|CERES No. 140 (FAO Ceres, 1993, 50 p.)|
Calculating the profit in carrying a load from A to B
By Peter Crossley
Why transport? The physical act of moving a commodity from one place to another adds nothing useful to it, often reduces quality, causes delay and costs money.
Imagine a transport contractor accepting a consignment from a farmer, loading it into a truck and driving it along a circular route that ends up back at its starting point, unloading it-then demanding a fee. The produce would have been subject to damage from loading and unloading, dust, heat, vibration, shock, pressure and impact, delay and biological deterioration-and the farmer's reaction would be unprintable.
Farmers are ready to pay to submit their crop to such abuse only because they need to carry it from point A. where it was produced, to point B, where they think they can sell it at the highest price. Calculating the profit to be made after the cost of shipping is the crux of the entire matter.
But most transport operations involve two parties, with different priorities in their financial transaction. The vehicle operator is concerned with the difference between what it costs to carry the goods and what he or she can charge for the service. A positive difference means a profit, but the real costs of providing the service may not always be known. As for the seller of the goods, he or she must calculate the load's increase in value and make sure it's high enough to justify the transport fee.
The real expenses
Every small child selling fruit and vegetables by the roadside has unconsciously concluded that while the produce might bring a higher price in the city, the time, effort and expense of getting it there are more than it's worth. A farmer, however, may not always think this through because calculating the increase in value of a load is not easy-and becomes still harder when the load's owner and transporter are the same person, group or company. Owner-transporters tend to lump transport vehicles in with other machinery and don't know how much shipping really costs.
The producer of a plantation crop like sugar cane assumes transport is a necessary evil, because the cane has to be brought to the factory for processing. If shifting sugar cane over 15 kilometres costs several dollars a ton, a typical estate will pay several million dollars to shift a million tons a year.
It would be worthwhile to save even a small percentage of that
kind of money. But how can you
make a saving if you don't know the present cost, or whether a different vehicle, transport system or infrastructure would be cheaper?
The processed sugar may be sold on the world market to gain foreign exchange. But production of sugar cane also costs foreign exchange for machinery, spare parts, fuel road construction and maintenance. The question is whether more foreign exchange is generated than consumed. The sugar company may find the operation financially viable, but its economics still have to be calculated, using shadow pricing for the real cost of machinery, fuel and local labor. Only then can a government decide whether the spin-off in terms of area development, rural employment and upgrading of infrastructure are sufficient to make up for any deficit in foreign exchange.
What is needed is a single benchmark calculation that applies to all kinds of transport in all conditions and all developing countries. But that is a tall order, because it would have to cover transport of:
- agricultural produce from field to farmstead for subsistence;
- produce for marketing from field to local or city market;
- fuelwood and water from source to household, town or city;
- cash crops from farm or estate via processing plant to national or world markets;
- agricultural inputs from plant or port to farmstead and field;
- relief and/or development aid from store or port to project or household;
- rural project inputs from factory or port to project.
And the variables don't stop there. Transport in developing countries ranges from people carrying loads on their heads to pack animals, animal carts, bicycles, motorcycles, small motorized vehicles, small agricultural vehicles, large agricultural vehicles and commercial vehicles. Infrastructure, especially road conditions, also affects transport. An animal cart travels at roughly the same speed on a winding earth track as it does on a straight bitumen-surfaced road, but the speed and performance of a pickup truck can differ by a factor of five or more.
What about settlements reached only by footpaths, water crossings that are narrow, fragile and seasonal? And how do you compare transport by road or track with transport by rail, river or canal?
Even if a simple calculation could decide what vehicle or mode of transport is most efficient under given conditions, it might not be best because of technical, environmental, socio-economic or political factors. If a settlement is reached by a footpath, the mode of transport can be only about half a metre wide. This may or may not-change if the settlement provides a consistent output of a useful commodity and the benchmark calculation shows a wider vehicle would be cheaper to operate. A cost-benefit study may conclude the path should be widened for wider vehicles, but a social impact study may warn against opening the area to marginal land exploitation or deforestation.
