Winner-Bullock to IBRD Ways to Manage RRs Better 8 Sep 04

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    John WinnerRichard Bullock

    Ten Ways to Manage Railways Better

    September 10, 2004

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    Contents

    Introduction

    Know your customers

    Know your costs

    Setting the price

    Controlling your costs

    Summary

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    Introduction

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    Restructuring a railway is a process which undoubtedly benefits most

    railways but it is only a means to an endThe basic objective of restructuring is to reorganise railway activities and assets which in

    many cases are stuck in another age - to better meet current market needs

    Typically, this involves separating regulatory functions (normally left in Government) from the operational

    management of the railway

    reorganising the internal operations of the railway from being functionally-based to beingcommercially-based (the Line of Business model)

    Sometimes the previous management remains under the new structure, more often it ischanged

    Often, the restructured railway performs much better commercially than its predecessor

    But this is not guaranteed

    And the basic principles of railway management apply just as much in a restructuredrailway as in an un-restructured one

    INTRODUCTION

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    The basics of successful railway management are the same as forany other business

    Know your customersKnow your customers

    Set the right prices andcollect the money

    Set the right prices andcollect the money

    Know your costsKnow your costs

    Control your costsControl your costs

    DRIVE REVENUEUP

    DRIVE REVENUEUP

    DRIVE COSTSDOWN

    DRIVE COSTSDOWN

    INTRODUCTION

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    This talk will discuss (and give examples) of each of these four basicelements applied to the three main businesses of most railways

    (passenger, freight and infrastructure)

    Passenger Freight Infrastructure

    Know your customersIf an

    infrastructurecompany

    Know your costs

    Set pricesIf an

    infrastructure

    company

    Control costs

    INTRODUCTION

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    Know your customers - passenger

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    On many systems the passenger fares are regulated but severalmanagements have successfully restricted this to the economy-class

    services and developed a flourishing commercial passenger business

    Such commercial passenger services generally easily cover their avoidable costs and the mainchallenge in tariff-setting is to establish the market price

    Unlike bulk freight, for which the tariff is generally either acceptable or not acceptable for thewhole tonnage on offer, passenger traffic is characterized by a large number of individualdecision-makers, each of whom has their own market price. Increasing the fare, or otherwisechanging the service specification, will thus generally not affect all the traffic in a single step butinstead will cause a change in traffic to a greater or lesser degree. This partial response is

    defined by the elasticity of demand with respect to the characteristic that has been changed.

    This impact on demand of a particular fare level can be estimated from market research.

    A good example of this is the commercial services in Indonesia which have been stronglydeveloped over the past fifteen years. In 2003 the PTKA management undertook a series of on-

    board surveys to better understand the market and its response to changes in servicespecification.

    KNOW YOUR CUSTOMERS - PASSENGERS

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    The survey covered the Argo Wilis (Bandung Surabaya) and ArgoBromo (Jakarta Surabaya) executive services

    Southern corridor (blue) is served by services from Bandung Surabaya and by several services from Jakarta to Surabaya and East Jawa(Malang, Kediri, Jombang) in addition to the Jakarta-Solo/Yogya servuces

    Northern corridor (yellow line) is served by KA Argo Bromo, KA Sembrani and KA Gumarang

    PTKA Train Services in Java (2002)

    KNOW YOUR CUSTOMERS - PASSENGERS

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    Competition in both corridors is provided by executive bus and air

    Bandung Surabays RailBandung Surabays Rail

    Three services daily

    Tariff is Rp. 165,000 (executive) and Rp90,000 (business)

    Travel time ranges from 11 -12 hours

    Three services daily

    Tariff is Rp. 165,000 (executive) and Rp90,000 (business)

    Travel time ranges from 11 -12 hours

    Bandung Surabaya: Other ModesBandung Surabaya: Other Modes

    Airline

    Indirect services via Jakarta

    Fare : Rp. 640,000 ($80)

    Effectively 4 per day, travel time 3.5 hours

    Buses

    Fare Rp. 130,000

    Effectively 2 per day, travel time 12 hours

    Airline Indirect services via Jakarta

    Fare : Rp. 640,000 ($80)

    Effectively 4 per day, travel time 3.5 hours

    Buses

    Fare Rp. 130,000

    Effectively 2 per day, travel time 12 hours

    Rail Jakarta - SurabayaRail Jakarta - Surabaya

    Five services on two routes

    Tariff is Rp. 195,000 (executive) and Rp90,000 (business)

    Travel time ranges from 9 to 14 hours

    Five services on two routes

    Tariff is Rp. 195,000 (executive) and Rp90,000 (business)

    Travel time ranges from 9 to 14 hours

    Jakarta Surabaya: Other ModesJakarta Surabaya: Other Modes

    Airline

    Jakarta Surabaya: Rp. 325.000 to Rp390,000

    Frequency 10/day, time 1.5 hrs

    Buses

    Jakarta Surabaya Rp. 130,000

    Frequency 10/day, time 14 hrs

    Airline

    Jakarta Surabaya: Rp. 325.000 to Rp390,000

    Frequency 10/day, time 1.5 hrs

    Buses

    Jakarta Surabaya Rp. 130,000

    Frequency 10/day, time 14 hrs

    ON-BOARDSURVEYS

    KNOW YOUR CUSTOMERS - PASSENGERS

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    Many Bandung - Surabaya passengers are university students who do not earnany income, while most Jakarta Surabaya passengers are private employees: on

    both trains passengers typically earn Rp. 2 6 Mn ($750) per month

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    Unive

    rsity

    Hous

    ewife

    Priva

    te

    Gove

    rnmen

    t

    Self-

    employed

    Othe

    rs

    Numberof

    respondent

    Arbo Wilis Argo Bromo

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    N/A < 2 mn 2 - 6 mn 6 - 15 mn > 15 mn

    Num

    bero

    fresp

    on

    den

    t

    Arbo Wilis Argo Bromo

    Respondents Occupation Respondents Monthly Income in Class

    KNOW YOUR CUSTOMERS - PASSENGERS

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    Most trips between Bandung and Surabaya were for private business andfamily purposes, while trips between Jakarta and Surabaya were for

    personal reasons - influenced by the survey being just before a holiday

    0

    5

    10

    15

    20

    25

    30

    35

    40

    Privatebu

    siness

    Governm

    entbusines

    s

    Personal

    busines

    s

    Tourism

    Family

    reason

    s

    Othe

    r

    Numbero

    frespon

    den

    t

    Arbo Wilis Argo Bromo

    Respondents trip purposes

    Note: More representative results will be achieved by combining surveys during peak and off-peak times.

    A normal day will have more business-related trips and fewer personal and family purposes trips

    KNOW YOUR CUSTOMERS - PASSENGERS

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    Passengers are not captive to rail: during the last year about 50%of trips were by train, with the balance split over car, bus and air

    0

    10

    20

    30

    40

    50

    60

    Rail Car Bus Air Other Rail Car Bus Air Other

    Numberofrespondent

    Arbo Wilis Argo Bromo

    Argo Wilis : Bandung Jogja Argo Bromo : Jakarta - Semarang

    Argo Wilis : Bandung Surabaya

    Argo Bromo : Jakarta - Surabaya

    Respondent previous trips by mode of transport

    Medium-distance Long-distance

    KNOW YOUR CUSTOMERS - PASSENGERS

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    Safety is the most important reason for choosing rail, followed by comfortand travel time (presumably compared to bus); price is not a primary

    consideration

    0

    0.5

    1

    1.5

    2

    2.5

    3

    3.5

    4

    4.5

    5

    Safety

    Com

    fort

    Travel

    time

    Price

    Sche

    dule

    Accessibilit

    y

    Re

    lative

    importanc

    Reasons for choosing rail (Jakarta - Surabaya)

    Smaller ismore

    important

    Most Importance Least

    These results are similarto surveys in other

    countries and previoussurveys in Indonesia asfar back as 1981- servicequality is a major factor inmode selection forintercity travel.

