RTM Module-5-2018

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INSTITUTE OF RAIL TRANSPORT
IRT-23
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Transport
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Economics
& Management
Module

5
COSTING & PRICING OF RAIL TRANSPORT SERVICES

Unit 1
Theory, Traffic Costing in Indian Railway System and 1
International Practices

Unit 2
Costing of Freight and Coaching Services 23

Unit 3
Pricing Concepts and Indian Railways’ Rating Policy 41
Course Preparation Team
Content Contributor

Shri Purushottom Guha


Former Principal Executive Director (Coaching)
Railway Board
Ministry of Railways

Smt. Amrit K. Brar


Director (Tourism and Marketing)
IRCTC Ltd.,

Course Writer
Course Contributor/ Revised/Updated
Shri P.C. Chandy Shri Sanjeev Sharma
Joint Director (retd.) Director, Finance(AR)
Railway Board, Railway Board
Ministry of Railway Ministry of Railways

Language Editing Format Editing


Prof. P.R. Ramanujam Prof. P.R. Ramanujam
STRIDE, IGNOU STRIDE, IGNOU

Acknowledgements are due to


Dr. Sanjaya Mishra, STRIDE, IGNOU
for his Co-ordination

Copyright with
Institute of Rail Transport, 2018 (Revised Edition)

All rights reserved. No part of this work may be reproduced in any form, by mimeograph
or any other means, without permission in writing from the Institute of Rail Transport.

Further information about the Institute of Rail Transport and its courses can be obtained
from the Institute’s office at 104, NCRPU Building, Shivaji Bridge, Behind Shankar Market,
Near IRWO office, New Delhi - 110 001

Printed and published on behalf of Institute of Rail Transport by Shri Pramod Uniyal,
Executive Director.

Printed at : Allied Traders, 455, Patparganj Industrial Estate, Delhi-92


IRT-22 : RAIL TRANSPORT AND MANAGEMENT
MODULE - 1 : Overview of the Transport Sector

Unit 1 : Historical Developments - I


Unit 2 : Historical Developments - II
Unit 3 : Characteristics & Role of Different Modes of Transport
Unit 4 : Cost Structure of Different Modes of Transport
Unit 5 : Unit Cost in Indian Railways
Unit 6 : Pricing of Transport Services
Unit 7 : Urban Transport - I
Unit 8 : Urban Transport - II
Unit 9 : Organisational Structure of Indian Railways

MODULE - 2 : Rail Operations Management

Unit 1 : Transportation
Unit 2 : Organisation of Operations
Unit 3 : Passenger Operations
Unit 4 : Goods Train Operations
Unit 5 : Recent Developments in Freight Operations
Unit 6 : Operating Statistics
Unit 7 : Rules of Safety in Railway Operations
Unit 8 : Accidents - Relief Measures, Enquiry into Causes

MODULE - 3 : Marketing & Commercial Policy

Unit 1 : Commercial Organisation


Unit 2 : Coaching Traffic
Unit 3 : Reservation, Luggage and Parcel Rules
Unit 4 : Goods Traffic
Unit 5 : Pricing of Rail Transport
Unit 6 : Passenger Amenities
Unit 7 : Compensations/Claims
Unit 8 : Marketing Strategies

MODULE - 4 : Logistics & Supply Chain Management

Unit 1 : Basic Concepts of Supply Chain Management


Unit 2 : Supply Chain Operations : Planning and Sourcing
Unit 3 : Supply Chain Operations : Marketing and Delivering
Unit 4 : Supply Chain Management in Multi-Modal Transport
Unit 5 : ITS in Logistics and Transportation

MODULE - 5 : Costing & Pricing of Rail Transport Services

Unit 1 : Theory, Traffic Costing in Indian Railway System and


International Practices
Unit 2 : Costing of Freight and Coaching Services
Unit 3 : Pricing Concepts and Indian Railways’ Rating Policy

MODULE - 6 : Human Resource Management in Indian Railways

Unit 1 : Management - Concepts and Evolution


Unit 2 : Structure of Organisations and Management Processes
Unit 3 : Management in Future
Unit 4 : Personnel Management Discipline - An Overview
Unit 5 : Employee Relations and Labour Legislation
Unit 6 : Organisational Behaviour
Unit 7 : Management in the Indian Railways

MODULE - 7 : Legal & Technical Aspects of Railway Functioning

Unit 1 : Signalling - I
Unit 2 : Signalling - II
Unit 3 : Interlocking
Unit 4 : Systems of Train Working
Unit 5 : Modern Signalling Systems
Unit 6 : Locomotives
Unit 7 : Coaches
Unit 8 : Multiple Units and Other Coaching Vehicles
Unit 9 : Wagons
Unit 10 : Electricity in Railways
Unit 11 : Train Lighting
Unit 12 : Air-Condition of Coaches
Unit 13 : Electric Traction
Unit 14 : Role of Telecommunication and Basic Infrastructure
Unit 15 : Modern Telecommunication Systems
Unit 16 : Track
Unit 17 : Railways Act 1989

MODULE - 8 : Planning, Financial Management & Investment Policies

Unit 1 : Finances on Indian Railways


Unit 2 : Railways Financial Planning
Unit 3 : Organisation and Function of the Finance & Account
Management of the Railways
Unit 4 : Railways, The Public Accountability and Parliament
Unit 5 : Structure of Railways’ Accounts
Unit 6 : System of Railway Accounting : Classification and
Budgetary Management
Unit 7 : Exercising Budgetary Control, Conducting Review of
Financial Performance, Statistics & Economics Analysis,
Traffic Costing, Management Accountancy Performance
Budgeting and Zero-base Budgeting
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Institute of Rail Transport
Costing & Pricing
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of Rail Transport
Services

UNIT-1
Theory,Traffic Costing in Indian Railway
System and International Practices

Structure
1.0 Objectives
1.1 Theory
1.2 Introduction
1.3 Costing Concepts
1.3.1 Fixed costs
1.3.2 Variable costs
1.3.3 Fully distributed cost
1.3.4 Dependent cost
1.3.5 Marginal/Incremental cost
1.4 Limitations of costing data
1.5 Traffic Costing in Indian Railways (IR) system.
1.6 Accounting System of IR
1.6.1 Allocation of revenue expenses
1.6.2 Abstracts
1.7 Statistical Data
1.8 Performance Factors
1.8.1 Unit Costs
1.9 Apportionment and Allocation of Expenses to Functional Groups of Services

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1.10 Elements of Fully Distributed Cost (F.D.C.)
1.10.1 Working Expenditure
1.10.2 Depreciation Provision
1.10.3 Interest Charges
1.10.4 General Overheads
1.10.5 Central Charges
1.10.6 Limitation of Fully Distributed Cost
1.11 Performance Costing
1.11.1 Current Status
1.11.2 Why Performance Based Costing (PBC) in IR
1.11.3 Advantages of Performance Costing
1.11.4 Pre-requisite for Successful Implementation of PBC
1.11.5 Challenges for PBC Implementation
1.12 Traffic Costing - International Practices
1.13 Profit & Cost Centre Concept
1.14 Avoidable Cost and Basic Facility Costs
1.15 Variable Cost Concept
1.16 Check Your Progress : The Key

1.0 OBJECTIVES
Decision to improve the financial performance of any enterprise involves,
calculation of the cost incurred in undertaking the business in each sector and
the corresponding revenue generated.In the business of transportation,the main
objectives of traffic costing aim at:

a) Generating basic cost data for the management in price fixation and
project appraisals,
b) Cost benefit analysis of existing and proposed traffic streams,
c) Creation of cost consciousness and there by bring in cost control. The
concept of cost varies according to the objectives of cost determination.
The reliability and usefulness of any costing method requires that i) it should be
relevant, ii) is correctly valued and iii) its structure is known to every one. It is
therefore important that the costs take into account the totality of rail activities
and include expenses and then determine how these expenses are related to the
traffic handled or service provided in each sector. This involves apportionment
of joint costs, allocation of common and direct expenses to various activities
and relates them to relevant performance indicators to derive unit costs. Traffic
specific costing of rail service in India poses problems of different gauges,
administrations, services and apportionment of joint costs. Collection, compilation
and allocation of expenses to different activities require suitable accounting
system and reliable statistical data.

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CHECK YOUR PROGRESS 1 :
1. What are the main objectives of traffic costing?

1.1 THEORY
Cost represents the expenses attributable to a given service or product. Costing
methods should ideally trace the costs to their cause.

1.2 INTRODUCTION
Railways produce transportation of goods and passengers. Costing of rail
transport service is a very complex exercise. A large number of assets and
expenses are common to goods, passenger, parcel, luggage, and postal and
catering services and also to Broad gauge, Metre gauge and Narrow-gauge
operations. All these joint and common costs need to be apportioned and
allocated to relevant functions, activities and services.

CHECK YOUR PROGRESS 2 :


1. Why do we consider traffic costing as a very complex exercise?

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1.3 COSTING CONCEPTS
A general understanding of the common terms used in cost analysis is helpful
in appreciating the techniques of traffic costing. Similarly, knowledge of the
terminology used in costing will also help in using the cost data for taking
decisions on pricing and project appraisals. Commonly used concepts are briefly
and broadly explained below:

1.3.1 Fixed Costs


These are expenses generally not affected by variations in the volume of traffic
and are also known as indirect costs. On railways, establishment charges,
interest payments, depreciation provision for asset replacement or renewals,
expenses on zonal and divisional managers” offices, maintenance of track and
signalling, expenses on station building and their maintenance are some of the
fixed costs. The principle of fixed costs is based on the fact that increase or
decrease in the quantum of traffic need not always be followed by proportionate
increase or decrease in expenses. Many of the expenses on railways are
independent of the volume of traffic. They are fixed costs, which have to be
incurred by railways whether the quantum of traffic increases or decreases. Fixed
costs per unit will vary inversely with the volume of traffic. For e.g. if the fixed cost
for working a railway line is Rs. 100 lakhs, it will remain Rs 100 lakhs if the traffic
is 1 lakh or 10 lakh tonnes. But the fixed cost per tonne will be Rs 100 in the first
case and Re 10 per tonne in the second case.

1.3.2 Variable costs


These are costs, which vary with the variations in volume of traffic. Such costs
will be incurred only when a particular category of traffic is handled Some
examples of variable costs are: fuel costs, wages of loco (engine) and crew
(driver), guards, operation and maintenance of wagons and coaches Variable
costs need not always vary in proportion to increase or decrease in quantum
of traffic. When traffic increases, utilization of assets improves and operation
becomes more efficient which in turn reduces cost per unit of out put. On the
other hand, additional traffic may cause or necessitate additional investment or
create traffic bottlenecks, which can cause increase in variable costs more than
proportionately. Variable costs are very important in working out the economics
and financial viability of individual streams of traffic and specific projects.

1.3.3 Fully distributed costs


These are total costs incurred in producing a service or product. This include:-

(i) Total Working Expense,


(ii) Interest Payments,

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(iii) Provision for depreciation
(iv) General overheads and
(v) Central charges

1.3.4 Dependent costs


These are also known as “long term variable costs and represent those costs
which vary with changes in the volume of traffic and can be directly assigned to
a given product or service. Expenses increase on account of increase in price of
inputs and also due to increase in volume of traffic. The increase in costs related to
price or wage rise is assessed and excluded before variability of costs is assessed.
Studies conducted in the past by the railways have shown that the variability differs
widely from 60 percent in respect of rolling stock maintenance to 90 percent in
fuel costs. Currently, railways estimate 78.5percent of the fully distributed costs as
Dependent costs for the purpose of fixing special rates in selected streams.

1.3.5 Marginal costs


These are also called “incremental costs” and represent that portion of variable
costs which is specifically incurred in moving the additional or incremental traffic.
For example, if the cost for transporting 10 million tonnes of traffic is Rs 10 lakhs
and cost of moving 10.5 million traffic is Rs. 10.1 lakhs, the incremental cost for
moving the incremental traffic of 0.5 million tonnes is Rs 0.1 lakh or Rs 10,000.
Expenses on fuel, lubricants, wages of running staff come under this category.

CHECK YOUR PROGRESS 3 :


1. Briefly explain the costing terminology, ‘variable cost’ and
incremental cost’.

2. What does the term ‘fully distributed cost’ mean.

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1.4 LIMITATIONS OF COSTING DATA
In rail transportation, the product is service and it has to be priced in advance
because it perishes the moment it is produced. One cannot store this product and
sell it later for a better price like other products. This poses the need for future
cost indicators to fix the tariff levels.

