Question

how to calculate ticket pricing of transportation model (MRT) based on capital budgeting theory?

Answer 1

The below given example is based on bus transportation :

Table of Contents

7.1 Costs and Revenues: Understanding Bus Operations

Transport costs are a monetary measure of what the public transport agency incurs for providing transportation services. In order to promote public transport use in Indian cities, it is often typical for agencies to maintain low fares, in spite of fare subsidies being provided to several groups. This means that people who can afford higher fares, pay very low fares for poor quality service. This results in a vicious circle, where people switch to private modes, forcing the agency to reduce fares to attract more users. This section focuses on the existence of an imbalance between major operating costs for a bus transport agency and the farebox and non-farebox revenues.

Types of Costs

​Transport costs come as fixed (infrastructure) and variable (operating) costs. They depend on a variety of conditions related to geography, infrastructure, administrative barriers, energy, and on how passengers and freight are carried. A wide variety of transport costs can be considered, but public transport operations largely distinguishes cost in two categories:

1. Capital and Operation & Maintenance Cost

Capital funding in public transit pertains primarily to the costs of buses. This only entails procurement of the vehicle, while costs depend on the type of vehicle to be procured. For bus operators, obtaining capital funding is conveniently available through programmes like the JnNURM scheme. Additionally, capital costs can also include infrastructure such as depots and stations. Government funding is also available for ancillary infrastructure.

Operation and maintenance (O&M) cost are related to the (annual) maintenance and operation expenditure on the infrastructure or assets. Some operating costs vary with traffic volumes, but other factors, such as weather conditions, geographical settings, and topographical features, also play an important role.

Example: Capital and Operating Costs in Naya Raipur

Table 18 lists costs typically related to bus transport, operating under a gross cost model. This case study is very peculiar as private procurement of services is an exception. Generally, public transport agencies invest in procuring the buses and employ private operators for running the service. In this case, the following two points are assumed:

1. The private operator will pay 20% of the bus cost as an upfront premium to the city agency; and
2. The private operator will receive 70% of their share as debt and balance and 30% as equity.

While capital costs or vehicle procurement is the lowest in terms of percentage of overall costs, fuel costs remain the highest investment for bus operations.

VALUE (RS.) VALUE (RS.) CAPITAL COST PARAMETER OPERATING COST PARAMETER 30,00,000o Mileage (kmpl) Diesel cost (Rs/Lt) Total cost of bus (Rs.) Share of operator (20%) Initial loan amount (Rs.) Equity % Equity (Rs.) Loan amount (Rs.) Interest rate Term of payment (yrs) No. of EMI EMI loan (Rs.) EMI per km (Rs.) Investment (Rs.) Return rate Term of payment (yrs) No. of EMI EMI investment (Rs.) Equity (Rs. / Km.) Capital Cost (Rs./ Km.) 6,00,000 6,00,000 30% 1,80,000 4,20,000 AMC (per km) 46 2.5 Bus km per day Bus km per month 150 3,300 Other monthly expenses i InsuranceAccident comp. Diesel Salaries Other expenses | 13.5096 7,500 50,600 20,000 1,000 60 9,664 2.93 1,80,000 Annual maintenance contract8,250 12,000 99,350 iTires | 15% Total expenses per month Operating cost (Rs./Km) 30.11 : 4,282 1.3 4.23 Capital cost (Rs. / Km) 4.23 Operating cost (Rs./Km)30.11 I Total Cost (Rs. / Km) 34.34

Table 18 Typical cost for bus operation under gross cost model (Naya Raipur Development Authority 2013)

Figure 94 Distribution of bus operation cost under major heads for every bus kilometre travelled *

Fuel Cost , 15.33 Rs/km, 45% O&M Cost, 8.41 Rs/km, 24% Manpower Cost, 6.37 Rs/km, 19% Capital Cost, 423 Rs/km, 1 2%

The analysis from the above table is summarized in Figure 94. The graph indicates that only 12 percent of the overall cost can be covered through Central funding schemes, including the JnNURM. The agency is required to finance the remaining 88 percent of costs. The distribution indicated is based on 150 km daily average per bus; hence, any increase or decrease of bus operations will impact the percentage distribution of the costs.

