RA6997498 Batmyagmar Myagmar

National Cheng Kung University
Institute of International Management

Masters Thesis

An Alternative Pricing Framework for the
Mongolian Rail Network

Student: Batmyagmar Myagmar
RA6997498

Advisor: Alan J. Webb

June, 2012

I
ACKNOWLEDGEMENTS

Sincere thanks and appreciation go to my advisor Professor Alan J . Webb for his
guidance, patience and help during the process of this thesis. I would also like to
thank my committee members Professor Kevin P. Hwang and Professor Shao-Chi
Chang for their insight and critics that helped me gain a fuller understanding and
guide me on the correct path. To Odonchimeg Myagmarsuren for your great support
and friendship during this amazing experience in Taiwan, As well as great help during
the application for this scholarship. I would like to thank Delgersaikhan Nyamjav
economist of Authority of Mongolian Railway for providing such vital information
for this thesis. At the same time, I would like to express my sincere thanks to all the
professors in the IMBA program, other departments and IMBA office staffs especially
Elsa Yang. Extreme thanks also go to my classmates and friends who were always
glad to help me. Without their assistance this work would not have been completed.
The warm hospitality and support of the IMBA program as well as all the support by
the Institute of International Management and National Cheng Kung University is
deeply appreciated.
Last but not least, I would like to express my sincere gratitude to my family
and my wife Oyuntulkhuur Oyun-Ukhaan who always gave me boundless love and
understood me without demanding anything in return. Thank you for the happiness
and support you gave to my life.

II

ABSTRACT
Keywords: Railway reform, Infrastructure vertical separation, Infrastructure
charging price.
This study examines the result of infrastructure vertical separation in Mongolian
railway. Mongolian railway started railway reform it include a lot of steps with the
aim of increase railway capacity and performance. One main step is to implement
infrastructure vertical separation and to find out optimal Infrastructure charging price.
We used secondary data from Ulaabaatar Railway and Authority of Mongolian
railway from 2005 to 2011. In order to see the infrastructure vertical separation result
we have chosen possible infrastructure charging price then forecasted necessarily
variable until 2014 after that formulated LP model.
The results of this study suggest that, infrastructure vertical separation can
increase the Mongolian railway capacity with less government cost compared with
direct investment to UBR. Beginning of study we considered suitable infrastructure
charging price important for private investment. The results also suggest that
obligation level from government is another technique to promote private company
investment in Mongolian case.

III
TABLE OF CONTENTS
ACKNOWLEDGEMENTS ........................................................................................... I
ABSTRACT .................................................................................................................. II
TABLE OF CONTENTS ............................................................................................. III
LIST OF TABLES ........................................................................................................ V
LIST OF FIGURES ................................................................................................... VII
CHAPTER ONE INTRODUCTION ............................................................................. 8
1.1 Research Background. ..................................................................................... 8
1.1.1 General Condition of Economic and Transport of Mongolia. .............. 8
1.1.2 Mongolian Railway. ............................................................................. 11
1.1.3 Starting Rail Sector Reform. ............................................................... 13
1.1.4 Some Result of Reform. ....................................................................... 14
1.2 Research Objectives. ...................................................................................... 16
1.3 Research Contribution. .................................................................................. 17
CHAPTER TWO LITERATURE REVIEW ............................................................... 18
2.1 Railway Reform and Vertical Separation. ...................................................... 18
2.2 Infrastructure Separation for Mongolian Railway. ........................................ 21
2.3 Railway Infrastructure Charging Price Related Literatures. .......................... 23
2.4 Alternative Infrastructure Charging Price for Mongolian Railway. ............... 28
2.5 Influencing Variables of the result. ................................................................ 31
CHAPTER THREE RESEARCH DESIGN AND METHODOLOGY ...................... 33
3.1 Introduction. ................................................................................................... 33
3.2 Mathematical Development of the Conceptual Framework. ......................... 35
3.3 Research Question. ........................................................................................ 40
3.4 Data Collection. ............................................................................................. 41

IV
CHAPTER FOUR ........................................................................................................ 42
DATA ANALYSIS ...................................................................................................... 42
4.1 Introduction. ................................................................................................... 42
4.2 Data Collection. ............................................................................................. 42
4.2.1 Transported Production Data .............................................................. 42
4.2.2 UBR Cost Statement Data ................................................................... 47
4.2.3 Pricing Data Collection. ..................................................................... 48
4.3 Forecasting ..................................................................................................... 50
4.3.1 Moving Average ................................................................................... 52
4.3.2 Weighted Moving Average ................................................................... 53
4.3.3 Exponential Smoothing ........................................................................ 54
4.3.4 Least Squares Method ...................................................................... 56
4.4 Linear Programming ...................................................................................... 59
4.4.1 Linear Programming variables and constraints ................................. 59
4.4.2 Linear Programming in First Case ..................................................... 60
4.4.3 Linear Programming in Second Case ................................................. 64
CHAPTER FIVE ......................................................................................................... 69
CONCLUSIONS.......................................................................................................... 69
5.1 Conclusions and discussion. .......................................................................... 69
5.2 Limitation of Study and Future Work ............................................................ 73
REFERENCES ............................................................................................................ 74
APPENDICES ............................................................................................................. 76
Appendix 1: .......................................................................................................... 76
Appendix 2: .......................................................................................................... 78

V
LIST OF TABLES
Table 1-1 Mongolian Industrial Output ......................................................................... 9
Table 1-2 Mongolian Freight Transport ...................................................................... 10
Table 2-1 Freight European Union Model Share (%, in tons.km) .............................. 18
Table 2-2 UBR Investment from Mongolia .................................................................. 21
Table 2-3 UBR Rolling Stock Age ................................................................................ 22
Table 2-4 Current Practice of Infrastructure Charging Price in European Union .... 28
Table 2-5 Main Track/km Cost of Infrastructure Maintenance and Renewal ............. 30
Table 4-1(a) Freight production data of UBR ............................................................. 44
Table 4-1(b) Freight production data of UBR by Percentage ..................................... 45
Table 4-2 Production data of UBR .............................................................................. 46
Table 4-3 Refined Cost Statement Data of UBR .......................................................... 47
Table 4-4 Cost of per ton km transport service. .......................................................... 48
Table 4-5 Cost of per ton km Transport Services. ....................................................... 48
Table 4-6 Price List of All Production ......................................................................... 49
Table 4-7 Price Calculation of Imported Product from China .................................. 50
Table 4-8 Production Data for Forecasting ............................................................... 51
Table 4-9 Next Year Forecasting Results of MA Method ........................................... 53
Table 4-10 Next Year Forecasting Results of WMA Method ...................................... 54
Table 4-11 (a) Next Year Forecasting Results of ES Method =0.8 .......................... 55
Table 4-11(b) Next Year Forecasting Results of ES Method =0.5 ........................... 56
Table 4-12 Next Year Forecasting Results of LS Method ........................................... 57

VI
Table 4-13 Forecasting Results in 2014 ..................................................................... 58
Table 4-14 LP variables.............................................................................................. 59
Table 4-15 First case LP constraints .......................................................................... 61
Table 4-16 First Case LP Production mix of UBR ..................................................... 62
Table 4-17 Second Case LP Constraints .................................................................... 65
Table 4-18 Second Case LP Production mix of UBR and Demand of Private
Operators ................................................................................................. 66
Table 4-19 Private Operator companies LP Constraints for Production Mix .......... 67
Table 4-20 Second case LP Optimal Transportation Service Mix of Private Operator
Companies................................................................................................ 67
Table 5-1 Profit level of railway service (Revenue-Variable Cost) ............................ 71

VII
LIST OF FIGURES
Figure 1-1. Mongolian gross domestic product ............................................................. 9
Figure 1-2. Mongolian industrial output ..................................................................... 10
Figure 1-3. Mongolian freight transport ...................................................................... 11
Figure 1-4. Mongolian railway lines (2010) ................................................................ 12
Figure 1-5. Mongolian railway structure change ........................................................ 13
Figure 2-1. Railway infrastructure full cost ................................................................ 26
Figure 2-2. International main track/km cost of infrastructure maintenance and
renewal ..................................................................................................... 30
Figure 3-1. Conceptual model ..................................................................................... 35
Figure 5-1. Profit level of UBR .................................................................................. 72

8

CHAPTER ONE
INTRODUCTION
1.1 Research Background.
The goal of this research is to investigate influence of partly vertical separation in
Ulaanbaatar Railway (UBR) J oint Venture Company using infrastructure charging
price for private operator transportation companies. This has been pushed by different
factors such as Mongolian economic growth, declining railway transport modal share,
international new trend to develop railway sector, attempts of railway sector reform of
Mongolia and the need to attract investment by private investors.
1.1.1 General Condition of Economic and Transport of Mongolia.
Mongolia is in a period of rapid economic growth driven by expansion of its
mining industry. Mongolia is developing country with an average real GDP growth
rate 4.89 percent during the 10 years from 1999 until in 2009. But, GDP growth
accelerated to an unprecedented 17.3 percent in 2011 from 6.4 percent in 2010 and the
unemployment rate fell from 13 percent in 2010 to 9 percent in 2011 (see Figure 1-1).
Nowadays, Mongolian economic condition is better trend to year by year base on
industrial sector expansion.
Table 1-1 shows mining and industrial output over the last 6 years. Although
mining output increased by more than 20% over the period, industrial output has
increased at an even faster pace from 1475 tug in 2005 to 2057 tug in 2011an
increase of nearly 40 percent.

9

Figure 1-1. Mongolian gross domestic product
Source: Adopted from the trade economics web page of World Bank (2010)
Table 1-1
Mongolian Industrial Output

2005 2006 2007 2008 2009 2010 2011
Percent of Mining
and quarrying
66.30 64.09 58.31 56.83 58.57 58.65 58.53
Mining and
quarrying bil.tug
978.3 1033.2 1034.2 1036.2 998.6 1099.4 1203.9
Total Gross
Industrial output
bil.tug
1475.5 1612.0 1773.6 1823.4 1704.9 1874.6 2056.8
Source: Mongolian statistical yearbook (2008, 2011)
Mongolian Industrial sector output continuously growing during the recent years
and mining is account for 60% of the total. Table 1-2 shows the total freight tonnage
shipped by all forms of transport and the component shipped by rail. The total
tonnage shipped has almost doubled over the 6 year period starting in 2005 but rail
shipments have increased less than 20%. This is an indication that a growing portion
of mining output is being shipped by trucka more expensive mode of transportation
compared to rail. Rail transport is increasingly becoming a bottleneck to Mongolias
economic development.

10

Figure 1-2. Mongolian industrial output
Table 1-2
Mongolian Freight Transport
2005 2006 2007 2008 2009 2010 2011
Railway freight
transport rate %
65.8 61.7 60.4 61.3 57.3 57.1 41.7
Rail freight mil.tn
15.59 14.78 14.07 14.65 14.17 16.80 18.33
Total freight mil.tn 23.67 23.97 23.28 23.90 24.74 29.42 43.97
Mongolian Transportation demands increased dramatically last year (in 2011)
almost 14 million ton, or a 50% percent increase because of booming coal transport
from Mongolia to China see Table1-2 and Figure1-3. In near future coal exploration
will increase more because four coal mining companies (Little Tavan Tolgoi, Ukhaa
khudag, Gashuun sukhait, Shivee khuren) are extending their operation in order to
meet China coal demand.
0.0
500.0
1000.0
1500.0
2000.0
2500.0
2005 2006 2007 2008 2009 2010 2011
Gross Industrial Output
Mining and quarrying bil.tug Total Gross Industrial output bil.tug

11

Figure 1-3. Mongolian freight transport
Although rail transport is environmentally safety and fuel efficient sector of
transport, the modal share is still declining in recent years. We can see railway
transport modal share of total transport from Table 1-2. For a land-locked expanding
mining based economy, this can be a major impediment to development. We will
consider about main reason for declining rail performance next section.
1.1.2 Mongolian Railway.
Ulaanbaatar railway (UBR) was established in 1949 as a joint venture between
the Soviet Union and Mongolia with each owning 50 percent. UBR railways primary
reason to build was to support thermal electric power stations by connecting them
with domestic coal producers. The second reason was to build a land bridge
connection between Europe and Asia which is shorter by around 1000 km compared
with the older Manchuria rail line to Beijing. In 2007, all Mongolian rail lines belong
to UBR which includes the Trans-Mongolian 1110 km long trunk line which runs
between Russia and China through Ulaanbaatar- capital city of Mongolia.
0.00
10.00
20.00
30.00
40.00
50.00
2005 2006 2007 2008 2009 2010 2011
Freigth Transportation

12

Figure 1-4. Mongolian railway lines (2010)

Mongolian Government consider about problems of UBR encountered as
follows:
Not competitive -UBR is only one Mongolian Mongolian-Russian joint stock
company until 2007.
Not independent -UBR is not a profitable company. It is provided subsidy by
Mongolian Government.
Lack of investment -From dissolution of the Soviet Union in 1989 to 2009, the
Russians never invested in UBR while Mongolian part invested around 130 million
USD. During this period from 1989, there has been no purchase of new rolling stocks
except two locomotive (DASH7 series from USA) and 16 passenger wagons from
China. It means all rolling stock and locomotives are aged at least 20 years and they
need a lot of maintenance and also are not enough safety. The normal lifetime for
rolling stock is about 20 years. Without a restructuring of the ownership, Mongolian
railway faces investment bottleneck.

