Concerning the Principles of Formation of Railway Transportation Tariff Policy

P. Tsagareishvili, Candidate of technical sciences

World practice of price formation knows two methods of price fixation. The fist one is based on the principle when the seller (railway), based on the demand existing market, fixes prices for its own product (transportation). The other method is founded on determination of medium cost price, with addition of a certain norm of profit necessary for development.

The first method is widely used in the counties with market economy. The other one is characteristic of the planned economy. Combination of these two methods is possible, when, taking into consideration the cost price, the minimum limit of orientation tariff is fixed, but the profit rate is regulated in accordance with the market.
In the opinion of European experts, presently an excessive attention is paid to the development of supply instruments, or perfection of power transfer capacity of railway transport and other technical parameters, on which most part of the attracted investments is ineffectively used.
They believe that it is necessary to pay attention to the instrument of demand regulation, including the tariff policy, PR, development of additional services, etc, that is to regulation of the demand. In accordance with this approach, it is necessary to find a corresponding balance between regulation of the demand and the strategies of supply formation.
In the process of railway transportation tariff policy formation it is necessary to take into account the essential circumstance that the railway represents one of the links of the single transport and technological chain. Proceeding from this, railway transportation tariff policy should be combined with tariff policy of other modes of transport.
The objective of perfection of railway transportation tariff policy is establishing of balance of interests of the state, consumers (freight owners), and railway transport as an enterprise.
One of the most effective instruments of regulation of balance of interests of these groups is the railway transport tariff policy since fulfillment of practically all the above-mentioned requirements is somehow related to it.
Achieving of maximum economic growth is possible only with balancing of interests of the three above-mentioned parties – the state, freight owner, and railway transport, and proceeding from this, urgency of a serious approach to the issues of forming optimum tariff policy is beyond doubt, and is a priority of state importance.
Georgian railway transportation market. The developed countries render assistance to the Georgian national economy with the purpose of transferring to western standards and integration into the world economic space.
This assistance is not only of material and financial character, but of organizational and technical one as well, and in the process of this assistance the developed European countries and foreign experts give recommendation on institutional organization of the Georgian railway.
In spite of the fact that most of these recommendations are undoubtedly effective for the railway sector, applying of some of them may have an inverse effect without taking into account the country’s scale factor.
The main merit of the market economy is its ability for self-regulation, which is revealed only in conditions of competitive market environment, on which a separate entrepreneur (carrier) cannot seriously influence the processes taking place on the market. Proceeding from this, individual attempts of each of them to increase transportation price because of customers’ applying to other companies will entail a loss of profits by them.
Taking into account the above-stated, the state policy should be spearheaded at limitation of state regulation, liberalization of the market, and increasing of freedom quality of the railway as a business subject. Most of foreign specialists’ recommendations are of this character.
The volume of the united transport market in western European countries provides for formation of a competitive environment. Correspondingly, the tariff policy conducted in these countries by the state is based on free price formation by separate companies, with minimum interference of the state in this process.
Unlike this approach, in conditions of a monopolized market occupied by one or two monopolist companies (only one company operates in Georgia), competition is weak or does not exist at all. This gives this company an opportunity to dictate its terms to the market, obtain super profits instead of profits by means of monopolistic prices, and decrease the quality of services and safety of consumers.
In its turn, this circumstance will entail reduction of number of consumers. That is why on a monopolized market it is necessary to block this kind of tendencies on the part of monopolists, and corresponding bodies that protect the interests of the state have a possibility of doing it.
Proceeding from the above-stated, the state’s policy being conducted on the monopolized states requires intensification of regulation so that the applied tariffs:
– would give sufficient budget revenue to the state, and a possibility of meeting its other interests;
– would supply necessary goods (services) to the customers at the price of socially necessary expenditures;
– would give necessary financial means to the railway sector for investment in the development program.
Taking into account the scale of Georgia and the level of its economic development, the volume of any market existing here is small and is much smaller than the volume of markets of the western European countries whose management models we were offered.
This means that Georgian railway, as a complex transport system of a small country, represents a natural monopoly, and that growth of competition on the domestic market of railway transportation is not expected in the nearest future. That is why the railway must be a structure regulated by the state, in whose functions the internal and international (export, import, transit) transportation tariffs are strictly determined.
As to the Georgian market of service of international railway transportation, here fulfillment of the country’s transit functions and high competitive ability depend on the capabilities of the main national carrier – Ltd. “Georgian Railway”. Enlargement and strengthening (but not differentiation) of the national railway company is necessary for better fulfillment of this transit functions.
In general, freight transportation tariff should be formed be means of optimum combination of two approaches:
Ï% compensation of expenditures or full covering of transportation’s cost price, and
Ï% marketing, based on market competition and solvency of a consumer.
At the same time, in conditions of changing state of market economy the tariff policy should be flexible. As a rule, minimum tariff should start from the cost price plus minimum rate of profit (approximately 5-7%). Its upper limit should be determined by the state of the market, in particular by such factors like solvency of the freight proprietor, the price of the produce, competitive prices, investment necessity, etc.