Viewed in the above context, the present traffic costing data, suffer from the
following limitations,

i) They are historical, i.e.; the costs are based on actual expenses and
performance of the railway system. They need updating to make them
useful for future pricing,
ii) The unit costs are figures averaged over the entire system. They do
not reflect the existence of higher or lower costs in different areas and
services. Application of these average costs to individual projects or
stream may not be appropriate unless allowances are made for such cost
variations.
iii) The existing costing methods do not account for the effect on costs of
efficiency, inefficiency and under utilization of capacity in selected area of
rail operation. Improved capacity utilization tends to reduce cost per unit
of out put. Use of unit costs without suitable modification and adjustments
for such situations, can present higher costs when additional traffic is to
be attracted in a section through rate cuts.
iv) Unit costs vary very widely from one zone to another for the same activity
indicating doubts on the reliability of these costs and also throwing
problems in computation of costs. Generally if traffic moves over more
than two zones, all India cost is applied which may still be inadequate
to highlight or represent the actual cost levels in different regions and
conditions of transport.

CHECK YOUR PROGRESS 4 :


1. Briefly explain any two limitations of the existing traffic costing
techniques?

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1.5 TRAFFIC COSTING IN
INDIAN RAILWAYS IR SYSTEM
Traffic costing commenced in IR System in the sixties. Before that the railways
were using average costs of transporting one wagon or train or tonne over a
distance or vehicle over a distance of one kilometer for passenger services.
However with the increased competition from road high value commodities
started moving away from rail and railways were left with low value commodities,
which did not fetch enough revenue to cover the cost of operation. The
alternative was to raise the rates for low value commodities and lower the tariff
level for high value items. It was in this background a strong need was felt by
IR to develop cost based rating practice. IR followed the traffic costing methods
followed in the United States and United Kingdom suitably modified by cost
consultants appointed by the Ministry of Railways. Railways have now in place a
well-organized traffic-costing wing at the Zonal Railway and Railway Board level.

CHECK YOUR PROGRESS 5 :


1. Explain briefly the circumstances, which necessitated introduction
of traffic costing in IR.

1.6 ACCOUNTING SYSTEM OF INDIAN RAILWAYS


A sound accounting system is a pre-requisite for developing reliable cost data for
any organization. IR has accordingly developed a ‘function’ and ‘activity’ oriented
accounting system, which can identify and relate the expenses to different
services and performance units.

1.6.1 Allocation of revenue expenses


The revenue expenditure of the railways is classified into thirteen statements called
‘Abstracts’ from A to N (excluding ‘I’). Seven Abstracts deal with functions like, repairs
&maintenance and operating, five Abstracts show expenses under ‘overheads ‘and

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the last Abstract deals with suspense accounts. These Abstracts are further divided
into ‘minor-heads’,’sub- heads’and ‘sub-detailed’ heads, which show expenses
incurred on specific activities. Expenses are booked against these Abstracts.

1.6.2 Abstracts
The details of the Abstracts are as under :

S. No. Abstract Particulars


1 A General Superintendence and Services
2 B Repairs & Maintenance of permanentway & works
3 C Repairs & Maintenance of motive power
4 D Repairs & Maintenance of carriage & wagon
5 E Repairs & Maintenance of plant & equipment
6 F Operating expenses-rolling stock & equipment
7 G Operating expenses-Traffic
8 H Operating expenses-Fuel
9 J Staff welfare & amenities
10 K Miscellaneous working expenses
11 L Provident fund, pension& other retirement benefits
12 M Appropriation to funds
13 N Suspense
* O Government contribution for defined contribution pension scheme

*Part of Abstracts 'L'

These Abstracts are further divided into following heads which show expenses
incurred on specific activities:

OO Minor head
OO Sub-head
OO Detailed head

Revenue Expenditure incurred is booked under more than 1200 detailed heads
of accounts. Initial accounts are maintained by various accounting units attached
to Divisional offices, workshops, zonal headquarters etc. The expenses are
booked either directly from cash transaction or from adjustment vouchers which
record the classifications.

CHECK YOUR PROGRESS 6 :


1. What are ‘Abstracts’ in railway accounting system? How many abstracts
are there and which are the abstracts that shows expenses on functions?

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1.7 STATISTICAL DATA
Traffic Costing relies on Railways statistics for Basic Data about Railways
performance. The statistical data is published in the form of “Annual Statistical
Statements” (ASS) every year. Instructions for collection and compilation of ASS
and other data are available in the Manual of Statistical Instructions Volume I and II.

Railway statistics is compiled in following broad categories:

a. Financial Statistics
b. Commercial Statistics
c. Operating statistics
d. Administrative Statistics

1.7.1 Financial Statistics (Statements 1 to 7)


These give details of financial results such as capital at charge, working
expenses, gross earnings, gauge-wise break up of expenses, etc.

1.7.2 Commercial Statistics (Statements 8 to 15)


These give details of commercial performance like passenger and freight traffic
carried and their earnings. With respect to certain important commodities these give
details like originating tonnage, earnings, average lead, etc.Statement 15 provides
background material for traffic costing and it gives the following information:

(i) Cost of hauling a passenger train and passenger vehicle per kilometer.
(ii) Cost of hauling a goods, train and goods wagon per km.
(iii) Cost of hauling a tonne per km.

Separate statistics are also available for non- revenue traffic in these statements.

1.7.3 Operating Statistics( 16-37 )


These contain data about important parameters like train km, engine km etc;
which are used in traffic costing for apportionment of common expenses as well
as for calculating unit costs for marshalling, terminal operations etc.

1.7.4 Administrative Statistics (40-44)


These relate to number and cost of staff of different categories and departments.
It also given details of man days last due to various reasons, accidents, statistics
and cost of RPF and GRP etc.

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CHECK YOUR PROGRESS 7 :
1. How are statistical data classified?

1.8 PERFORMANCE FACTORS


Railways perform a large number of operations to provide various services under
“goods” and “coaching”. Some of the important performance factors or out put
indicators are:

i) tonnes originating,
ii) gross tonne kms,
iii) net tonne kms,
iv) wagon kms and wagon days,
v) train kms,
vi) wagon kms per wagon day,
vii) engine kms,
viii) passenger originating,
ix) passenger carried,
x) vehicle kms and vehicle days,
xi) dining car kms,
xii) no of invoices and parcel way bills, etc.

1.8.1 Unit costs


Unit costs basically show the cost for providing selected services /activities
related to the above performance units/factors. Once the expenses are
allocated activity wise, they are rated against most appropriate performance
factors. Reliability of unit costs depends largely on the selection of appropriate
performance factors and their correct compilation. IR has developed unit costs

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separately for freight, passenger and other coaching (parcel/luggage/postal/
catering) services. These unit costs are published separately for zonal railways
and on all Indian railways basis every year. Costs for a given year is updated
using escalation factors (percentage) notified by the railway ministry.

1.9 APPORTIONMENT & ALLOCATION


OF EXPENSES TO FUNCTIONAL
GROUPS OF SERVICES
Apportionment of expenditure to different services is the pre-requisite for any
traffic costing exercise. The process of traffic costing begins from the time the
financial accounts for a given year are closed and the capital and revenue
accounts are finalised. The total expenses of a zonal railway are first bi- furcated
into Broad gauge, Metregauge and Narrow gauge. Thereafter, expenses for
Electrical Multiple Units (E.M.U) are separated and remaining expenditure for
each gauge is bifurcated into i) Coaching and ii) Goods. Expenses, which are
booked directly to a gauge/activity, are allocated directly to that activity while
joint expenses are distributed on the basis of ratios developed in surveys,
performance factors, engineering analysis and statistical methods like
regression analysis.

CHECK YOUR PROGRESS 8 :


1. Briefly explain the steps involved in segregation of total railway
expenses into ‘Goods’ and ‘Coaching’ services.

1.10 ELEMENTS OF FULLY


DISTRIBUTED COST (F.D.C)
It is important that costing system covers all railway expenses and determines
how they are relevant to the type of service provided when present and future
price levels are considered and compared. IR use Fully Distributed Cost (FDC)
as the floor level for general cost benefit analysis of traffic. FDC has five (5)
elements, which are described below:

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1.10.1 Working expenditure
This includes, staff, store and maintenance expenses attributable to a specific
function or service.

1.10.2 Depreciation provision


IR has a separate fund called ‘Depreciation Reserve Fund (D.R.F). This is
meant for meeting the cost of replacement and renewal of railway assets. It is
calculated at the present day cost of assets on straight-line basis depending on
the life of asset. For e.g., if the present day cost of a wagon is Rs 15 lakhs and
its life is thirty-five years, annual depreciation provision of the wagon will be Rs
15 lakhs less ten percent scrap value divided by thirty-five years ((1500000-
150000)/35=Rs 38,572).

1.10.3 Interest Charges


These are amounts charged off to revenue expenditure at a fixed rate calculated
on the booked value of assets. The rate fixed by Railway Convention Committee
(RCC) for dividend payment to central government for a given year is taken as
interest charges in costing. After merger of Railway Budget with Union Budget,
no dividend is now payable by Railways to General Revenues.

1.10.4 General Overheads


These are expenses not directly or indirectly identifiable with a particular activity,
but are necessary for the organization. These costs are incurred as a whole for
the rail operation and are unavoidable for providing various services. Overhead
expenditure includes expenses on general management, material management,
financial management and personnel management services, staff welfare
including staff quarters and other residential and welfare buildings, educational
and health services, provident fund, retirement benefits, appropriation to pension
fund and such areas railway protection force, staff training etc come under this
category. Overhead is expressed as a percentage of the total expenditure

1.10.5 Central Charges


These charges include expenditure incurred on policy formulation and services
common to railways like Railway Board, Research, Design and Standard
Organization (RDSO) of the railways, Railway Rates Tribunal (RRT), and
Railway Recruitment Boards (RRBs) and other railway training institutes. This
is also expressed as a percentage applicable on the total expenditure including
overheads.

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1.10.6 Limitation of Fully Distributed Cost
The fully distributed cost gives only an idea of total cost. When pricing is to be
done in a competitive environment, application of fully distributed cost is not
adequate. One needs to use variable cost and incremental costs.

CHECK YOUR PROGRESS 9 :


1. Comment on the limitations of Fully Distributed Cost

2. What is ‘depreciation’? How is it calculated in costing?

3. What are ‘over heads’? Which are the items of expenses that
constitute ‘over heads’?

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1.11 Performance Costing
As mentioned above, the present fully distributed costing system is not useful in
a competitive business environment. Considering the need Hon’ble Minister for
Railways in Budget Speech for 2015-16 and 2016-17 emphasized an improved
costing system for Railways. Accordingly, under Mission Beyond Book-Keeping,
Indian Railways has taken up three initiatives viz implementation of accrual
accounting for preparation Accrual based Financial Statements in addition to
existing cash based Financial Statements, Pilot study on implementation of
Performance Costing and Outcome Budgeting. For pilot study on Performance
Costing Indian Railways has engaged Institute of Cost Accountants of India. The
objective of Performance Costing are:

Design an information system with different access levels for categories of


users to provide information about various costs in key performance areas viz.
construction, augmentation, operations and maintenance; measure performance
of each activity/line of business and line of service; measure costs, revenue &
profitability of the following, but not limited to:

OO Passenger and freight traffic [for each class and each commodity
OO Train, section, gauge, traction, route etc. including sub-urban train, EMUs,
special trains, tourist/luxury trains etc.
OO Production Units, service units, utilities etc.
– Zone, Division, field units etc.
– Locomotive, coach, wagon etc.
– Rail accidents & other abnormalities

1.11.1 Current Status:


Pilot study on Performance Costing started on Northern Railway in association
with Institute of Cost & Works Accountants- Management Accounting Research
Foundation (ICWAI-MARF). The Consultants have since submitted Draft As-is-Report
detailing existing costing system and gap analysis and design framework of improved
costing system. Next stage is developing an improved activity- based costing system.
An Advisory Body of Principal Head of Departments has been formed on Northern
Railway to guide and assist the study and a working group on Delhi Division of
Northern Railway is coordinating with the Consultants for field study.

1.11.2 Why Performance Based Costing (PBC)


in IR?
In IR, the indirect expenses are increasingly displacing the direct expenses
that deliver services to the customers. Mostly, this displacement is caused

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by technology. In addition, IR has been servicing more and different types of
customers. Introducing this greater variation and diversity (i.e., heterogeneity)
creates complexity, and increasing complexity results in greater overhead
expenses. Such dominance of overhead component of expense does not
automatically mean that the IR is becoming inefficient or bureaucratic. It simply
means that IR is offering move variety of services to different types of customers.
However, the price may not be cost oriented.

Capturing such expenses to particular product/ service is not easily possible in


the traditional system. In a traditional cost accounting system, the accountants
allocate indirect expenses (i.e. overheads) to different services (or products)
without any uniform scientifically established logic. There is minimal or no
relationship to how the products or service lines uniquely consumed these
overheads. This results in distorted product or service costs. The consumption of
resources needs to be traced and assigned as costs based on cause and effect
relationships – and that is what the performance costing system does.

