An Account-oriented Approach for the Marginal Cost Based Price Calculation in the Case of the Hungarian State Railways



An Account-oriented Approach for the Marginal Cost Based Price Calculation in the Case of the Hungarian State Railways

Authors

P Ronai, K Tanczos, Budapest University of Technology, HU

Description

Abstract

Cost calculation, its theory and practice has always been an ardently discussed question within the Hungarian State Railways (HSR). Before the political system change an aggregate-cost-approach was used to determine the costs of a single freight shipment.

With the applied co-efficients announced by the Ministry of Transport, the price calculation for the railway company resulted in very strongly diversified prices: transit traffic was invoiced for more time higher prices than inland traffic. Therewith, a very heavy cross-subsidisation was discernible between passenger- and freight transport or, indeed between the several types of freight transport. This lead to a quite ambiguous situation within the railway?s accounting processes. In this case a serious redistribution of the transport demand (starting with the political system change) and as a result of this, a new and undesired modal split for the railways resulted in a desperate decline of railway?s transport activity.

Under these circumstances, the HSR is searching for adequate solutions and pricing policies that can (at least) provide better cost coverage of its activity. On the other hand, the state, as the owner would like to use and profit as much as possible from the existing rail network. The Commission of the EU launched more research projects that encourage the use of marginal costs in the transport sector, and itself provided a wide range of solutions for the scheme, it seemed to be advantageous to examine the marginal-cost methodology. Since for the aim of ?using the existing facilities at the optimal utilisation level? (according to the neo-classical welfare theory) the marginal cost based prices seem to be the most adequate, an elaboration and implementation research has been started in Hungary to give answer to the following questions:

* Is marginal cost calculation really beneficially for the HSR with respect to its special circumstances (relatively small network with important EU-frontier tasks, many crossing TEN corridors, still high modal share compared to EU-countries, etc)?

* What are the most unpleasant constraints and barriers for marginal cost based prices?

* How can the benefits be acquired without all accompanying drawbacks of this pricing scheme? The paper gives an overview of the research activities and results at this field. In the first chapter it introduces the market-structure of the HSR with respect to its specialities as the railway-company for an accession-country (fulfilling the requirements of the EU-directives and bidding the network to some East-European countries, strong effects of the competition of some road-based new shipper companies from the west, etc).

The second chapter gives a short and rough overview of the previous, and partly still existing pricing scheme underlining its specialities (both pros and cons). It works with an after-reckoning way of cost-distribution to each cost-drivers (transport activities).

This is followed by the third chapter, where the general consequences of the marginal-cost theory are examined with looking at the application possibilities. After clarifying the strongest barriers and constraints the principal attributes of the desired new pricing scheme is derived. On this basis the new rules for developing the practical solutions are given. The evaluated practical alternative got the name: ?account-based marginal cost approach?.

Serving the needs of the practical exploitation, firstly the core cost components are defined. This cost components can be nearly directly be addressed to a certain train operation. In the case of non-direct costs the distribution and fitting method is given (how to associate these costs to a train movement, i.e. train number). This calculation is supported by a new-defined database entity: the cost-record. It includes the perfect-, the adherent-, the imposable and the non-direct costs. Since the availability of these components over time is different, the usage of the net present value of each one is needed. These cost-records give the basis for the function-composition which (through derivation) make possible to calculate the marginal cost units.

The usage of the cost-records give a perfectly new viewpoint for the economists within the railway company. Instead of working out distribution methods and operation (as it was the routine previously) the new task is to find the way to associate costs to certain activities. In this manner, the account-based marginal cost approach experiences some similarity with activity based pricing methods.

After accomplishing the accounts (as described above) the return-answer to the market events have to be worked out. This exists to two different market-behaviour: the monopoly and the free competition. Real-world marketplaces of the railway company are interpreted as a ?mixture? of these two excessive cases. The paper gives a graphical introduction to the behaviour of the method under both market conditions.

The reaction (answering method) of the account-based marginal cost approach is determined by a specific price function (instead of using directly the marginal cost rule).

This is a quantic, vectorial function that incorporates some qualitative dependants as well. With the help of the price function, much of the drawbacks of the ?pure? marginal cost approach can be eliminated: price fluctuations, effects of discrete expanding possibilities of the service, equity constraints, non-desired distributional impacts, etc. On the other hand, the introduction of the price function provides some drawbacks as well: the mathematical optimum usage of the existing equipment is not guaranteed, there are inefficiencies in the system, etc. All effects of the account-based marginal cost approach are examined and judged in the paper.

The method is only usable, when it is built into the internal decision-supporting system of the railway company. This is why restructuring the information-flow routes and the system of information usage for decision-making was needed. Since the result is quite sensitive to the proper usage of the price function (this is what the management is to look for), it is essential to fit the decision making and supporting system to the needs of the scheme. The new-designed parts of the management?s activities are shown in the paper.

A new scheme for accounting and decision-supporting can be very complex conditionally on the level of disaggregation of cost drivers. In this case, a medium-depth disaggregation is used, and the launching process is worked out. The results show that a one-year temporary period should be enough to start the system, and further one and a half year is needed to fully replace the old calculation scheme. The planned introduction schedule of the account-based marginal cost approach is indicated in the paper.

The main benefit of the paper might be the demonstration of a new cost calculation scheme which can be used as an alternative for small and medium-size railway companies. There are many specialities of accession countries incorporated both in the method and in the annotation, this can be beneficial for experts focussing on this region.

Furthermore, the paper can help for theoretical economists to proceed with the debate around the usage of marginal costs in the transport sector.

Publisher

Association for European Transport