Pakistan RailwaysChallenges and Response

Shahid Hussain RajaIndependent Consultant-Public Policy

May 10,2015

Introduction Importance of Railways SWOT Analysis What ails the Pakistan Railways Causes of decline How to fix it ? Conclusion

Sequence

Pakistan Railways is one of the most discussed state owned enterprises(SOEs) in the country, blamed for incurring huge annual losses and unsatisfactory performance

Keeping in view its social and political significance and its being the most environmental friendly transportation mode necessitates necessary measures to improve its efficiency.

What went wrong and why ? What measures can be taken to arrest its further decay are some of the questions we are going to discuss in this presentation

Its article version is available at my website www.shahidhussainraja.com

Introduction

Pakistan Railways has been playing a very crucial role in social, economic and political development of Pakistan for the last 150 years.

Employing more than 75,000 persons and providing employment indirectly to al least ten times more, it contributes significantly to the GDP of the country.

Being the cheapest mode of transportation of goods and commuting passengers, it has been the pivot of Pakistan’s industrial and commercial development.

With more than 80 million passengers every year from one corner of the country to other, it is not only a symbol of unity of the country but also a vehicle of social and political integration.

Importance of Pakistan Railways

Rail transport consumes only one sixth of the energy per unit weight-km as compared to road transport, it is less polluting source of traffic-emissions per TKM

Despite common perception, rail fatalities are much lower than road i.e. more than 10,000 per year on roads as compared to less than 100 in railway system.

During any disaster or emergency Pakistan Railways has been the most preferred means of transporting relief goods in the shortest possible time

Lastly, keeping in view the geographical contours of Pakistan, it is an excellent and most economical mode of transportation for long distance goods haulage.

Importance of Pakistan Railways

From strategic asset to commercial entity

From monopolistic to competitive

From public welfare to commercial

From purely state managed to private

From all haul to long haul

Journey Since Establishment

Continuous losses

Consumer dissatisfaction

Depleting assets

Demoralized manpower

Areas of Concern

Constant fall in earnings of the Pakistan Railways has been the prime reason for the continuous losses it is suffering. This in turn is due to three major reasons

1. Reduction in its train operations either because of shortage of locomotives and goods wagons and passenger bogies or the dwindling number of passengers who are opting to travel by road because of improved road network

2. Stagnant tariff structure of Pakistan Railways due to social welfare and political considerations

3. Leakages and wastages in revenue collection due to structural or managerial inadequacies are the third major reason for the revenues falling sort of the targets fixed annually

A. Continuous Losses-1 (Decrease in revenues)

In 2005 Pakistan Railways passenger services covered 85 per cent of their train-running costs. Since then, passenger revenue per passenger-km has increased by 50 per cent while costs have more than trebled due to following reasons

1. Inflation-inflationary pressures are eroding the purchasing power of railway to buy goods and services for running, maintaining and developing the railways operational network.

2. Inefficiency-underinvestment has now started yielding results in the form of low efficiency threshold of almost every railway activity

3. Corruption-lack of proper checks and balances create loopholes for corruption even in the presence of best legal framework and institutional mechanism

A. Continuous Losses-2 (Increased Costs)

Before condemning Pakistan Railways for incurring huge losses ,we must know the magnitude of the of loss, its composition ,context and reasons to arrive at appropriate decisions.

While calculating the loss suffered by the railways, it is assumed that the difference between revenue and costs is profit and loss. It is true for commercial entity, not for an organisation run as a government department as is the case now with Pakistan railways. Some questions;

1.Salaries and allowances-is it a loss ? 2.Pension payments-really loss ? 3.Securituy expenses- 4.Utilities-inflation 5.loan repayments 6 .External factors responsible for loss- a. burning of railway stations during riots(loss of revenue) b. floods (stopping of trains, speed restrictions) c. security(less passengers, more expenses)

All the above are public expenditure. If all above are losses then treat other departments as you would like to treat railways

Decomposition of Loss-a side note

Although Pakistan Railways has been successful in maintaining its passenger traffic mainly due to its cheap fare policy, number of complaints have been mounting about its less than satisfactory performance.

