Armenian Railways: Five Year Business Plan

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4.3.2.3Cross Subsidy
Table 1

4.3.2.2Freight Business

y contrast, the freight business generates positive operating income. In the Base Case scenario, this income increases from about 350 million AMD (US$ 700,000) in 2000 to 900 million AMD (US$ 1.5 million) in 2005. By the end of the period, this is enough to cover about half of the passenger loss.

In the cost reduction scenario, operating income doubles from about 350 million AMD (US$ 700,000) to 2 billion AMD (US$ 3.4 million). Operating expenses for the Transportation CJSC are cut nearly in half, with reductions/downgrading of stations, improved efficiency of freight clerical work and better planning of shunting and train formation work made possible by the investment in the operation management system. That system also improves the utilization of rollingstock, so that the Transportation CJCS needs to buy 16% less service from the Rollingstock CJSC to accomplish the same work. Requirement from Infrastructure are reduced by 7%, through better train planning and the reduction of train-km.

4.3.2.3Cross Subsidy

Review of the passenger and freight results indicates that the freight business makes a substantial cross-subsidy to the passenger business. Cost reduction is necessary if the freight business is to ever have any prospect of covering the passenger loss. But even if freight could cover passenger losses, strong economic reasons argue that it should not.

The need to cover passenger losses keeps freight rates higher than they need to be and impairs the railway’s ability to compete. In some markets, the railway could lower its prices and attract traffic away from motor carriers or increase the amounts Armenian producers are able to sell.

The need to cover passenger losses uses funds that could be used to maintain or replace assets of the railway. Armenian Railways is operating in near crisis mode, spending very little on materials and making only modest renewals to old equipment. The railway needs to make enough income to eventually support replacing the assets it needs.

The Government of Armenia needs to consider these issues. Over time, it needs to either pay for the losses of the passenger business or allow and encourage the railway to exit the passenger business.

Table 1

Base Case: Infrastructure CJSC, Income Statement, (AMD Millions)

	Actual	Projected
	1999	2000	2001	2002	2003	2004	2005

Key Operating Statistics
Gross Tonne-km, system-wide (000,000)	853	882	914	945	984

	Infrastructure Unit Employment	1,817	1,809	1,822	1,832	1,842	1,852	1,864


Operating Revenue
Freight operators - infrastructure use fee		928	999	1,066	1,146	1,242	1,338
Passenger operators - Infrastructure use fee		699	718	740	756	764	783
Total operating revenue	1,591	1,626	1,717	1,806	1,903	2,006	2,120

Operating Expenses
Salary	423	436	456	476	498	521	546
Pension & health benefits [social insurance]	124	122	128	133	139	146	153
Materials	387	378	386	391	397	404	411
Fuel	54	110	112	113	113	114	115
Electrical power supply	77	79	81	83	86	88	91
Depreciation	362	216	224	233	242	252	262
Other operating expense	142	146	151	157	163	170	176
Bad Debt	0	0	0	0	0	0	0
Total operating expenses	1,568	1,486	1,536	1,586	1,639	1,695	1,755

Operating Income	23	141	181	220	264	311	365

Other Income and Expense

Auxiliary activities*	484	506	530	554	584	617	653
Gain (loss) on disposal of fixed assets	0	0	0	0	0	0	0

Interest Expense	0	0	41	127	215	263	266

Income Before Income Tax	507	647	669	647	633	665	752

Income tax	60	161	167	161	157	165	187

Net Income	447	486	503	486	475	499	565

Financial Ratios
Working ratio including depreciation	99%	91%	89%	88%	86%	85%	83%
Working ratio excluding depreciation	76%	78%	76%	75%	73%	72%	70%

* Auxiliary activities are primarily resale and distribution of electric power.

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