Technical Assistance Consultant’s Report Project Number: 46452 October 2017 People’s Republic of Bangladesh: South Asia Subregional Economic Cooperation Railway Connectivity Investment Program (Financed by the Technical Assistance Special Funds) Final Report on Updating Railway Master Plan Prepared by: CPCS Transcom Limited In association with: e.Gen Consultants Ltd. Ottawa, Ontario, Canada This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.) FINAL REPORT – Railway Master Plan | Bangladesh SASEC RCIP Project CPCS Ref: 15328 Financial Performance Key Messages . Bangladesh Railways has a very high Operating Ratio, averaging 210% over the past nine years . A large part of the degrading financial performance is due to the non‐indexing of rail tariffs to inflation . Utilization of rolling stock is very poor due to insufficient maintenance and shortage of both operating and maintenance staff . Maximizing availability of rolling stock will improve financial returns to the railway . Increasing rolling stock by procurement will increase throughput, but tariff reform will be necessary before these increases improve BR financial performance . There are several types of line capacity enhancements that should be considered before line doubling | 193 FINAL REPORT – Railway Master Plan | Bangladesh SASEC RCIP Project CPCS Ref: 15328 Current Financial Performance 9.1.1 Bangladesh Railway Financial Reporting Prior to looking at BR’s financial results, it is important to make some comments regarding BR’s accounting practices. The numbers below refer to operating revenues and costs, but BR does not include all of what could be considered “operating revenue” in its books as such. For instance: Revenue from the lease of fibre optic lines to Grameen Phone is not included with freight and coaching earnings. However, the O&M costs of the lines are included in operating costs freight and coaching operations. The line itself was installed to assist in running freight and coaching services. Many freight‐related items such as demurrage, wharfage and siding charges are not included in freight revenue, although they are accrued from freight operations. The net effect of these accounting practices is to under‐represent earnings per passenger‐km and tonne‐km, and therefore BR shows a lower Operating Ratio than would normally be the case if the accounting practices were more in line with other railways’ practice. ADB is assisting BR in the reform of its accounting practices; this will greatly assist in more comparable reporting as well as improved financial ratios for the railway. However, despite the under‐representation of operating revenue, even if the revenue were more conventionally reported operating revenues would still be less than operating costs. BR would still show a financial loss; accounting reform will only bring about a decrease in the size of that loss. To show profitable operations, BR will need to dramatically revise its operations/maintenance and tariff reform would have to be instituted by Government. Thus, the conclusions of the next section are still valid. In many countries where trains are operated below operating cost on socio‐economic and political reasons, governments give subsidies similar to Bangladesh’s PSO & Welfare grant. The GOB, on principle, agreed to pay PSO and welfare grant on passenger services excluding Intercity, but this grant is not indexed to inflation or revised annually for other considerations. Bangladesh’s persistent inflation rate means that the grant decreases in real terms year by year. Today’s 100 taka is not equal next year’s 100 taka. The net effect is that BR’s costs are rising due to inflation and other reasons, while its revenues are not rising at the same rate. Both tariffs and the PSO/Welfare grant are not indexed to inflation. 9.1.2 Bangladesh Railway Operating Ratio Presently (and for most of the recent past), Bangladesh Railways has been operating in a deficit position. BR’s operating ratio for both freight and passenger traffic has been far above 100% for several years. In other words, BR is spending much more money to support operations than it earns from those operations. Table 9‐1 below shows the Operating Ratio (OR) for the past nine years. | 194 FINAL REPORT – Railway Master Plan | Bangladesh SASEC RCIP Project CPCS Ref: 15328 Table 9‐1: Bangladesh Railways Operating Ratios Year Operating Ratio (%) 2006‐07 206 2007‐08 194 2008‐09 188 2009‐10 222 2010‐11 237 2011‐12 260 2012‐13 194 2013‐14 200 2014‐15 194 Source: BR Information Book 2015 BR’s average OR (operating expenses divided by revenue from operations) has averaged 210% over the past nine years. While an OR over 100% can be justified by the social obligation of providing passenger services (especially where tariffs are not set