Presently, IR has many activity centres located at different points of operation


undertaking the same or similar activities. In the present system, the expenses
relating these activities are booked under the same account heads without
any reference of a particular activity centre. In such aggregated financial data,
it becomes difficult to pin-point the centre of efficiency / in-efficiency. This is a
serious draw back in the existing system. In the existing costing system followed
by IR, basis for apportionment of joint costs were fixed long time back. Since
then, with the massive changes in the traffic pattern, Technology upgradation
and many other factors, these basis have lost their relevance. Conventional
or Functional based costing system are unable to properly assign the costs of
non-unit related overhead activities. These overhead activities are consumed
by products in different proportions than are unit-based overhead activities.
Because of this, assigning overhead costs using only unit based drivers distort
product costs. This can be a serious matter if the non-unit based overhead costs
are significant in proportions of total overhead costs. Traditional costing method
utilizes only unit based cost drivers for allocating overheads and caused the
obtained cost price to have a great difference with the real cost price. Overhead
cost assignments should reflect the amount of overhead demanded (consumed)
by each product or service.

1.11.3 Advantages of Performance Costing


IR needs a system to obtain more accurate and relevant costing system. PBC
is akin to Activity Based Costing that would enable IR to onboard costs of each
activity Viz train, route, section etc. to take timely strategic decision. The following
are specific advantages:-

OO Performance data from activity centres and their costs will provide better
accuracy in compilation of cost elements of an operation and finally
preparing a cost statement which will provide fair picture of costs for

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difference activities and operation directly pin-pointing the performance of
each cost centres.
OO Cost Statements at regular intervals and reduction of time gap between
incidence of cost and its impact on operation will be of great advantage
in using cost management tools in negotiating many issues at the
operational areas.
OO Periodic Comparative Performance Cost Statement will be an added tool
in the hands of management towards tracking the efficiency / inefficiency
of operation and will generate right kind of environment for cost control
exercise at different points of operation to achieve desired efficiency.
OO Comparative performance analysis of same operation among different
operational activity centres will provide opportunities for process
improvement and cost optimization by utilizing the potentials available at
different centres.
OO The system will have the provision of generation of reports at the
Divisional level, Zonal level and for the IR as a whole with ease by
change of input data base only. This will lead to the management taking
concrete and practical steps in controlling costs at different points.
OO Cost Statements will also display the points of in-efficiency and will help in
assessing the imbalance in resource use. This will help frame corrective
course of action both short-term and long term to ensure optimal
utilization of resources.
OO Development plan may be chalked out according to the need at different
areas of operation. Allocation of resources from the resource pool will
be well directed according to the requirement of resources and cost for
development plan.

1.11.4 Pre-requisite for Successful


Implementation of PBC
OO Top Management Commitment
OO Employee Engagement at all levels
OO Learning Organisation (willingness to unlearn and learn)

1.11.5 Challenges for PBC Implementation


Implementation of Performance based costing in Indian Railways would have its
own challenges, such as challenges relating to the:--

OO Existing accounting & budgeting system of IR and its linkage to the


Central Government accounting & budgeting system,
OO Active support from Railway officials at different levels,

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OO Adaptability to change & change management,
OO Changes required in the operation & business processes,
OO Changes required in the existing IT applications,
OO Technological requirements,
OO Availability of adequate trained people in IR, and
OO Availability of professional experts having adequate experience to
successfully implement the PBC

1.12 TRAFFIC COSTING - INTERNATIONAL


PRACTICES
British and Canadian railways slowly migrated to de-regulation and with that
costing techniques underwent rapid changes. They realised the need for market
oriented rating system whjich required development of variable and avoidable
cost data in place of fully distributed costs.

1.13 PROFIT & COST CENTRE CONCEPT


British railways were following the concept of fully distributed cost till 1969/
70.They discontinued using that cost concept mainly because of its inability to
identify and quantify the saving in costs if a particular service is withdrawn or
reduced. They follow the system of ‘planning, profit and cost centre’ analysis.
The expenses are split into about 700 activities called ‘profit centres’. Size and
description of these profit centres will vary .The accounting system shows the
surplus of earning over direct costs as a contribution to joint expenses of track,
signalling and general administration.

CHECK YOUR PROGRESS 10 :


1. What is the costing method followed by British rail?

17
1.14 AVOIDABLE COST &
BASIC FACILITY COSTS
British and some other European railways work out ‘avoidable’ costs and ‘basic
facility’ costs. Avoidable costs are those expenses, which are not incurred when a
facility or service is withdcrawn. For, eg, if a station is to be closed, the avoidable
cost is the maintenance expenses. The staff cost cannot be avoided.

CHECK YOUR PROGRESS 11 :


1. What are ‘avoidable costs’?

1.15 VARIABLE COST CONCEPT


Canadian railway system follows computation of variable costs of rail
movements. The rail traffic presents large variations in costs due to train types,
geographical diversity, and types of equipments used, load and lead of the traffic.
They are therefore following a point-to-point costing system, which can take into
account the specific cost characteristics of the route over which the consignment
is moved. They have developed a computer based programme called’ Cartage’
which is used for point-to-point costing of both passenger and goods traffic. It
automatically selects the shortest route, available traction and captures section
specific variations in cost on account of terrain, speed and load differences.
Some of the limitations of unit costs mentioned above have been eliminated in
these methods. It calculates cost data for a large number of output tables.

United nation’s ‘Economic and Social Commission for Asia and the Pacific’
(ESCAP) have also suggested a costing system on the above lines for Asian
countries and recommended use of ‘avoidable cost’ in studying the viability of
opening individual lines and sub-divisions of a railway.

18
CHECK YOUR PROGRESS 12 :
1. What is the ‘Cartage’ programme used by Canadian railways?

1.15 CHECK YOUR PROGRESS : THE KEY


CYP 1 :

The main objectives of traffic costing are:

(a) Creation of basic cost data to enable fixation of rates by management, b)


cost benefit analysis of existing and proposed traffic streams,
c) generation of data required for project appraisals, and d) creation of cost
consciousness and there by exercise cost control.

CYP 2 :

A large number of railway assets and expenses are common to goods, passenger,
parcel, luggage, and postal and catering services and also to Broad gauge, Metre
gauge and Narrow-gauge operations. These expenses are to be apportioned and
allocated to each and every service and also to different gauges before costing is
done. This is why costing of rail transport is a very complex exercise.

CYP 3 :

1. Costs, which vary with increase or decrease in the volume of traffic and
incur only when a particular category of traffic is handled are termed as
variable costs. Cost of fuel and wages of engine crew are examples in
railways. Variability of these costs differs from category of expenses to
another. Variable costs are important in working out the financial viability
of individual streams and projects. Incremental costs are that portion of
variable costs which is specifically incurred in moving the additional or
incremental traffic.
2. Fully distributed costs represent total direct and indirect costs incurred in
producing a service or product. In railways this includes (i) total working

19
expenses, (ii) interest payments and (iii) provision for depreciation and
general overheads and central charges.

CYP 4 :

Existing traffic costing system suffer from the following limitations:

(a) The unit costs represent figures averaged over an entire zone and
application of these costs to specific streams without suitable adjustments
may result in over or under estimate of costs.
(b) The unit costs do not reflect effects of efficiency or in-efficiency in
operation and the resultant cost variations. In individual streams when
rate cuts are considered for attracting additional traffic, application of
average costs does not help to assess the margins.

CYP 5 :

Indian Railways in the past were using average costs for price fixation. These
costs were available for moving a wagon/train/tonne over one kilometre for goods
service and a vehicle/passenger over one kilometre for passenger services.
However with the increased competition from road high value commodities
started moving away from rail leaving railways with low value commodities, which
did not fetch enough revenue to cover the cost of operation. The alternative was
to raise the rates for low value commodities and lower the tariff level for high
value items. This option called for cost based pricing. It was in this background
that IR felt the need for developing traffic costing.

CYP 6 :

As a pre-requisite for costing, IR has developed a ‘function’ and ‘activity’ oriented


accounting system, which can identify and relate the expenses to different
services and performance units. In this system, the revenue expenditure of the
railways is classified into statements called ‘Abstracts’. Each abstract is further
divided into ‘minor-heads’,’sub-heads’and ‘sub- detailed’ heads, which show
expenses incurred on specific activities. There are thirteen such Abstracts from
A to N (excluding I). Seven of these Abstracts deal with functions while five deal
with overheads and last one is suspense account. The seven Abstracts dealing
with functions are:

B Repairs & Maintenance of permanentway&works


C Repairs & Maintenanc of motive power
D Repairs & Maintenanc of carriage&wagon.
E RRepairs & Maintenanc of plant&equipment.
F Operating expenses-rolling stock & equipment.
G Operating expenses-traffic.
H Operating expenses-F

20
CYP 7 :

Statistical data are classified into i) commercial, ii) financial, iii) operating and iv)
administrative statistics

CYP 8 :

The total expenses of a zonal railway are first apportioned into Broad gauge,
Metre gauge and Narrow gauge. Thereafter, expenses for Electrical Multiple
Units (E.M.U) are separated and remaining expenditure for each gauge is
bifurcated into i) Coaching and ii) Goods. Expenses, which are booked directly to
a gauge/service, are allocated directly while joint expenses are allocated on the
basis of ratios developed in surveys.

CYP 9 :

1. Fully distributed cost gives only an idea of total cost. When pricing is to be
done in a competitive environment, application of fully distributed cost will
not help. One needs to use variable costs and also incremental costs.
2. Depreciation provision is meant for meeting the cost of replacement and
renewal of railway assets. It is calculated at the present day cost of assets
on straight-line basis depending on the life of asset. In this method,
ten percent scrap value is deducted from the present day cost and the
balance is divided by the number of years representing the life of the
asset to arrive at the annual depreciation provision.
3. General overheads are expenses not directly or indirectly identifiable
with a particular activity, but are necessary for the organization. These
costs are incurred as a whole for the rail operation and are unavoidable
for providing various services. Overhead expenditure includes expenses
on general management, material, financial and personnel management
services, staff welfare including staff quarters and other residential
and welfare buildings, educational and health services, provident
fund, retirement benefits, appropriation to pension fund and as railway
protection force, staff training.

CYP 10 :

British railways have discontinued using the fully distributed costs mainly
because of its in ability to identify and quantify the saving in costs if a particular
service is withdrawn or reduced. They follow the system of ‘planning, profit and
cost centre’ analysis. The expenses are split into about 700 activities called ‘profit
centres’. Size and description of these profit centres will vary.

CYP 11 :

Avoidable costs are those expenses which are not incurred when a facility or
service is withdrawn. For eg, if a station is to be closed, the avoidable cost is the
maintenance expenses. The staff cost cannot be avoided.

21
CYP 12 :

Canadian railway system follows computation of variable costs of rail movements


on a point-to-point costing technique. They have developed a computer
programme called ‘Cartage’ which is used for point-to-point costing of both
passenger and goods traffic. It automatically selects the shortest route, available
traction and captures section specific variations in cost on account of terrain,
speed and load differences. It calculates cost data for a large number of output
tables.

22
5
u
fjog l
Institute of Rail Transport
Costing & Pricing
s i

La Fkku

irt
jy

ub Z
fnY y h
of Rail Transport
Services

UNIT-2
Costing of Freight and Coaching
Services

Structure
2.0 Objectives
2.1 Costing of Freight service
2.2 Functional Groups
2.3 Green Book
2.4 Group ‘A’ and Group ’ B’ costs
2.5 Application of Freight Unit Costs
2.6 Costing of Specific Stream
2.6.1 Stream wise costing-sample calculation
2.7 Costing of Coaching Services
2.8 Electrical Multiple Units (E.M.U)
2.9 Performance Factors
2.10 Bi-furcation of Coaching Expenses
2.10.1 Terminal and running expenses are further apportioned to
2.10.2 Expenses in these three groups are further bifurcated into
2.11 Apportionment & Allocation of Expenses
2.12 Passenger Service Unit Costs
2.13 Parcel and Luggage Services Unit Costs
2.14 Catering Service Unit Costs
2.15 General Overheads
2.16 Escalation Factors
2.17 Check Your Progress : The Key

23
2.0 OBJECTIVES
Freight service unit costs are “fully distributed costs” where the total expenses
including depreciation and interest allocated to a specific activity or service are
divided by relevant performance factors. Rail travellers originate from a station
and then are carried over up to destination station. They are provided services
at terminals and on trains. Terminal services include issue of tickets, enquiry
& reservation, retiring rooms, cloak rooms etc. On train, activities like ticket
checking, serving of food etc. take place in addition to providing sitting and
sleeping accommodation in classes. Parcels are also carried. All these functions
and services incur a cost.