    The general importance isthe same whicheveralternative would be takenif rail did not exist except that time is moreimportant for those whowould otherwise take bus

    and less important forthose who wouldotherwise take air

    KNOW YOUR CUSTOMERS - PASSENGERS

    KNOW YOUR CUSTOMERS PASSENGERS

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    If no executive train were available, passengers will generally switch to airwhere it is available, followed by business rail and car or bus

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    move to

    business

    class

    use

    airplane

    use car use bus use ship cancel

    trips

    others move to

    business

    class

    use

    airplane

    use car use bus use ship cancel

    trips

    others

    Number

    ofrespondent

    Arbo Wilis Argo Bromo

    Argo Wilis : Bandung Jogja (no direct flight)Argo Bromo : Jakarta - Semarang

    Argo Wilis : Bandung Surabaya

    Argo Bromo : Jakarta - Surabaya

    Medium-distance passengers behavedifferently to long-distance passengers if theroute is not properly served by plane

    Medium-distance passengers behave thesame as long-distance passengers if theroute is properly served by plane

    Respondent reaction if executive class is no longer available

    Medium-distance Long-distance

    KNOW YOUR CUSTOMERS - PASSENGERS

    KNOW YOUR CUSTOMERS PASSENGERS

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    More detailed analysis can be undertaken using two analyticalapproaches revealed preference and stated preference

    STATED PREFERENCE

    There are often issues which are difficult to

    analyse, particularly hypothetical situations such asthe introduction of a new service or changes in thequalitative aspects of a service

    Stated preference methods were thereforedeveloped in which surveys interviewedpassengers who then stated what their reaction

    would be to a change in service levels Such methods are widely used but need to be

    undertaken carefully quality is an essentialingredient of a successful stated preferencesurvey

    Experience has also shown that stated preferencedata generally overstates passenger responses toany given situation in part because idealisticalternatives are often compared to a less-than-ideal existing situationl

    REVEALED PREFERENCEREVEALED PREFERENCE

    Revealed preference data is data that has beencollected by observing the choices that

    passengers have actually made in practice i.e.that have revealedto observers

    This data is normally of two types:

    cross-sectional data which compareschoices that passengers make, at a

    particular point in time, when faced withalternative modes of transport e.g. this typeof analysis would try to relate the choicesbetween air and rail, say, between Jakartaand major centres in Jawa to the level andtype of services available by each mode

    time-series data, which records howpassengers changed their habits in responseto changes in modal characteristics e.g. theimpact of changes in air fares on rail and airtravel between Jakarta and Surabaya andother before-and-after studies

    Revealed preference data is data that has beencollected by observing the choices that

    passengers have actually made in practice i.e.that have revealedto observers

    This data is normally of two types:

    cross-sectional data which compareschoices that passengers make, at a

    particular point in time, when faced withalternative modes of transport e.g. this typeof analysis would try to relate the choicesbetween air and rail, say, between Jakartaand major centres in Jawa to the level andtype of services available by each mode

    time-series data, which records howpassengers changed their habits in responseto changes in modal characteristics e.g. theimpact of changes in air fares on rail and airtravel between Jakarta and Surabaya andother before-and-after studies

    KNOW YOUR CUSTOMERS - PASSENGERS

    KNOW YOUR CUSTOMERS PASSENGERS

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    An example of revealed preference analysis price elasticity of suburban traffic inBombay

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    1971

    1973

    1975

    1977

    1979

    1981

    1983

    1985

    1987

    1989

    1991

    1993

    1995

    Passenger Kms

    Paise / Pass (Constant 1995 money values)

    Demand Falls.....

    When Fares Rise

    The estimated fare elasticity is -0.35, comparable with normal experience

    KNOW YOUR CUSTOMERS - PASSENGERS

    KNOW YOUR CUSTOMERS - PASSENGERS

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    An example of stated preference value of time and the price of crowdingin Bombay

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    35%

    Affordable Comfortable Reliable Safe Convenient Fast No Choice

    %

    respondent

    0

    100

    200

    300

    400

    500

    600

    700

    < 2 2-5 5-10 10-15 > 15

    Icome / month (Rs 000)

    #respondent

    0

    5

    10

    15

    20

    25

    30

    35

    40

    < 2 2-5 5-10 10-15 > 15

    Income (Rs 000/month)

    VOT(Rs/hr

    0

    10

    20

    30

    40

    50

    60

    70

    VOT/income(

    KNOW YOUR CUSTOMERS - PASSENGERS

    0

    5

    10

    15

    20

    25

    30

    35

    < 2 2-5 5-10 10-15 > 15 < 2 2-5 5-10 10-15 > 15

    Income (Rs 000/month)

    WTPas

    %o

    fVO

    WTP for morestanding room

    WTP for seatPost-tax

    Pre-tax

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    Know your customers - freight

    KNOW YOUR CUSTOMERS - FREIGHT

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    Freight customers are influenced by a range of factors and these all need to beaddressed to operate a successful business

    KNOW YOUR CUSTOMERS FREIGHT

    PRICE

    TRANSIT TIME

    RELIABILITY

    Schedules

    For rail, this includes pick-up and delivery (PUD) this can be aslarge as the linehaul cost for short hauls (under 500 km)

    For rail, this also includes PUD

    Poor reliability either means the cost of waiting time at destinationterminals or customers factoring expected delays into expected

    transit times

    Particularly important in the overnight freight markets on longercorridors is also linked to arrival time window

    Customers are prepared to trade these attributes off against each other but all too often the only weapon rail uses is price reliability,

    schedules, and security are also within managements control

    Other important factors are security and damage

    KNOW YOUR CUSTOMERS - FREIGHT

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    Between Melbourne and Sydney rail is uncompetitive on price and transittime; it is also unreliable besides serving only a small part of what is

    essentially an overnight market

    0

    1 0

    2 0

    3 0

    4 0

    5 0

    6 0

    R a il R o a d

    A$/to

    nne

    L i n e h a u l

    P U D

    0

    2

    4

    6

    8

    1 0

    1 2

    1 4

    1 6

    1 8

    R a il R o a d

    Traveltime(hrs)

    L i n e h a u l

    P U D

    0

    10

    20

    3040

    50

    60

    70

    80

    90

    100

    -100 0 100 200 300 400

    Minutes early/late on schedule

    Cumulative%

    oftrainsarriving

    O OU CUS O S G

    0

    2

    4

    6

    8

    10

    12

    0 4 8 12 16 20 24

    %

    ofgoodsdespatche Current rail cut-off

    means it only servesabout 50% of the

    market

    About 55% of trainsarrive on time,

    compared to 95% by

    road but the 90%rail performance isabout 3 hours late

    KNOW YOUR CUSTOMERS - FREIGHT

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    But, rail is very competitive on price between Melbourne and Perth, hasreasonable reliability and serves almost all the market

    0

    2 0

    4 0

    6 0

    8 0

    1 0 0

    1 2 0

    1 4 0

    1 6 0

    1 8 0

    2 0 0

    R a il R o a d

    A$/tonne

    L i n e h a u l

    P U D

    0

    1 0

    2 0

    3 0

    4 0

    5 0

    6 0

    7 0

    R a il R o a d

    Traveltime(hrs)

    L i n e h a u l

    P U D

    0

    10

    20

    3040

    50

    60

    70

    80

    90

    100

    -300 -200 -100 0 100 200 300 400

    Minutes early/late on schedule

    Cumulative%oftrainsarriving

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    3.0

    0 4 8 12 16 20 24

    %

    ofgo

    odsdespatche

    Current rail cut-

    off enables it toserve at lesat

    80% of themarket

    About 65% of trains arriveon time, compared to 95%by road but the 90% rail

    performance is about 4hours late

    KNOW YOUR CUSTOMERS - FREIGHT

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    The trade-offs can be expressed in terms of elasticities

    In this context, the elasticity is the % change in freightmode share (or demand) in response to a 1% change

    in the particular service characteristic. Thus, a 1%reduction in price will increase demand by about 1.1%

    PRICE

    TRANSIT TIME

    RELIABILITY

    CUT-OFF TIME

    -1.1

    -0.3

    0.6

    0.4

    Elasticities for Australian rail long-haul general freight

    These elasticities can be used to assess the impact on demand of various changes in railservice characteristics

    For example, increasing the rail mode share on Melbourne Perth from 70% (2002) could be done by:

    Reducing the price from $103/ tonne to $96/tonne

    Reducing the transit time from 60 hours to 45 hours

    Improving the reliability from 66% to 75%

    Increasing the service availability from 80% to 95%

    Reliability (almost entirely a management issue) almost certainly offers the best pay-off

    KNOW YOUR CUSTOMERS - FREIGHT

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    Almost all this work was undertaken not by an above-rail operator but by atrack authority (ARTC) and they seem to have been doing something right

    Rail land freight market share (net tonnes Eastern States to WA)

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    3.0

    3.5

    90/1 91/2 92/3 93/4 94/5 95/6 96/7 97/8 98/9 99/0 00/1 01/2 02/3 03/4

    Netton

    nes(mil

    60%

    65%

    70%

    75%

    80%

    85%

    90%

    MarketShar

    Road Freight Rail FreightMarket Share Total Land Freight

    Creation of ARTCThird-party access andtrack authority

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    Know your costs - general

    KNOW YOUR COSTS - GENERAL

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    There are two dimensions to knowing your costs knowing your inputcosts and knowing your output costs

    Input costsInput costs

    Input costs are the costs of undertaking particulartechnical activities e.g.

