Operating Ratio in Indian Railways

O.R.- Operating Ratio in Indian Railways

 

By NageswaraRao, 9492432160

 

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

 

What is Ratio?

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

4.    Current Assets / Current Liabilities

 

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

 

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

 

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

 

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

 

= Closing balance / Total Credits 

 

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

 

 

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

 

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

 

Example:  400 / 2000 x 100 = 20 %

 

It should be as low as possible

 

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

 

= Traffic Suspense on 31^st March / Earnings per day

 

= Earnings per day = Total Earnings / 365 days

 

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

 

Earnings Per Day = 3650 / 365 = 10

 

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

 

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

This should be as low as possible

Operating Ratio: 

 

·         Codal provisions - Para 308& 434 of I.Rly.Finance Code.

 

·         It is regarded as one of the Most Important financial statistics/ratios and has frequently been used as an Index of the operating efficiency of the Railways.

 

·         Definition of O.R.: Percentage of Gross Working Expenses to Gross Earnings of any accounting year.

 

·         In general, Operating ratio is the number of rupees spent to earn every 100 Rupees.

 

·         If O.R. is less than 100 = Organisation is in profits.

 

·         If O.R. is more than 100 =Organisation is in losses.

 

 

              Gross Working Expenses (GWE)

·         O.R  =     _______________________    x  100

                  Gross Earnings (GE)

 

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

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

·         GE = Coaching Earnings + Goods Earnings + Sundry Earnings 

·         Earnings means always Apportioned only.  Not Originating

·         Complying the Commercial Accounts. 

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

 

 

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

 

 

Simplified Operating Ratio Table -   OR Table

 

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

 

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

 

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

 

Net Receipts = Total Revenue Receipts – Total Revenue Expenditure

 

Net Receipts also called as Net Revenue and Surplus

 

Net Receipt is nothing but Surplus. 

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

Practicals

 

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

 

1.    OWE – 600

2.    Appropriation to DRF – 100

3.    Appropriation to Pension Fund – 200

4.    Coaching Earnings – 300

5.    Goods Earnings –600

6.    Sundry Earnings – 100

7.    Suspense on Earnings side - +25

8.    Suspense on Expenses side -  (-) 10

9.    Misc Expenditure -110

10. Misc Receipts  -  75

 

Solution:

 

  OR Table

 

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

 

 

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

 

Net Receipts = Total Revenue Receipts – Total Revenue Expenditure

 

Net Receipts also called as Net Revenue and Surplus 

 

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

 

 

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

 

1.    Gross Receipts – 210

2.    Gross Expenditure – 150

3.    Suspense on Earnings side -  +10

4.    Suspense on Expenses side -  (-) 10

5.    Misc Expenditure - 75

6.    Misc Receipts  -   10

 

 

Solution:

 

  OR Table

 

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

 

 

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

 

Net Receipts = Total Revenue Receipts – Total Revenue Expenditure

 

Net Receipts also called as Net Revenue and Surplus 

 

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

 

Hence Shortfall = 5

 

 

 

ü  There is no ideal Operating Ratio for Indian Railways.

 

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

 

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

 

ü  Landmark Year – 2005 

 

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

 

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

 

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

 

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

 

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

 

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

 

A)   Maximizing the traffic earnings

B)   Rationalization of fare and freight tariff

C)   Effective marketing strategies to capture more and more traffic

D)   Creation of additional capacity

E)   Optimum utilization of the existing rail infrastructure.

F)   Generating more NFR – Non Fare Revenue

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

H)   Improved man-power planning

I)     Inventory management

J)    Optimizing the fuel consumption 

 

 

 

 

 

 

 

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

 

ü  Last  few years O.R. of Indian Railways is

 

2015-16  - 91.25 %

 

2016-17 -  90.48 %

 

2017-18 -  96.5 %

 

2018-19 -  98.44 %

 

2019-20-  97.29 %

 

2020-21  -96.28 %  (Target)

 

2021-22  -96.08  % (Target)

 

 2020-21 Railway Revenue Budget - Financials

 

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

 

Net Revenue = Total Revenue Receipts – Total Revenue Expenditure

Net Revenue = 225913 - 219413

Net Revenue = 6500

Rs. 6500 Crores Net Revenue is appropriated to

 

1.       Development Fund - Rs. 1500 Crores

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

 

 

Nil appropriations to Capital Fund and RSF - Railway Safety Fund 

Operating Ratio = Gross Working Expenses / Gross Earnings x 100

 

Operating Ratio = 217117.17 / 225513 x 100

 

Operating Ratio = 96.28 %

 

Highest & Lowest Operating Ratio of Zonal Railways 2020-21

 

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

 

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

 

ü  Comparing O.R of different Zonal Railways:  It is not possible to compare the O R of one Zonal Railway with another Zonal Railway due to several factors such as Floods, Accidents and other special factors.  Hence it is better to compare OR of particular Zonal Rly from Year - Over - Year (YOY) basis.

 

 

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

 

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

 

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

 

 

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

 

 

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

 

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

 

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

 

ü  Operating Ratio is helpful for comparing the Railways' efficiency of Year-over-year(YOY) as well as evaluating the Inter Zonal comparison among different  Zonal Railways in India.

DIVISIONS and PEI - Performance Efficiency Index

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

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

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

ü  That means unlike Operating Ratio, Appropriation to DRF and Pension Fund will not be considered for calculating PEI.  Also Apportioned Earnings not considered for calculating PEI.

                          Demands 3 to 12

ü  PEI of Division =     _______________________    x  100

                         Originating Earnings

                       

 

 

 

Differences between OR and PEI                        

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

 

 

Earnings Vs Revenue

 

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

 

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

 

Revenue minus Expenditure is equal to Earnings.

 

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

 

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

 

So, here after

 

Abstract X -  Coaching Revenue

 

Abstract Y  -  Goods Revenue

 

Abstract Z - Sundry Revenue

 

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

 

 

 

Key Takeaways

 

1.    OR for Indian Railways and Zonal Railways

 

2.    PEI for Divisions

 

3.    OR Formulae = GWE/GE x 100

 

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

 

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

 

6.    OR – Apportioned Earnings

 

7.    PEI – Originating Earnings

 

8.    Highest OR – Metro Railway, Kolkata

 

9.    Commercial  -  Earnings  and Expenses

 

10. Government – Receipts and Expenditure

 

11. New name for Earnings  -  Revenue

 

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