th Report on this subject has noted that in the present state of Railway finances and prevalent high costs of construction, the Railways are not in a position to inject adequate capital investment in under-developed areas.

ü  Therefore, they have felt that reliefs like making available land free of cost and waiver of dividend payment on such lines for a minimum period of twenty years are justified.

ü   Periodic reviews have revealed that of the 17 lines examined in 2016-17, as part of Social Service Obligations of the Railways for development of backward areas, all lines are showing either negative or unremunerative returns

Compensation for Social Service Obligations in Other Countries:

Railways, the world over, are called upon to meet certain public service obligations at lower tariffs for which they are adequately compensated for by the government. Such support is provided in various forms and for different purposes like:

(i) Compensation for losses on account of concessional tariffs;

(ii) Out-right grant to cover deficits;

(iii) Soft loans to meet the deficits;

(iv) Financial support to maintain viability of the system and to earn marginal profits;

(v) Writing off of accumulated debts and unproductive capital; and

(vi) Support for investment and infrastructure maintenance.

Corporate Social Responsibility

Corporate social responsibility is the responsibility of the corporate entity towards the society in consideration of the support given and sacrifices made by the society. The corporations exploit the natural resources of the country, cause incidental damage to environment and inconvenience to the people of the project area. Therefore, they have a responsibility towards the society to share a part of their profit.

CSR and India 

·          Section 135 & Schedule VII of Companies Act, 2013

·          2 % of the average net profits of the last 3 years.

·         Activities of reduction of poverty, education, health, environmental sustainability, gender equality, vocation skills etc

·         Railways wish to use CSR funds of Railway PSUs such as CONCOR, IRCTC, IRCON, RITES & RVNL

·         For utilising the CSR amounts to upgrade passenger amenities in major stations such as Mumbai, Howrah, New Delhi, Guwahati, Patna, Varanasi, Vadodara, Chennai, Agra and Bengaluru.

***