    Cost of locomotive maintenance

    Cost of tampingThis information is essentially a matter offinancial accounting a well-structured generalledger will provide the raw material but will alsonormally require some manipulation to produceuseful information.

    Input costs are the costs of undertaking particulartechnical activities e.g.

    Cost of locomotive maintenance

    Cost of tampingThis information is essentially a matter offinancial accounting a well-structured generalledger will provide the raw material but will alsonormally require some manipulation to produceuseful information.

    Output costsOutput costs

    Output costs are the costs of the products therailway is producing e.g. the cost of carrying awagonload of freight or the cost of operating a

    passenger train:This is essentially a matter ofmanagementaccounting only in exceptional cases canfinancial accounts provide this informationdirectly.

    Knowing output costs is essential for: setting floor prices deciding whether to reinvest by replacinglife-expired rollingstock and infrastructure

    Historically, most railway accounting systems were quite good at financial accountingbut little effort was put into service and traffic costing and even less use made of it.

    Although modern accounting systems may have much more power and capacity thenprevious ones, in the end they are only as good as the quality of the information goinginto them.

    KNOW YOUR COSTS - GENERAL

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    Most railways know their input costs well but not their output costs.A key step is to analyse the contribution of services the difference between

    revenue and avoidable cost the costs that would be avoided if the traffic were

    not carried or the service not undertaken

    Service-basedService-based

    The service is taken as the unit of costing

    Costs are calculated for the service

    Revenue is then allocated e.g. if a passengerhad a through ticket from A to B via C, therevenue would need to be split into A-B and

    B-CPassenger traffic is almost always costed using this

    approach

    The service is taken as the unit of costing

    Costs are calculated for the service

    Revenue is then allocated e.g. if a passengerhad a through ticket from A to B via C, therevenue would need to be split into A-B and

    B-CPassenger traffic is almost always costed using this

    approach

    Traffic-basedTraffic-based

    The traffic is taken as the unit of costing:

    Revenue is derived directly from accountingdata (e.g. A-B)

    Costs are calculated by combining the cost

    of the different legs (e.g. A-C plus C-B)Freight traffic is generally costed using thisapproach

    Two approaches to analysis

    Where revenue can be related directly to a specific train operation, e.g. where there isno through ticketing for passengers (as in Indonesia) or where freight traffic travels in

    dedicated block trains, the two approaches are identical in practice

    BUT

    KNOW YOUR COSTS - GENERAL

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    The most important factor in traffic costing and business managementgenerally is to ensure that reliable financial and operating information is

    provided on a timely and consistent basis.

    Financial information should enable costs for each of the activities identified in the previousslides to be derived in a reasonably simple manner. If the costs are to be used to support

    claims for PSOs, there will be major advantages in credibility if this can be done directly fromthe accounts with a minimum of manipulation using data from other sources

    Operational data should be available on both an aggregate and service-specific basis. This isoften a major management weakness. It can be addressed by initiatives such as TIMS

    but unless management takes an active interest in reviewing the data on a regularbasis, the quality almost invariably deteriorates.

    IF YOU CANNOT MEASURE, YOU CANNOT MANAGE

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    Know your costs - passenger

    KNOW YOUR COSTS - Passenger

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    Botswana Railways (BR) has a network of 888 km and carriesabout 2 million tonnes and 0.7 million passengers

    The mainline was constructed in 1897 and formany years was the only line between South

    Africa and Zimababwe, as part of RhodesiaRailways

    On independence the line continued to beoperated by Zimbabwe Railways until theinfrastructure was purchased by Botswana in1987.

    Since then it has been operated independentlyby Botswana Railways

    The Selebi Phikwe and Morupule brancheswere funded by Botswana and opened in 1974and the Sua Pan line in 1992.

    Mafeking

    Bulawayo

    Sua Pan

    SelebiPhikwe

    Morupule

    Lobatse

    KNOW YOUR COSTS - PASSENGER

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    In 2001/2 BR transport revenue almost covered working expenditure anddepreciation comfortably ahead on a cash basis but this hides a

    significant cross-subsidy between freight and passenger

    Total revenue of P166 million, of which P130 million from transport activities

    Total expenditure of P146 million, of which working expenditure of P112 million, depreciation of P22million (historic basis understates true renewal requirement) and interest of P12 million

    Infrastructure costs

    rather low and corporatecosts high compared totypical pattern of costs

    0

    20

    40

    60

    80

    100

    120

    140

    160

    180

    Revenue Expenditure

    P

    ula(millio

    Interest and asset sales

    Rents, leases etcOther transport income

    Freight

    Passenger

    Interest and asset sales

    DepreciationCorporate management/services

    Infrastructure

    Above-rail

    Transport

    revenue

    5 Pula = $US

    KNOW YOUR COSTS - PASSENGER

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    Description of ServiceDescription of Service

    The day train (typically operated as a 8-carconsist) operates daily in each directionbetween Gaborone and Francistown with ascheduled transit time of about 8 hours.

    The night train (typically a 10-car consist)operates daily in each direction between

    Francistown and Lobatse with a scheduledtranist time of about 10 hours.

    The Gaborone schools service operates areturn ten-minute trip twice daily fromGaborone.

    The day train (typically operated as a 8-carconsist) operates daily in each directionbetween Gaborone and Francistown with ascheduled transit time of about 8 hours.

    The night train (typically a 10-car consist)operates daily in each direction betweenFrancistown and Lobatse with a scheduledtranist time of about 10 hours.

    The Gaborone schools service operates areturn ten-minute trip twice daily fromGaborone.

    BR currently operates two return passenger services on the north-south line as well as a twice-daily school service in Gaborone

    Day Night Commuter

    Pass (000) 322 195 215

    Passenger-km (mill) 95 74 2

    Revenue (P000) 5561 7560 232

    Key operating statisticsKey operating statistics

    Based on 2002 operations; commuter service estimated

    500101315763Loco-hrs

    50083954964Train-hrs

    2172135Gross tonne-km (mill)

    7384330Loco-km (000)

    3536942540Car-km (000)

    7369318Train-km (000)

    7506435Distance

    CommuterNightDay

    KNOW YOUR COSTS - PASSENGER

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    The day train currently has an average maximum load of about 400passengers, with loadings a little lower north of Mahalapye

    F

    rancistown

    Shashe

    Serule

    Topisi

    Palapye

    Radisele

    Mahalapye

    Pha

    laRoad

    Dibete

    Artesia

    Malotwana

    Pilane

    Gab

    orone

    Ramotswa

    Otse

    Lob

    atse

    0

    50

    100

    150

    200

    250

    300

    350

    400

    Day train (average of both directions)

    Alight/board to/from north Alight/board to/from south Passengers on-board

    Based on analysis of ticket sales for November 1-7 2002

    Th i h i i l d d ffi b G b

    KNOW YOUR COSTS - PASSENGER

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    The night train carries mostly end-to-end traffic between Gaboroneand Francistown, with an average load currently of about 280, but

    is very lightly loaded between Gaborone and Lobatse

    Based on analysis of ticket sales for November 1-7 2002

    Francisto

    wn

    Shash

    e

    Serule

    Topis

    i

    Palapye

    Radisele

    M

    ahalapye

    Phala

    Road

    Dibete

    Artesia

    M

    alotwana

    Pilane

    G

    aborone

    Ram

    otswa

    O

    tse

    Lobatse

    0

    50

    100

    150

    200

    250

    300

    N igh t tra in (average of bo th d irections )

    A light /board to/ from north A light /board to/ from south P as s engers on-board

    KNOW YOUR COSTS - PASSENGER

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    The overall financial performance is poor revenues barely coverfuel, crew and rollingstock maintenance

    P AS S E N G E R R E V E N U E AN D E X P E N D IT U R E 2 0 01 /2

    0

    2000

    4000

    6000

    8000

    10000

    12000

    14000

    16000

    18000

    20000

    R e ven ue Tra in

    opera t ions

    S ervic e s In fras t ruc tu re C o rpo ra te De prec ia t ion In te res t

    Pula

    (000

    R e v e n u e

    Cater ing

    Pa rce l s e tc

    Fares

    T r a i n o p e r a t i o n s

    Loco m a i n tenance

    C o a c h m a in t e na n c e

    F ue l

    Loco c rew

    S e r v i c e s

    Parce l s

    Cater ing

    S ta t ion servicesP ass enge r se rvi ces

    I n f ra / t ra in cont ro l

    Train contro l

    Infrastructure

    C o r p o r a t e

    D e p r e c i a t i o n

    L o c o

    Carr iages

    Track renewal

    I n te res t

    L o c o

    Carr iages

    Track renewal

    Commercially revenue must cover marginal recurrent operatingKNOW YOUR COSTS - PASSENGER

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    Commercially, revenue must cover marginal recurrent operatingcosts (train operations and services) as well as the capital costs of

    assets that will be replaced

    Train operations

    Infrastructure

    Depreciation

    Interest

    Corporate

    Services

    Interest calculated at 7%real. In Botswana, lococapital should be covered;coaches and track could betreated as effectively sunk

    Train operations cost probablyunderstated as historically coacheshave been under-maintained.