by the railway itself), a profitable railway will have an OR somewhere below 100%. Table 9‐2: International Railway Operating Ratios Railway (s) Year Operating Ratio (%) North American Class 1 Railways (average) 25 2014 69.7 Indian Railways26 2014‐15 91.3 Turkish State Railway27 2015 94 Pakistan Railways28 2013‐14 174 It is clear by comparison to other railways (even discounting for BR’s accounting practices) that BR operating ratios can be improved. The projects set out in this Master Plan could assist in that improvement, but only if BR uses the resultant assets to their best advantage. Reasons for the poor financial performance are many and have been discussed at length throughout the course of this study. They include, but are not limited to: 25 Association of American Railroads 26 Gov’t of India Press Information Bureau 27 Turkish State Railway 2015 Annual Report 28 Pakistan Railways statistical tables | 195 FINAL REPORT – Railway Master Plan | Bangladesh SASEC RCIP Project CPCS Ref: 15328 Inadequate RS maintenance facilities Poor spares inventory and inefficient spares procurement procedures Rolling stock that has exceeded its economic life and should be retired Outmoded S&T technology, which prevents the existing lines from being used with full efficiency Poor PWay maintenance and deteriorating infrastructure, leading to speed restrictions which lead to inefficient PWay usage Manpower shortages which constrain both operations and maintenance Passenger and freight tariffs set far below cost recovery levels Shortage of locomotives (leading to poor utilization of carriages/wagons as well as staff) Shortage of passenger carriages (trains could be longer, generating more revenue for a marginal increase in cost) Competition with the Roads sector Not only is the financial performance poor, it has been degrading over the past decade, mainly due to inflation. Figure 9‐1 shows the annual revenue versus cost performance for the railway for the period 2006‐1015. Revenue was relatively flat between 2006 and 2011. This is a reflection of the passenger tariff, which had been unchanged since 1992. A tariff increase was made in 2012 and revenue performance improved. However, the inflation index line on the same graph clearly shows that BR’s costs have been increasing at roughly the same rate as Bangladesh’s inflation index. This implies that not only should rail tariffs be brought up to (or at least close to) cost recovery levels, they should also be indexed to inflation to avoid further degradation of financial performance. However, willingness to pay on the part of both passengers and freight clients should be carefully studied prior to any tariff increases to ensure that those increases do not result in a dramatic modal shift away from rail. | 196 FINAL REPORT – Railway Master Plan | Bangladesh SASEC RCIP Project CPCS Ref: 15328 Figure 9‐1: BR Costs and Revenue 2006‐2015 Source: BR 2014‐15 Information Book, WB World Development Indicators Most of the unit cost increases have been experienced in the fuel, maintenance and general admin cost components as can be seen in Figure 9‐2. It should be noted that the largest cost center is maintenance. It is entirely likely that, even with the new projects, the percentage share of maintenance could rise overall, as more maintenance is required in general terms. However, this will be more than offset by greater revenues resulting from better RS availability, as will be shown in the next section. Figure 9‐2: BR Operating Cost Breakdown (BDT per train‐km) 1200.0 1000.0 800.0 km ‐ Train 600.0 per BDT 400.0 200.0 0.0 2006‐07 2007‐08 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 2014‐15 Gen Admin Maint Ops Staff Ops Fuel Ops Other Misc Source: BR 2014‐15 Information Book | 197 FINAL REPORT – Railway Master Plan | Bangladesh SASEC RCIP Project CPCS Ref: 15328 Increasing Rolling Stock Availability Bangladesh Railway has been losing market share for decades, despite the fact that Bangladesh’s market for transportation services has been steadily growing. Several studies in the past have pointed out that BR’s revenue is not so much dependent on the size of its market as on the ability of BR to operate trains and provide transport services. The report Guidelines for Development and Approval of Transport Master Plans, Programs and Projects (c.2007) on page 35 shows that in 1975 the long‐distance passenger market was 17 billion passenger‐km. Rail share was 30%, or 5.1 billion passenger‐km. By 2006 the market had grown more than ten‐ fold to 178 billion passenger‐km of which rail’s share had fallen more than ten‐fold, to 2.8%. This implies that, since 1975, rail’s passenger market capture (passenger‐km) has remained roughly static. This was verified by accessing the World Bank data base (Figure 9‐3).