13

Until in 2007
After 2007
Ulaanbaatar railway (UBR)
50% Mongolian Gov
50% Russia owned

Railway Authority of Mongolia
UBR

50% Mongolian Gov
50% Russia owned

Mongolia railway

51% Mongolian Gov
49% Public owned

Private railway
companies

100% Private

R
e
f
o
r
m

Figure 1-5. Mongolian railway structure change

1.1.3 Starting Rail Sector Reform.
In order to solve the problems and improve Mongolian railway sector
performance, the Government of Mongolia (GOM) and other sources have created
numerous strategies to improve the transport sector. The GOM started Rail sector
reform after new legislation was launched in 2007 to establish the Railway Authority
of Mongolia and rearranged new structure of Mongolian railway sector see Figure1-5.
Railway reform is any significant change in government policy, investment strategy,
or management structure that seeks to improve railway performance. Railways are
complex institutions with multiple measures for performance- costs, transport charges,
service levels, and investment needs, among other factors (World Bank, 2011).

14

As defined by Mongolian government, reform goals include the following:
Reduce government expenditures and liabilities associated with providing railway
services
Improve railway financial performance and sustainability
Attract private capital to the rail sector to alleviate government investment
requirements
Eliminate transport capacity constraints to economic growth
Increase customer responsiveness and improve services, including efficiency gains
so transport charges can be reduced
Adopt requirements to increase competition, provide access to strategic national
infrastructure, or introduce new rail transport laws and regulations
1.1.4 Some Result of Reform.
New Private and State railway companies were established and they are
beginning to resolve the lack of investment problem. However, these companies are
making investments in the railway industry such as constructing new branch railroad
and buying new rolling stocks expecting to cooperate with UBR. That case carrying
freight and turnover of rail transport did not increase simultaneously with private
investment. UBR has been renting some rolling stock from these private interests but
the two sides have not been able to settle on an optimum renting price until now.
There is bottleneck situation in Mongolia. Transportation demand is still rising but
UBR, the only operator and owner of main line, cannot increase their rolling stock
capacity because of lack of investment. However, other railway companies
investment (which is primarily in rolling stock) -has been increasing during the last
years but these companies have not been able to find an efficient and economic mode
of cooperation with each other and with UBR. Mongolian rail freight shipping has

15

been declining in spite of a rapid increase in economic growth for the country. After
the 2007 reform conditions seemed to improve a little and the rate of decline
decreased but still rail freight growth is far behind the economic growth of the
country. For a country whose economy depends on a rapidly expanding mining
industry, rail freight is a major impediment to the countrys economic growth if
Mongolia cannot solve the problems faced by the Mongolian railway sector.
Why infrastructure charge pricing is the one of the solutions?
Until 2010 Mongolian private rolling stock owners increased their purchase of
the number of rolling stocks. For example one of the private companies had over 1000
freight car and 8 locomotives. If the Railway Authority and UBR give them chance to
use the rail network infrastructure and just transport as an operator company, they
have potential to provide transportation services. Most other countries with modern
rail networks use a pricing model that allows separated infrastructure owner and
rolling stock owner in order to encourage private investment. If Mongolia were to start
vertical pricing separation for Mongolian Railways, UBR would have to separate
infrastructure charges that could be paid by operator companies.
This research tries to help in the Authority of Railway of Mongolia how to
influence partly vertical separation of UBR using infrastructure charging price for
private operator companies. We compare the two way of railway sector which with
partly vertical separation and without separation. Railway performance have
demonstrated and measured by variety of factors. This research focuses on net
revenue of infrastructure owner and volume of transported product.
However, many of political, geographic and economic factors influence in
railway sector. We will consider only structure changing aspects of the issue.

16

1.2 Research Objectives.
This thesis first gives an overview about the railway reform, separating
infrastructure charger from rolling stock and other equipments usage charges. It will
include a review of Mongolian transport market trends. Infrastructure charging price
application of Mongolian railway sector can improve their performance compared to
without separation trend. Cases featuring such as private railway companies
improvement in condition of separated structure of railway sector would present them
long term safety business environment. This information should provide the
government of Mongolia as well as the Authority of Railway officials with first hand
investment decisions information on railway sector.
The importance of the study is to develop research that studies the separation of
infrastructure charges with the alternative of continuing to charge customers based on
a package of services that includes infrastructure access, rolling stock rental and
charges combined. So far no research projects could be obtained that focus in the
infrastructure charging price. But other countries have plenty of studies to
investigating and calculating result of vertical separation and infrastructure charging
price.
This research will show the influence of implement partly vertical separation
using infrastructure charging price for Mongolian railway freight transport. The
research objectives of this study are examined as following:
To identify alternative infrastructure charging price
To forecast and freight production demand
To investigate infrastructure and rolling stock capacity of UBR
To formulate linear programming model
To compare result of linear programming

17

Based on the foundation of these objectives, the research result can provide
information to suggest whether implementing a partly vertical separation of
infrastructure charging price in Mongolian railway is a viable economic alternative.
1.3 Research Contribution.
Identification of research objectives -> Collection and review of relevant
literature ->Development of research model -> Data analysis ->Conclusion and
Suggestions.

18

CHAPTER TWO
LITERATURE REVIEW
2.1 Railway Reform and Vertical Separation.
At the end of the 1990s, Railroads were confronted in Europe with the
continuous decline of their modal share for passenger transport as well as goods
transport despite high levels of subsidies from central governments that could reach
close to 50% of the operational costs (Nash & Toner, 1998). It means railroad
transport share for both of passenger and freight was declining compared with other
transportation modes.
Table 2-1
Freight European Union Model Share (%, in tons.km)

Car Rail Inland waterways Pipelines
1970 48.6 31.7 12.3 7.4
1980 57.4 24.9 9.8 7.9
1990 67.5 18.9 8.3 5.3
1994 71.7 14.9 7.7 5.6
Source: Bouf, Crozet, Guihery, and Peguy (1999)
In a strong European competitive environment of among transport modes,
railways continue to loose market shares as opposed to road transport. This trend
affects both passengers and freight. European Union began a Railway reform program
in order to improve railway performance. Railway reform is any significant change in

19

government policy, investment strategy, or management structure that seeks to
improve railway performance. Railways are complex institutions with multiple
measures for performance- costs, transport charges, service levels, and investment
needs, among other factors. In the past, most interested parties sought industry
improvements that would reduce government subsidies, introduce competition,
improve capacity and reliability, and increase responsiveness to user needs to expand
the client base (World Bank, 2011).
Every country has their special circumstances. In addition there is a question
what reform of the railway institution is likely to increase the efficiency of railways?
Facing the different types of reforms chosen, it appears that a key objective of
government was to search for a better effectiveness of railway operator.
A railway can be divided into one or more entities that own and manage railway
infrastructure and one or more entities that operate train operating companies offering
transport services. Countries that pursued vertical separation are hoping that
separation will bring greater competition in rail service that will generate greater use
and revenue for the railway network (World Bank, 2011). Railway vertical separation
is an essential concern of the railway reform because key issue is competition induces
efficiency improvement. Researchers have studied and discussed ways to achieve this
during the last 20 years.
Rivera-Trujillo (2004) concluded that, if vertical separation is necessary for
introducing competition, it may increase efficiency indirectly.
But actual implementation studies in The United States: Bitzan (2003)
demonstrated that vertical separation of infrastructure from operations increases costs.
He also showed that having more than one operator increases costs since railroads are
- natural monopolies over their own networks (because of economies of density).
Ivaldi and Cullough (2004) found both vertical and horizontal economies of scope in

20

railways. Consequently, separating rail freight operations from infrastructure led to a a
20-40% loss of technical efficiency and an additional 70% loss of operational
efficiency if there were more than one rail transport operator.
Research in the European Union: In the European Union, research on the
advantages and disadvantages of vertical separation is also not convincing either way.
This is partly because few countries had until recently carried out vertical separation.
Also there are difficulties with obtaining comparable data, with measuring the extent
of reform and with isolating the impact of vertical separation from that of other
factors. Rivera-Trujillo (2004) analyzed European data and found that competition
increases efficiency but that vertical separation reduces it. However, if vertical
separation is necessary for introducing competition, he concluded that its overall
effect may be to increase efficiency. Merkert, Smith, and Nash (2010) found that
vertical separation did not have significant effect on technical efficiency although it
had a negative effect on allocated efficiency.
Some countries just started reform in that circumstances might be not possible to
draw any conclusions on the benefits of separation. Also, researchers have not
considered the key issue of whether vertical separation increases competition and if
so, whether this leads to faster growth in rail traffic and market share. Academic
literature provides no evidence that vertical separation leads to efficiency gains
although one study indicates that, if vertical separation is necessary for introducing
competition, it may increase efficiency indirectly (Drew & Nash, 2011).
Finally, railway vertical separation introduces competition directly or indirectly
and provides access new operator company in railway sector whether or not technical
efficiency and operational efficiency. In Mongolian railway case, attracting new
comers in railway sector is a key objective of railway reform.