    Cost of servicesuncertain as bookingto passenger andfreight cost centres

    does not properlyreflect actual activities.

    Infrastructure-related costs are largelyfixed but passenger services imposesome costs associated with trackquality, train control and some wearand tear.

    Corporate management is high (up totwice) compared to other railways fixed in short run but will vary pro ratato other costs in long-run

    Revenue (currently Pula 13million) should aim to cover:

    Pula (million)Train operations 13

    Services 2

    Variable infrastructure 2

    Share of corporate 4

    Loco depreciation 3

    Loco interest 3

    Total 27

    B d th l i t d l d th t f

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    Based on the analysis, management developed three sets ofoptions to improve the financial performance of the services

    Operational changes

    Improve carriage utilisation by using common rakes on both the day and nightservices reducing fleet requirements and maintenance costs

    Attaching priority freight to the night services

    Rationalising maintenance and car-cleaning facilities

    Route changes

    Operate only between Gaborone and Francistown

    Withdraw low-volume stops for night service

    Level-of-service changes

    Withdraw sleeper service and ensure club/second service is a net contributor

    Some of these changes can be done on a stand-alone basis others need to be done incombination. The combined effect of the above measures would improve overall cost

    recovery from 40% to 60%

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    Know your costs - freight

    KNOW YOUR COSTS - FREIGHT

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    By contrast to passenger, the BR freight traffics easily coveredtheir working costs in 2002

    -20

    0

    20

    40

    60

    80

    100

    120

    Revenue Train-running Infrastructure Surplus before capital

    Pu

    la(million

    )

    Passenger Freight Other

    Th f i h ffi f fi h l i h S P

    KNOW YOUR COSTS - FREIGHT

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    The freight traffics form five groups the largest is the Sua Pansoda ash traffic to South Africa

    0

    100

    200

    300

    400

    500

    600

    700

    800

    900

    Tonnes (000) Ntk (million) Revenue (P

    million)

    Revenue/tonne

    (pula)

    Revenue/ntk

    (thebe)

    Tonnes/ntk

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    Pula/theb

    Sua Pan Selebi Phikwe North South Transit

    B t th i b t i i d l it l t i

    KNOW YOUR COSTS - FREIGHT

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    But the margin above train running and loco capital costs variessignificantly between traffics

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    Sua Pan Selebi Phikwe North South Transit

    Pula(million)

    Revenue Train-running Loco capital Wagon capital Infrastructure

    Th S P t ffi (40% f tk ) g t ll th gg g t

    KNOW YOUR COSTS - FREIGHT

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    The Sua Pan traffic (40% of ntkm) generates all the aggregatefreight contribution to passenger and corporate costs

    Contribution after train running costs and loco capital (pula million)

    0

    2

    4

    68

    10

    12

    1416

    18

    20

    Sua Pan Selebi Phikwe North South Transit

    These surpluses have to fund wagoncapital (to the extent it is required)

    and infrastructure costs

    More detailed analysis showed that many of the individual traffics (especially to/from South) failed to cover even train-running costs

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    Know your costs - infrastructure

    It is important to understand both your input costs (unit costs of maintenance)

    KNOW YOUR COSTS - INFRASTRUCTURE

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    p y p ( )and also the factors affecting costs but this latter is not so easy - pay your

    money and take your choice!

    CONSULTANTS ADVICE TO UZBEKISTAN

    To develop accurate levels of variability of expenditureson an activity basis, regression analysis is often usedbut this requires three or four years of statistical data

    related to each infrastructure expenditure activity. Inthis instance, this was not feasible as infrastructurerelated expenditures could not be provided by UTY for afour-year period. Therefore based on the consultantsexperience of major freight railways working in acompetitive regime, variability was set at 80% foractivities that are traffic related. While an 80%variability may appear excessive in the light of pastpractice it is, nevertheless, considered normal whendealing with open access for market-driven railwaysand the necessity to recover, as a minimum, all variable

    expenditures.

    CONSULTANTS ADVICE TO KAZAKHSTAN

    Rail infrastructure costs can be considered as beingmostly fixed and not vary directly with the volume oftraffic that uses the infrastructure. There have been

    many technical discussions on the issue of thevariability of infrastructure costs due to a higherfrequency or heavier train loads. Typically the variablecosts of providing and operating railwayinfrastructure range between 15% and 25%. Suchcosts include a proportion of maintenance costsassociated with the wear and tear of the track andassociated equipment, certain shunting activities,dispatching trains and other traffic control services,breakdown and emergency services. Most other costsare fixed as they are related to time, weather and the

    environment and will be incurred irrespective of trafficdensity.

    So what might be the right answer?

    The most important group of infrastructure costs track maintenance and

    KNOW YOUR COSTS - INFRASTRUCTURE

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    Many of these cost relationships are non-linear e.g. resurfacing (tamping) isprobably variable with Tonnes0.3

    The most important group of infrastructure costs track maintenance andrenewal include activities influenced by a wide range of factors

    Line speed Volume Elapsed Standard Climate Curvature % of cost

    Time of constr. 2MGTtimber

    20MGTconcrete

    Visual inspection 2 1

    Other inspection 0 1

    Resurfacing 8 10

    Ballast cleaning 8 10

    Rail grinding 1 3

    Miscellaneousmaintenance

    16 18

    Formationmaintenance

    13 8

    Resleepering 48 25

    Rail renewal 4 23

    Total 100 100

    Cost breakdown shown is fortypical Australian main-line

    track (80-100 km/hr linespeed)

    An aggregate cost function for Australian track maintenance and renewal

    KNOW YOUR COSTS - INFRASTRUCTURE

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    An aggregate cost function for Australian track maintenance and renewal,based on individual functions for each of the components, shows average

    costs reducing rapidly with tonnageTOTAL, AVERAGE AND MARGINAL TRACK

    MAINTENANCE COSTS

    0

    10

    20

    3040

    50

    60

    7080

    0 5 10 15 20 25 30 35 40 45 50 55 60

    MGT p.a.

    $000/k

    0

    5

    10

    15

    20

    25

    Cost($/0

    00gtk

    Total cost Average cost Marginal cost

    KNOW YOUR COSTS - INFRASTRUCTURE

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    Variability is thus not a single figure it steadily increases with tonnage

    from almost zero at very low tonnages to 70-80% at high tonnages

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    70%

    80%

    90%

    0 5 10 15 20 25 30 35 40 45 50 55 60

    MGT pa

    Variability(m

    arginal:averagecos

    But, beware, track quality (and hence cost) is also correlated with tonnage

    KNOW YOUR COSTS - INFRASTRUCTURE

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    But, beware, track quality (and hence cost) is also correlated with tonnage so statistical cross-sectional analysis is likely to demonstrate a long-

    term variability which may not exist in practice

    -

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    10 15 20 25 30 35

    MGT p.a.

    Co

    st/km(A$000

    Average quality Lower quality Higher quality

    Apparent variability alsoincludes impact of quality

    chnages

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    Setting the price

    Research has shown that the choice of mode where a choice exists canbe related to the difference in utility between the modes

    SETTING THE PRICE - PASSENGERS

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    be related to the difference in utility between the modes.

    The standard approach to a competitive market suchas that for commercial passengers is to develop achoice model

    The simplest form is the binomial logit model,applied where there is a choice between two

    alternatives (e.g. executive and business class oftrain where other modes do not exist)

    In commercial markets with several alternatives e.g., bus, air and car a multinomial model mustbe used to deal with the multiple choices

    A further complication is that some modes arecloser substitutes for each other than others and to overcome this nested logit models havebeen developed to reflect these differingsensitivities

    Calibrating a binomial model is relatively simplebut the other models are more difficult and inorder to obtain something useable somesimplifying assumptions generally need to bemade

    LOGIT MODEL

    The most commonly-used model and one that hastheoretical support is known as the logit model.

