O.R.- Operating Ratio in Indian Railways
By NageswaraRao, 9492432160
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Different
Parameters in IR |
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Calculation of OR |
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Calculation of Net Revenue / Net Receipts
/Surplus |
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OR Practicals |
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Performance
Efficiency Index |
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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 30th 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 31st 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 31st March /
Earnings per day
= Earnings per day = Total Earnings / 365 days
Example: Traffic Suspense on 31st
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.
·
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
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Credits |
Debits |
Net |
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Commercial |
(i) Coaching Earnings (less refunds) |
(x) Ordinary Working Expenses = Expenses booked under final heads,
excluding appropriation to DRF & Pension Fund |
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Commercial |
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(ii) Goods Earnings (less refunds) |
(xi) Appropriation to Depreciation Reserve Fund. |
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(iii) Traffic Earnings = (i)+(ii) |
(xii) Appropriation to Pension Fund. |
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(iv) Sundry Other Earnings (less
refunds)=Other than Traffic Earnings. |
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(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 |
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LINK |
(vi)
Suspense (Traffic & DR) |
(xiv) Suspense. (DP) |
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Llink |
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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. |
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Government |
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(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. |
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(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
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Earnings/Receipts |
Amt |
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Expenses/Expenditure |
Amt |
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Coml |
Gross Earnings (X +Y +Z) |
200 |
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Gross Working Expenses
(OWE+DRF+PF) |
160 |
Coml |
|
Link |
Suspense ( + ) |
5 |
|
Suspense
( + ) |
-10 |
Link |
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Govt |
Gross Receipts |
205 |
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Gross Expenditure |
150 |
Govt |
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Misc Receipts ( +
) |
15 |
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Misc Expenditure (
+ ) |
25 |
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Total Revenue
Receipts |
220 |
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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
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Earnings/Receipts |
Amt |
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Expenses/Expenditure |
Amt |
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Coml |
Gross Earnings (300+600+100) |
1000 |
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Gross Working Expenses
(600+100+200) |
900 |
Coml |
|
Link |
Suspense ( + ) |
25 |
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Suspense
( + ) |
-10 |
Link |
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Govt |
Gross Receipts |
1025 |
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Gross Expenditure |
890 |
Govt |
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Misc Receipts ( +
) |
75 |
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Misc Expenditure (
+ ) |
110 |
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Total Revenue Receipts |
1100 |
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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
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Earnings/Receipts |
Amt |
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Expenses/Expenditure |
Amt |
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Coml |
Gross Earnings |
200 |
|
Gross Working Expenses
|
160 |
Coml |
|
Link |
Suspense ( + ) |
10 |
|
Suspense
( + ) |
-10 |
Link |
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Govt |
Gross Receipts |
210 |
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Gross Expenditure |
150 |
Govt |
|
Misc Receipts ( +
) |
10 |
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Misc Expenditure (
+ ) |
75 |
||
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Total Revenue
Receipts |
220 |
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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 % |
|
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2 |
Goods Earnings |
147000 |
65 % |
2 |
Appropriation to DRF |
800 |
1 % |
|
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3 |
Sundry Earnings |
11013 |
5 % |
3 |
Appropriation to
Pension Fund |
53160 |
24 % |
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4 |
Gross Earnings (1+2+3) |
225513 |
100 % |
4 |
Gross Working Expenses
(1+2+3) |
217,117.17 |
100 % |
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5 |
Suspense |
100 |
5 |
Suspense |
- 404.17 |
|||
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6 |
Gross Receipts (4+5) |
225613 |
6 |
Gross Expenditure
(4+5) |
216713 |
|||
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7 |
Misc Receipts |
300 |
7 |
Misc. Expenditure |
2700 |
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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
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Zonal
Railway |
OR % |
Rank |
|
Metro
Railway, Kolkata |
250.3 |
Highest |
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Eastern
Railway, Kolkata |
171.1 |
Second Highest |
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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. |
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3.
Appropriation to DRF & Pension Fund are considered. |
3.
Appropriation to DRF & Pension Fund are not considered. |
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4.
Calculated for Zonal Railways |
4.
Calculated for Divisions |
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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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