Despite such complications, a benchmark calculation method is possible for field-to-farm or market-to-farm transport using the same cost per ton kilometre (tkm)-the cost of shifting one ton a distance of one kilometre-that is applied to higher level transport systems.
If a trailer-truck carries a payload of 22 tons on an 800-km trip, this is a performance of 17 600 tkm. An annual operation of 80 000 km would be 1.76 million tkm if fully laden coming and going, or half that if it always returns empty. The ton kilometre is not always meaningful. It can produce very large numbers when combined with realistic performance factors, or deceptively small ones when combined with units of expenditure. Nevertheless, it can be applied to nearly all transport vehicles and modes, is easy to calculate and allows comparison of different modes of transport in a given set of conditions.
This is how it works:
1) calculate the total operating expenditure of the vehicle or mode over a given period of time;
2) find its performance in ton kilometres over the same period;
3) divide the expenditure by the performance to find the cost per ton kilometre;
4) use the same procedure for other modes to produce the same units for easy, and often instructive, comparison.
A 22-ton trailer-truck operates for 2 000 hours a year. Half the time it is running and the other half it is being loaded or unloaded or is idle, so that it is full half the time and empty the other half. The truck travels at an average speed of 50 kph, and the total operating expenditure per year is US$50 000, including interest on capital, depreciation, parts, repair, labor and insurance.
What is the cost per ton kilometre? Performance is I 000 hours at 50 kph totalling 50 000 km per year, of which 25 000 km are loaded with 22 tons-550 000 tkm per year. The cost per ton kilometre is 50 000/550 000 or nine US cents per ton kilometre.
Note that the term expenditure is used for operating outgoings to distinguish it from the final operating cost. This is important because a low expenditure is very different from a low operating cost.
Development experts often advise small farmers to choose small-scale transport, because that is all they can afford. But what does afford mean? The farmer or transporter is not spending money on a luxury, but an essential business operation. The benefits of making the trip must be greater than its costs, and that isn't always the case with a small, cheap vehicle.
Compare the cost per ton kilometre for a small vehicle with the trailer-truck cost. A small' single-axle tractor with trailer that incurs an operating expenditure of US$2 500 per year carries 500 kilograms at an average speed of 10 kph and runs for 1 000 hours per year, giving a total distance of 10000 km of which half is carrying 0.5 tons for 2 500 tkm per year. Operating cost is 2 500/2 500 or US$1 per tkm-11 times higher than for the trailer-truck.
Why don't all small farmers own 22-ton trailer-trucks? Because of the performance potential of the larger vehicle-550 000 tkm per year. If the average trip to market is 15 km, a fully utilized trailer-truck would transport 550 000/15 tons per year-36 667 tons a year or 100 tons every day of the year-far more than a small farm produces.
Clearly, load size is crucial. If the load is greater than the vehicle's performance potential, the vehicle will be fully utilized and more than one vehicle will be needed. If the load is less than the vehicle's potential performance, the vehicle will be underutilized. It will be more expensive to operate because some of the expenditure will be the same as before, but the performance per year will be lower and the cost per unit of performance ($/tkm) will be higher.
Expenditures that will remain the same include insurance, taxes, shelter, interest on borrowed capital and labor-unless the operator is paid only while working or is used on other jobs when not driving.
More significant are expenditures that are proportional to use and so do not affect the cost per ton kilometre. These include fuel, repairs, parts and sometimes maintenance. Depreciation is also proportional in developing countries, where vehicles often wear out before they become obsolescent. If simple straight-line depreciation is equal to purchase price divided by years of life, a vehicle used less has a longer life and the depreciation is proportionately lower. This means that even when not fully utilized, a larger vehicle may still be economical to operate. The operating cost of the trailer-truck can increase tenfold and still be cheaper in real terms than the small tractor.