    In this model, the proportion P of trips made by mode Ais related to the difference U in utility between twochoices by

    P = exp(k(U+C))(1+exp(k(U+C)))

    Logit models are very widely-used and give goodresults if properly calibrated.

    The parameters k and C are estimated during model

    calibrationK is known as the spread parameter

    C is the mode-specific constant

    0.0

    0.1

    0.2

    0.3

    0.4

    0.5

    0.6

    0.7

    0.8

    0.9

    1.0

    -4 -3 -2 -1 0 1 2 3 4

    Difference in disutility (mode A - mode B)

    Percentagechoosingmode

    An example of such a nested multinomial structure was developed in Indonesia: ithas two levels in which level 1 chooses between executive class modes and

    SETTING THE PRICE - PASSENGERS

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    has two levels in which level 1 chooses between executive class modes andbusiness train and level 2 between executive train, airplane, and executive bus

    All logit models assume each individual has a utility functionwith a systematic compoent reflecting the physicalcharacteristics of each choice and a random componentreflecting his personal taste. However, each person is alsoassumed to behave rationally in maximising his personalutility

    In a multinomial model the probability person t choosesalternative i from a choice set Ct =

    Nested logit models are derivatves of the above model inwhich the choices are considered as taking pace in two ormore stages as shown in the diagram

    Vit = systematic utility function in this case can be simplifiedas the sum of fare and the value of time, as discussedpreviously

    Mode Choice

    Business ClassTrain

    Executive ClassServices

    ExecutiveClass Train

    AirlineExecutive

    Class Buses

    =

    Cti

    Vjt

    Vit

    e

    ePit

    Model characteristics and assumptions

    LEVEL 1

    LEVEL 2

    A model was calibrated using survey data combined with market

    SETTING THE PRICE - PASSENGERS

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    A model was calibrated using survey data combined with marketinformation and general experience

    Surabaya Semarang

    Mode-specific constants

    Executive rail 0 0

    Business rail -230 -65

    Air 245 75

    Executive bus -210 -105Spread parameters

    Level 1 0.008 0.008

    Level 2 0.010 0.010

    Generation parameter 0.001 0.003

    Demand model calibration parametersDemand model calibration parameters

    These parameters (in Rp 000)allow for non-measured factors

    e.g. suitability of schedules,difficulty of booking, general

    preferences for a particular mode

    due to perceived safety, comfortetc

    The spread parametersdetermine the sensitivity of themodel to changes in variables

    such as fare, travel time etc they are directly related to the

    elasticityof demand.

    The generation parameter

    determines the amount ofsuppression and generation thatoccurs when variables change these are trips that do not divertto or from other modes but are

    not made at all.

    The parameters differ for the two routes partly due to theinherent differences in the characteristics of the two marketsand partly due to the mixed quality of the base market data

    which could be improved with further research

    The model predicts a tariff increase by Rp. 40,000 will reduce PTKA

    SETTING THE PRICE - PASSENGERS

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    market share by 7%, equivalent to a 26% reduction in demand but some

    of these transfer to business class

    Surabaya Semarang Surabaya SemarangMarket share

    Executive rail 30% 26% 23% 19%

    Business rail 14% 40% 15% 43%

    Air 49% 18% 54% 20%

    Executive bus 6% 17% 8% 18%

    Trip generation -1.0% -2.7%

    Base Rail +Rp 40,000

    Market shares Base Case and with executive rail fare increase of Rp 40,0000Market shares Base Case and with executive rail fare increase of Rp 40,0000

    The model forecasts a 26% reduction in demand for a fare increase of 24% to Surabaya and 31% toSemarang. This gives a fare elasticity of about -1, a value at which revenue remains constant.

    This prediction can be checked against historic data and the model parameters adjusted accordingly.

    Conversely, an air tariff increase of Rp. 50,000 will reduce airs marketshare by between 25 35% and increase PTKA market share by 11% to

    SETTING THE PRICE - PASSENGERS

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    share by between 25-35% and increase PTKA market share by 11% toSurabaya and 5% to Semarang

    Surabaya Semarang Surabaya SemarangMarket share

    Executive rail 30% 26% 38% 28%

    Business rail 14% 40% 17% 42%

    Air 49% 18% 37% 12%

    Executive bus 6% 17% 9% 18%

    Trip generation -2.1% -2.2%

    Base Air + Rp 50,000

    Market shares Base Case and with air fare increase of Rp 50,0000Market shares Base Case and with air fare increase of Rp 50,0000

    The response of PTKA demand to a change in the characteristic of another mode (in this case the air fare) is

    known as the cross-el;asticity, and for the Surabaya market is estimated at about 1.8 (an increase in demandof 20% for an increase of 12% in airfare), although the corresponding estimate for Semarang is rather small at0.4.

    Again, these predictions can be checked against historic data and the model parameters adjustedaccordingly.

    This suggests the current rail fare structure between Jakarta and

    SETTING THE PRICE - PASSENGERS

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    ggSurabaya is about right.

    0%

    20%

    40%

    60%

    80%

    100%

    120%

    230 210 190 170 150 130

    Executive rail fare (Rp 000)

    %o

    fBaseCas

    Executive Business Total

    The case study costings estimated the floor price of executive travel at Rp 88 per passenger-km, excludingtuslah. This wpuld cover train operating costs but contribute nothing to track costs or corporate overheads.For the Surabaya service (725 km) this gives an absolute minimum fare of about Rp 75,000, comfortablybelow even the lowest fare considered in this analysis. However, as such a price is below the business classfare it would destroy PTKAs pricing structure and has not been included in this analysis.

    0%

    20%

    40%

    60%

    80%

    100%

    120%

    140%

    160%

    230 210 190 170 150 130

    Executive rail fare (Rp 000)

    %o

    fBaseCas

    Executive Business Total

    Demand as a function of executive rail fareDemand as a function of executive rail fare Revenue as a function of executive rail fareRevenue as a function of executive rail fare

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    Setting the price - freight

    The Gede Bage terminal is a dry port which is part of a chain of transportservices (including freight forwarders (EMKL) and terminal operators (PT

    SETTING THE PRICE - FREIGHT

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    services (including freight forwarders (EMKL) and terminal operators (PTMTI and PT JICT)) for Bandung and West Java exporters/importers

    EMKL / FreightForwarders/

    Trucking

    Connect exporterswith foreign market

    Have the flexibility touse railway-based orroad based services

    Transport containers

    from the factory toPTKAs freightterminal or directly tothe port

    Influenced by Organdarate for trucking

    Connect exporterswith foreign market

    Have the flexibility touse railway-based orroad based services

    Transport containers

    from the factory toPTKAs freightterminal or directly tothe port

    Influenced by Organdarate for trucking

    PTKA FreightTerminal and Train

    Export documentmanagement,quarantine, bankingetc

    Container storing

    Container handling

    (loading off andloading on)

    Container transportfrom Gede Bage toPasoso/Lagowastation

    Transport containerfrom Pasoso/Lagowato Gede Bage

    Export documentmanagement,quarantine, bankingetc

    Container storing

    Container handling

    (loading off andloading on)

    Container transportfrom Gede Bage toPasoso/Lagowastation

    Transport containerfrom Pasoso/Lagowato Gede Bage

    PT. Multi TerminalIndonesia Pasoso

    Terminal andTransport

    Container handling

    Container storing

    Container transportingfrom Pasoso station(the land for Pasosoterminal is owned by

    MTI) to JICT

    Container handling

    Container storing

    Container transportingfrom Pasoso station(the land for Pasosoterminal is owned by

    MTI) to JICT

    PT. JICT Container Terminal

    Container handling

    Ship loading and un-loading

    Container storing

    Container handling

    Ship loading and un-loading

    Container storing

    KAI, MTI and JICT signed an agreement in year 1999 for a joint tariff

    In 1999, PTKA entered an agreement with MTI and JICT to integrate their

    SETTING THE PRICE - FREIGHT

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    services including offering a joint tariff to the customers

    Role and Responsibility of Each PartyRole and Responsibility of Each Party

    PTKA prepare export summary list, export documents, container exchange interchangereceipt, train documents and transport container from Gede Bage to Pasoso

    MTI inform PTKA on ship schedules, prepare equipment, labor and storage areas,

    perform loading off and loading on of container in the Pasoso terminal; transport containersfrom Pasoso to JICT

    JICT prepare ship schedules, provide priority to the Gede Bage containers from gate in tothe stacking areas; put containers on the ship

    PTKA prepare export summary list, export documents, container exchange interchangereceipt, train documents and transport container from Gede Bage to Pasoso