Costing of services involves the following stages:

Stage 1

 Gauge-wise segregation of expenses.


 Direct allocation of gauge specific expenses.
 Common or joint expenses apportioned on the basis of certain ratios.
 The instructions for apportionment of joint expenses over different gauges
booked under various Abstracts are contained in Manual of Statistical
Instructions Volume II

Stage II

 Exclusion of expenses pertaining to EMU services.


 Share of EMU expenses is worked out separately for all relevant
Abstracts.
 The method of allocation of joint expenses between sub-urban services
and other services are contained in Manual of Statistical Instructions
Volume II.

Stage III

 Bifurcation of expenses of each gauge between coaching and goods


services.
 As for as possible direct allocation under each Abstract to coaching and
goods services.
 Proportion of expenses amenable to direct allocation <30%.

Methodology of cost allocation between coaching and goods in accordance with


instruction contained in Manual of Statistical Instructions Volume II.

24
2.1 COSTING OF FREIGHT SERVICES
Freight traffic costing aims at allocation of total expenses incurred for the
haulage of goods traffic to functional group of services/activities involved in train
operations.

2.2 Functional Groups


The physical functional groups and services for which expenses are finally
allocated for deriving unit costs are :

(i) terminal functions which include mainly booking and delivery of goods.
Activities of documentation, shunting of wagons and trains, terminal
movements required for train formation. These expenses are called
terminal expenses and they remain fixed.
(ii) line haul functions, which include actual haulage of trains or wagons with
consignments from originating to destination stations. Expenses on fuel,
loco, crew, track and signalling constitute this cost.
(iii) marshalling functions which involve attachments/detachments/ handling
of wagons /trains for formation/placements, safe to run examination etc.
These are important activities related to movement of trains.
(iv) transshipment from one gauge to another becomes necessary at break-
of- gauge when consignments are booked from one gauge to another.
Wagons get detained here and contents are unloaded and re- loaded into
wagons of other gauge.
(v) provision and maintenance of rolling stock includes expenses on the
wagon cost, repair and maintenance and detention cost.
(vi) Costs are worked out separately for these functions using suitable
performance factors.

CHECK YOUR PROGRESS 1 :


1. Which are the main elements of freight unit costs?

25
2. Which are the activities or functions considered for calculating
terminal cost?

2.2 GREEN BOOK


A compilation called ‘Green Book’ is the basic document for working out unit
costs for freight traffic. This book has seven Schedules starting from Schedule ‘A’
to Schedule ‘G’. These Schedules are broadly explained below:

(i) Schedule ‘A’. This provides the general framework for distribution of
goods expenses including interest charges and depreciation provision
among the functional groups of freight services mentioned above.
(ii) Schedule ‘B’. Working expenses for specific functional groups are divided
by most appropriate performance units to arrive at unit costs.
(iii) Schedule ‘C’. Gives the proforma for segregation of expenses under
different heads into sub-activity like, cost of documentation, line-haul for
each traction etc.
(iv) Schedules D, E, and F similarly show distribution and bifurcation of
expenses and performance factors to enable calculation of unit costs for
functional groups and their sub-groups.
(v) Schedule G gives a summary of end results worked out on Schedules, B,
D and F.

CHECK YOUR PROGRESS 2 :

1. What is ‘Green Book’? List out the different Schedules in it.

26
2.4 GROUP A AND GROUP B COSTS
Goods unit costs are developed and published for two groups, i.e.Group’A’ costs
and Group’s’ costs. Salient features and use of these costs are explained below:

(1) Group A costs are very general and do not give break up of traction,
wagon maintenance and overheads. They are used for overall estimate of
costs where the mode of traction is not specified and segregation of the
above elements is not necessary. The unit costs under this group are:
i) terminal cost per tonne or per wagon.
ii) Transshipment cost per tonne per transshipment
iii) Marshalling cost per wagon per yard handled
iv) Line haul cost per train km/wagon km/net tonne km and per wagon
km (carrying units)
v) Line haul costs are available for
a) through goods and
b) van & shunting trains.
(2) Group B costs give break up of all elements separately and are useful in
working out the transport cost in specific stream of traffic. Group ‘B’ costs
are worked out for the following units:
i) Cost of documentation per invoice
ii) cost of other terminal services per tonne and per wagon
iii) cost of transshipment per tonne per transshipment
iv) cost of marshalling per wagon per yard handled
v) cost of provision and maintenance of wagon per wagon day
vi) cost of line haul services traction per 1000 gtkms for Diesel and
electric separately
vii) cost of line haul services track per 1000 gtkms
viii) cost of line haul services signalling per 1000 gtkms and per train km.
Separately
ix) general over heads as percentage to direct expenses
x) central charges as percentage to total expenses.
xi) Line haul costs are available for,
a) through goods and
b) van & shunting trains separately.
The above costs are available for both BG and MG

27
CHECK YOUR PROGRESS 3 :
1. What are Group ‘A’ and ‘B’ unit costs? How do they differ in end use ?

2.5 APPLICATION OF FREIGHT UNIT COSTS


The concept of cost will vary depending on the objective of determining the cost
and the use of cost data will assume different meaning in different situations.
Some of the important end uses of the unit cost data are:

i) help the management in fixing the price or rate,


ii) supply data for profit analysis of lines, services and cost centers,
iii) evaluate capital investments, operational and technological improvements
and,
iv) compare rail and road costs for quotation of special rates in selected
streams.

In addition to the above applications, costing data is extensively used in project


appraisals and estimate of individual project costs. Capital projects will have to
be financially justified.

a) New lines,
b) Line capacity works like gauge conversion, electrification of lines, c)
Telecommunication works,
d) Re-modelling of Yards and,
e) Augmentation of terminal facilities,
f) essentially require cost data for preparing detailed project reports.

28
CHECK YOUR PROGRESS 4 :

1. What are the important applications of freight unit costs?

2.6 COSTING OF A SPECIFIC STREAM


Quotation of special reduced rates for a specific commodity between two
stations for a limited period becomes necessary to retain existing traffic or attract
additional traffic with a view to earn more revenue. In such cases, one needs
to know the incremental cost to decide the quantum of reduction in rates to be
offered. Costing of the individual stream thus becomes necessary. The end
results of freight unit costs are used for costing individual streams. Unit costs are
notified on zonal and all-India basis for each gauge separately.

If traffic is moving within a zone or between two zones, the zonal cost is
applied. If the traffic moves over more than two zones, all-India costs are used.
Before attempting costing of individual streams, cost parameters will have to
be compiled. These are, number of wagons, total tonnage moved or likely to
be moved, type of traction, distance from originating to destination station,
type of movement i.e., trainload or wagonload, name of the commodity and its
permissible carrying capacity in a wagon, extent of empty return involved, total
gross tonne kms, train kms, wagon turn round, average speed of trains etc. Once
these data are compiled for the particular stream, group B costs are used to work
out the cost of different functions to arrive at the total cost, which is then updated
for current year using escalation factors.

2.6.1 Stream wise costing-sample calculation


The following sample calculation for a stream of coal traffic over 1500 kms under
electric traction will explain the methodology:

29
Parameters
1 Distance 1500 km (over 3 zones),
2 Traction electric,
3 Commodity coal,
4 Type of wagon BOX’N’,
5 Wagon kms per wagon day 300,
6 Payload per BOX’N’ 63 tonnes
6.1 Tare weight 25 tonnes
7 No of wagons (4 wheeler) 2.5(BOX’N’=2.5)
8 Empty return ratio 100%
9 No of marshalling 2
10 Terminal detention 3 days for 2 terminals.
11 Loaded GTKMs 1500*(63+25)= 132000
12 Empty GTKMs 1500*25 = 37500
13 Total GTKMs = 169500
14 wagon days (1500/300+3)*2.5=20
15 in effective days@8% =20*8%=1.6
16 total wagon days =20+1.6=21.6 days
17 train kms 1500+1500=3000 kms
18 escalation over 2005-06 to 2007-08 = 6.35%s
Group B Unit costs 2005-06.
1 documentation/invoice Rs 73.80
2 terminal services/wagon/terminal Rs 238.51
3 marshalling/wagon/yard Rs 49.69
4 provision & maintenance of wagon/wagon
day Rs 148.87
5 line haul traction (electric)/1000gtkm Rs 90.00
6 line haul track/1000gtkm Rs 39.74
7 line haul signalling/train km Rs 14.60
8 cost of transportation/1000gtkm Rs 30.12
9 general overhead (percent) 27.81%
10 central charges (percent) 0.61
Computation of cost (in Rs)
1 Documentation =1*73.80=73.80
2. other terminal =2.5*2*238.51=1192.55
3. marshalling =2.5*2*2*49.69=496.90
4. provn & maint of wagons =2.5*21.6*148.87=8038.98
5. linehaul-traction =90.00*169500 1000=15255
6. linehaul-track =39.74*169500/1000=6735.93
7. linehaul-transportation =30.12*169500/1000=5105.34
8. linehaul-signalling =14.60*3000=43800
9. Total 1to 8 =80698.5
10. Overhead =80698.5*27.81%=22442.25
11. Total including overhead =103140.75

30
12. Central charge =86769.58*0.61%=629.16
13. Fully distributed cost (11+12) =103769.91
8. linehaul-signalling =14.60*3000=43800
9. Total 1to 8 =80698.5
10. Overhead =80698.5*27.81%=22442.25
11. Total including overhead =103140.75
12. Central charge =86769.58*0.61%=629.16
13. Fully distributed cost (11+12) =103769.91
13.1. FDC per tonne =103769.91/63=1647.14
14. Dependent [email protected]% of FDC/bogie =81459.38
14.1. Dependant cost per tonne =1647.14*78.5%=1293.00

Explanatory Note :

i) Wagon’ refers to a 4 wheeler. A 6 wheeler is equivalent to 1.5 wagons and


8 wheeler to 2 wagons if payload is 44tonnes and below, 2.5 wagons if
payload is above 44 tonnes. Thus, a BOX’N’is equated to 2.5
wagons.
ii) Wagon turn round is the time period between 2 successive loading of a
wagon. This is expressed as days. Lesser the days more efficient are
the use of wagons. Wagon turn round is converted into wagon days to
calculate the provision and maintenance cost of wagons.
iii) Empty return ratio is an important factor in cost calculation. A wagon
or train requires to be hauled empty before loading at a station. Since
it is not always possible to assess the extent of empty movement, a
study wise conducted and the results are used generally where empty
movements are not known. These ratios are:
a) 100% for special type of wagons,
b) 100% for iron ore & raw material movements to steel plants, c) 80%
for coal traffic and
d) 23% on BG and 33% on MG for all other commodities.
iv) Marshalling cost is available as Rs per wagon per yard handled. Normally,
2 marshalling per wagon is taken for bulk traffic. Marshalling cost is
inflated by the empty return ratio.
v) Terminal cost is calculated both for originating and destination stations for
a wagon.
vi) Documentation cost is worked out at the rate of one invoice for 5 wagons
subject to a minimum of 1 invoice.
vii) GTKMs means gross tonne kilometres, which are worked out by
multiplying the distance with gross load of a wagon.
viii) Escalation factors are used to update the total cost. This updating
becomes necessary as the unit costs are worked out for an earlier year.

31
CHECK YOUR PROGRESS 5 :
1. Calculate wagon day following movement s, GTKMs and wagon kms for the,
distance 1200 kms
wagon pay load wagon 63 tonnes
tare weight w.kmsper 20 tonnes
w.day 250
empty return terminal 23%
detention In-effective 1.5 days each terminal.
percent 8
8-wheeler wagon 2.5 four wheelers

2.7 COSTING OF COACHING SERVICES


Coaching services are grouped under three distinct categories. They are:

i) passenger,
ii) luggage,parcel& postal and
iii) catering.

Railways provide the above services on three gauges by operating about 12000
trains a day. Unlike freight trains passenger trains involve a large number of
stoppages and run them according to time table irrespective of the occupancy
level. This makes costing of passenger services a very difficult task.

CHECK YOUR PROGRESS 6:


1. Which are the major categories in coaching services?

32
2.8 ELECTRICAL MULTIPLE UNITS (EMU)
This service comes under passenger traffic. EMU services are taken up
separately for profitability analysis mainly because of its nature of operation,
which is distinct from passenger service. This service is predominantly
provided in suburban areas and used by commuters over short distances. The
traffic will be peaking in the morning and evenings and very lean during the
daytime. No unit costs are worked out for EMU service. Only profit and loss
assessment is made.

CHECK YOUR PROGRESS 7 :


1. Why are unit costs not calculated for E.M.U service?

2.9 PERFORMANCE FACTORS


Traffic specific costing aims at developing costs per unit of out put for a specific
service or acivity. The out-put indicators are described as ‘performance factors’.
For,e.g,the cost of reservation activity in passenger service is derived per
passenger originating.Important performance factors used in unit cost calculation
are:

i) passenger originating,
ii) passenger carried,
iii) vehicle kms,
iv) passenger kms,
v) gross tonne kms,
vi) train kms,and
vii) dining car kms.