21

2.2 Infrastructure Separation for Mongolian Railway.
Mongolian transport demand is growing dramatically last years as a result of
growing mining industry investment. UBR is only one Railway Company until 2007.
Lack of investment for UBR is one of main reasons to declining railway performance.
The 1949 restricted agreement between Soviet Union and Republic of Mongolia for
UBR is still valid until today in spite of intensive effort of Mongolia to renew it over
last 10 years. This old agreement influence badly UBR performance and prevents
future develop.
Table 2-2
UBR Investment from Mongolia
Mongolian investment to UBR 1986-2009
Investment sources
Implemented
year Amount
Mongolian Government Investment loan of WB 1999-2009 USD 8 456 234
Mongolian Government Investment loan of J apan 2000-2005 USD 73 220 278
Mongolian Government Investment assistance of
J apan 1994-2004 USD 40 633 138
Mongolian Government Investment loan of Russia 1986-1990 USD 8 996 200
Total investment
1986-2009 USD 131 305 850
Source: Mongolian Authority of Railway speech
For example Mongolian part invested over 130 million USD to UBR last 20 years
with the purpose of support UBR execution meet with transportation market demand
but company share still 50 percent respectively Russia and Mongolia.
In near future UBR will face cumbersome investment needs because over 60
percent of UBR rolling stocks technical age finished and even the current stock of
UBR rolling stock is not sufficient to market demand. In addition over 1000 freight
cars and 11 locomotives owned by private and state owned companies rent to UBR in
2011. But in long term, private companies are not willing to add their rolling stock

22

numbers because of renting process seems temporary. They need long term
cooperation improvement due to difficulty for entry in the railway sector. Mongolian
Government is trying to provide them new circumstance which partly vertical
separation. Mongolian Government chose the potential modern way which encourages
private companies and provides them the opportunity instead of direct investment in
UBR rolling stocks. That partly vertical separation is the way to use fully
infrastructure of UBR because professionals told its capacity is around 20 million
tones production a year. The 2011 actual situation of shipped product of UBR has
never been in excess 15million tone each year because low demand and lack of rolling
stocks except recent years increasing demand. If private company start to operate
their transport using their rolling stocks as an operator company on the infrastructure
of UBR they should pay infrastructure using cost to UBR. In that case we have
questions which pricing is possible for them? How to calculate UBR infrastructure
tariff?
It is clear infrastructure separation is a lower cost alternative for Mongolian
Government compared with direct investment to Ulaanbaatar Railway. If Mongolian
Government has to subsidize rolling stock owner it would be cheaper than direct
investment.
Table 2-3
UBR Rolling Stock Age
UBR ages of Locomotives
Age Number Percentage Over aged percent
Over 20 years 80 64 64
From 11 to 20 years 15 12
Until 10 30 24
Total 125 100 64

23

UBR ages of railway cars
Age Number Percentage Over aged percent
Over 31 years 704 26.6 61.7
From 21 to 30 years 928 35.1
From 11 to 20 years 829 31.3
Until 10 184 7.0
Total 2645 100 61.7
Source: UBR statement (2009)
2.3 Railway Infrastructure Charging Price Related Literatures.
Estimating cost functions for railway organizations has a long history and can be
found as early as the 1960s (Borts, 1960). The focus of the early research was to
check for inefficiencies in the U.S. railroad industry and to regulate monopoly prices
in the presence of economies of scale (Keeler, 1974).
However, each country appears to treat wear and tear differently and there are
different definitions and ways of accounting for operating, maintenance and renewal
costs. As a result, each country arrives at very different figures for marginal cost. The
differences may partly reflect the overall cost levels in the different countries and the
different levels of efficiency with which rail infrastructure is constructed and
maintained. It also reflects differences in local circumstances and different objectives
concerning the government contribution to infrastructure costs. Differences in the
level of charges can also reflect excess costs for some railways when the network is
over dimensioned for current demand. But it is important that in any approach, full
account is taken of operating, maintenance and renewal costs if charges are to reflect
the total marginal costs of operating a train service.
The opening of Europes rail market has led to the introduction of several
methods for pricing rail network access. Despite differences in these methods, they all
follow one of two models: pricing according to the marginal cost (MC) or pricing
according to full costs (FC).

24

Marginal Cost: The marginal cost pricing model recovers internal and some
external costs directly related to train operations. Since this method provides a direct
connection between usage and costs, it is ideal for managing demand and helps to
improve overall transport system efficiency. The main drawbacks are that it is difficult
to estimate MC, and it provides a low internal cost recovery around 10% of total
infrastructure costs (European Commission, 2003; Pittman, 2003). MC is applied in
Sweden, Switzerland, and Denmark (Calvo, Ona, & Nash, 2007). Recent European
studies have a different perspective as they are looking at the cost structure in
vertically separated rail infrastructure organizations to derive short run marginal costs.
Some studies have grown out of a sequence of research projects on transport
infrastructure pricing funded by the European Commission, such as Pricing European
Transport Systems (PETS) (Nash & Sansom, 2001), UNIfication of accounts and
marginal costs for Transport Efficiency (UNITE) (Nash, 2003)and Generalisation of
Research on Accounts and Cost Estimation (GRACE) (Nash et al., 2008).
Studies that take up the issue of pricing focus on estimating marginal costs. The
reason is that, despite the fact that marginal cost pricing is not followed by EU
railways, the marginal cost still provides guidance to optimal pricing that can be
valuable for management. Marginal cost is simply the derivative of the cost function
with respect to output. For a thorough literature review with an emphasis on empirical
estimates of marginal costs and the role of utilization rate, the reader is directed to
Thomas, Dionori and Foster (2003).
In order to secure use of and non-discriminatory access to the rail infrastructure,
the infrastructure businesses must establish an appropriate set of charges for
infrastructure use. Commission Directives require that responsibility for access charge
regimes be independent of any train operator, which they promote efficient use of
infrastructure and they do not discriminate among operators wishing to make

25

comparable use of the infrastructure. The economic principles behind an appropriate
access regime are well established. Access charges should reflect the marginal cost
that each user imposes on the infrastructure provider. To these marginal costs should
be added the external costs (pollution, accidents, congestion, etc) that each user
generates. This is social marginal cost pricing and, if implemented correctly, will
result in the most efficient use of the rail infrastructure (Tsionas, Baltas, & Chionis,
2010).
Full Cost: The objective of a full cost pricing model is total cost recovery.
Therefore, charges are fixed above MC using Ramsey prices (RP), increasing
variable charges above MC for services that are less price sensitive), attending
operators willingness to pay, and/or using a two-part tariff (comprising fixed and
variable charges). FC methods do not actually pay the full infrastructure costs, since
these costs are so high that they would be impossible for operators to pay. In European
countries practice, up to 65% of the total cost is recovered, while the rest is subsidized
by the government. The main advantage of the FC pricing method is that cost
recovery can be increased. Some of its main drawbacks are that charges are higher
(which may affect demand); it is difficult to accurately estimate the actual cost of
infrastructure investments; and levying fixed costs from infrastructure to operators is
complicated, since they are less infrastructure related. FC is applied in France,
Germany, Italy, Spain, and the United Kingdom (Calvo et al., 2007).
Most costs for the railway infrastructure network include capital and maintenance
costs for track, engineering structures such as bridges and tunnels, train signaling,
communications systems, power supply in electrified sections, and terminal
infrastructure.

26

Figure 2-1. Railway infrastructure full cost
Source: Adopted from World Bank (2011)
These infrastructure costs have a component that is essentially fixed or invariant
with the level of infrastructure usage and a component that is variable with traffic
levels over the long-term (Figure 2-1). The proportion of the fixed cost component
will differ by lines and traffic levels but rarely is estimated at less than 70 percent of
total infrastructure costs, except on the busiest lines. The variable component, should
vary over the long term by traffic level, but is often not this characteristic (at least
downward) in the short and medium term.
Numerous economic studies have demonstrated that railways exhibit economies
of density- their long-run average cost curve slopes downward. Unit costs decline as
output rises on the railway line as the fixed cost of providing track is spread over more
and more traffic units (Caves, Christnesen, & Tretheway, 1980; Charney, Sidhu, &
Due, 1977; Friendlaender & Spady, 1981; Griliches, 1972; Harris, 1977; W.Caves,
Christnesen, & Tretheway, 1980).
These economies of density are substantial on their own. But when combined
with the impossibility of storing unused train paths, they create a convincing case that

27

railway infrastructure networks financial sustainability depends critically on high
traffic volumes. Good railway network economics requires high infrastructure
utilization-the higher the utilization, the better the infrastructure economics. This is
true whether the infrastructure network is part of a vertically integrated railway, or
provided by a separate rail infrastructure authority or company. Vertical separation of
train operations from railway infrastructure is insufficient to improve railway financial
sustainability, although it may facilitate other policies that help. However, a vertically
separated track authority or company will face much higher fixed costs across its total
business than a vertically integrated railway company (World Bank, 2011).
The infrastructure cost curve is largely fixed in relation to traffic volume, but can
be shifted downwards by management actions that improve efficiency in infrastructure
provision and maintenance. A company exhibits economies of scale if its long run
average cost curve slopes downwards as the output of the company increases.
Economic studies suggest that economies of scale may exist when railways are very
small; realizing further economies of scale is harder when the railways become larger
perhaps because of greater management complexity and loss of corporate agility
(Caves, Christensen, & Tretheway, 1980; Charney et al., 1977; Friendlaender &
Spady, 1981; Griliches, 1972).
The exception is the point when capacity is reached and incremental traffic
requires a major capacity enhancement; but once the capacity increment is made, the
general rule usually again applies. Therefore, the venerable principle of Ramsey
pricing may be weakened by placing its full burden on rail infrastructure charges
rather than the total freight rate. If so, and other things being equal, vertical separation
may have made it more difficult to maximize infrastructure utilization and to recover
infrastructure fixed costs. Countries that pursued vertical separation are hoping that
separation allied to greater competition in rail service will generate greater use and

28

revenue for the railway network. Will potential economic benefits from competition in
services outweigh the dilution of economic benefits from Ramsey price differentiation
and the transaction costs of separation? This remains to be seen (World Bank, 2011).
At the domestic level, the decision as to which pricing system is applied has
depended on several factors: the government budget allocated to the railroad, degree
of network congestion, and importance of reducing transportations external costs as a
policy objective (Calvo et al., 2007).
2.4 Alternative Infrastructure Charging Price for Mongolian Railway.
Infrastructure charging price covers at least MC or in maximum case FC of
Infrastructure. Every country chooses their charging price depend on affordable level
of Operation Companys payment. This level exists in interval of MC and FC we can
see it from the Table 2-4.
Table 2-4
Current Practice of Infrastructure Charging Price in European Union
Country
Pricing
Principle
Main Variables Considered Country
Austria MC+ Infrastructure, railway service, rolling stock, traffic, time
Belgium FC
Infrastructure, railway service, rolling stock, operation,
traffic, time
Bulgaria MC Infrastructure, railway service
Czech
Republic MC+ Infrastructure, railway service
Denmark MC+ Infrastructure, railway service, time
Estonia FC Railway service
Finland MC+ Railway service, rolling stock
France MC+ Infrastructure, railway service, traffic, time
Germany FC
Infrastructure, railway service, rolling stock, operation,
traffic
Greece MC Infrastructure, rolling stock, operation, time
Hungary FC Infrastructure, railway service
Italy FC Infrastructure, rolling stock, operation, time
Latvia FC Railway service
Lithuania FC Infrastructure
Luxembourg MC Railway service, rolling stock

29

Country
Pricing
Principle
Main Variables Considered Country
Netherlands MC
Poland FC Infrastructure, railway service, rolling stock, operation
Portugal MC+ Infrastructure, railway service, operation
Romania FC Railway service
Slovakia FC Infrastructure, railway service
Slovenia FC Infrastructure, rolling stock, operation
Spain MC+ Infrastructure, rolling stock, traffic, time
Sweden MC+ Railway service, rolling stock
Switzerland MC+ Railway service, time
United
Kingdom MC/MC+ Railway service, rolling stock, operation, traffic, time
Note: MC =marginal cost; FC =full cost; =dimensionless.
Source: Macrio, Teixeira, and Rothengatter (2010)
Any countrys defining affordable pricing process start from defining MC or FC.
After that they use approaching method which increase MC charging price or decrease
FC charging price. We did not prefer FC cost charging price in starting point because
full cost charging price often unaffordable for operation companies. Furthermore in
practice very few countries operation company can afford FC charging price.
We tried to find Marginal Cost of infrastructure. However, there were varies of
method to calculate MC in the articles it always needs wide range of cross sectional
data. Cross sectional data is unavailable in Mongolian case because only one line is
owned by UBR. One of solution to choose alternative pricing of infrastructure is
calculating infrastructure service cost. In Table 2-5 we found annual infrastructure
maintenance and renewal cost of UBR allocated with per track km. If we see the
Figure 2-2 that cost is near to the USA average 14600 per track/km (last five years
average of Mongolia is 14800 per track/km). Mongolian railway is freight dominated
same as USA railways.

30

Table 2-5
Main Track/km Cost of Infrastructure Maintenance and Renewal
2006 2007 2008 2009 2010
Annual Infrastructure maintenance and renewal
costs bil.tug
42.96 35.66 46.68 41.58 52.97
UBR's Rail line length km 1810 1810 1810 1810 1810
Annual Infrastructure maintenance and renewal
costs tous.euro per track/km.