    MTI inform PTKA on ship schedules, prepare equipment, labor and storage areas,

    perform loading off and loading on of container in the Pasoso terminal; transport containersfrom Pasoso to JICT

    JICT prepare ship schedules, provide priority to the Gede Bage containers from gate in tothe stacking areas; put containers on the ship

    Activities & Rate in 1999 (Rupiah 000)Activities & Rate in 1999 (Rupiah 000) FeetFeet

    Container from TPKB to JICT viaPasoso or vise versa

    Container from TPKB to JICT viaPasoso or vise versa

    Container from TPKB to Pasoso or viseversa

    Container from TPKB to Pasoso or viseversa

    Empty container from TPKP Pasosoor vise versa

    Empty container from TPKP Pasosoor vise versa

    20

    40

    20

    40

    20

    40

    20

    40

    20

    40

    20

    40

    PTKAPTKA

    232

    390

    232

    390

    232

    390

    232

    390

    137

    233

    137

    233

    MTIMTI

    107

    154

    107

    154

    47

    73

    47

    73

    23

    37

    23

    37

    JICTJICT

    23

    37

    23

    37

    TotalTotal

    363

    580

    363

    580

    279

    463

    279

    463

    160

    270

    160

    270

    $US = Rp 8000 approx

    The tariff package (KAI + MTI + JICT) was increased in May 2001 andagain, by an average 66% by each party in February 2003; both increases

    SETTING THE PRICE - FREIGHT

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    Export from Gede Bage (TEU) 1999-2002

    again, by an average 66% by each party in February 2003; both increaseshad a significant impact on rail container traffic

    0

    500

    1000

    1500

    2000

    2500

    Jan

    Feb

    MarchAp

    rilMa

    yJu

    ne July

    Augu

    stSe

    pt OctNo

    vDe

    cJa

    nFe

    b

    MarchAp

    rilMa

    yJu

    ne

    TEU/m

    ont

    0

    200

    400

    600

    800

    1000

    Tariff(000rp/TEU

    TEU Rate

    31267 31436

    23156

    20826

    0

    5000

    10000

    15000

    20000

    25000

    30000

    35000

    1999 2000 2001 2002

    Tariff increased in May 2001 and again in February 2003

    Export from Gede Bage (TEU) in 2002-3

    The current tariff structure causes the rail-based service to be lesscompetitive than the road-based service; even more so when the

    SETTING THE PRICE - FREIGHT

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    p ;comparative travel time and flexibility are taken into account

    Comparison Between Rail and Road Cost for JKT BDG JKT (20 FEET in 1000 Rp)

    0

    200

    400

    600

    800

    1000

    1200

    1400

    1600

    1800

    trucking

    (empty)

    Depo

    JKT to

    Pasoso

    Lift on

    depo

    JKT

    PT. MTI KAI

    Pasoso -

    TPKb

    (empty)

    OB +

    Lo/Lo

    Depo

    Bdg

    Trucking

    depo

    Bdg -

    Factory

    KAI

    TPKB -

    Pasoso

    PT. MTI PT JICT Total Rail Road

    Time of travel (Gede Bage Pasoso)Scheduled : 6.5 hoursActual : 7 hours

    But access and egress to/from terminals arejust as large, if not more sot

    Time of travel(factory JICT)5-6 hours

    After the latest tariff increase revenue now cover train operating and

    SETTING THE PRICE - FREIGHT

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    p grollingstock renewal costs but still not its terminal costs

    3938

    2294 2350

    91

    819

    1303

    439

    7296

    0

    1000

    2000

    3000

    4000

    5000

    6000

    7000

    8000

    Revenue Train operating

    cost

    Terminal Anciliary Rolling s tock

    capex

    IMO Corporate OH Total

    Effect of Tariff Increase for Gede Bage Revenue and Expenditure, 2003 Forecasted (in Million Rupiah)

    There are at least three alternatives for an improvement strategy tocreate an avoidable cost that is less that market price

    SETTING THE PRICE - FREIGHT

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    Review the operating plan and unit costs Train operation (schedules, train consist etc)

    Rolling stock maintenance (loco, wagons etc)

    Station and terminal operations etc

    Review unit costs

    Should plans be based on actual or future/efficientcosts?

    As a last resort, prepare exit plan

    Review the business model

    Gede Bage container traffic should PTKA be awholesaler or a retailer

    Factors which justify support by Government ?

    Road congestion and damage

    General political/development considerations

    First decide objective (e.g. what should Gede Bagelook like in 5 years time)

    Develop plan to achieve objective

    Operation Plan ImprovementOperation Plan Improvement

    Within the Gede Bage general cost, 77% are for theterminal operation that is being outsourced. PTKAshould analyse and renegotiate (if required) for theoutsourcing of the Gede Bage freight terminal

    management Establishment of Gede Bage as a business unit

    under the Divisi Kereta Barang that will beestablished as part of the KAI restructuring

    Gede Bage freight services as well as other unitsshould be operated with clear performance indicators

    to ensure the traffic is not treated as second classafter the passenger traffic

    High flexibility to be given to the Gede Bage unit indetermining the business model

    Establishment of a separate account for the GedeBage service in order to more easily identify financial

    information

    Within the Gede Bage general cost, 77% are for theterminal operation that is being outsourced. PTKAshould analyse and renegotiate (if required) for theoutsourcing of the Gede Bage freight terminal

    management Establishment of Gede Bage as a business unit

    under the Divisi Kereta Barang that will beestablished as part of the KAI restructuring

    Gede Bage freight services as well as other unitsshould be operated with clear performance indicators

    to ensure the traffic is not treated as second classafter the passenger traffic

    High flexibility to be given to the Gede Bage unit indetermining the business model

    Establishment of a separate account for the GedeBage service in order to more easily identify financialinformation

    ALTERNATIVES

    In terms of its business model, PTKA should take more control over theoverall chain in upstream and downstream

    SETTING THE PRICE - FREIGHT

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    overall chain in upstream and downstream

    Upstream Possible ImprovementUpstream Possible Improvement

    Operate as a retailer

    Deal direct with customers

    Have direct contracts with local truckcompanies to collect and deliver locally

    Have freedom to hire truclks if necessaryto carry by road to the port when there aredelays by rail

    Operate as a retailer

    Deal direct with customers

    Have direct contracts with local truckcompanies to collect and deliver locally

    Have freedom to hire truclks if necessaryto carry by road to the port when there aredelays by rail

    Downstream Possible ImprovementDownstream Possible Improvement

    Deal direct with JICT

    Employ contractors for local terminal handling anddelivery in Jakarta

    Consider other container-related servicesRepairs

    Cleaning

    Storage

    Deal direct with JICT

    Employ contractors for local terminal handling anddelivery in Jakarta

    Consider other container-related services Repairs

    Cleaning

    Storage

    However, it will be very difficult for PTKA to successfully compete under public-sector constraints

    The container business unit must have considerable commercial freedom and should be clearlyseparated from the rest of PTKA

    While rail-oriented it should not be 100% tied to rail

    It could own or lease the container wagons with haulage provided by PTKA proper under a formalcontract probably on a take-or-pay arrangement

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    Controlling costs - passenger

    Better ticketing systems can be installed at little cost to the railway

    CONTROLLING COSTS - PASSENGER

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    Bangladesh Railways installed one at little cost to itself

    Contract awarded using twoContract awarded using two--stage processstage process

    The contractorThe contractor::

    Designs, sets up and operates the computer network andDesigns, sets up and operates the computer network andterminals,terminals,

    Maintains hardware and software,Maintains hardware and software, Pays a fixed monthly stipend to BR booking clerks,Pays a fixed monthly stipend to BR booking clerks, Hands over the system to BR at the end of the contract period.Hands over the system to BR at the end of the contract period.

    BRBR

    Pays the contractor at a rate per ticket issuedPays the contractor at a rate per ticket issued Pays normal salary to the booking clerksPays normal salary to the booking clerks

    Contract durationContract duration

    4 years after commissioning, or after a specified total number4 years after commissioning, or after a specified total numberof tickets have been issued.of tickets have been issued.

    CONTROLLING COSTS - PASSENGER

    Fare evasion is often widespread but it can be controlled by a suitableinspection regime

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    0

    0.1

    0.2

    0.3

    0.4

    0.5

    0.6

    0.7

    0.8

    0.9

    1

    0.00% 0.50% 1.00% 1.50% 2.00%

    Inspection Probability

    ProportionofPassengersWithValidTicket R=40

    R=3

    Approximately

    3% gap

    Approximately

    0.7% Inspection

    Probability

    R is the ratio of

    penalty charged to

    fare evaded

    LONDON TRANSPORT POLICY

    Each passenger should have theirticket checked or see another

    customers ticket being checked onone in every five trips. This seems tomaximise the efficiency of ticketchecking at lowest sensible costs.