33
2.10 BI-FURCATION OF
COACHING EXPENSES
After excluding EMU expenses, the coaching expenses are bifurcated into the
following groups:

a) terminal,
b) running and
c) overhead.

2.10.1 Terminal and running expenses are


further apportioned to
i) passenger services,
ii) parcel, luggage& postal services and
iii) catering/dining car services.

2.10.2 Expenses in these three groups are


further bifurcated into
a) mail & express and
b) ordinary train services.
Passenger services expenses are further split into classes of travel under mail
express and ordinary services. These classes are at present,

i) Air-conditioned first class,


ii) Air-conditioned two-tier,
iii) Air-conditioned three-tier,
iv) Air-conditioned chair car,
v) Sleeper class,
vi) First class,
vii) Chair-cars and
viii) Second class (sitting).

34
CHECK YOUR PROGRESS 8 :
1. What are the steps followed in breaking and apportioning the total
coaching expenses into its constituents?

2.11 APPORTIONMENT &


ALLOCATION OF EXPENSES
The method of apportionment of expenses, follow the same pattern as in goods
services. Items of expenditure, which are directly booked under ‘sub- detailed’
heads in accounts books, are directly allocated to relevant functional group of
services. Joint costs are apportioned on the basis of ratios developed in surveys,
and other parametres like,engineering analysis, regression analysis etc.

CHECK YOUR PROGRESS 9 :


1. What is meant by ‘apportionment’ of expenses? How are they done?

35
2.12 PASSENGER SERVICE UNIT COSTS
After bi-furcation of expenses into Mail/Express,Orinary and classes of travel,unit
costs are worked out for each function using relevant performance factors.
Passenger Services unit costs are published for both BG and MG separately.

The following unit costs (Rs per unit of performance) are worked out and
published every year for the following functions separately for Mail/Express, Ordy
and all classes of travel:

i) Terminal services,
a) booking per passenger originating.
b) ticket–checking per passenger carried
c) enquiry & reservation per passenger carried
d) special services per passenger carried
e) miscellaneous services per passenger carried.
f) Over all terminal services per passenger carried
Special services include provision of conductor guards, coach attendants in AC
and first class coaches, ticket examiners in trains etc.

Miscellaneous services include cloakrooms, reservation offices, retiring rooms


plat form inspectors, ticket collectors etc.

i) Traction(Diesel) per 1000 GTKMs,


ii) Traction(Electric)per 1000GTKMs,
iii) Track per 1000 GTKMs
iv) Signalling per train KM
iv) Transportation per 1000 GTKMs
v) Provision & maintenance of coaches per vehicle per day,
vi) And Over all linehaul cost per vehicle km and per pass.carried.

CHECK YOUR PROGRESS 10 :


1. Which are the unit costs of passenger service terminal functions?

36
2.13 PARCEL & LUGGAGE SERVICES
UNIT COSTS
Parcel, luggage and postal services, Mail/Express

a) terminal services per vehicle km


b) line haul services per 1000GTKMs and per vehicle kms

2.14 CATERING SERVICE UNIT COSTS


Cost of dining car services per dining car km for terminal and line haul for Mail/
Express.

2.15 GENERAL OVERHEADS


General overhead and central charges are notified on a percentage basis.

2.16 ESCALATION FACTORS


The unit costs are made available after the accounts are closed for a year. This
makes them historical. Escalation factors (percentage) are to be used to update
the total distributed costs.

CHECK YOUR PROGRESS 11 :


1. What are ‘escalation factors’ and why are they required ?

2.17 CHECK YOUR PROGRESS : THE KEY


CYP 1 :

1. The main elements of freight unit costs are i) documentation, ii) terminal
functions, iii) line haul functions which include fuel, transportation,
track maintenance and signalling, iii) transshipment at break of gauge)

37
provision and maintenance of wagons, vi) marshalling operations, vii)
general overheads and viii) central charges.
2. Goods, passenger and other coaching traffic are booked and dispatched
and delivered at terminals. Documentation, shunting of wagons and
trains, terminal movements required for train formation, interest charges
and depreciation provision for capital investments are the items of
expenses considered for working out terminal costs.
CYP 2 :

Green book is the basic compilation for working out unit costs for freight traffic.
This book has seven Schedules from Schedule ‘A’ to Schedule ‘G’. These
Schedules are:

Schedule ‘A’. –General distribution of goods expenses into different functional


groups,

Schedule ‘B’. - Working expenses for each functional group are divided by most
appropriate performance units to arrive at unit costs.

Schedule’C’. - Unit costs for specified functions

Schedules D, E, and F- Distribution and bi-furcation of expenses and


performance factors to enable calculation of unit costs for functional groups and
their sub-groups.

Schedule G gives a summary of end results worked out on Schedules, B, D


and F.

CYP 3 :

Group A costs are general and do not give break up of traction, wagon
maintenance and overheads. They are used for overall estimate of costs where
the mode of traction is not specified and segregation of the above elements is not
necessary. Group B costs give break up of all elements separately traction wise
and are useful in working out the transport cost in specific stream of traffic.

CYP 4 :

Application of freight unit cost data will assume different meaning in different
situations. Some of the important end uses of the unit cost data are, fixation
of rates,quotation of specific station-to-station rates,profit analysis of cost
centres and individual lines, evaluation of capital investments and operational
and technological improvements.In addition,cost data is also used in project
appraisals and preparation of cost estimate of individual projects like, new
lines, line capacity works, telecommunication works, re-modelling of yards and
augmentation of terminal facilities.

38
CYP 5 :

1. Calculate wagon days, GTKMs and wagon kms for the following
movement,

distance 1200 kms


wagon pay load 63
tonnes wagon tare weight 20 tonnes
w.kmsper w.day 250
empty return 23%
terminal detention 1.5 days each terminal.
In-effective percent 8
8-wheeler wagon 2.5 4 wheelers
Answer

1 Wagon days =(1200+23% of 1200)/wkms per wagon day


of 250 kms+terminal detention of 3 days+ineffective of 8
percent.=(1200+276)/250+3+8%=8.55days x 2.5wagon equation
= 8.77 days.
2. GTKMs =gross wt of wagon in loaded ectionxdistance + tare
wt of wagon in empty direction x distance x empty return ratio
=83tx1200km+20tx1200kmx23% =(99600+5520) =105120
3. Wagon Kms(loaded) =distance x no of wagons(4 wheelers) =
1200x2.5=3000km
CYP 6 :

Coaching services are categorised into i) passenger service including electric


multiple unit service(E.M.U), luggage & parcel service,postal service and catering
service including dining cars.

CYP 7 :

EMU services are distinct from passenger services mainly because of its nature
of operation. They are provided in suburban segments predominantly used by
commuters over short distances. The traffic peaks in the morning and evening
and is lean during day time. Because of these factors costing is done to assess
only the profitability of this service. No unit costs are worked out for EMU service.

CYP 8 :

After excluding EMU expenses, the coaching expenses are bi-furcated into a)
terminal,b) running andc) overhead. Terminal and running expenses are further
apportioned to, i) passenger services, ii) parcel, luggage&postal services and
iii) catering/dining car services. Expenses in these three groups are further

39
bifurcated into,a) mail &express andb) ordinary train services. Passenger
services expenses are further split into classes of travel under mail express and
ordinary services.

CYP 9 :

The method of distributing common or joint costs to different gauges,services


and specific functional service groups is apportionment of expenses. Items of
expenditure which are directly booked under sub-detailed heads in accounts
books, are directly allocated to relevant functional group of services. Joint costs
are apportioned on the basis of ratios developed through surveys and studies like
engineering analysis and statistical method like regression analysis etc.

CYP 10 :

Unit costs are worked out for the following terminal functions:

a) Cost of booking per passenger originating,


b) Cost of ticket –checking per passenger carried,
c) Cost of enquiry& reservation per passenger carried, d) Cost of special
services per passenger carried,
e) Cost of misc.services per passenger carried,
f) Over all cost of terminal services per pass. originating/carried

CYP 11 :

The unit costs are made available only after the accounts are closed for a year.
This makes them historical and are required to be updated. Escalation factors
(percentage) are used to update the costs.

40
5
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Institute of Rail Transport
Costing & Pricing
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of Rail Transport
Services

UNIT-3
Pricing Concepts and Indian Railways’
Rating Policy

Structure
3.0 Objectives
3.1 Pricing Concepts
3.2 Principles of Rate Fixation
3.2.1 Factors which determine the value of service
3.2.2 Factors affecting the cost of service
3.3 Indian Railways’ Rating Policy
3.3.1 Railway’s rating policy during the pre-independence
period (1853-1947)
3.3.2 New National Railway Rating Policy after Independence
3.3.3 Review of Tariff Policy by Expert Committees
3.3.4 Objectives of Rail Tariff Policy
3.4 Main features of Freight Traffic Rating
3.4.1 Classification of Commodities
3.4.2 Telescope nature of rates
3.4.3 Taper of rates
3.4.4 Basic scale of class 100
3.4.5 Distance blocks for charge
3.4.6 Railway risk and Owner’s risk rates
3.4.7 Inflation in distance for charge
3.4.8 Rating of trainload and wagonload movements
3.4.9 Weight for charge
3.4.10 Dangerous goods
3.4.11 Penalty for overloading and misdeclaration of commodity
3.5 Main features of passenger fare structure
3.5.1 Suburban and Non-suburban services

41
3.5.2 Fare structure
3.5.3 Relativity of classes
3.5.4 Monthly and quarterly season tickets
3.6 Rating of parcel and luggage services
3.7 Tariff setting mechanism
3.8 Cross subsidization in rail pricing
3.9 Dynamic pricing-current scenario
3.10 Check Your Progress : The Key

3.0 OBJECTIVES
A financially sound railway system is central to a healthy and growing economy
for any country. The financial viability of any enterprise including railways
depends largely on the administration of a sound pricing policy. Such a policy
should ideally aim at generation of resources not only for survival but also for
development as well. It should also address the need for bringing gains to the
community in the form of cheaper transport costs of men and material.

Rating of rail transport services in India broadly falls into two distinct
periods,namely,pre-independence and post independence.With the liberalisation
of economy since 1991,the rail pricing has slowly migrated to dynamic pricing
which aims at demand management.

3.1 PRICING CONCEPTS


The money for which a commodity or service is bought or sold is described
as price.Economic activities are regulated by supply and demand through the
mechanism of pricing. Under a capitalist economy producers may join together to
maintain an artificially high price while in socialism,prices are set centrally by the
state. Rail pricing in India is set by the government.

CHECK YOUR PROGRESS 1 :


1. Why should an enterprise need a sound pricing policy? What should
a sound pricing policy aim at?

42
3.2 PRINCIPLES OF RATE FIXATION
Railway rates for goods and passenger services are generally fixed on the two
broad principles of, ‘the value of service’ and ‘the cost of service’. The rates
should ideally be fixed between the two : cost as the lower limit and value as the
upper limit. These two principles are fundamental in all modes of transportation.
The value of service is also known as ‘what the traffic can bear’. There is a loss
when rates fall below the cost and profit or margin if charged above the cost.
Similarly, rates fixed below the value reduce earning and when rates exceed the
limits of value, the traffic may not move at all. However, before you apply these
two principles in rate making, it is important that you understand the factors,
which determine the value and cost of the service.

3.2.1 Factors which determine the value of


service
Factors, which determine the value of service, are:

i) Competition from other modes


ii) Value of goods at destination as compared to that at originating iii) The
extent to which the particular traffic can bear a rate
iv) Potential competion from new modes or new products.

3.2.2 Factors affecting cost of service


i) Loadability, i.e, density or relation of bulk to weight.
ii) Empty haulage involved in providing the service,
iii) Volume of traffic, i.e, whether movement is in train -load or less than
trainload,
iv) Handling required for special types of wagons with unusual dimensions
and weight,
v) The extent of damage, loss or waste and liability to compensation.

CHECK YOUR PROGRESS 2 :


1. Explain the two cardinal principles of rating?

43
2. Which are the factors affecting the ‘value’ of rail transport service ?

3. Which factors affect estimation of the ‘cost’ of rail transport service ?

3.3 INDIAN RAILWAYS’ RATING POLICY


Ever since the first train service was commissioned in 1853, railways’ rating
policies have gone through many changes. These changes could broadly be put
into two phases, pre-independence and post-independence periods.