14.56

12.09

15.82

14.09

17.95
Source: UBR annual statement (2011)

Figure 2-2. International main track/km cost of infrastructure maintenance and renewal
Source: Pietrantonio and Pelkmans (2004)
European average cost for maintenance and renewals amounts to an annual
average of 63800 per track/km compared to the 14600 per track/km in the US.
Every country trying to includes fully those cost for infrastructure charging prices.
This cost is not minimum also not maximum. Our solution to choose alternative price
is infrastructure maintenance and renewal cost per tn.km. The Figure 2-1 shows the
international main track/km cost of infrastructure maintenance and renewal.

31

2.5 Influencing Variables of the result.
This research will more consider about revenue change and shipped production
change influence of partly vertical separation of UBR using infrastructure charging
price for private operation companies.
The GOM aim is to provide enough transport to meet market demand and
decrease subsidies for UBR. We will use liner programming with the aim of seeing
influence of using an alternative pricing structure that relies on an infrastructure
charging price. The following variables will considered.
Productions.
In real condition Mongolian railway is shipping 8 main activities as follows:
Domestic coal - From coal mining to main power station in city area. UBR is
obligated to this transport.
Export coal From coal mining to boarder of China
Iron ore From iron mining area to boarder of China
Copper concentration From copper concentration producer to boarder of China
Oil product From Russian boarder to UB. Mongolian 100 percent oil product is
exported from Russia
Imported product From China and Russia equipment, construction material and
food production to Mongolia
Transshipment - Russia to China and China to Russia. Mongolian main line is
one of the shortest land bridge lines connect Europe and Asia.
Passenger service UBR obligated to transport local passenger service.
Capacities.
Infrastructure capacity UBR annual infrastructure capacity measured 20 million
tons.

32

UBR rolling stock capacity Actually in real condition railway production
constrained by UBR rolling stock capacity it was from 13 to 15 million tons per year
2005 to 2010.
Private company rolling stocks capacity We will assume it which transportation
demand excess UBR rolling stock constraint it would be shipped by private operator
companies rolling stocks. It depends on transportation demand.

33

CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction.
The purpose of this research is to show a comparative analysis of UBR
performance under two conditions:
(1) Partly vertical separation of UBR using infrastructure charging price for
private operation companies
(2) Without separation of the infrastructure charge.
Linear programming is useful to formulate our problem then we can see UBR
revenue and optimal production mix without separation and with separated case.
In this chapter we can find the model chosen to integrate the information we
collected in the chapter two and describes the methodology that we will be used to
determine influence of partly separation. We will do this by finding the demand of
each product for railway transport, determine the constraint and some needed
assumptions for the linear programming. The calculations will be realized with linear
programming method of max net revenue using purely business decision methods and
will be based on real and forecasted data. Also, it integrates the variables that form
part of the model. Followed by the research questions that are going to be tested in
chapter four and answer in the chapter five of this study. The collection of the data
and data analysis techniques will be discussed in the last part of the chapter. Our
developed models focus on 2014
th
performance of UBR. If GOM will implement
partly vertical separation we could see first result around 2014.

34

35

3.2 Mathematical Development of the Conceptual Framework.

Figure 3-1. Conceptual model

We use a two step process to develop this framework we determine all
production demand, investigate capacities and calculate alternative pricing then we
will progress LP model specification that use all above results.
First step:
All production would be forecasted using historical data.
UBR Infrastructure and rolling stocks capacity would be investigated based on
technical specification.
Alternative pricing would be defined by based on data of UBR statements.
Second step:
LP Model specification
- To define all constraint for
linear programming

- To calculate Infrastructure
charging price
LP model specification for
UBR net revenue without
Infrastructure charge
LP model specification for
UBR net revenue with
Infrastructure charge

Comparison and
analyze

36

1. Suppose we maximize the total net revenue of the UBR without infrastructure
charging price in 2014. So that means:
NR =TR TC, where,
TR is total revenue. And it is composed of the revenue generated by 5
services:
TR
cd
=total revenue from shipping domestic coal.
TR
ce
=total revenue from shipping export coal.
TR
ir
=total revenue from shipping iron ore
TR
cu
=total revenue from shipping copper concentration
TR
oi
=total revenue from shipping oil product (from Russia)
TR
im
=total revenue from shipping imported product (from China)
TR
ts
=total revenue from transshipment (Russia to China or China to Russia)
TR
pg
=total revenue from passenger service.
Hence, =
8
=1

Then, for each TR
i
, i=1,2,3,4 (that is for shipping commodities)
TR
i
=P
i
* W
i
* L
i
, where
Pi is the freight tariff per unit shipped 1 km
Wi is the quantity of annual
Li is the distance shipped per period.
PASSENGERS: TR
pg
=F * L * N where
F is the fare per passenger
N is the number of annual passengers
L is the average distance travelled per passenger
There are at least 4 sets of costs
1. those associated with the every freight product and passenger specific cost
2. those associated with the infrastructure.

37

3. those associated UBR rolling stock cost
4. those associated operation and financial department cost
Product specific costs:
These costs include the type and capacity of the rolling stock, any price premium
or discount for the type of usage of the infrastructure. For example, passenger traffic
commands a premium because it must be scheduled first for passenger convenience.
Transit shipping also commands a premium because it is given priority (and
commands a higher freight charge). Rolling stock, of course, differs based on the type
of product being shipped. So we can represent product specific costs for the ith
service as Ki such that:
K
i
=(R
i
+k
i
) L
i
* W
i
where
Ri is the cost of UBR rolling stock cost per tn.km for the i
th
service
ki is the surcharge for infrastructure usage and scheduling for the i
th
service and
Li and Wi are as defined earlier.
Operation costs can be represented as O which is UBR Central operation office
cost for the period for operating of whole railway network.
Authority of UBR and financial department costs can be represented as F which
is the almost fixed cost related with operate whole organization.
Therefore, the objective function to be maximized would be:
max{
8
=1

8
=1

Subject to the constraints:
Railway network capacity (Number of cars that can travel on the network in a
period)
The maximum number of rail cars available in period t for shipping service i
The tariff rate schedule Pi
The maximum quantity of product for shipping by rail in period t

38

The alternative cost of shipping product i by the next best transport mode. (i.e.,
by truck/ bus for passengers)
Demands for products which includes:
Demand for Mongolian coal in China
Demand for coal in Mongolia (powerplant requirements)
Demand for iron ore in China
Demand for copper concentration in China
Demand for transshipment services (Shipments between China and Russia per
period)
Demand for passenger traffic
Demand for oil product in Mongolia (from Russia)
Demand for construction and food production in Mongolia (from China)
After this calculation we can find max net revenue of UBR and optimal
production mix for UBR.
2. Suppose we maximize the total net revenue of the UBR with infrastructure
charging price in 2014.
Old objective function to be maximized was:
max{
8
=1

8
=1

We will add additional revenue of UBR from new operator companies transport
AR.
max{
8
=1

8
=1
+
AR formulate is following.
=
5
=1
where
Pi- Infrastructure charging price we calculate it from statement of UBR.

39

- New Operator companies product. It would transport excess product of UBR

transported (UBR obligated to transport passenger and domestic coal for those
transport no excess). Formulate is following.
w
ce
=export coal by other operator company .
w
ir
=iron ore by other operator company
w
cu
=copper concentration by other operator company
w
oi
=oil product (from Russia) by other operator company
w
im
=imported product (from China) by other operator company
W
ce
=export coal by UBR

W
ir
=iron ore by UBR
W
cu
=copper concentration by UBR
W
oi
=oil product (from Russia) by UBR
W
im
=imported product (from China) by UBR De
ce
=export coal.
W
ce
=Demand of export coal by UBR

D
ce
=Demand of export coal
De
ir
=Demand of iron ore
De
cu
=Demand of copper concentration
De
oi
=Demand of oil product (from Russia)
De
im
=Demand of imported product (from China)
w
ce
=D
ce
- W
ce

w
ir
=De
ir
- W
ir

w
cu
=De
cu
- W
cu

w
oi
=De
oi
- W
oi

w
im
=De
im
- W
im
Therefore, the objective function to be maximized would be:
max{
8
=1

8
=1
+
5
=1

40

Subject to the constraints: (are same as before)
Railway network capacity (Number of cars that can travel on the network in a
period)
The maximum number of rail cars available in period t for shipping service i
The tariff rate schedule Pi
The maximum quantity of product for shipping by rail in period t
The alternative cost of shipping product i by the next best transport mode. (i.e.,
by truck/ bus for passengers)
Demands for products which includes:
Demand for Mongolian coal in China
Demand for coal in Mongolia (power plant requirements)
Demand for iron ore in China
Demand for copper concentration in China
Demand for transshipment services (Shipments between China and Russia per
period)
Demand for passenger traffic
Demand for oil product in Mongolia (from Russia)
Demand for construction and food production in Mongolia (from China)
3.3 Research Question.
Based on the literature review in chapter 2 the following research questions were
developed for the following empirical validation of the research. These questions are
focused on answering main questions around influence of charging pricing for railway
network of the research. After we answer the questions we can make conclusion.
Research question 1: Can vertical separation improve on UBR performance?
Research question 2: Can vertical separation achieve producing more transport
product with less Government cost?

41

3.4 Data Collection.
The collection of data for this study was gathered from various sources and
includes different kinds of data. The data collected includes information and
characteristics from journal articles for railway transportation sector, annual report
from UBR, government publications and web pages from governments and agencies
related to railway or statistics and field notes also we run railway economist audit with
the help of the economist Delgersaikhan J argalsaikhan who works for Authority of
Mongolian Railway.

42

CHAPTER FOUR
DATA ANALYSIS
This chapter provides the data analysis which includes forecasting and,
mathematical methods of production mix using purely LP method. The presentation of
the forecasting is used to define the future production demand and some of fixed costs
based on the result of analyze of Mongolian railway performance. The Linear
Programming model presented here finds the optimal production mixes.
4.1 Introduction.
This chapter provides the data analysis which includes forecasting and Linear
Programming. The methods of data collection and the presentation of the forecasting
will be displayed. Initially, how the data were composed and then complied for the
variables of the LP model will be discussed followed by the forecasting method.
4.2 Data Collection.
4.2.1 Transported Production Data
We collected information about the whole UBR transport system for all
directions and all types of product. UBR has reported as two main categories which
are freight and passenger. In this research, we were trying to find out UBR optimal
transport service mix for freight based on historical demand data. We are going to
investigate two casesone which assumes cooperation with private operator
companies and one which assumes no cooperation. Both scenarios are based on
expected conditions in year 2014. If Mongolian railway would start to use

43

infrastructure separation price, it could be possible to implement this system starting
2014. Also we will investigate net revenue of UBR for both of the above two cases.
We collected Mongolian railway production transport data from UBR. These data
cover the 6 years from 2005 to 2010 (Freight data in appendix 1).
Freight data production is subcategorized into more than 70 types which we
sought to simplify for further analysis. We subtracted some of low weight products
compared with the total and reduced the subcategories to a total of 8 which accounts
for around 75 percent of total freight handled (tons) and around 80 percent of all
freight transport services (in ton/km) (table 4.1). This is important to define LP model.
(If we have a lot of types of product we have to design cumbersome model but these
low weighted products will not significantly influence our result.) Finally we will
assume that UBR have the following 8 categories freight transportation products for
the LP model.
Domestic coal is one of the most important products of Mongolian railway
transportation. It accounts for 35.2 percent of production (measured by tn) and 14.8
percent transportation (measured by tn.km). Domestic coal transport is obligated from
government in order to provide sufficient coal to power station. Demand is steadily
growing related with economic development and growing urbanization of Mongolia.
It is the lowest rate (price) revenue production for UBR.
Exporting coal is one of the most important exported products of Mongolian
transportation market. In 2010, merely 8.2 thousand tons of exported coal was
transported by UBR while a total of 16,590 thousand tons was transported by truck. It
is important product of railway transport in the future but now account for only 1.2
percent of production (measured by tn) and 0.8 percent of transportation (measured by
tn.km).