    Inspection Number of inspections Likely level of evasion (%)

    probability (%) Annually Frequency Low penalty High penalty

    0.20 1.2 About every ten months 40 15

    0.50 3.0 Once per four months 20 100.75 4.5 Once each quarter 13 91.00 6.0 Every two months 10 81.50 9.0 Every 5-6 weeks 8 52.00 12.0 Every month 5 23.00 18.0 Every 2-3 weeks 2

    Outsourcing can be an effective cost control techniqueOutsourcing can be an effective cost control techniqueWholesaling Local Passenger Trains in BangladeshWholesaling Local Passenger Trains in Bangladesh ....

    CONTROLLING COSTS - PASSENGER

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    ObjectiveObjective

    Curb unauthorizedCurb unauthorized travellingtravelling and to reduce dependence on PSOand to reduce dependence on PSO Gain experience in a new area of PPPGain experience in a new area of PPP

    Basic concept of scheme, the lesseeBasic concept of scheme, the lessee

    Operates trains.Operates trains. Collects revenue directly from passengers,Collects revenue directly from passengers, Pays BR on the basis of carriagePays BR on the basis of carriage--trips operated.trips operated.

    Pilot project:Pilot project: DhakaDhaka--NarayanganjNarayanganj section were selected for the pilot projectsection were selected for the pilot project Award of contract in July, 1997Award of contract in July, 1997 88% rise in BR88% rise in BRs revenue from the trainss revenue from the trains Service quality improved and there was an increased demand for sService quality improved and there was an increased demand for serviceervice

    Frequency of service then increasedFrequency of service then increased Further 28% overall rise in revenueFurther 28% overall rise in revenue

    Now leasing out more trainsNow leasing out more trains -- so far 44 more trains leased out (37% of nonso far 44 more trains leased out (37% of non--intercity seatintercity seat--km)km)

    Result: An average 68% rise in BRResult: An average 68% rise in BRs revenues revenue

    CONTROLLING COSTS - PASSENGER

    and Outsourcing Onand Outsourcing On--Board Services for Intercity TrainsBoard Services for Intercity Trains

    Outsourcing can be an effective cost control techniqueOutsourcing can be an effective cost control technique

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    and Outsourcing Onand Outsourcing On--Board Services for Intercity TrainsBoard Services for Intercity Trains

    ObjectiveObjective

    Improving quality of onImproving quality of on--board servicesboard services Preventing pilferage of fittings and fastenings of passenger carPreventing pilferage of fittings and fastenings of passenger carriagesriages

    Basic concept of scheme, the contractor provides stewardsBasic concept of scheme, the contractor provides stewards Take over the coaches before departure of the trainTake over the coaches before departure of the train Admit passengers in the coach & help them occupy the allottedAdmit passengers in the coach & help them occupy the allotted seatsseats Look after the comfort of passengers ;Look after the comfort of passengers ; Hand over the coach to BR staff after the round tripHand over the coach to BR staff after the round trip

    TypicallyTypically

    BR pays the contractor at the agreed rateBR pays the contractor at the agreed rate Contractor rents BRContractor rents BRs buffet cars buffet car

    ResultsResults Pilot project achieved a 48% real improvement in contribution toPilot project achieved a 48% real improvement in contribution to BRBR

    CONTROLLING COSTS - PASSENGER

    Outsourcing OnOutsourcing On--Board Services for Intercity TrainsBoard Services for Intercity Trains

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    Outsource Whole Business Segments Where Possible

    Rail Services Provided by Private Operators

    CONTROLLING COSTS - PASSENGER

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    Concessioning and outsourcing have grown dramatically around the world

    As a result, there are a number of qualified investors and operators

    While often complex, concessioning can dramatically reduce costs and investmentneeds

    Light Rail

    & Metro

    Mainline

    Suburban &

    Commuter

    Domestic

    Intercity

    Passenger

    International

    Passenger Freight

    United Kingdom X X X X X

    France X X 1

    Sweden X X X X

    Germany X X X

    Netherlands X X Planned

    1: Limited to local services operated under contract (by private operators) to SNCF

    Rail Services Provided by Private Operators

    Competitive Tendering Has Reduced Costs Dramatically

    CONTROLLING COSTS - PASSENGER

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    Outsourcing provides the opportunity to bring private capital as well as new andmore focused business practices-turning fixed costs and investment needs intovariable costs

    %

    System Period Converted Total Cost Service Level Unit Costs

    Auckland 1990-1996 100.0% -21.2% 16.5% -33.5%

    Denver 1988-1995 25.0% 3.0% 25.0% -18.0%Indianapolis 1994-1996 70.0% 8.5% 38.4% -25.9%

    Copenhagen 1989-1996 56.0% -18.5% 5.0% -22.3%

    Las Vegas 1993-1994 100.0% 135.0% 243.0% -33.3%

    London 1985-1996 57.0% -30.0% 28.7% -45.7%San Diego 1979-1996 37.0% 2.7% 46.6% -30.0%

    Stockholm 1992-1995 59.0% -18.5% 2.8% -20.3%

    %ChangeCompetitive Tendering of Transit Services to the Private Sector

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    Controlling costs - freight

    Simplify Business Structures

    Extended Core Railway (UZRR)

    Ukrzaliznytsia (UZ)*

    CONTROLLING COSTS - FREIGHT

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    UZ had over 440business units andover 500,000employees

    Cumbersomestructures tend tomake costs fixed

    Eliminateunnecessary

    business units,and consolidateothers

    Business unitsshould focus on

    defined marketswith similarcharacteristics

    State Administrationfor Railway Transport

    of Ukraine

    Donetsk

    Railway

    InterTransFreigh

    Forwarder

    City MetroServices(3-1/2)

    ComputerCenter

    Lviv

    Railway

    LiskyIntermodal

    IndustrialRailways &

    Services

    PrintingNewspapers& Gazette

    Odessa

    Railway

    SpecialWagon Unit

    (tanks)

    Railway Shops(21 factories6 bureaus)

    KievRollingstock

    Bureau

    Dneiper

    Railway

    RefrigeratedWagon Unit

    Manufacturing& Sleepers(9 factories)

    Catering& Trading

    Group

    Southwest

    Railway

    PassengerCustomer

    Center

    MaterialsStores &

    Distribution

    Hospitals& Medical

    Supply

    Southern

    Railway

    FreightCustomer

    Center

    EngineeringDesign

    Bureaus (4)

    Training &Education(15, 5, 1)

    Core Railway

    y ( )

    Government

    Rolling stock

    Commercial

    Railway

    Administration

    Look for ways to reduce assets

    Fleet Rationalization and Workshop Improvement Investment Rationalization & Workshop Upgrade Program

    CONTROLLING COSTS - FREIGHT

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    Many state railways have multiple workshops for wagon, coach and locomotive repairs

    Most private operators, even big ones, have a single big workshop with a few smaller facilitieslocated strategically around the system

    In part, this practice is often based on how assets are used and managed

    Locomotives assigned to particular services and particular geographies are especially egregious

    Common purpose equipment, managed across geographies, improves utilization and reducesassets required

    Fleet Rationalization and Workshop Improvement Investment

    0

    2

    4

    6

    8

    10

    12

    14

    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

    US

    $(millions)

    p pg g

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

    Numb

    erofWorkshops

    0

    5,000

    10,000

    15,000

    20,000

    25,000

    30,000

    35,000

    Numb

    erofEmployees

    Workshops Closed

    Staff Reductions

    Look for ways to reduce assets

    Centralization & Computerization Investment Computerization Improvement Program

    CONTROLLING COSTS - FREIGHT

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    Information technology can reduce operating costs dramatically by eliminating small stations,centralizing call centers, billing and accounting systems

    Improved train control systems, even for light density railways (through radio dispatching, for

    example), can reduce operating costs and eliminate unneeded assets associated with stations andmini-control centers

    Better traffic costing systems help identify opportunities and focus attention

    0

    1

    2

    3

    4

    5

    6

    7

    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

    US$(millions)

    0

    200

    400

    600

    800

    1000

    1200

    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

    NumberofStations

    0

    5,000

    10,000

    15,000

    20,000

    25,000

    30,000

    35,000

    CumulativeStaffReduction

    Look for ways to reduce assets

    Operating Plan & Improvements Cumulative Impact of Operation Plan & Network Improvements

