Improving the Methodology for Evaluating the Efficiency of Investment in Digital Projects in the Railway Industry

Abstract

Railway networks have a cost structure dominated by fixed and semi-fixed expenses, which means that when traffic volumes fall, costs cannot be reduced proportionally. This paper identifies such cost rigidity as the economic rationale for investment in digitalisation. Using the operating statistics of Uzbekistan Railways JSC, it shows that in 2019–2020 traffic measured in train-kilometres decreased by 13.9%, while total costs increased by 16.5%, giving a negative cost elasticity with respect to volume of −1.19. Under such conditions, the main way to raise efficiency is to perform the same volume of work with fewer resources, which is precisely what digital solutions offer. However, the standard discounted cash flow (DCF) apparatus distorts the value of digital projects. The study identifies three systematic limitations of the standard approach: benefits in the form of avoided losses from improved safety and reliability are not reflected in cash flows; software components have a much shorter service life than hardware; and observed changes are attributed entirely to the project. Corresponding adjustments are proposed: an attribution coefficient for the avoided-loss component, a reinvestment stream for short-lived components, and a discount rate weighted by the actual financing structure of the investment portfolio. An analysis of that structure for 2020–2021 shows that it is stable (Ryabtsev index 0.0458) and that market-based sources account for less than 3%, which makes a purely market discount rate unjustified. Finally, a binomial expansion option model is applied to value staged implementation; under illustrative parameters, flexibility adds 45% to the static net present value. The proposed methodology shifts appraisal results in a conservative direction and provides a basis for starting digital projects with a pilot stage.