44

Iron ore: Mongolian iron ore companies annual production capacity is 8 mil.ton
but their mining output is heavily depending on railway capacity. Iron ore is one of the
most profitable products to transport by railway. Six years average it accounts for 7.3
percent of production (measured by ton) and 11.9 percent of transportation (measured
by tn.km).
Table 4-1(a)
Freight production data of UBR
Freight production

Report for 2005 Report for 2006 Repert for 2007
tous.tn mil.tn.km
tous.tn
mil.tn.km tous.tn mil.tn.km
1. Domestic coal 4963.9 1138.7 4804.0 1156.1 4920.3 1198.4
2. Exporting coal 154.0 61.8 244.2 97.9 154.0 61.8
3. Iron ore 238.3 214.5 1000.5 900.5 238.3 214.5
4. Copper concentration 613.9 686.3 585.8 654.9 613.9 686.3
5. Oil product 493.5 202.4 538.0 220.6 493.5 202.4
6. Fluorspar 198.2 154.6 257.6 200.9 198.2 154.6
7. Imported production (from China) 476.8 307.0 681.5 442.0 476.8 307.0
8. Transshipment 3444.1 3822.9 2295.9 2548.4 3444.1 3822.9
Total of above 8 freights 10582.7 6588.1 10407.6 6221.3 10539.0 6647.8
Total of all freights 14095.5 8207.5 13935.8 7815.8 14043.4 8489.9
Percent of 8 freights 75.1 80.3 74.7 79.6 75.0 78.3

Freight production

Report for 2008 Repert for 2009 Report for 2010
tous.tn
mil.tn.km tous.tn mil.tn.km tous.tn mil.tn.km
1. Domestic coal 5195.3 1259.3 5180.0 1313.4 5834.7 1515.9
2. Exporting coal 244.2 97.9 279.0 111.6 8.2 4.8
3. Iron ore 1000.5 900.5 1420.0 1278.0 2798.7 2916.8
5. Oil product 538.0 220.6 446.6 183.1 644.0 281.8
6. Fluorspar 257.6 200.9 175.1 136.6 297.8 221.8
7. Imported production (from China) 681.5 442.0 484.5 317.9 483.3 326.8
8. Transshipment 2295.9 2548.4 2516.5 2793.3 2314.6 2569.2
Total of above 8 freights 10798.8 6324.5 11088.1 6789.5 12952.7 8478.6
Percent of 8 freights 73.9 76.4 77.3 82.8 77.1 82.4

45

Table 4-1(b)
Freight production data of UBR by Percentage
Freight
2005 2006 2007
% of
ton
% of
ton.km
% of
ton
% of
ton.km
% of
ton
% of
ton.km
1. Domestic coal 35.22 13.87 34.47 14.79 35.04 14.12
2. Exporting coal 0.95 0.65 1.61 1.15 0.96 0.63
3. Iron ore 1.69 2.61 7.18 11.52 1.70 2.53
5. Oil product 3.50 2.47 3.86 2.82 3.51 2.38
6. Fluorspar 1.41 1.88 2.28 2.88 1.41 1.82
7. Imported production (from
China) 3.38 3.74 4.89 5.66 3.40 3.62
8. Transshipment 24.43 46.58 16.47 32.61 24.52 45.03

Freight
2008 2009 2010 Average
% of
ton
% of
ton.km
% of
ton
% of
ton.km
% of
ton
% of
ton.km
% of
ton
% of
ton.km
1. Domestic coal
35.57 15.22 36.11 16.02 34.71 14.73 35.19 14.79
2. Exporting coal
1.53 1.08 1.95 1.36 0.04 0.03 1.17 0.82
3. Iron ore
6.85 10.88 9.90 15.59 16.65 28.35 7.33 11.91
4. Copper
concentration
4.01 7.92 4.09 8.00 3.40 6.24 4.07 7.83
5. Oil product
3.68 2.67 3.11 2.23 3.83 2.74 3.58 2.55
6. Fluorspar
2.17 2.72 1.93 2.16 2.41 2.59 1.94 2.34
7. Imported production
(from China)
4.67 5.34 3.38 3.88 2.88 3.18 3.76 4.23
8. Transshipment
15.72 30.80 17.54 34.07 13.77 24.97 18.74 35.68

Copper concentration is account for 4.1 percent of production (measured by ton)
and 7.8 percent of transportation (measured by tn.km) in six years average. It has been
a highly profitable long-standing product.
Oil production: For Mongolia, all oil is imported from Russia by railway. It
accounts for 3.6 percent of production (measured by ton) and 2.55 percent of
transportation (measured by tn.km) in six years average.
Fluorspar: Mongolian has Fluorspar mining companies. Their mining output
depend on Russian fluorspar market. It accounts for 1.9 percent of production

46

(measured by tn) and 2.3 percent of transportation (measured by tn.km) in six years
average.
Imports (from China): China is the biggest trading partner with Mongolia.
Imported products from China mainly divided into four categories which are building
materials, equipments, food and container. It account for 3.8 percent of production
(measured by ton) and 4.2 percent of transportation (measured by tn.km) in six years
average.
Transshipment: Transshipment is China to Russia and Russia to China
production transportation. Demand is determined from three countries agreement also
volume of production depend on UBR capacity. It account for 18.7 percent of
production (measured by tn) and 35.7 percent of transportation (measured by tn.km) in
six years average.
Passenger service of UBR is obligated by government also it is declining slightly
recent years. But our study is more focused on freight transportation. In the further
research we will suppose that above all 8 types of freight production and passenger
transport are going to be transported by UBR in 2014. These transport services
account for around 83 percent of all transport services of UBR for the last few years
(see Table 4-2).
Table 4-2
Production data of UBR

2005 2006 2007 2008 2009 2010
mil.tn.km mil.tn.km mil.tn.km mil.tn.km mil.tn.km mil.tn.km
Passenger 1234.3 1287.1 1406.4 1400.5 1008.5 1220.0
Total of 8 freights 6588.1 6221.3 6647.8 6324.5 6789.5 8478.6
Percent of considered
product 82.8 82.5 81.4 79.8 84.7 84.3

47

4.2.2 UBR Cost Statement Data
Also we collected information about the railway transport cost data. We received
UBR cost data from Authority of Mongolian Railway. These Data involved with in 5
years which from 2006 to 2010 (appendix 2).
We also simplified UBR cost statement data for future LP formulation and
reduced to 6 main categories from 7 main categories and over 360 minor categories.
We merged Locomotive and pulling cost and Rolling stock and Loc maintenance
together then named Rolling stock cost. Central operation office cost and Cost
of finance department costs are not nearly related with production volume but we
didnt merge them together in order to generate more precise forecasts (see Table 4-3).
Table 4-3
Refined Cost Statement Data of UBR
Type of cost
2006 2007 2008 2009 2010
mil.tug mil.tug mil.tug mil.tug mil.tug
1. Operation of freight transport cost 3468.3 3829.5 5286.4 5259.5 6679.8
2. Infrastructure renewal and service 42956.3 35656.9 46675.3 41576.0 52968.6
3. Rolling stock cost 90936.0 92465.8 139983.5 107126.5 162820.4
4. Operation of passenger transport
cost 8270.8 7952.6 10547.7 10181.1 11167.5
6.Central operation office cost 3836.6 4605.4 7062.9 6635.9 8799.2
7.Cost of Finance department 27273.2 22412.8 12888.7 50076.3 55789.3
TOTAL 176741.3 166923.1 222444.5 220855.2 298224.9

We refined cost data due to suitable for LP formulation. First we calculated each
category costs related per ton km work on the Table 4-4.

48

Table 4-4
Cost of per ton km transport service.
Types of costs Demonstrations
2006 2007 2008 2009 2010
Average
tug/t
n/km
tug/tn/
km
tug/tn/
km
tug/tn/
km
tug/tn/
km
tug/tn/k
m
1. Operation of
freight transport cost
divided by all
freight 0.4 0.5 0.6 0.6 0.6 0.6
2. Infrastructure
renewal and service
divided by all
product 4.7 3.6 5.8 4.5 4.6 4.7=Pi
3. Rolling stock cost
divided by all
product 10.0 9.3 14.5 11.6 14.2 11.9
4. Operation of
passenger transport
cost
divided by all
pass 6.4 5.7 7.5 10.1 9.2 7.8

Then we calculated fixed costs related to considered work each year.
Table 4-5
Cost of per ton km Transport Services.
Types of costs Demonstrations
2006 2007 2008 2009 2010
bil.tug bil.tug bil.tug bil.tug bil.tug
Central operation
office cost
multiple by
percent of each
year 3.05 3.61 5.40 5.49 7.41
Cost of Finance
department
multiple by
percent of each
year 21.71 17.55 9.85 41.47 47.02
Considered work
percent

82.5% 81.4% 79.8% 84.7% 84.3%

For forecasting cost amount =Real cost amount x Considered work percent
4.2.3 Pricing Data Collection.
Mongolian railway uses two kinds of tariff for freight transport which are
International agreement freight transportation tariff and Domestic freight
transportation tariff.
Domestic Tariff is valid for all import, export and local freight products. We can
choose the railway transport price from tariff table depends on distance and type of
product. First six products are chosen by that way on the Table 4-6.

49

Table 4-6
Price List of All Production
Products Unit Price
1. Domestic coal Tug/ton/km 21.0
2. Exporting coal Tug/ton/km 33.0
3. Iron ore Tug/ton/km 29.0
4. Copper concentration Tug/ton/km 33.0
5. Oil product Tug/ton/km 27.0
6. Fluorspar Tug/ton/km 26.0
7. Imported production (from China) Tug/ton/km 26.6
8. Transshipment Tug/ton/km 33.0
9. Passenger Tug/passenger/km 23.0

To determine price ton/km method is following:
To choose shipping price from pricing table depend on product type and shipping
distance then use follow formula.
Price (ton /km) =Shipping price/ Distance/Per car cargo mass
But in imported production case is different because it contained four types of
production then we calculated the price following Table 4-7. We found prices of 4
products based on distance from domestic freight transportation tariff table after that
multiply by related weight. Finally sum of above four products weighted price
represented imported product price.

50

Table 4-7
Price Calculation of Imported Product from China
Imported products
from China
Percent of
total Tariff Weighted price
Building products 17.9 % 25 tug/ton/km 4.5
Food 22.7 % 14 tug/ton/km 3.2
Equipment 24.3 % 20 tug/ton/km 4.9
Other goods (container) 35.0 % 40 tug/ton/km 14.0
Price 26.5 tug/ton/km

International agreement freight transportation tariff is valid to transit shipment
but there were 14 type of product. Defining a passenger transport price is also burden
of calculation. In this case we chose average price as a representing price of
transshipment and passenger from UBR statement report (Railway, 2011).
4.3 Forecasting
We determine which of our time series data should be forecast. Therefore we
investigate exactly which forecasting method is suitable for our time series data in this
section.
Firstly, we seek to define all production demand in 2014. Except iron ore we will
forecast because iron ore mining company can ship up to 8mil.ton per yearit just
depends on railway capacity and possibility. Therefore, iron ore demand is
automatically chosen as an 8 mil.tn if enough railway capacity would be there
(Railway, 2011).

