Factors to Consider When Assessing the Efficiency of a Railroad

Factors to Consider When Assessing the Efficiency of a Railroad

When comparing the financial efficiency of multiple railroads, governments, transportation authorities, and rail experts worldwide frequently turn to benchmarking studies as a tool that can help identify opportunities for improvement. Benchmarking analyses can certainly be a useful way of comparing and contrasting the efficiency of different international railroad systems, and uncovering valuable best practice information and potential solutions, but it is important for users of such analyses to be aware of their limitations. Specifically, in order to avoid a narrow, “one size fits all approach,” those who use benchmarking studies should be careful to acknowledge some of the fundamental differences underlying various railroad systems, and how these contribute to each railroad’s efficiency. Chief among such differences are:

Differences in railroad goals and roles.

Definitions of what makes an efficient railroad can vary, which can make it challenging for users of benchmarking analyses to determine the standards that a railroad is using to assess its efficiency. One definition of an efficient railroad, for example, may be a railroad that is profitable with minimal public funding. In other countries, an efficient railroad might be one that supports national mobility and economic policies beyond its direct business performance by offering lower fares or wider market coverage than would make sense from a purely business standpoint. When assessing the efficiency of a railroad, it is therefore important to observe and understand its self-defined goals. Furthermore, experts suggest that it is critical for railroads and governments to define and set the goals and objectives of the railroads in their country, and clearly distinguish roles and responsibilities accordingly.

Differences in network and operations characteristics.

high speed rail lineDifferent railroad systems offer a wide range of services, all of which have varying impacts on costs, revenues, and overall financial efficiency. Factors to consider include the relative share of freight versus passenger traffic; the mix of market segments, such as long distance high-speed rail or operations with an urban agglomeration; the scope of the rail network, whether densely knit or operated along a corridor; and how traffic is concentrated throughout the system. It is also important to examine those particular network characteristics, such as switch density and the degree of electrification, which can have significant, long-term effects on the maintenance costs for infrastructure and equipment.

Differences in system structures.

An issue that is particularly important to consider in international benchmarking analyses is the degree to which a railroad’s functions, especially its operations and infrastructure management, are managed or owned by different entities. For example, in Europe, policies implemented by the European Commission have encouraged vertical separation between railroad infrastructure management and operations. The goal behind this move is to ensure open access to railroad networks and to encourage competition between train operators. Awareness of this difference is important when countries whose rail systems are not vertically separated compare their efficiency levels with those of their European counterparts.

Differences in debt and accounting standards.

Unfortunately, when it comes to benchmarking, there is no unified standard for railroad financial reporting. The most noticeable differences occur with respect to how public sector contributions are reported and accounted for. Financial documentation for publicly funded capital expenditures, as well as accounting procedures for public funding of railroad operations, can vary widely. Another major variance concerns capital cost data: when such data is incomplete or missing from balance sheets, this can strongly influence the assessment of a railroad’s efficiency, given that railroads are inherently asset-intensive businesses. Finally, the interpretation of efficiency can also be affected by how able or likely a railroad is to take on debt. For example, one railroad may appear to be operating efficiently, but may in fact be heavily in debt due to network and technology investments. Similarly, government support for capital projects, as well as government write-offs of longer-term debt, can also quickly change a railroad’s appearance of efficiency.

Differences in railroad company status.

In some countries, railroads are owned and operated by governments, while in others, railroads conduct operations as private sector firms, which can either be monopolistic or functioning within a competitive marketplace. Around the world, the past several decades have seen many efforts at increased privatization, with mixed results. Some privatization efforts have yielded improved performance and cost efficiency; others have resulted in higher refinancing costs and greater equity yield rates, as well as the sacrifice of proper asset maintenance in order to achieve short-term financial improvements. Therefore, the corporate status of railroads should be carefully taken into account in benchmarking studies.

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