Effects of infrastructure
Infrastructure also affects performance and operating expenditures. Poor road conditions cut speeds and raise expenditures on parts and repairs. As performance goes down, expenditure goes up and with it the cost per ton kilometre.
If road conditions reduce the trailer-truck's average speed from the original 50 kph to 10 kph, its annual performance would drop to 110 000 tkm. Some expenditure components would remain constant, while the cost of fuel would drop in proportion to uses. Maintenance costs per km would double or triple, and depreciation would rise due to the effects of the rough road. The expenditure might drop to 60 per cent because the vehicle is travelling only one-fifth of the original distance, but performance would also drop to 20 per cent-so the cost per ton kilometre would triple to 30 000/110 000, or 27.3 U.S. cents/tkm.
To what extent is it worth upgrading infrastructure ? Improving a road lowers the cost per ton kilometre for most vehicles, so the cost per ton shifted becomes lower over the improved kilometre. Multiplying by the number of tons shifted per year over that section of road gives the savings per year. Multiplying again by the estimated road life in years gives the total saving per kilometre. Discounted to present-day values real savings may be reduced to about 60 per cent. Comparing the cost of improving a kilometre of road with its benefits indicates whether the upgrading is feasible.
Who pays/who benefits?
But who should provide the infrastructure and who should get the benefits? Most governments upgrade public roads al public expense. The benefits accrue directly to vehicle operators through reduced operating costs which' presumably, will be passed down to load owners. Whether this happens depends on competition in the marketplace. Lower expenditures on parts and repair arising from better roads may benefit the national economy through a reduced need for foreign exchange. but upgrading an infrastructure costs foreign exchange for equipment, parts and fuel.
Unless an enterprise takes on the upgrading and maintenance of the infrastructure it uses, the relationship between who pays and who benefits can be tenuous. But maintenance of infrastructure is almost always cost-effective compared with allowing an expensive road or water crossing to deteriorate so badly it needs not only repair, but rebuilding.
Considering various kinds of infrastructure, if a river already exists in a suitable form in the right place. the operating cost of using it for transport is likely to be lower than for other modes. But if an expensive infrastructure like a canal or railway has to be provided, transport analysis should incorporate the cost. Road transport is convenient because it usually carries a load from door to door, and its form-highway, road, track, trail or path-can be tailored to needs and conditions. Nearly every rural enterprise, plantation or village has a link to a road or track. The link may be of low quality but is often fairly short. It would be bad economics to provide an equivalent rail link and impossible to use waterways. In addition, the gradient is much lower for railways than for roads while for waterways, the laws of physics dictate the permissible up-gradient.
A dollar per ton kilometre value is useful when looking at existing transport systems where vehicle usage is known and operating costs are not, but when planning transport for an activity or a number of activities within a region, an alternative trip-based approach can be used. It is a simple system that can be revised and refined as needed:
1) estimate the average trip distance and likely road conditions of each transport activity. Calculate likely roundtrip time, including travel and time spent loading, unloading or idle for each vehicle or mode. Average speed will vary with conditions and the type of vehicle. Divide trip time into the operator working hours per year to get the number of trips, and multiply by the payload the vehicle can shift per year;
2) estimate the annual expenditure for each type of vehicle and divide the figure by the number of tons it can shift per year for the cost per ton shifted. If it is more convenient to use the cost per ton kilometre to compare different vehicles or modes, divide the cost per ton by the one-way trip distance;
3) estimate the total available load per year, and divide it by the amount each vehicle can shift per year to determine the number of vehicles of its type needed.
There is no reason why this procedure can't be used for almost any kind of transport, including head-loading and animal-drawn carts (where opportunity cost of labor is critical to results), and rail or waterways. A more sophisticated approach would also include shadow prices for labor and foreign exchange components and divide the year into quarters, which could be analysed separately to account for seasonal variations in conditions.
Once planners know the operating costs and calculate the benefits of providing or upgrading an infrastructure, they can take other factors into account. Even if they decide social or political issues should take short-term precedence, they'll better appreciate the economic and financial consequences of their decisions.