51

Table 4-8
Production Data for Forecasting
Year
Domestic
coal
Exporting
coal
Copper
concentration
Oil
product Fluorspar
Imported
production
Passenger
number
Passenger
travel
distance

tous.tn.km tous.tn.km tous.tn.km tous.tn.km tous.tn.km tous.tn.km tous km
2005 4963.9 154.0 613.9 493.5 198.2 476.8

2006 4804.0 244.2 585.8 538.0 257.6 681.5

2007 4920.3 154.0 613.9 493.5 198.2 476.8 4482.4 313.8
2008 5195.3 244.2 585.8 538.0 257.6 681.5 4358.8 321.3
2009 5180.0 279.0 586.3 446.6 175.1 484.5 3118.3 323.4
2010 5834.7 8.2 571.3 644.0 297.8 483.3 3516.3 347.0
2011 3832.1 365.3

Passenger transport data is special (see Table 4-8). Passenger numbers are
declining smoothly but the average distance per passenger is increasing. Hence, we
forecasted separately passenger transport data in order to adapt this trend in the future.
We see cost data for Central operation office cost and cost of the Finance
department are increasing compared with other types of costs which are directly
related to transport volume. Also if we see carefully, these two costs have two
different trends that reason we tried to keep it for forecasting. Then we forecasted
those two costs until 2014 using historical data on Table 4-5.
Finally we have to choose suitable forecasting method. To see how well one
model works, or to compare that model with other models, the forecasted values are
compared with the actual or observed values. The forecast error is defined as follows:
Forecast error =Actual value Forecast value
One measure of accuracy is the mean absolute deviation (MAD). This is
computed by taking the sum of the absolute values of the individual forecast errors
and dividing by the numbers of errors (n).
=
| |

52

((In order to investigate MAD we suppose that in the past, UBR had forecasted
transport services for each year to be the same as the actual transport services from
the previous year. This is sometimes called a nave model.)
There are other measures of the accuracy of historical errors in forecasting that
are sometimes used besides the MAD such as Mean squared error (MSE) and mean
absolute percent error (MAPE) but these two measurements functions similar to
MAD.
A time series data is based on e sequence of evenly spaced data points (in our
case we used yearly data). Forecasting time series data implies that future values are
predicted only from past values of that variable and that other variables, no matter
how potentially valuable, are ignored.
4.3.1 Moving Average
Moving averages are useful if we can assume that market demands will stay
fairly steady over time. An n- period moving average forecast, which serves as an
estimate of the next periods demand, is expressed as follows:
=

Mathematically, this is written as
+1
=

+
1
++
+1

Where
Y
t+1
=forecast for time period t +1
Y
t
=actual value in time period t
n=number of periods to average

53

Forecasting of moving average results on Table 4-9.
Table 4-9
Next Year Forecasting Results of MA Method (2011)
Names of Forecasting variables Unit Forecasted amount MAD
Central operation office cost bil.tug 6.52
16.32
Cost of Finance department bil.tug 44.72
19.63
1. Domestic coal tous.ton 5507.36
284.68
2. Exporting coal tous.ton 143.63
105.91
4. Copper concentration tous.ton 578.81
14.09
5. Oil product tous.ton 545.34
66.32
6. fluorspar tous.ton 236.47
48.42
7. Imported production (from China) tous.ton 483.88
99.77
Passenger number tous.pass 3674.19
679.81
Passenger travelling distance kilometer 356.11
20.19

4.3.2 Weighted Moving Average
When there might be a trend or pattern emerging, weights can be used to place
more emphasis on recent values. This makes the technique more responsive to
changes because latter periods may be more heavily weighted. Deciding which
weights to use requires some experience and a bit of luck. Choice of weights is
somewhat arbitrary because there is no set formula to determine them. However,
several different sets of weights may be tried, and the one with the lowest MAD
should be used (Render, Ralph M. Stair, & Hanna, 2009).
A weighted moving average is expressed as
+1
=
( )( )
()

Mathematically this is
+1
=

1
+
2
1
++
+1
1
+
2
++

54

where
w
i
=weight of ith observation
We chose two time period weighting and results are on the Table 4-10.
Table 4-10
Next Year Forecasting Results of WMA Method (2011)
Central operation office cost bil.tug 6.82 1.49
Cost of Finance department bil.tug 45.49 18.05
1. Domestic coal tous.ton 5,616.46 275.68
2. Exporting coal tous.ton 98.50 111.12
4. Copper concentration tous.ton 576.31 15.29
5. Oil product tous.ton 578.24 75.68
6. fluorspar tous.ton 256.92 59.29
7. Imported production (from China) tous.ton 483.68 117.15
Passenger number tous.pass 3,726.82 581.91
Passenger travelling distance kilometer 359.16 18.34

4.3.3 Exponential Smoothing
Exponential smoothing is a forecasting method that is easy to use and is handled
efficiently bye computers. Although it is a type of moving average technique, it
involves little record keeping of past data. The basic exponential smoothing formula
can be shown as follows:
New forecast =Last periods forecast +(Last periods actual demand Last
periods forecast)
where is a weight (or smoothing constant) that has a value between 0 and 1,
inclusive.
Equation can also written mathematically as
+1
=
+(
)
where
F
t+1
=new forecast (for time period t +1)

55

F
t
=previous forecast (for time period t)
=smoothing constant (0 1)
Y
t
=previous periods actual demand
The latest estimate of demand is equal to the old estimate adjusted by a fraction
of the error (last periods actual demand minus the old estimate).
The smoothing constant, , can be changed to give more weight to recent data
when the value is high or more weight to past data when it is low. In our case we
choose two different smoothing constants. For the first, we used =0.5 and for the
second =0.8. Forecasting results are on Table 4-11.
Table 4-11 (a)
Next Year Forecasting Results of ES Method =0.8(2011)
China) tous.ton 490.03 122.79

56

Table 4-11(b)
Next Year Forecasting Results of ES Method =0.5
7. Imported production (from China) tous.ton 513.95 107.03

4.3.4 Least Squares Method
Another method for forecasting time series with trend is called trend projection.
This technique fits a trend line to a series of historical data points and then projects the
line into the future for medium- to long- range forecast. A trend line is simply a linear
regression equation in which the independent variable (X) is the time period. The
form of this is
=b
0
+b
1
X
where
=predicted value
b
0
=intercept
b
1
=slope of the line
X =time period
The least squares method applied to find the line that minimizes the sum of the
squared errors. This approach results in a straight line that minimizes the sum of the
squares of the vertical distance from the line to each of the actual observations. This

57

technique also results in the trend line that minimizes the MSE. But we more focus on
MAD in order to compare all forecasting method. Results on Table 4-12.
Table 4-12
Next Year Forecasting Results of LS Method (2011)
China) tous.ton 511.99 86.03

4.3.4 Forecasting Results.
We have historical data from 2005 until 2010. First forecasted year is obviously
2011, in that case we used above four methods in that year forecast then we choose
the suitable method which has least MAD score. From the results Least-square model
is suitable for all data. Then, we found out forecasted result in 2014 using Least-
square forecasting method see Table 4-13.

58

Table 4-13
Forecasting Results in 2014
Names of
Forecasting
variables
Unit
MAD of
MA
MAD
of
WMA
MAD
of ES
=0.8
MAD
of ES
=0.5
MAD
of LS
LS
method
result in
2014
Central operation
office cost bil.tug 16.32 1.49 0.97 1.23 0.35 12.4
Cost of Finance
department bil.tug 19.63 18.05 10.82 11.91 8.13 79.4
1. Domestic coal tous.ton 284.68 275.68 207.08 223.51 166.4 6218.8
2. Exporting coal tous.ton 105.91 111.12 91.52 84.71 77.77 81.4
4. Copper
concentration tous.ton 14.09 15.29 15.7 15.54 8.44 548.4
5. Oil product tous.ton 66.32 75.68 63.64 55.79 42 622.7
6. fluorspar tous.ton 48.42 59.29 56.27 47.76 35.83 288.4
7. Imported
production (from
China)
tous.ton 99.77 117.15 122.79 107.03 86.03 481.6
Passenger number tous.pass 679.81 581.91 375.72 373.67 349.71 2575.6
Passenger travelling
distance kilometer 20.19 18.34 11.72 14.29 4.31 411.3

On the table 4-13 four different forecasting methods and 5 different forecasts are
shown. We have to choose suitable method for our study by comparing all MAD. All
MAD for the Least-square method are smaller than all the others for all products and
costs. Weve chosen it and forecasted them until 2014 on the Table 4-13. We chose
unit of tous.tn for products because our final target is to find out freight service
optimal mix by product volume. Also Mongolian railway main line capacity data
given by tou.tn infrastructure capacity 22,000 tous.tn it means total product transport
by main line cannot be in excess of that capacity. In the next section will see more
clear explanation.

59

4.4 Linear Programming
4.4.1 Linear Programming variables and constraints
After data collection and forecasting we found enough data for LP formulations
these data are given on Table 4-10
p
i
price of each transport service is determined from price data collection
l
i
transported distance of each product is from product data collection
c
i
cost of each product is from cost data collection
D
i
demand of each product is from forecasting
W
i
volume of each transport service of UBR is going to be determined from LP
analysis.
w
i
volume of each transport services provided by private companies is going to
be determined by LP analysis.
Table 4-14
LP variables
Transport
services
Price
tug/tn/km
Distance
km
Cost
tug/tn/km
Demand
tous.ton
Optimal
transport
service mix
UBR Private
p
i
l
i
c
i
D
i
W
i
w
i

1. Domestic coal
p
1
21.0 l
1
244.9 c
1
16.94 D
1
6218.9 W
1
w
1

2. Exporting coal p
2
33.0 l
2
430.5 c
2
16.94 D
2
81.4 W
2
w
2

3. Iron ore p
3
29.0 l
3
923.7 c
3
16.94 D
3
8000.0 W
3
w
3

4. Copper
concentration
p
4
33.0 l
4
1118.8 c
4
16.94 D
4
548.4 W
4
w
4

5. Oil product p
5
27.0 l
5
414.6 c
5
16.94 D
5
622.7 W
5
w
5

6. Fluorspar p
6
26.0 l
6
774.1 c
6
16.94 D
6
288.4 W
6
w
6

7. Imported
production
p
7
26.6 l
7
652.9 c
7
16.94 D
7
481.6 W
7
w
7

8. Transshipment p
8
33.0 l
8
1110.0 c
8
16.94 D
8
2597.6 W
8
w
8

9. Passenger p
9
23.0 l
9
411.3 c
9
24.14 D
9
2575.6 W
9
w
9

60

We consider main two capacities limitations that in the Mongolian Railway faces
nowadays. Rolling stock and railway line infrastructure capacities are the main
constraints in LP formulation.

This research mainly focuses on increasing rolling stock capacity because
infrastructure capacity is 22 mil.tn in each year compared to 16 mil.tn for rolling stock
in 2010. The reason is that rolling stock age is still declining over the year. If do not
invest in additional UBR rolling stock, it would be only 14 mil.tn year in 2014. If
UBR uses private companies rolling which have already bought by them, it would be
16 mil.tn year in 2014 (reference).
First LP investigated only UBR performance in 2014 without additional
investment for railway rolling stock from government. They use rolling stocks which
already had bought by private companies.
4.4.2 Linear Programming in First Case
First case linear programming is written as following.
= [{
=

where
[max{
8
=1

]
8
=1
- LP formulation to find first case optimal production
mix for UBR
O Forecasted operation cost of UBR
F- Forecasted Financial department cost

If we extract LP formulation it looks like following:

61

max(NR){ (p
1
W
1
l
1
+p
2
W
2
l
2
+p
3
W
3
l
3
+p
4
W
4
l
4
+p
5
W
5
l
5
+p
6
W
6
l
6
+p
7
W
7
l
7
+
p
8
W
8
l
8
+p
9
W
9
l
9
) - (c
1
W
1
l
1
+c
2
W
2
l
2
+c
3
W
3
l
3
+c
4
W
4
l
4
+c
5
W
5
l
5
+c
6
W
6
l
6
+c
7
W
7
l
7
+
c
8
W
8
l
8
+c
9
W
9
l
9
)
where
variables are given on Table 4-14
constraints are given on Table 4-15
About unit explanation:
p
i
c
i
units is given tug/ton/km
W
i
- units is given tous.ton
l
i
units is given km
Revenue =p
i
x W
i
x l
i
=(tug/ton/km) x tou.tn x km=tous.tug
Cost =c
i
x W
i
x l
i
Table 4-15
First case LP constraints
Products constraint Demand Explanation
tous.tn
1. Domestic coal W
1
=> 6218.9 Obligated from Gov to UBR
2. Exporting coal W
2
<= 81.4 Possible to choose volume
3. Iron ore W
3
4. Copper
concentration
W
4
=> 548.4 Need to transport
5. Oil product W
5
=> 622.7 Need to transport because important
product
6. Fluorspar W
6
7. Imported
production
W
7
=> 481.6 Need to transport
8. Transshipment W
8
<= 2597.6 Possible to reach the agreement
9. Passenger W
9
>= 2575.6 Obligated from Gov to UBR
Total production W
i
= 16000.0 Rolling stock constraint