3.3.1 Railway rating policy during the pre-


independence period (1853-1947)
This period saw private railway companies running railways. There were no
effective government regulations. Each railway followed its own independent
policy in rating and this led to individualistic pricing system and unhealthy
competition amoung companies. The motive was to make maximum profit from
minimum volume of traffic. Since these companies operated in a limited net
work, rates were charged pro-rata with increase in distance. However, when
the inter-railway competition increased, the Government passed a resolution
on 12 the December 1887, which laid down the basis for regulation of rail rates
and fares in India for the first time. Government fixed the schedule of maximum
and minimum charges for all descriptions of traffic to protect public from levy
of unreasonable charges by railway companies. The railway companies were
asked to publish these rates for the benefit of public. Later in 1922 the Acworth
Committee again reviewed the railway pricing structure. The rail traffic during the
pre-independence period was moving to and from ports and was not encouraging

44
internal developments. It was the report of the ‘Indian Tariff Board’, 1929 headed
by Dr.John Mathai that made the railway charges a powerful instrument for the
development of industry in India and introduced the concept of telescopic rating.

3.3.2 New national railway rating policy after


independence
Railway’s rating policy underwent a complete orientation with the attainment of
independence. The central government took full control of the railways in India.
The Crawford Committee’s report, which came into force on the 1st of October
1948, outlined a new national railway rating policy, which brought out:

i) Uniformity in charging,
ii) Rationalization of rate structure and
iii) Maximization of revenue.

3.3.3 Review of tariff policy by expert


committees
Individualistic pattern of pricing was replaced by a universal pattern with state
control. Along with state control came the need for accountability in public tariff
fixation. Accordingly, expert committees were appointed as under by the central
government from time -to -time to review and recommend rail-pricing policies.
These committees were:

i) Railway Freight Structure Enquiry Committee, 1957,


ii) Rail Tariff Enquiry Committee, 1980,
iii) Railway Reforms Committee, 1983 and
iv) Railway Fare and Freight Committee, 1993

3.3.4 Objectives of rail tariff policy


The railways’ tariff structure has been designed to achieve the following
objectives:

i) Individual service to be priced on “what the traffic can bear” principle.


ii) Optimum co-ordination between different modes.
iii) Uniform charges on different gauges.
iv) Social benefits and social burden are to be taken into account.

45
CHECK YOUR PROGRESS 3 :
1. What are the main objectives of tariff policy?

2. Compare and bring out the differences in rating policies followed


prior to and after independence.

3. Why are expert committees appointed to review the fare and


freight structure? Name any two such committees appointed after
independence.

3.4 MAIN FEATURES OF FREIGHT


TRAFFIC RATING

3.4.1 Classification of commodities


There are a large number of commodities moving by rail. Based on the principles
of ‘what the traffic can bear’ and also ‘cost of service’, these commodities or
commodity groups are assigned different classifications. These classifications

46
range from 90 to 220 now. The rates will be more for higher classes than
the lower class. Class 100 is taken as the base class, all distances. The
classifications exhibit a percentage relationship with class 100. The base
freight rate for a commodity classified at 150 will be 1.5 times the rate for class
100,class 200,2 times the rate for class 100 and so on.

The price, use and transportation characteristics of the commodity are examined
before assigning a specific classification to it. Thus, a commodity with very poor
loadability in a wagon may be put in a lower classification than a commodity,
which can be loaded to the full carrying capacity of a wagon.

The number of classifications as existing at present, are shown below:

Freight Chargeable Classes


LR-3 100 130 150 170
LR-2 110 140 160 180
LR-1 120 145 165 190
200 145A 145B

3.4.2 Telescopic nature of rates


All commodities are not available in all parts of a country. This necessitates
transportation of many commodities from one part to another involving movement
over long distances. Salt for human consumption, raw material for steel plants, food
grains and chemical manures are some of the commodities, which are essentially
required everywhere. It is therefore necessary that the incidence of freight is not
very high, but at the same time the cost of operation is recovered in the rates
charged. It is in this background the railway freight rates have been deliberately
made telescopic in nature. This means, the rate per tonne per kilometre, decreases
with increase in distance. It is a known fact that the cost of operation per unit of
output decreases with increase in distance. It is also a fact that with increases in
distance the capability of the traffic to bear a higher charge decreases.

3.4.3 Taper of rates


The rate at which the charge per unit of output decreases is called ‘taper’ and is
expressed as percentage. If the rate per tonne per kilometer at 100 km is Rs 5,
the rate per tonne per kilometre at 1000 km will be less than Rs 5. The rate per
tonne for class 100 at 100 km, 500km, 1000km and 3000km are given below,
also indicating the rate per tonne per km and the corresponding taper.

Distance Wise Freight rate


Distance Rate Per Rate Per Rate Paisa/ Taper
Tonne Tonne Per/Km tonne Per/Km (%age)
(in Km) (in Rs.) (in Rs.) (in Paisa) (% age)
100 113.40 1.13 113.40 100
200 216.70 1.08 108.35 96

47
Distance Rate Per Rate Per Rate Paisa/ Taper
Tonne Tonne Per/Km tonne Per/Km (%age)
300 306.00 1.02 102.00 90
500 484.40 0.97 96.88 85
800 754.30 0.94 94.29 83
900 842.70 0.94 93.63 83
1000 930.70 0.93 93.07 82
1200 1108.70 0.92 92.39 81
1400 1285.60 0.92 91.83 81
1500 1373.80 0.92 91.59 81
2000 1723.90 0.86 86.20 76
2500 1958.30 0.78 78.33 69
3000 2205.20 0.74 73.51 65
3500 2437.80 0.70 69.65 61

The taper as on 1.4 99, 1.7.2006 and 1.7.2018 are given under for a comparison:

Dist.Kms 1.4.1999 1.7.2006 1.7.2018


100 100 100 100
200 82 85 96
300 75 79 90
500 73 74 85
800 71 71 83
900 71 71 83
1000 71 71 82
1200 70 70 81
1400 69 69 81
1800 66 68 81
2000 63 66 76
2500 58 60 69
3000 53 56 65
3500 50 53 61

3.4.4 Basic scale of class 100


The rates for all distances of class 100 is structured first and rates for other classes
calculated as percentage of it. The basic scale is given below to explain the
method of calculation:

Distance (in Km) Rate per tonne (in Rs)


100 113.40
200 216.70
300 306.00
500 484.40
800 754.30
900 842.70
1000 930.70
1200 1108.70
1400 1285.60
1500 1377.80
2000 1723.90
2500 1958.30

48
3000 2205.20
3500 2437.80

The basic scale thereafter got modified with revision of rates from time to time.

3.4.5 Distance blocks for charge


The freight rates are charged for specified distance blocks. The rate will be the
same for all distances in the block. The distance blocks now being charged are:

Distance Blocks (Minimum Chargeable Distance 100km)


Distance Slab Distance Block
100-500 25
501-1000 50
1001-1500 100
1501-3500 125

3.4.6 Railway risk and Owner’s risk rates


Rates are notified at railway risk and owner’s risk. If a commodity rate is at
owner’s risk (OR), it can be carried at railway risk if a surcharge of 20 percent is
paid by the shipper. Some of the commodities, which are moved at owner’s risk,
are, coal, flours, fodder, motor vehicles, livestock, sugarcane, fruits &vegetables,
milk, charcoal etc.

3.4.7 Inflation in distance for charge


The distance for charge will normally be the actual distance over which the
consignment is carried or the route rationalized for that movement. However, in
certain sections where cost of operation is very high due to gradients etc, the
distance is inflated by a fixed percentage for charging purpose. There are few such
sections and the details are notified for public by zonal railways. These inflations
are reviewed at time intervals and withdrawn or reduced as the case may be.

3.4.8 Rating of trainload and wagonload


movements
A rail user can book consignments either in wagonload or trainload. Freight
charges for wagonloads are higher than that for trainloads. In case a wagon is
booked, the consignment will be charged for the carrying capacity of the wagon
irrespective of the actual weight of the consignment. Similarly, in case of trainload
booking, a customer needs to book a minimum number of wagons of a given
type to avail lower tariff rates. For e.g.: if a train load of food grain is to be booked
in one of the covered wagons, i.e, BCN, a minimum of 39 wagons are required to
avail the lower tariff. Some examples of the composition of trainloads are given
below for a general understanding:

49
Type of Wagons Standard Rake Size Minimum No. of Wagons to loaded
BOX’N’/BOXNHS 59 58
BOX 35 30
BOBR 53 50
BFR/BFK/BFKI 35 30
BCN/BCXN 41 39
BCX 40 35
BTPN 50 49

The above compositions may under go modifications from time to time. Bulk of the
freight traffic moves in trainloads and the classifications notified in goods tariff are
applicable for trainloads. Wagonload traffic will be charged one class higher than the
trainload class applicable to that commodity group subject to a minimum of class
150 unless a lower class is specified in goods tariff. This is because the wagonload
movement involves higher cost of operation as compared to trainload movements.

3.4.9 Weight for charge


Freight traffic is charged on the basis of the carrying capacity of the wagon
marked on the body of the wagon or separately notified. For certain commodities
in specified wagons, the freight will be charged on the basis of ‘enhanced
carrying capacity notified for that commodity.

3.4.10 Dangerous goods


Dangerous goods are separately listed in railway red tariff. These commodities
are charged subject to conditions notified in railway red tariff.

3.4.11 Penalty for overloading and mis-


declaration of commodity
Overloading a railway wagon is not permitted. If and when a wagon is detected
with overload, penalty in the form of a higher charge is levied. Misdeclaration
of a commodity is an offence under the railway act and will be punished with
imposition of fine or detention in jail.

CHECK YOUR PROGRESS 4 :


1. What is classification of commodities? Which principles are followed
in fixing the class? How does it influence the freight rates?

50
2. What is meant by telescopic nature of rates? Give example.

3. What constitutes a trainload? How is a trainload movement charged?

3.5 MAIN FEATURES OF


PASSENGER FARE STRUCTURE
In India the rail passengers have all along been charged on the basis of distance
travelled. It is the principal mode of travel for the people. Apart from commercial
considerations, passenger business has been a social responsibility in India.
This approach has put many limitations in fixing cost based rates. Passenger
fare levels have there fore been fixed on the basis of not only costs, but also the
comfort level provided and the ability of the passenger to bear the charge.

3.5.1 Suburban and Non-suburban services


An important feature of passenger business is the traffic moving in suburban
and non-suburban segments. Suburban traffic mainly consists of short distance
commuter journeys performed on monthly or quarterly season tickets. In no-
suburban segments, passengers travel over long distance. The passenger fares
are therefore designed to cater to the needs of these two distinct segments.

51
3.5.2 Fare structure
For the purpose of fixing fares, passenger service is categorized as i) Mail
&Express Services and ii) Ordinary Services. Mail &Express services is bi-
furcated into the following classes:

a) Second class,
b) Sleeper class
c) First class
d) Air-conditioned chair car
e) Air-conditioned 3-tier
f) Air-conditioned 2-tier and
g) Air-conditioned first class

Ordinary service has the following cloasses,

a) Second class
b) First class and
c) Sleeper class.

The tariff structure of passenger services is also based on the principles of cost
of service and value of service. Seating capacity of a coach, competition from
other modes of transport, elasticity fo demand and socio-economic conditions
of the country are also considered. However, the principle of what the traffic can
bear is an important factor in fixing the level of fares.

Details of fare structures of trains on Indian Railways are described below:

Regular Trains

1. Time Tabled Mail/Express and Passenger trains: Normal fare structure


is applicable for these trains. No increase in fare has been affected,
except in general class (2S) where the minimum fare was increased from
Rs.5 to Rs.10 with effect from 22nd November 2015

Premium Services

1. Rajdhani, Shatabdi and Duronto Trains (Flexi fare trains) – Special


variable fare structure has been introduced with effect from 9th September
2016 where in the fares increase by 10% with every 10% of berths sold
subject to a maximum ceiling limit of 1.5 times for 2S, Sleeper class , AC
chair car, 2A sleeper and upto a maximum of 1.4 times for 3A sleeper.
Flexi fare are not applicable for executive class and first AC. Flexi-fares
are not applicable to Executive Class (EC) and First AC (IA).