Most of the complaints are about extremely low quality of services provided, lack of punctuality, disrespectful attitudes of the employees towards the passengers, unnecessary secrecy and outright fleecing

This across the board consumer dissatisfaction has created a crises of confidence among the very loyal passenger base of Pakistan Railways

B. Consumer Dissatisfaction

Although not peculiar to Pakistan railways only, there is a widespread demoralization among the rank and file of all railway employees due to continuous losses, adverse publicity and sense of self-alienation.

Demoralization and motivation, both are self-sustaining and self-perpetuating. If there were a turn around, it would boost self-confidence and vice versa.

It is not only adversely affecting the efficiency and effectiveness of service delivery but is also forcing the most efficient and essential to leave the service.

C. Demoralized manpower

Every asset of Pakistan Railways is fast deteriorating as most of them have outlived their productive lives- infrastructure as well as its rolling stocks.

It is adversely impacting upon its operational efficiency, as it could not be upgraded as per technological developments in other countries.

Consequently extensive speed restrictions, engine failures, lack of proper facilities in trains, railway stations, and engine workshops which have not been upgraded as per technological developments

A cursory look at its physical structures and rolling stocks paint a gloomy picture of an elaborate structure crumbling, finances are collapsing, with services being suspended, assets deteriorating and debt spiral

D. Depleting Assets

1.Underinvestment

2.Institutional dichotomy

3.Governance issues

Causes 

After 1973 Pakistan Railways' budget was amalgamated with the national budget with the result that the profit they earned was diverted to other heads, leaving less and less for its maintenance, expansion and improvement.

On the other hand, the Government spent three times more

on road sector. It was this combination of neglect to railways and preference to roads, which is the root cause of the present malady of Pakistan Railways.

Ministry of Railways ,which is responsible for providing funds for the maintenance and development of the provision of the railway network has no long-term framework for capital support to perform these roles.

Underinvestment

On the contrary India invested heavily in railways and less on roads with the result that our road sector is better than Indian one.

Indian railways are far better than their Pakistani counterparts in terms of profitability and customer satisfaction because India invested in rail network

We have not been able to formulate any National Transport Policy which could at least show where railways stand vis a vis other modes of transportation.

Underinvestment

Overall financial crises of the country have reduced the availability of the resources for routine operations not to speak of replacement and up gradation. Not up to date, even then present rolling stock can earn profit if cash is injected

Wrong priority of investment in the railway is another big anomaly. There was no justification for the dualization of railway tack from Karachi to Lahore in the initial stages of its development as we could have easily handled the traffic load by lengthening the railways stations loop lines.

Similarly up gradation of Monabao track from narrow gauge to broad gauge was just a political expediency without financial or economic cost effectiveness.

Underinvestment

Besides amalgamating the two budgets, the government also made Pakistan Railways a government department under the newly created Ministry of Railways

Consequently, instead of a commercial organization, it became a bureaucratic organization where rules and procedures count more than end results.

Direct interference of bureaucrats in the purely technical issues always leads to ineffective service delivery.

Now the anomaly is that we are expecting commercial results from an entity being run as governmental department. Railways cannot increase fares even if the price of oil triples.

Institutional dichotomy

Similarly, it cannot terminate those services, which are no more needed as better road network, and good bus/truck services are available in the private sector because of political imperatives.

In India, if the government needs to continue a loss making train service due to strategic reasons, it has to pay to the railways for the loss but you can not do it in Pakistan. Even train stops are now decided on political basis.

Ministry is effectively rule-maker, manager, player and umpire of Pakistan’s ‘railway’ team. Such a combination of conflict in roles with concentration of powers is inimical both to good public policy-making and to effective commercial management of state-owned enterprises.

Institutional dichotomy

Running a commercial organisation with political considerations cannot yield profits, just losses.

Tariff rationalisation, operational decisions and developmental budget allocation need commercial considerations not political interference

  Posting/ transfers made on political expediency

adversely affects the operational efficiency and employees morale

Corruption is widespread because those caught have long hands reaching the corridors of power

Governance Issues

SWOT Analysis

Despite dissatisfaction passenger traffic is constant

Experienced well trained staff who are still motivated and serious about improving its performance

Profitable long haul passenger and freight corridor with good permanent way despite maintenance backlog

Well equipped and well staffed loco and rolling stock maintenance facilities

Availability of a modern container terminal

Strengths

Rapidly depleting assets ;rolling stock, telecommunications and signaling networks.