The strategy of tariff policy perfection. The tariff policy to be conducted in Georgia should envisage the main guiding line of railway sector’s development. The existing order of fixing the tariff rate is liable to changing, in particular, the current system of single tariffs, that includes the costs of using the railway infrastructure and the very transportation process, should be rejected. Instead, it is purposeful:
Ï% to establish the system of rates for using the railway infrastructure, which will not depend on freight type and service parameters. Its amount should depend on the factor determining the cost price of the infrastructure’s maintenance, its technical equipment, intensity of transportations carried out by it, type of the rolling-stock, and transportation speed. At the same time it should be different for the trunk-railway and side-lines, and take into account the state as the main proprietor of the fixed capital, rate of profit, and financing of the railway development program.
Ï% The tariff should be fixed taking into account the rolling-stock, the rate of its utilization, transportation distance, consignment volume, and other factors.
Ï% There should be elaborated the system of extra service tariffs which implies securing, heating/air conditioning, information, insurance, etc.
The total transportation tariff is fixed as a sum of the three above-mentioned elements the number of components of which exactly corresponds to the structure of a concrete consumer’s requirements.
Besides, the objective of the tariff policy in the sphere of railway transportation should be elaboration of such guiding lines which will contribute to maximum growth of the state’s economic parameters, and not that of corporate or narrow departmental ones.
The principles of tariff policy formation. Practical elaboration of the tariff policy is related to fulfillment of a difficult optimization task. A lot of factors as well as different priority interests of several subjects should by envisaged in it.
Taking into account the above-mentioned services, the tariff policy implemented in the railway transportation sphere should be spearheaded at accomplishing three main tasks:
1. Transparency of railway tariffs, and essential economic growth of its components, which implies singling out of the cost of infrastructure, transportation, and extra services in the total tariffs.
2. Paying attention not to increasing of revenues but to reduction of nonproductive expenditures, including singling out of activities uncharacteristic of the railway in the form of independent business structures.
3. Orientation for the profit rate included in the tariffs, or administration of profitability rate.
Efficient solution of the first task can be achieved by creation of transparent social atmosphere necessary for the market economy, and will be implemented by means of antimonopoly instruments.
Optimal solution of the second task will, on the one hand, create preconditions for reduction of the general rate of tariffs. It will become a stimulative factor for the national economy in view of reduction of transport components in its other brunches (on the internal market). At the same time, the country’s foreign trade balance will be improved as a result of attraction of freight flow from alternative corridors.
On the other hand, reduction of the railway’s nonproductive expenditures will contribute to management improvement, and will make its effectiveness commensurable with the effectiveness of other countries’ railway systems.
Solution of the third task will provide for increasing of the railway’s competitive ability and effectiveness of utilization of investments.
Regulation of the tariff policy. In the sphere of railway transport tariff policy regulation two main financial instruments are singled out – reduction of the cost price (%) for different freights, and the ways of establishing an average profit rate (%);
At the same time, reduction of cost price is related to:
– structural analysis of the current and future expenditures;
– exact forecasting of future period’s traffic;
– introduction of new technologies;
– revelation of reserves and reduction of unproductive expenditures.
Proceeding from this, determination of an optimal level of cost price reduction is a complex optimization task. Presently, not only complexity of this task but even its necessity is not fully realized in the sector management process.
From its part, the profit rate determines final actual tariff amount, and, on one hand, provides for profitable work, and on the other – competitive ability of railway transportation, as well as increasing of freight flow volume.
It is noteworthy that at underutilized sections of the railway infrastructure (side-lines), where stoppage of railway traffic is inadmissible for social, economic, political or other reasons, tariff formation is possible without profits, and sometimes work at a loss is possible, in order to avoid bigger losses by means of reduction of transportation volume.
In case of rendering services to national economy subjects on the internal market, if they are located on this kind of side-lines, it is desirable to determine the tariffs separately for the trunk-railway and the side-lines.
The following factors should be taken into account: tariff policy implemented by competitors, totality of the market condition and own technical capabilities, volume of demand for transportation of some freight, own corporate (increasing of profits, utilization of production facilities, departmental (payments to the budget), ecological, and traffic safety requirements, ranking of national priorities (implementation of the country’s transit function, strategic military and economic security, political relations with neighboring countries, etc.), etc.
Proceeding from the above-stated, we can conclude that, in view of a large number of factors that should be taken into account, optimization of the railway transportation tariff policy is impossible without corresponding mathematical simulation and taking into consideration these models and the parameters of the national economy. This kind of simulation must be used in the process of formation of the railway’s tariff policy.
Complexity of information acquisition and currently existing qualification level existing in the sector do not give us an opportunity of full optimization of tariff policy using the digital simulation. That is why, at the first stage of solving of this kind of tasks it is possible to use empirical methods of tariff formation which provide for consecutive approaching to an optimal decision.
Scientific-and-technical provision of tariff policy. The analysis of the mentioned approaches verifies what kind of complex and responsible sphere the formation of national policy belongs to, and in particular to one of its most important components – the task of elaboration of railway transportation tariff policy. Its solving only at the level of intuition and personal experience should be considered as anachronism.
Achieving is quite possible by means of the management that has capabilities for market relations, economic analysis, modern forecasting methods, mathematical simulation, foreseeing thousands of factors, and choosing an optimal variant among other alternative variants, which actually requires enabling of highly professional and specialized scientific potential.