52
New Brand of Trains (with additional facilities and special features)

1. Gatimaan Express: Introduced between Nizamuddin and Agra Cantt in


April 2016. The Fares are 45% more than the Shatabdi Basic Fare for
both CC and EC.
2. Humsafar trains- These trains with all AC-3 Tier accommodation were
introduced in December 2016 with various features like GPS based
passenger information system, Passenger announcement system, fire
and smoke detection and suppression system, CCTVs, comfortable
seats, mobile and laptop charging points, integrated Braille display, LCD
display above compartment doors in the aisle, fire retardant curtains etc.
Base fare in these trains is 1.15 times of the base fare of AC 3 tier of
Superfast Mail/Express trains which is applicable for the first passenger
block of 50% and thereafter a 10% increase for every 10% increase in
passenger block for the remaining 50%. (Maximum about 1.7 times the
normal mail/exp fares).
3. Tejas trains- First train was introduced in May 2017 with some special
features like ergonomic seating with improved cushioning and upholstery,
automatic doors, infotainment system with on-board wi-fi, GPS based
passenger display/announcement system, dust sealed gangways, fire
and smoke detection system, CCTV systems, concealed LED lighting
with adjustable reading lights, integrated Braille display and BIO-vacuum
toilets with sensorised taps, flushing system and driers for touch-less
experience of toilet use etc. The basic fares for this train is 20% higher
than Shatabdi Express fares. The catering service is optional.
4. Mahamana trains – The first Mahamana train was introduced in April
2016 with some special features like use of superior material for panels in
terms of fire retardation, aesthetically appealing toilet modules provided
with enhanced passenger amenities like controlled discharge water tap,
odour control system, exhaust fan, LED lights, dustbin inside the toilet
etc, ergonomically designed ladders for climbing up to upper berths, LED
lights for enhanced illumination, increase in mobile and laptop charging
points, Passenger information and address system, windows with
powered venetian blinds in first AC coaches and roller blinds in second
AC coaches etc. The basic fares for these trains are 15% higher than
the normal superfast mail/exp trains in all classes except in unreserved
second class (2S).
5. Antyodaya trains- These trains were introduced in February 2017.
It is a fully unreserved train having some special features like wider
windows, vestibule ends for inter coach movement, cushioned luggage
rack, handhold in door way area, fire extinguishers with anti-theft
arrangements, portable water filtration system, exterior colour scheme
with anti-graffiti coating, MU cables for push-pull operation etc. It is a
fully unreserved train. The basic fares for unreserved second class (2S)
in these trains are 15% higher than the base fare of unreserved second
class of Mail/Express trains.

53
6. AC EMU services :These trains were introduced with effect from 26th
December 2017 where the fares are 1.2 times the fare of First Class for a
trial period of 6/12 months and thereafter it is proposed to be made as 1.3
times the First Class fare.

Special Trains/Non-Time tabled trains (During summer times and festival rush
period)

1. Special trains on special fares- (Introduced in April 2015) Fares on


these trains are 30% more than the normal mail/exp fares. These trains
are run over and above the time tabled trains to meet additional demand.
2. Suvidha trains- (Introduced in June 2015) These are run to meet peak
demand during festivals/holidays. They have variable fare structure
consisting of 5 slabs wherein the fares go up for every 20% of slabs
with minimum fares at 30% higher than the normal base fares of mail/
exp trains and maximum goes up to 3.9 times the normal mail/exp
fares for the class. The basic fares for unreserved second class (2S) in
these trains are the same as applicable to unreserved second class of
Superfast Mail/Express trains.

3.5.3 Relativity of classes


The passenger fares of different classes were fixed in 1983 on a relativity ranging
from 100 to 1100 taking fare levels of Second Class Ordinary as the base (100).
The relativity was fixed on the basis of factors like speed, comfort, number of
stoppages, and above all the capacity of a passenger to bear fares for long
distance travel. However, during the year 1999-2000, the railways have revised
this relativity followed by minor modifications in later years. The relativity indices
as on 1.4.99 and 1.4.2006 are compared below:

i) Ordinary Service 1.4.99 1.4.06 1.4.08


2nd Ordinary - 100 100 100
Sleeper (Ordinary) - 155 160 160
1st Ordinary - 525 525 525
ii) Mail Express Service -100 100 100
2nd Class (Mail/Express) - 100
Sleeper Class (Mail/Exp) - 155 160 160
AC Chair Car - 300 350 350
AC 3 T - 425 425 425
1st Mail/Express - 525 525 525
AC Sleeper - 720 650 600
AC First - 1440 1150 1000

The fare levels are fixed on the basis of standard cost developed for the base
class suitably tapered with increase in distance. The fares for second-class
ordinary service are however, fixed at comparable levels with road rates up to
100 kms.

54
3.5.4 Monthly and quarterly season tickets
In suburban and non-suburban areas, a large number of commuters travel on
season tickets. A season ticket holder is charged for a minimum of 15 journeys
though he or she makes an average 50 to 60 journeys a month. This involves
a huge concession. Quarterly season tickets are fixed at 2.7 times the fares for
monthly season tickets.

CHECK YOUR PROGRESS 5 :


1. What is meant by relativity of classes in passenger service?

3.6 RATING OF PARCEL AND LUGGAGE SERVICES


Railways have all along charged this traffic on the basis of commodity types. This
meant clubbing certain commodities into separate groups and charge differently
for these groups. This practice has since been discontinued wef 2006- 07. Now the
charges are based on the type of service provided. Parcels moving by all ordinary
trains & shatabdi trains will be charged a standard parcel rate, which is the base
rate (index=100). Parcels carried in other train services are charged at 2times,
3 times depending on the service. Luggage is charged at 3.6 times the standard
parcel rate. For e.g., for a distance of 100 kms parcel and luggage rates chargeable
for one quintal (100 kg) are given below with corresponding relativity indices,

Scale Rate/tonne
Scale’S’ (standard rate) 279.3
Scale ‘P’ (premier service) 558.6
Scale ‘R’ (Rajdhani) 837.9
Scale R + 25 1047.4
Scale’L’ (luggage) 1005.5

Parcel and luggage rates are also telescopic as in the case of goods and
passenger service rates.

55
CHECK YOUR PROGRESS 6 :

1. Which are the parcel scale of rates ?

3.7 TARIFF SETTING MECHANISM


In India railways are owned and operated by the government. It functions within the
powers stipulated in ‘Railway Act, 1989’ passed by the parliament. Railway Board
under the Ministry of Railways has been vested with the powers in this regard.

The existing mechanism for effecting tariff changes is:

i) Recommendation of independent expert committees


Adjustments in tariff rates become necessary not only to cope with the
changing needs of the economy but also to meet short-term financial
requirements. These annual adjustments lead to some anomalies and
distortions over a period of time and these are reviewed, corrected and
modified by expert committees later. These independent committees are
appointed by the central government to examine in detail the fare and
freight structure and make recommendations.
ii) Committee of chief commercial managers
There is also a tariff setting exercise undertaken on a continuous basis
by a committee of chief commercial managers under the aegis of Indian
Railway Conference Association (IRCA). The recommendations of this
committee regarding classifications and other conditions are taken into
account while changes are announced.
iii) The Railway Rates Tribunal (RRT)
This is a statutory body set under the provisions of railway act and
it examines the reasonableness of railway freight rates whenever
customers require so. The decisions of the RRT are generally
implemented unless challenged in a higher court.

56
3.8 CROSS SUBSIDIZATION IN RAIL PRICING
There is an element of cross subsidization within the freight services between
commodities. Similar cross subsidization exists within passenger service also
between different classes. This is a part of the pricing mechanism where the
transportation charge varies from one commodity to another and one class to
another. However, the range of variation falls within the bear ability. Railways
are incurring losses in coaching services not only in India but also in other
countries including developed nations. The fare levels are generally kept low in
lower classes mainly on social considerations. The losses in passenger/par- cel/
luggage service in some selected years are given below along with the ele-ment
of cross subsidization from freight: -

Year Loss in passenger/ Frt. Erng. (Rs. Cr) Cross Subsidy


parcel/luggage from frt. (%age)
services (Cr)
1994-95 1927 13424 14
1998-99 4166 19676 21
2015-16 35,919 1,09,208 33
2016-17 39,566 1,04,339 38

It is evident that a reduction in the cross subsidy in passenger and freight


services can be achieved gradually through reasonable adjustments in
passenger fares, maximum restraint in freight rate hikes and effective cost
control. Railways have already initiated suitable measures to achieve this
objective.

Government has taken various steps to minimize losses in passenger segment


viz,

OO Enhancing load of more popular trains,


OO Extension/ increasing frequency of existing trains,
OO Increase speed of trains,
OO Introducing trains with limited stoppages,
OO Attaching extra coaches in the existing trains,
OO Also regular analysis and review are undertaken on quota utilization,
occupancy and patronage of trains and accordingly recommend for
augmentation of trains having better revenue,
OO Ticket checking drives are also conducted with a view to improve window
sales.
OO Running of new trains like Humsafar Express, Tejas Express, Antodaya
Express, Mahamana Express have been introduced on higher fare on
cost recovery basis.

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OO Augmentation of ticket selling capacity through operation of Automated
Ticket Vending Machines (ATVMs), ticket booking through mobile phones,
utilizing the services of ticketing agents like Jan Sadharan Ticket Booking
Sewaks (JTBS), Station Ticket Booking Agents (STBA), Yatri Ticket
Suvidha Kendra (YTSK) etc.
OO Running of special trains during festivals and holidays, running of
Suvidha trains, etc. Suvidha trains (Introduced in June 2015) are run
to meet peak demand during festivals/holidays. They have variable fare
structure consisting of 5 slabs wherein the fares go up for every 20% of
slabs with minimum fares at 30% higher than the normal base fares of
mail/exp trains and maximum goes up to 3.9 times the normal mail/exp
fares for the class. The basic fares for unreserved second class (2S) in
these trains are the same as applicable to unreserved second class of
Superfast Mail/Express trains.
OO Special trains on special fares: (Introduced in April 2015) Fares on
these trains are 30% more than the normal mail/exp fares. These trains
are run over and above the time tabled trains to meet additional demand.
OO The new AC EMU and Anubhuti coaches have been introduced with
special fare structure.
OO Introduction of special measures to increase passenger earnings through
schemes like booking of tickets under Tatkal Quota, Premium Tatkal
Quota, Flexi-fare system etc.

IR has taken following measures as freight initiatives with a view to realized


additional earnings and recovers part of losses:

OO Mini Rake Loading: Distance restriction eased from 400km to 600km-


The mini rake policy for covered wagons has been liberalised by
increasing the distance for mini rake operations.
OO Policy guidelines on Merry go Round (MGR) System: With a view
to facilitate transportation of coal from mines to power houses near pit
heads, the policy has been rationalised. The freight rates for MGR have
been kept very competitive which is about 82% lower than the normal
freight rate. Impact of this policy is very encouraging.
OO Port Congestion Charge - @10% on all traffic originating from
Ports discontinued: With withdrawal of Port Congestion Charge from
13.04.2016, freight on imports have become cheaper by 10%. This policy
is helping manufacturing sector and consumers because cheaper raw
material provides boost to domestic production/manufacturing.
OO Liberalised Automatic Freight Rebate Scheme in Empty flow
Directions: has been issued w.e.f.01.01.2017 by modifying earlier TEFD
Scheme. Under this scheme loaded traffic in empty flow direction is being
charged at LR1 (with certain conditions), which amounts to average
discount of 30 – 40%. Some of the notable changes are- criteria for empty
flow has been upgraded to 10 loaded rakes from 5 rakes earlier, loading

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allowed for intermediate points and all the division of destination zone.
This will help to decrease empty flow movement of rakes.
OO Withdrawal of Dual Freight Policy for Export Iron Ore: The charging
of iron ore for domestic consumption as well as export were made at par.
This policy which was implemented from 10.05.2016
OO Expanding the freight basket: 43 Additional commodities at Freight
All Kind (FAK) rates w.e.f.02.09.2016. FAK rates are approximately
30% cheaper than Class-100. The policy aims at attracting traffic to
rail from other competing modes of transport. This will give boost to
containerisation of traffic, thereby increasing railway’s share in freight
movement. One more commodity i.e. Bulk cement (cement in loose form
in tank container) in has been added in the list of de-notified commodities.
Now 44 additional commodities has been brought under FAK rate.
OO Re-introduction of short lead concession and reduction in minimum
distance for charge from 125 km to 100 km: To attract short lead traffic
to railways, graded concession has been provided on base freight rate.
The concession granted for different slabs as follows:
Distance Slab (in Km) Freight Concession
0 – 50 15%
51 – 75 10%
76 – 90 5%
91 – 100 Nil
OO Rationalization of Coal Tariff: Rationalization of Coal Tariff has been
done with reduction in freight for long lead power houses. In order to
make long distance power plants competitive in the Merit Order, the
rationalization of coal tariff has been implemented with effect from 24th
Aug, 2016 by the Ministry of Railways. The coal tariff rationalization has
resulted in reduction in rates on long leads due to reduction in distance
slabs beyond 700 km. Besides changing slabs for charging, Coal Terminal
Surcharge @ Rs. 55 per tonne at both loading and unloading point
has been imposed beyond 100 km. The base freight for Coal & Coke
has further been rationalized from 15.01.2018. Now the Coal Terminal
Surcharge (CTS), the levy of Busy season charge and development
charge on Coal & coke traffic has been dispensed with.
OO Station to Station Rates:The policy guidelines have been issued on
29.09.2016 which offers up-to 30% concession for incremental traffic
between station to station. It is hoped that this policy will go a long way in
helping zonal railways to attract additional traffic to rail. The policy aims at
win-win situation for railways and industry both.
OO Bridge surcharge was notified for traffic passing through Digha
Railway Bridge and Monghyr Railway Bridge on River Ganga:
Surcharge @ `10 per tonne on Goods traffic and `25 on 1AC & 2AC,
`15 on 3AC, CC & Sleeper classes and `5 on Second Ordinary & M/E
per passenger respectively on Passenger traffic passing through these
Bridges were notified.