    CONTROLLING COSTS - FREIGHT

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    In railways where traffic patterns have shifted, a new operating plan can reduce the need formarshalling yards and terminal facilities and eliminate the need for locomotives

    Most major railways develop new operating plans every year and modify them intensively during the

    year

    CN, one of the best operated railways in the world, was able to eliminate over 300 locomotives andclose 3 major marshalling yards, by developing a new operating plan focused on its best businesssegments

    Operating Plan & Improvements

    0

    2

    4

    6

    8

    10

    12

    14

    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

    US

    $(millions)

    Cumulative Impact of Operation Plan & Network Improvements

    0

    2

    4

    6

    8

    10

    12

    14

    16

    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

    Numberof

    TerminalsClosed

    0

    2

    4

    6

    8

    10

    12

    14

    16

    StaffRed

    uctions(000's)

    Concentrate traffic on fewer routes where possible

    Black SeaG i

    Russia

    30 35 40

    Black SeaG i

    Russia30 35 40Bulgaria

    CONTROLLING COSTS - FREIGHT

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    TCDD, Turkeys national railway, has a very light density network

    The largest density is near citiessuburban services mostly, about 20 million tonnes per kilometer

    The rest of the network averages less than 2 million-tonnes per kilometer per year

    AnkaraKirikkale

    Zonguldak

    Kayseri

    Mersin

    Adana

    Narh

    Ulukisla

    Konya

    Iskenderun

    AfyonManisa

    Kutahya

    Izmir

    BandirmaSivas

    Kars

    Samsun

    Malatya

    Turkey

    Georgia

    Armenia

    Syria

    Greece

    Lebanon

    Iraq

    Iran

    Medi terranean Sea

    35

    40Ankara

    Kirikkale

    Zonguldak

    Kayseri

    Mersin

    Adana

    Narh

    Ulukisla

    Konya

    Iskenderun

    AfyonManisa

    Kutahya

    Izmir

    BandirmaSivas

    Kars

    Samsun

    Malatya

    Turkey

    Georgia

    Armenia

    Syria

    Greece

    Lebanon

    Iraq

    Iran

    Medi terranean Sea

    35

    40

    23

    22

    21

    20181617

    1905

    04

    0607

    07

    08

    09

    40

    39

    38

    4128

    29

    3031

    37

    35

    48

    36

    86

    10

    43

    4245

    46

    44

    71

    7273

    74 7576 77

    78

    80

    79

    69 64

    65 66

    63 67

    6870

    81NA

    8283

    85

    25

    26

    87

    5651

    8988

    60

    62

    61

    56

    57

    58

    52

    54

    55

    59

    24

    37

    5090

    49

    0302

    01

    11

    12

    13

    14

    15 IstanbulHydarpasa

    Consider radical solutions

    Black Sea30 35 40

    BulgariaRussia

    TCDD Core Network

    CONTROLLING COSTS - FREIGHT

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    A strategy of reducing TCDDs network to a core system (red), seeking subsidy forstrategic pieces (purple), and concessioning the rest (green) is not enough to make TCDDself supporting

    AnkaraKirikkale

    Zonguldak

    Kayseri

    MersinAdana

    Narh

    Ulukisla

    Konya

    Iskenderun

    AfyonManisaKutahya

    Izmir

    Bandirma

    Sivas

    Kars

    Samsun

    Malatya

    IstanbulHydarpasa

    Black Sea

    Syria

    Greece

    Lebanon

    Iraq

    Iran

    35

    40

    Bulgaria

    Turkey

    Georgia

    Mediterranean Sea

    Armenia

    23

    22

    21

    2018

    16

    1719

    05

    04

    09

    4039

    41282930

    3137

    3548

    3686

    43

    4245

    46

    44

    71

    7273

    74

    75 7677

    7879

    64

    6566

    63

    6967

    6870

    81 NA

    8283

    84 85

    25

    26

    87

    5351

    888960

    6261

    56

    57

    58

    52

    55

    59

    24

    37

    5090

    49

    03020111

    13

    15

    54

    1412

    06

    07

    08

    38

    10

    80

    Sometimes, even that is not enough

    Operating Cost of Railway$0

    CONTROLLING COSTS - FREIGHT

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    Even complete concessioning requires ongoing subsidy

    ($1,200)

    ($1,000)

    ($800)

    ($600)

    ($400)

    ($200)

    $0

    2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

    $

    Millions(2002)

    Concessioning

    Efficient Core

    Core Network

    90% of Traffic

    Existing Strategy

    No Change

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    Controlling the costs - infrastructure

    Look for programs that prolong asset life

    CONTROLLING COSTS - INFRASTRUCTURE

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    Many railways are able to achieve rail life of more than 2 billion tonne-kilometers while others persistwith practices that have rail life of 500 million tonne-kilometers:

    Rail grinding, flange lubrication

    Maintenance practices based on replacement of track components rather than whole systems

    Substitution of lower cost components (e.g., the 12 piece Soviet style rail fastening system by the5 piece Pandrol type fastening)

    Elimination of little used brancheseither through sale (short-lining) or closure

    Track Investment

    0

    10

    20

    30

    40

    50

    60

    70

    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

    US$(millions)

    Track Rationalization & Maintenance

    0

    5,000

    10,000

    15,000

    20,000

    25,000

    30,000

    35,000

    40,000

    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

    cumulative staff reduced

    cumulative track kilometers eliminated

    COMMERCIALIZATION OF BRS TELECOM SYSTEM

    IInn 19871987--89, BR established its own optic89, BR established its own optic--fibrefibre telecom networktelecom network

    CONTROLLING COSTS - INFRASTRUCTURE

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    IInn 19871987 89, BR established its own optic89, BR established its own optic fibrefibre telecom networktelecom network

    BR equipped it with 120 channels for its own use but a large latBR equipped it with 120 channels for its own use but a large latent capacity remained untapped.ent capacity remained untapped.BR decided to exploit this capacity through PPP withBR decided to exploit this capacity through PPP with GrameenGrameen Telephone.Telephone.

    Contract structureContract structure

    Long term lease (20Long term lease (20--30 years) of the system for commercial use30 years) of the system for commercial use

    Existing telecom capacity and facilities used by BR retained andExisting telecom capacity and facilities used by BR retained and provided by the lessee free ofprovided by the lessee free ofcostcostThe lessee (The lessee (GrameenGrameen Phones) :Phones) :

    bears costs of repair, replacement and upgrading of the systembears costs of repair, replacement and upgrading of the systemreimburses salaries and allowances of BR telecom personnelreimburses salaries and allowances of BR telecom personnel

    pays BR an annual rental for use of the system up to a specifiedpays BR an annual rental for use of the system up to a specified limit;limit;shares revenue with BR for any subshares revenue with BR for any sub--lease of any channel capacity;lease of any channel capacity;shares revenue with BR for capacity utilization beyond the specshares revenue with BR for capacity utilization beyond the specified limit;ified limit;makes an upmakes an up--front payment to BR at the time of contract signing.front payment to BR at the time of contract signing.

    Lease contract for 20 years signed inSeptember1997Lease contract for 20 years signed inSeptember1997 payments currently being renegotiatedpayments currently being renegotiated

    New contract is likely to represent about 10% of gross earnings - and 30% ofpassenger earnings at no cost to BR

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    Summary

    It is all too easy for railways to get caught in a cycle of doom

    Many railways are starved for capital, and

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    spend what little is available on the wrongthings

    Investments that expand profit making businesssegments will help brake the cycle of doom;

    investments that enhance the ability to losemoney strengthen the cycle

    Investments that reduce costs also help brake

    the cycle: mechanizing track maintenance,replacing unreliable locomotives

    Eliminating divisions and assets with poor profitperformance, especially those with private

    sector counterparts (e.g., advertising, printing,engineering design, construction, buildingmaintenance, etc.) also brake the cycle

    PoorTrackConditions

    OldLocomotiveFleet

    High OutOf ServiceLevels

    SlowTrainOperations

    ExcessEquipment

    NeedsExcessLocomotiveNeeds

    ExcessTrains,Crews

    ExcessCosts

    Slow &UnreliableService

    Low Fares

    Rates &Tariffs

    DecliningTrafficBase

    InsufficientCapital &Funds

    Cycleof

    Doom

    Restructuring in isolation may only rearrange the boxes specificmanagement measures are also required to escape the cycle

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    Know your customersKnow your customers

    Set the right prices andcollect the money

    Set the right prices andcollect the money

    Know your costsKnow your costs

    Control your costsControl your costs

    DRIVE REVENUEUP

    DRIVE REVENUEUP

    DRIVE COSTSDOWN

    DRIVE COSTSDOWN

    And dont forget about safety!!

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