In the first criteria of LP formulation we supposed only UBR responsible for
railway transport so, in that case, they have to be obligated to transport domestic coal,

62

copper concentration, oil product, imported product from China and passenger
transport service from government. Also we supposed those obligations are
implementing now if we dont choose any better way to increase railway sector it will
continuous in 2014. Another assumption is total capacity is 16mil.ton in main line,
actual UBR rolling stock capacity 14mil.tn a year and if they will use private company
rolling stock which has already bought by them capacity would be 16 mil.tn each year
in 2014.
Forecasted production unit tous.ton and our main objective is to find out optimal
transportation service mix measured by ton. Capacity data unit is also given us by ton.
We found determine the price and cost data measured by tug/ton/km it is suitable for
LP model.
In the first case Result as following: In the first case Result as following:
Table 4-16
First Case LP Production mix of UBR
Transport Services UBR production by tous.tn
1. Domestic coal W
1

6218.9
2. Exporting coal W
2
0.0
3. Iron ore W
3
2955.2
4. Copper concentration W
4
548.4
5. Oil product W
5
622.7
6. Fluorspar W
6
0.0
7. Imported production W
7
481.6
8. Transshipment W
8
2597.6
9. Passenger W
9
2575.6

Because of a 10.45mil.ton government obligation they fully denied to transport
fluorspar and exporting coal. However they have profitable product demand to
transport they ignored it because of heavy volume of obligation. It is main reason of

63

government subsidy in Mongolian railway. LP showed us profitable result but we will
compare it next section result.
NetRevenue = [max{
8
=1

]
8
=1
=
=99,708,530 12,381,418 79,352,644 = 7,974,468 tous.tug

64

4.4.3 Linear Programming in Second Case
Second case net revenue determining equation as following:
Netrevenue =[ max{
8
=1

8
=1
] +
5
=1

where
[max{
8
=1

]
8
=1
- LP formulation to find first case optimal production
mix for UBR
O Forecasted operation cost of UBR
F- Forecasted Financial department cost

5
=1
- Additional revenue from private operator companies for UBR (we
will calculate it later)
If we extract LP formulation it looks like following:
max(NR){ (p
1
W
1
l
1
+p
2
W
2
l
2
+p
3
W
3
l
3
+p
4
W
4
l
4
+p
5
W
5
l
5
+p
6
W
6
l
6
+p
7
W
7
l
7
+
p
8
W
8
l
8
+p
9
W
9
l
9
) - (c
1
W
1
l
1
+c
2
W
2
l
2
+c
3
W
3
l
3
+c
4
W
4
l
4
+c
5
W
5
l
5
+c
6
W
6
l
6
+c
7
W
7
l
7
+
c
8
W
8
l
8
+c
9
W
9
l
9
)
where
p
i
c
i
W
i
l
i
units is given km
Revenue =p
i
x W
i
x l
i
Cost =c
i
x W
i
x l
i

65

Table 4-17
Second Case LP Constraints
Products constraint Demand
tous.ton
Explanation
1. Domestic coal W
1
<= 6218.9 Free to choose
2. Exporting coal W
2
3. Iron ore W
3
4. Copper
concentration
W
4
5. Oil product W
5
=> 622.7 Obligated to UBR
6. Fluorspar W
6
7. Imported
production
W
7
8. Transshipment W
8
9. Passenger W
9
=> 2575.6 Obligated to UBR
Total production W
i = 14000.0 UBR rolling stock capacity

Second case allowed to vertical separation of rail freight charges. It means
private operator companies accepted to enter railway transport. We supposed in the
second case after government obligation divided into UBR and private companies. In
that case UBR service obligation reduced from 10.45 mil.ton to 3.1 mil.ton. In the
second criteria of LP formulation we supposed UBR only obligated to transport
passenger service and oil product and UBR possible to choose another profitable
product to transport limited in its capacity 14 mil.ton. Total main line infrastructure
capacity is 22mil.ton. We also supposed in this case, private operator companies fill
the gap 8 mil.ton and they are willing to transport remaining obligated products such
as domestic coal and imported products from China.
Forecasted production unit thousand tons and our main objective is to find out
optimal transportation service mix measured by ton. Capacity data unit is also given
us by ton. The price and cost data measured by tug/ton/km it is suitable for LP model.
After above LP formulation can find out optimal UBR freight service product
mix in second case.

66

In order to complete whole equation we have to determine private companies
freight service product mix as followings:
First step: To find out demand of private operation companies on Table 4-18
Table 4-18
Second Case LP Production mix of UBR and Demand of Private Operators
Products UBR transport
services
Demand Di Demand for
private
operators
d
i
=D
i
-W
i

W
1

tous.tn tous.tn tous.tn
1. Domestic coal W
1

0.0 6218.9 6218.9
2. Exporting coal W
2
0.0 81.4 81.4
3. Iron ore W
3
7656.0 8000.0 344.0
4. Copper
concentration
W
4

548.4 548.4 0.0
5. Oil product W
5
622.7 622.7 0.0
6. Fluorspar W
6
0.0 288.4 288.4
7
0.0 481.6 481.6
8. Transshipment W
8
2597.6 2597.6 0.0
9. Passenger W
9
2575.6 2575.6 0.0

From the table UBR willing to transport whole transshipment products, copper
concentration and obligated to passenger service, oil products. Also UBR have chance
to transport most of iron ore 7.6 mi.ton from total of 8. 0mil.ton. It means Private
companies have chance to choose remaining products.
Second step: to formulate LP model formulation in other to find out private
companies optimal freight service product mix
max{(p
1
w
1
l
1
+p
2
w
2
l
2
+p
3
w
3
l
3
+p
6
w
6
l
6
+p
7
w
7
l
7
) - Pi (w
1
l
1
+w
2
l
2
+w
3
l
3
+w
6
l
6
+
w
7
l
7
)
where
Pi- Infrastructure charging price (infrastructure using cost of private operator
companies)

67

p
i
c
i
W
i
l
i
units is given km
Revenue =p
i
x W
i
x l
i
Cost =c
i
x W
i
x l
i
Table 4-19
Private Operator companies LP Constraints for Production Mix
Products Constraint Demand
tous.tn
Explanation
1. Domestic coal W
1
=>
6219
Private companies obligated for it
2. Exporting coal W
2
<= 81 Free to choose
3. Iron ore W
3
6. Fluorspar W
6
7. Imported
production
W
7
=>
482
Private companies obligated for it
Total production W
i = 8000 Private companies rolling stock capacity

Private operator companies obligated to transport domestic coal and imported
products.
Above is the private company freight service
After above LP run, we can find private operator companies production mix on
Table 4-20
Table 4-20
Second case LP Optimal Transportation Service Mix of Private Operator Companies.
Products UBR transport (tous.tn)
1. Domestic coal W
1

6219
2. Exporting coal W
2
81

68

Products UBR transport (tous.tn)
3. Iron ore W
3
344
6. Fluorspar W
6
288
7
482

Private company freight service product mix determine on Table 4-20. So we can
calculate UBR additional revenue.
=
5
=1
= 11,342,352 tou. tug
Final result of second case LP ar
Netrevenue = [max{
8
=1

8
=1
] +
5
=1

=142,877,000 12,381,418 79,352,644 +11,342,352 = 62,485,290 tous.tug
In the next chapter we will explain the results of those two LP formulated UBR
net revenue.

69

CHAPTER FIVE
CONCLUSIONS
5.1 Conclusions and discussion.
This paper set out to examine influence of partly vertical separation in UBR using
infrastructure charging price for private operator transportation companies. We use
analysis which includes forecasting and, mathematical methods of production mix
using purely LP method to compare the net revenue of UBR with infrastructure
separation case versus without any private operation companies. The key research
questions were about maximizing net revenue or minimizing government subsidy and
railway performance have to seek to meet future increasing demand. The challenge
was to put the two alternatives performance in 2014 and compare the results.
Next answer the research question through the findings of this analysis.
Research question 1: Can vertical separation improve on UBR performance?
From the LP modeling result we found two alternative Net revenue of UBR.
Net revenue of first case 7,974,468 tous.tug
Net revenue of second case 62,485,290 tous.tug
Direct result looks profitable but study can explain reason of high profit of UBR.

70

Vertical separation can increase the railway transport capacity without high
government cost. More capacity will bring chance to transport more profitable freight
for UBR.
Policy makers have to consider about important issue which private companies
willingness to enter the railway transportation sector. For example in second case
result we assumed UBR only obligated to passenger transport and oil product
transport and private companies willing to be obligated to domestic coal and import
product.
Final targets of policy makers are to support private investment for rolling stocks
and provide profitable transport market both UBR and private companies. In order to
achieve those goals they have to investigate Price sensitivity issue and Government
subsidy issue. We will discuss about it late of this chapter.
Research question 2: Can vertical separation achieve producing more transport
product with less Government cost?
This study considered that vertical separation is stimulation of private sector.
This study found Mongolia has profitable product to transport but not enough rolling
stock supply. We assumed UBR rolling stock capacity 14 mil.tn/year and private
company rolling stock capacity 8 mil.tn/each year in 2014 and saw result in second
case. But in real world in order to achieve these capacity level, policy makers need to
do diversified study such as cost study based on production type, technical feasibility
study to increase infrastructure capacity etc. Our paper might be one of the main
studies for them.
Government subsidy issue:
After LP formulation this study determined new issue which has a major influence on
profitable level of Railway Company. Less profit freight obligation from government

71

more risk. We can see profit level from 1tn service (1 passenger in passenger service)
on Table 5-1.
Table 5-1
Profit level of railway service (Revenue-Variable Cost)
Products
Profit level from
1tn Demand in 2014
1. Domestic coal 995.4tug 6218.9 tous.tn
2. Exporting coal 6,916.3 tug 81.4 tous.tn
3. Iron ore 11,143.9 tug 8000.0 tous.tn
4. Copper concentration 17,973.4 tug 548.4 tous.tn
5. Oil product 4,172.6 tug 622.7 tous.tn
6. fluorspar 7,017.2 tug 288.4 tous.tn
7. Imported production (from China) 6,277.3 tug 481.6 tous.tn
8. Transshipment 17,831.3 tug 2597.6 tous.tn
9. Passenger -470.1tug 2575.6 tous.pass

Iron ore is the highest demand product also one of the most profitable products.
Domestic coal product is one of reason for railway company losses but domestic coal
has to be transported by railway to support power stations. If low capacity railway
they dont have chance to transport profitable freight it is reason of government
subsidy.
In 2014 if no investment to rolling stocks of UBR and no private companies rolling
stock too we can see the result from above LP formulation. In that case UBR losses
would be 14.3 bil.tug. The reason is that whole domestic coal 6.2 mil.tn transport
obligation. Then we found out obligation breakeven point to UBR from LP
formulation in above case. From the result we conclude that this study is important for
policy makers to determine no subsidy level.

72

Figure 5-1. Profit level of UBR

Price sensitivity issue:
One of three of Mongolian railway lines is parallel with paved road. It is specific
monopoly for the freight transport because all main freight transport railway line no
direct competing paved road. But passenger service is shrinking over the year because
of road transport competitor. In the near future another two of three would be parallel
with paved road in that case railway freight transport face with competitive pricing
issue. Pricing issue have to be studied by Authority of Mongolian Railway.