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OO Withdrawal of levy of congestion charge for stone traffic: transported
from Eastern Railway to Bangladesh via Darsana/Benapole. This shall
generate loading and earning to IR.
OO Policy on Long Term Tariff Contract with key freight customers:
has been issued on 30.3.2017. The customers entering into long term
contracts with railways shall bring assured traffic to railways and they get
assurance of certainty in tariff rates as well as freight rebate on fulfillment
of certain conditions. At present, 22 Agreements have been signed on
different zonal Railways with Major customers. The major companies who
have entered into contact with Zonal Railways under this scheme are
TATA Steel, Ultra-tech Cement, India Cement, Jindal Steel and Power,
J.K. Cement, Ambuja, ACC etc.
OO Weighment of Bagged consignment: policy has been rationalised.
Definition of ‘standard bag’ has been modified which includes uniform
loading, which may be manual loading or automated loading. This will
help us in attracting bagged consignment from road. Around 1 million
tonne additional traffic is expected.
OO Liberalisation of Booking of traffic for Two Point/Multi Point
Destination: Under this policy, any Two Point Rakes can be loaded at
Trainload class rate under certain conditions.
All the covered wagons have now been permitted for such booking.
Earlier only BCN wagons were permitted. Similarly, earlier, list of two
point/multi-point destination terminals were notified by Railway Board. In
the liberalised regime, any two points not more than 200 km apart in Busy
Season and 400 km in Lean season can be booked as two point rake and
customers get trainload rate benefit. For multi-point destination terminal,
distance restriction for two terminals is 200 km in both the season
Liberalised system enables customer to book parcel size consignment at
trainload rate.
OO Dispensation from mandatory weighment: Exemption from weighment,
in case of loading of “Standard Bags of uniform size” in container, has
been granted. This step is expected to further lower operational time and
improve fluidity.

Similarly following initiatives have been taken to improve parcel earnings:

OO Modification in policy of ‘Comprehensive Parcel Leasing Policy


(CPLP): With a view to provide value-added assured service to the
rail customers and thereby improve the utilization of the parcel space
of Brakevan /Parcel Vans of passengers’ carrying trains, a scheme
namely ‘Comprehensive Parcel Leasing Policy (CPLP)’ was introduced
by the Railways. Under the scheme, parcel capacity of the entire unit of
Brakevan/Parcel Van is leased out to the private parties by the Railways
by inviting bids through open tenders.
Earlier, the reserve price for leasing of parcel space was equivalent to
the freight at par with the normal tariff rate applicable for booking of non-
leased piecemeal parcel traffic as per category of train/ service.

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To make the parcel leasing scheme more liberal and market-oriented
and thereby improve utilization of the parcel space of Brakevan of mail/
express trains, powers have been delegated to the zonal railways for
revision of reserve price even downwardly considering road rates.
OO Policy modification in ‘Parcel Cargo Express Trains (PCET): Under
‘Parcel Cargo Express Trains (PCET)’ scheme, entire parcel capacity of
train is leased out between specific originating – destination stations on
round trip to the private operator by inviting bids through open tenders.
To make the scheme more liberal, customer-friendly and market-oriented
and thereby increase Railway’s earnings, powers have been delegated to
the zonal railways for revision of reserve price even downwardly subject
to minimum reserve price i.e. ‘1.0 times of Scale-P’ for round trip.
OO Initiatives taken to improve parcel earnings (Non- Leased Parcel
Traffic): In order to improve the utilization of Brake Vans of trains and
augment parcel traffic on Indian Railways, powers have been delegated
to the zonal railways to decide the charging of non-leased parcel traffic
carried in Brake Vans of trains subject to:
i) Utilization of Brake Vans is below 25%;
ii) No demand for leasing of Brake Vans of Such trains during last 3
years; and

Train is running within the same zonal railway’s jurisdiction.

CHECK YOUR PROGRESS 7 :


1. Explain briefly in 2 or 3 sentences the following:
(a) Inflation in distance for charge
(b) Taper of scales.
(c) Cross-subsidisation
(d) Railway Rates Tribunal

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3.9 DYNAMIC PRICING-CURRENT SCENARIO
Indian railways have all along been following a policy of charging uniform rates
across the country irrespective of the wide variations in cost and demand from
one area to another. When demand goes up line capacity and rolling stock
availability are put to considerable strain.On the other hand during lean season
line capacity is under utilised and wagons/engines/ coaches idle.Differential
pricing is an alternative and railways are slowly but cautiously migrating to
a regime of ‘dynamic pricing’ which is more demand oriented than other
considerations.

Railways all over the world are already following this approach to tariffs. Rail
pricing in the past has not adequately responded to demand management and
as a result, its rolling stock and line capacities either got strained or remained
idle during peak and lean periods. Industries have already overcome this
phenomenon by flexible pricing and effective inventory control. To meet this
challenge railways have initiated several schemes both for passenger and freight
services . Some of these initiatives are:

i) liberalisation of siding rules,


ii) modified wagon investment schemes where full re- imbursement of
investment is allowed,
iii) leasing of parcel service on more liberal terms,
vi) commodity classifications have been reduced from 49 to 18,
vii) the system of charging freight on specific “minimum weight condition”
attached to each commodity has been done away with and charges have
been based on carrying capacity of the wagon used.
viii) light goods, which cannot be loaded to the full capacity of wagons, have
been assigned lower classifications.
ix) railway administrations have been empowered to offer long-term freight
discounts up to 3 years to attract additional traffic
x) Passenger fares have been rationalized with suitable relativities amoung
classes minimizing cross subsidization.
xi) Wait listed passengers are offered automatic migration to upper class w/o
extra payment to avoid cancellations
xiv) Peak and Lean season pricing has been introduced in passenger fares
xv) Heavy discounts offered in empty flow freight movements
xvi) Flexi –Fare scheme
xvii) The process of migration to demand management is on and the results
are already visible.

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CHECK YOUR PROGRESS 8 :
1. What is meant by ‘dynamic pricing’? Which are the steps taken by
railways in this regard?

3.10 CHECK YOUR PROGRESS : THE KEY


CYP 1 :

The financial viability of an enterprise depends largely on the administration of a


sound pricing policy. Such a policy should ideally aim at generation of resources
not only for survival but also for development as well.

CYP 2 :

1. ‘Cost of service’ and ‘value of service’ are the two cardinal principles of
rail pricing. The value of service is also known as ‘what the traffic can
bear’. The rates should ideally be fixed between the costs as the lower
limit and value as the upper limit. There is loss when rates are fixed below
the cost. If rates are fixed above the value, the traffic may not move at all.
2. Major factors which affect the value of service are,
i) competition from other modes,
ii) the extent to which the traffic can bear a rate,
iii) value of goods at destination as compared to that at originating point
and
iv) potential competition from new modes or new products.
3. Cost of rail transport is affected by:
i) loadability, i.e, density or relation of bulk to weight,
ii) empty haulage involved in providing the service,
iii) volume of traffic, i.e, whether movement is in train -load or less than
trainload,

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iv) handling required for special types of wagons with unusual
dimensions and weight and
v) the extent of damage, loss or waste and liability to compensation.

CYP 3 :

1. The main objectives are: i) individual service to be priced on “what the


traffic can bear” principle, ii) optimum co-ordination between different
modes, iii) uniform charges on different gauges and iv) social benefits are
to be taken into account.
2. Prior to independence, railways were owned and operated by private
companies. Each company followed its own independent pricing policies
and the main motive was to make profit. As a result, there was no
uniformity in rating. After independence, railways came under complete
state control and pricing policies were rationalised with a view to effect
uniformity in charging, maximisation of revenue and development of
industries and regions.
3. Adjustments in tariff rates become necessary not only to cope with the
changing needs of the economy but also to meet short-term financial
requirements. These annual adjustments lead to some anomalies and
distortions over a period of time and these are reviewed, corrected and
modified by expert committees later. Rail Tariff Enquiry Committee, 1980
and Railway Fare and Freight Committee, 1993 are two such committees.

CYP 4 :

1. On the basis of the rating principles of ‘what the traffic can bear’ and the
‘cost of service’, commodity groups are assigned classifications for the
purpose of charging. The price, use and transportation characteristics of
the commodity are examined before assigning a specific classification
to it. Class 100 is the base class and other classes have a percentage
relation with base class. The freight rates will be more for higher classes
than for the lower classes.
2. Telescopic nature of rates means, the rate per tonne per kilometre,
decreases with increase in distance. The following example will explain
this principle:
i. The freight charge of coal for 100km = Rs 193.40/tonne.
ii The freight rate per tonne per km = Paise 193.40.
iii The freight charge of coal for 500 km = Rs 660.60/tonne.
iv The freight rate per tonne per km = Paise 132.12.

The freight rate per tonne per km decreases with increase in distance.
The freight charge would have been much higher for 500 km (Rs 967) if
the telescopic nature was not followed.

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3. Rail users can book consignments either in wagonload or trainload.
Freight charges for wagonloads are higher than that for trainloads.
In case a wagon is booked, the consignment will be charged for the
carrying capacity of the wagon irrespective of the actual weight of the
consignment. Similarly, in case of trainload booking, a customer needs
to book a minimum number of wagons of a given type to avail lower tariff
rates.

CYP 5 :

The relativity of classes mean the comparative relationship of different classes of


travel with the base class, i.e second class for express and ordinary services. In
express services this relativity as on 1.4.2006 ranged from 100 for Second class
to 1140 for the highest class,i.e Air-conditioned First class. The relativity is fixed
on the basis of factors like speed, comfort, number of stoppages, and above all
the capacity of a passenger to bear fares for long distance travel.

CYP 6 :

The parcel scale of rates are,

S. No. Scale Rate/ Tonne


i) Scale’S’ (standard=100), ` 279.3
ii) Scale ‘P’ (premier service=200) ` 558.6
iii) Scale ‘R’ ` 837.9
iv) Scale ‘R’ + 25 ` 1047.4
v) Scale ‘L’ (Luggage) ` 1005.5
CYP 7 :

(a) Inflation in distance for charge


Answer: In certain sections where cost of operation is very high due to
gradients etc, the distance is inflated by a fixed percentage for charging
purpose. This is one way of charging a higher rate to make up for the high
cost. These inflations are reviewed at time intervals and withdrawn or
reduced as the case may be.
(b) Taper of scales.
The rate at which the charge per unit of out put decreases with increase
in distance is called ‘taper’ and is expressed as percentage. The rate
per tonne per kilometer at 100 km is taken as 100% and the lower
percentages at which rate per tonne per km for longer distances are fixed
constitute the taper of that scale of rates.
(c) Cross-subsidisation.
Answer: This is a pricing mechanism where a low priced commodity or
lower class of travel is charged lower rates and high value commodity or

65
higher class of travel is charged higher rates to balance earning. There
is an element of cross subsidization within the freight services between
commodities and between classes within passenger service.
(d) Railway Rates Tribunal.
Answer: This is a statutory body set under the provisions of railway act
to examines the reasonableness of railway freight charges whenever
customers require so. The decisions of the RRT are generally
implemented unless challenged in a higher court.

CYP 8 :

Rail pricing in the past has not adequately responded to demand management
and as a result, its rolling stock and line capacities either got strained or
remained idle during peak and lean periods. To meet this challenge Railways
have initiated several schemes to migrate to a demand management regime by
going in for dynamic pricing of both freight and passenger services

Some of these schemes are :

i) Railways’ siding rules have been liberalized


ii) Wagon investment schemes modified with full re-imbursement of
investment
iii) Terminal incentive schemes are on the offer.
iv) Commodity specific pricing has now been changed to commodity group
pricing.
v) No of commodity classifications have been reduced from 49 to 18. Light
goods, which cannot be loaded to the full capacity of wagons, have been
assigned lower classifications
vi) The system of charging freight on specific “minimum weight condition”
attached to each commodity has been done away with and charges have
been based on carrying capacity of the wagon used.
vii) Passenger fares have been rationalized with suitable relativities among
classes minimizing cross subsidization.
viii) Peak and Lean season pricing has been introduced in passenger
faresand freight services.
ix) Heavy discounts offered in empty flow freight movements.
x) Flexi fare scheme

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