Public transport agencies face an imbalance between major operating costs and revenues brought in through farebox and non-farebox methods.

2. Variable and Fixed Costs

​Variable costs are costs that relate to the usage of the vehicle, such as fuel or spare part. Fixed costs, on the other hand, do not depend on the use of the vehicle; rather they include depreciation, insurance and registration (Litman 1999).

Revenue

Revenue is income that an organization receives from its normal business activities, usually from the sale of goods and services to customers. In the case of public transport operations, revenue can be derived from the following sources:

Farebox: includes revenue received on account of sale of tickets, passes, and concession to the passengers i.e. the payment received from passengers for the journey performed is usually termed as farebox revenue.

Non-Farebox: includes revenue from non-ticket sales and may include revenue from advertisement, commercial development, cross subsidy, land value capture, etc. Non-farebox revenue sources play an important role in improving the viability of public transport operations.

Farebox revenue is the most important source of revenue for transportation services, and therefore, user fare is a critical component of transportation services

In a majority of the cases, farebox revenue is the most important source of revenue for transportation services, thereby making user fare a critical component. The following section discusses this component of bus transport operations.

Through central government programmes like the JnNURM scheme, bus procurement was made relatively easier than before. As indicated in the Naya Raipur case study, this makes up a low percentage of overall costs. It is critical that agencies recognize the need to finance the remaining portion consisting of operation and maintenance costs. With the responsibility to operate and manage city bus services, public transport agencies run the risk of excessive financial burden resulting in heavy losses. It is important for agencies to recognise and understand this financial consequence. Table 19 details the costs and revenues of seven Indian public transport services, indicating that each of these seven agencies needs to increase their earnings in order to improve overall financial performance.

Table 19 Cost and earnings for major STUs (Association of State Road Transport Undertakings 2014)

AGENCIES COST REVENUES RS./ KM (2013) VIABILITY GAP Ahmedabad Municipal Transport Service (AMTS) 58.38 26.56 -31.82 The Brihan Mumbai Electric Supply 77.53 53.75 23.78 & Transport Undertaking (BEST) Bangalore Metropolitan Transport Corporation (BMTC)36.99 Chandigarh Transport Undertaking (CTU) Delhi Transport Corporation (DTC) Metro. Transport Corporation (Chennal) Limited. (MTC) 39.76 Navi Mumbai Municipal Transport (NMMT) 35.42 47.55 30.64 120.67 37.57 36.38 39.51 11.57 -16.91 -83.1 -3.38 -6.41 45.92

Minibus Operations in Bhopal Public transport in Bhopal consists of formal and informal sectors: The Bhopal City Link Limited (BCLL) manages the city bus services, the Bus Rapid Transit (BRT) System and the Tata Magic and minibus services that make up the informal sector. The minibus services cater to an average daily ridership of 95,000 passengers, or 30% of the total public transport ridership (World Bank and EMBARQ India 2014). Data collected from minibus operators indicated that the average revenue per minibus is roughly Rs. 3,500, with an average daily ridership of 300-350 passengers per minibus. With an average 180 kms operated per bus per day, this equates to Rs. 19.44 earnings per km. In comparison, the cost components of minibus operations include the capital costs (financing costs), operating costs (permits, salaries, fuel costs, etc.) and maintenance costs (repair and maintenance costs). The two models currently being followed are the owner-operates-vehicle and the owner-rents-vehicle for a fixed fee. The costs vary slightly for these two models, as shown in Table 20 and Table 21.

Table 20 Operating costs under the owner-operates-vehicle model (World Bank and EMBARQ India 2014)

COST RS./ KM 3.13 EMI Maintenance and depreciation0.88 Permit, insurance and taxes Fitness 0.33 0.03 8.8 2.2 0.22 15.6 Fuel Conductor remuneration Miscellaneous Total Cost

Table 21 Operating costs under the owner-rents-vehicle model (World Bank and EMBARQ India 2014)

COST RS. / KM Payment to owner Rs. 800/day)533 Fuel Conductor remuneration Miscellaneous Total Cost -ト 8.8 2.2 0.22 16.5

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