0
20
40
60
80
100
120
140
160
0 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000
R
e
v
e
n
u
e

b
l
.
t
u
g
Domestic cola obligation tous.tn
Profit level
Revenue
Cost
4
8
0
0

t
o
u
s
.
t
n

73

5.2 Limitation of Study and Future Work
Obviously we cannot contain in this study special technical feasibility and other
diversified matters. We just calculated revenue and cost of simplified model which
include 8 categories freight service. We did not examine very carefully considered
every product, transported by Mongolia railway, service cost and revenue. In this
study only used UBR data in the future if private company data available this sort of
study can explain wider view.
This research examined the optimal freight transport service mix from government
view which railway transportation service in excess demand situation without direct
competition other transport mode. LP model is suitable for production mix industry
but in railway transportation case we can use it in the excess demand. In the practice
this research main study to determine fair production mix for multiple railway
operator companies.
This study sought to find out profitable UBR performance and analyzed data of UBR.
There is a lot of consideration to increase railway performance we just considered
about vertical separation and optimal production mix. If using this study in practice
more extended study needed. Related to private company cost and also price sensitive
analysis with highway transportation.
Also implementing vertical separation means new companies are coming to railway
sector. They need new legislation environment also need wider study for it.

74

REFERENCES
Bitzan, J . D. (2003). Railroad costs and competition: The implications of introducing
competition to railroad networks Journal of Transport Economics and Policy,
37(2), 201-255.
Borts, G. H. (1960). The estimation of rail cost functions. Econometrica, 28(1), 108-
131.
Bouf, D., Crozet, Y., Guihery, L., & Peguy, P.-Y. (1999). Compared performance of
railways companies in Europe. Paper presented at the Operating Railways for
Traffic Growth and Profit. Proceedings of Seminar A, AET European Transport
Conference.
Calvo, F., Ona, J . d., & Nash, A. (2007). Proposed infrastructure pricing methodology
formixed-use rail networks. Journal of the Transportation Research Board, 9-16.
Caves, D. W., Christensen, L. R., & Tretheway, M. W. (1980). Flexible cost functions
for multiproduct firms. The Review of Economics and Statistics, 62(3), 477-481.
Caves, D. W., Christnesen, L. R., & Tretheway, M. W. (1980). Flexible cost functions
for multiproduct firm. The Review of Economics and Statistics, 62(3), 477-481.
Charney, A. H., Sidhu, N. D., & Due, J . F. (1977). Short run cost functions for class II
railroads. Logistics and Transportation Review, 13(4), 345-359.
Drew, J ., & Nash, C. A. (2011). Vertical separation of railway infrastructure - does it
always make sense? Retrieved March 12, 2012.
from http://eprints.whiterose.ac.uk/.
European Commission. (2003). Calculating transport infrastructure costs. Retrieved
February 20, 2012. from ec.europa.eu/transport/infrastructure/doc/infrastr-
cost.pdf.
Friendlaender, A. F., & Spady, R. H. (1981). Freight transport regulation: Equity,
efficiency and competition in the rail and trucking industries. London: The MIT
press.
Griliches, Z. (1972). Cost allocation in railroad regulation. The Bell Journal of
Economics and Management Science, 3(1), 26-41.
Harris, R. G. (1977). Economies of traffic density in the rail freight industry. The Bell
Journal of Economics and Management Science, 8(2), 556-564.
Ivaldi, M., & Cullough, G. J . M. (2004). Density and integration effects on class I US
freight railroads. Journal of Regulatory Economics, 19(2), 161-182.
Keeler, T. (1974). Railroad costs, returns to scale, and excess capacity. Review of
Economics and Statistics, 56(2), 201-208.
Macrio, R., Teixeira, P., & Rothengatter, W. (2010). Deploying business logic for
railway infrastructure charging. Transportation Research Record: Journal of the
Transportation Research Board, 2159(2010), 44-51.
Merkert, R., Smith, A., & Nash, C. (2010). Benchmarking of train operating firms - a
transaction cost efficiency analysis. Transportation Planning and Technology,
33(1), 35-53.
National Statistical Office of Mogolia (2008). Mongolian statistical yearbook 2008.
Ulaanbaatar.
National Statistical Office of Mogolia (2011). Monthly news. Retrieved J anuary 18,
2012. from http://www.nso.mn/v3/.

75

Nash, C. (2003). UNITE (UNIfication of accounts and marginal costs for Transport
Efficiency). Leeds: Funded by the European Commission 5th Framework
Programme, Institute for Transport Studies, University of Leeds,o. Document
Number)
Nash, C., Matthews, B., Link, H., P.Bonsall, Lindberg, G., Voorde, E. v. d., et al.
(2008). Policy conclusions. GRACE (Generalisation of Research on Accounts
and Cost Estimation) Deliverable 10. Retrieved February 10, 2012.
from www.transport-research.info Projects & Analysis.
Nash, C., & Sansom, T. (2001). Pricing European transport systems: Recent
developments and evidence from case studies. Journal of Transport Economics
and Policy, 35(3), 363-380.
Nash, C., & Toner, M. (1998). Background notes o. Document Number)
Pietrantonio, L. D., & Pelkmans, J . (2004). The economics of EU railway reform o.
Document Number 13
Pittman, R. A. (2003). A Note on non-discriminatory access to railroad infrastructure:
Department of J ustice Antitrust Division. Economic Analysis
Groupo. Document Number)
Railway, U. (2009). Finantiol statement of UBR. Ulaanbaataro. Document Number 1
Railway, U. (2011). Finantiol statement of UBR. Ulaanbaataro. Document Number 3
Render, B., Ralph M. Stair, J ., & Hanna, M. E. (2009). Quantitative analysis for
management (10th ed.): Pearson international edition.
Rivera-Trujillo, C. (2004). Measuring the productivity and efficiency of railways (An
International Comparison). Unpublished, Leeds.
Simple trans. (2010). Mongolian railway route map.
Thomas, J ., Dionori, F., & Foster, A. (2003). EU Task force on rail infrastructure
charging: Summary findings on best practice in marginal cost pricing. European
Journal of Transport and Infrastructure Research, 3(4), 415-431.
Tsionas, E. G., Baltas, N. C., & Chionis, D. P. (2010). Rail infrastructure charging in
Hellenic railways. Journal of Policy Modeling, 33(2011), 370-380.
W.Caves, D., Christnesen, L. R., & Tretheway, M. W. (1980). Flexible cost functions
for multiproduct firm. The Review of Economics and Statistics, 62(3), 477-481.
World Bank. (2010). GDP of Mongolia. Retrieved J anuary 13, 2012.
from http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny
_gdp_mktp_cd&idim=country:MNG&dl=en&hl=en&q=gdp+of+mongolia.
World Bank. (2011). Railway reform: Toolkit for improving rail sector performance.
Retrieved J anuary 13, 2012. from web.worldbank.org.

76

APPENDICES
Appendix 1:
Direction
Report for 2005 Report for 2006 Repert for 2007 Report for 2008 Repert for 2009 Repert for 2010
tous.
tn
tous.tn
.km km
tous.t
n
tous.t
n.km km tous.tn
tous.t
n.km km
tous.t
n
tous.t
n.km km
tous.t
n
tous.t
n.km km
tous.t
n
tous.t
n.km km
Transit 3444 3823 1110 2296 2548 1110 3444 3823 1110 2296 2548 1110 2516 2793 1110 2315 2569 1110
from Russia to China 2915 3236 1110 1919 2129 1110 2915 3236 1110 1919 2129 1110 1968 2185 1110 1797 1995 1110

Crude oil 58 65 1110 0 0 58 65 1110 0 0 0 0 0 14 15 1110
Mineral oil 113 125 1110 101 112 1109 113 125 1110 101 112 1109 227 252 1110 185 205 1110
Timber 2552 2833 1110 1664 1847 1110 2552 2833 1110 1664 1847 1110 1522 1690 1110 1400 1554 1110
Metal ore

28 31 1110 0 0 1110
Non-ferrous
metals

11 13 1110 0 0 1110
Chemical
cargoes 179 199 1110 136 151 1110 179 199 1110 136 151 1110 108 120 1110 161 179 1110
Rail

37 41 1110 15 17 1110
Other 13 15 1110 18 20 1110 13 15 1110 18 20 1110 35 39 1110 22 25 1110
from China to Russia 529 587 1110 377 419 1110 529 587 1110 377 419 1110 548 609 1110 518 575 1110

PEC 172 191 1110 64 71 1110 172 191 1110 64 71 1110 105 117 1110 130 145 1110
Coke 85 95 1110 68 75 1110 85 95 1110 68 75 1110 48 53 1110 109 121 1110
Building
products shipments 21 23 1110 14 16 1110 21 23 1110 14 16 1110 12 13 1110 16 18 1110
Chemical
cargoes 26 29 1110 21 23 1110 26 29 1110 21 23 1110 11 12 1110 27 30 1110
Equipment 106 118 1110 168 187 1110 106 118 1110 168 187 1110 145 161 1110 97 107 1110
Other 118 131 1110 43 47 1110 118 131 1110 43 47 1110 228 253 1110 139 154 1110

77

Direction
Report for 2005 Report for 2006 Repert for 2007 Report for 2008 Report for 2009 Report for 2010
tous.
tn
tous.t
n.km km
tous.
tn
tous.t
n.km km
tous.
tn
tous.t
n.km km
tous.
tn
tous.t
n.km km
tous.t
n
tous.t
n.km km
tous.t
n
tous.t
n.km km
From MGL 1776 1575 886 2565 2188 853 1776 1575 886 2565 2188 853 2897 2395 827 3800 3,382 890
CONTROL

2565 2132 831 2,955 2,352 796

to Russia
368 304 825 376 300 800 368 304 825 376 300 800 213 171 802 255 204 799

347 242 697 215 145 674

coal
20 8 410 20 8 410 20 8 410 20 8 410

410

fluorspar
198 155 780 258 201 780 198 155 780 258 201 780 175 137 780 215 168 780
Skoroportyashiysy
a goods
9 6 730 7 5 730 9 6 730 7 5 730 8 6 730 6 700
Other
142 135 950 90 86 950 142 135 950 90 86 950 30 28 950 32 30 950
to China
1408 1271 903 2190 1888 862 1408 1271 903 2189 1888 862 2,685 2,225 829 3545 3,178 897

2218 1891 852 2,740 2,207 806

coal
134 54 400 224 90 400 134 54 400 224 90 400 279 112 400 100 40 400
iron ore
238 214 900 1001 900 900 238 214 900 1001 900 900 1,420 1278 900 2400 2280 950
The copper
concentrate
614 686 1118 586 655 1118 614 686 1118 586 655 1118 586 656 1118 594 664 1,118
fluorspar
- 400 60 655 400

400 60 24 400 102 41 400 115 46 400
zinc ore
91 22 240 109 655 240 91 22 240 109 26 240 111 27 240 148 36 240
crude
35 10 280 11 655 280 35 10 280 11 3 280 45 13 280 45 13 280
timber
124 130 1050 69 655 1050 124 130 1050 69 73 1050 43 45 1050 43 45 1,050
Other goods
172 155 900 130 655 900 172 155 900 130 117 900 99 55 550 100 55 550

78

Appendix 2:
Category
2006 2007 2008 2009 2010
tous.tug tous.tug tous.tug tous.tug tous.tug
1. Operation of freight transport cost 3,468,318 3,829,532 5,286,427 5,259,461 6,679,763
2. Infrastructure renewal and service 42,956,329 35,656,912 46,675,313 41,575,997 52,968,632
3. Locomotive and pulling cost 70,709,256 69,772,920 104,927,882 83,711,069 134,875,750
4. Passenger 8,270,778 7,952,625 10,547,675 10,181,094 11,167,526
5. Rolling stock and Loc maintenance 20,226,770 22,692,937 35,055,606 23,415,413 27,944,629
6.Central operation office cost 3,836,638 4,605,369 7,062,929 6,635,906 8,799,260
7.Cost of Finance department 27,273,239 22,412,833 12,888,662 50,076,289 55,789,330
TOTAL 176,741,328 166,923,128 222,444,494 220,855,229 298,224,890

79

RA6997498 Batmyagmar Myagmar

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

RA6997498 Batmyagmar Myagmar

Transféré par

Droits d'auteur :

Formats disponibles

National Cheng Kung University

Institute of International Management

- New Operator companies product. It would transport excess product of UBR

Vous aimerez peut-être aussi