An Application of Asset Valuation for Railroad Tracks

The concept of asset valuation, which is the part of asset management, has been widely accepted from many agencies in both private and public sectors. In Thailand, many public agencies have addressed the concept of asset management and incorporated into their infrastructure management system. The public transportation agencies such as the Department of Highways (DOH) have applied the concept of asset management into its infrastructure management such as Pavement Management System (PMS) and Bridge Management System (BMS). This concept helps DOH manage their infrastructures more effective in allocate maintenance resources and manage the agency maintenance funds.

Valuing the value of asset is one of the important procedures that play an important role in asset management. The value of asset can be incorporated in the financial statement of the company. Moreover, it plays as one of the criterion that the managers use in the decision-making.
Reporting the asset in monetary term can help the managers or politicians understand the value of assets easier than the engineering term and can help them understand the return on benefits when maintenance is applied. Mr. Chinnawit Yamkruan conducted a study in which he applied different valuation techniques to evaluate the value of railroad tracks and analyzes the sensitivity of the track value in order to enhance the knowledge of the decision-makers and to improve the efficiency of the decision-making.

The main objective of his research was to develop the framework for valuing railroad track of the State Railway of Thailand (SRT) in order to assist the maintenance program and to increase the efficiency of the decision-making process. The secondary objectives of his research were to: (1) apply different asset valuation approaches to determine the value of railroad track; and (2) recommend the advantage and disadvantage of each asset valuation techniques.

Conclusion

Railroad track value comparison

1. Cost Approach
According to the results of track values from the cost approach, that track value of the Northern line is higher than track value of the Eastern line. Most of railroad tracks in the Northern line are in a good condition. This study also found out that track value appears to be sensitive to QI value when a change of QI value results a change in the recommended maintenance treatment type of SRT since QI value has a direct relationship with a physical deterioration. Therefore, when the conditions of railroad track decline or QI values increase, it will make the physical deterioration increase and track values decrease or when QI values decrease, track values will increase.
Disadvantages of the cost approaches are: there are many methods to calculate parameters of the cost approach. It might make the asset value of the same asset to be different if the appraisers use different methods.

2. Income Capitalization Approach
Based on the results of track values from the income capitalization approach in, the track value of the Northern line is higher than track value of the Eastern line approximately two times. Because the net operating incomes (NOI) of the Northern line are much higher than the net operating incomes of the Eastern line. This approach estimates track values by interesting only the potential of income generating of both lines. Therefore, it makes a difference of track values of both lines is high.

Disadvantages of the cost approaches are; asset value from the income capitalization approach does not have the relationship to the real condition of the asset.

3. Sensitivity analyses of relevant variables
Test cases of relevant variables are analyzed to investigate their impacts on track values. This study performs the sensitivity analyses in both the relevant variables of the cost approach and the income capitalization approach. The summarized results of the sensitivity analyses of these two approaches are following below:

a. Sensitivity analysis of track values from the cost approach

In the sensitivity analyses of relevant variable of the cost approach, relevant variables are classified into two categories:

1. Monetary variables - defined as a variable that are related to money, e.g. material price, labor cost and maintenance price.

2. Non-monetary variables are defined as variables that do not related to money, which are Track Quality Index (QI), type of rail, type of sleeper and type of construction standard.
The impacts of different variables were investigated and comparison was performed between a base case and test case.

The sensitivity study of the monetary variables can be summarized as a change in material price and labor cost appear causes a change of track value in the same direction but the change of maintenance price causes the change of track value in the reverse direction. In addition, material price has the impacts on the changes of track value more than labor cost and maintenance price do.

The analysis also reveals that track values are sensitive to the changes in QI value, rail type, sleeper type and construction standard with respect to non-monetary variables. According to the sensitivity study of QI values, track value appears to be sensitive to QI value results in a change of the recommended maintenance treatment from SRT.

The results of the sensitivity study of rail type, sleeper type and construction standard show that track value will increase when rail type, sleeper type and construction standard are changed from the exits type to the better type. In addition, it should be noted that the change of the construction standard has very high impact to the changes of track values.

b. Sensitivity analysis of track values from the income capitalization approach
In the sensitivity analysis of track values from the income capitalization approach, relevant variables that are applied in this analysis are revenue, expenditure and discount rate. According to the sensitivity analyses results, it can be summarized that a change in revenue and discount rate appear to cause a change of track value in the same direction but the change of expenditure causes the change of track value in the reverse direction. Moreover, revenue has the impacts on the changes of track value more than discount rate and expenditure do.

His thesis abstract is copied and posted.

ABTRACT
Railroad track maintenance is a part of infrastructure maintenance of the State Railway of Thailand (SRT). In reporting the maintenance programs, results from improving the condition of railroad tracks are reported to the top of organization or the politicians in the form of engineering term. Reporting the maintenance programs in the engineering term is difficult for the top managers or politicians to imagine or understand the benefits or affects when the maintenance program is applied.

This study focuses on an application of the asset valuation approaches in order to develop the framework for valuing railroad tracks and demonstrate reporting the railroad track in monetary term. Railroad tracks of the Northern line and the Eastern line of SRT are used as the case studies in this study. This study applies two valuation approaches, which are cost approach and income capitalization approach, in estimating value of railroad tracks. In addition, sensitivity analyses of relevant variables are performed to investigate their impact on railroad track values.
Results of this study show that railroad track value, which are derived from the cost approach, are different from the track values that are derived from the income capitalization approach. The differences of railroad track values between these two approaches are caused from the different interest in estimating asset value. The results of the sensitivity analyses of relevant variables in both cost approach and income capitalization approach show that different variables have effects on railroad track value at different levels.