Despite being a commercial organization, it is being run as a government department, having public sector procedures and culture

Limited number of individual freight customers and commodities

Political necessity to operate even those services which can never cover their costs

Weaknesses

Extensive network, to maintain which cannot be commercially viable in the face of tough competition from road

Overstaffing in certain categories, while understaffing in critical areas.

Poor MIS and financial reporting system needed for a modern, commercial organization

Poor connectivity with other modes of transport to make it a part of multi-modal transport system

Weaknesses

Increasing passenger and freight traffic due to increasing population and prosperity

Increased demand for cross border regional linkages

Global preference for multi-modal transport in which rail is becoming dominant

Growing concerns/awareness about environmental issues can force policy makers to give more importance to railways

Opportunities

Greater cost effectiveness of railways as compared to other modes of transport

Improved road network in remote areas-a blessing in disguise for stopping uneconomical train operations without much inconvenience for the public.

Development and commercialization of railway property not needed for operations

Growing importance and acceptance of Public Private Partnership (PPP) along with emergence of strong private sector can bring the needed financing and skills and management through out sourcing 

Opportunities

Continued efficiency improvements in road sector along with improved road network can give tough competition to railways

Improved service by road transport firms can be a challenge

Premature and ill planned privatization can bring ruins

Claims of the provincial governments on its land can stall any efforts to modernize it by commercialization of its lands not needed

Threats

1.how to increase the profitability of Pakistan Railways by improving its operational efficiency and reducing its costs

2.how to gain consumer loyalty by offering quality services at affordable prices without adversely affecting its profitability

3.how to modernize Pakistan railways at a speed and cost which is realistic yet enough to keep it relevant in the rapidly globalizing world

4.how to stop attrition of essential staff and attract the best talent through proper incentives and rewards

Challenges

Making Pakistan Railways the preferred means of passenger travel and goods movement for majority of Pakistani population by providing them a safe, efficient, reliable, comfortable and affordable means of transportation by modernizing its services, rationalizing its operations and efficiently managing its resources

 

Vision

1.Enhancing safety and security of the trains by training the staff and developing new technologies

2. Promoting technological innovations by increasing investment in research and development

3.Unify social benefits and economic benefits by putting convenience of the public first and reducing operational cost

4.Strengthen energy conservation and environmental protection by developing eco-friendly technologies

Mission

Helping directly to increase Pakistan's growth rate through increased and better rail services as well as employment opportunities

Helping indirectly to increase Pakistan's growth rate by providing support services to other sectors of the economy

Providing safe, modern, convenient and comfortable mode of transport for the public at affordable prices

Becoming hub of transport connectivity with rail as pivot around which other modes are aligned

National integration by providing the nation a symbol and a vehicle of national unity

Strategic Objectives

Pakistan Railways is not the only one in trouble; all over the world railway systems are facing the same issues-huge losses and consumer dissatisfaction

Main causes are also the same-underinvestment, competition from road/air, rising expectations of the stakeholders

Similarly road to recovery consists of taking the following steps

1.running it as commercial organisation 2.bringing professional management 3.concentration on core activities 4.disinvestment of peripheral business 5.separation of track ownership/maintenance from train operations 6.outsourcing of maximum core activities 7.Induction of private sector even in track maintenance 8.creation of independent regulatory authority

Global Experience

1.Institutional Restructuring

2.Outsourcing of operations

3.Corporatization of entities

4.Commercialization of assets

5.Governance improvement

6.Rationalization

7.Indigenization 

Response

Finalize the national transport policy lying in the ministry of communications for years, setting out aims and objectives for transport as a whole.

Every mode of transport should know where they stand in the overall national transport perspective

It will not only give the direction to the transport sector but will also encourage private sector to come forward, in a mutually consistent and competitively neutral way

It will also end the unnecessary competition among the four modes of transportation and force them to go for a national multi-modal transport network

1.Institutional Restructuring

After the finalization of a cogent overall national transport policy, finalize and promulgate new legal framework for Pakistan Railways

It should envision an active participation of private sector in the rail sector

Establish Railway Regulatory Authority (RRA) so

that the multi-functional role of Ministry as administrator, operator, regulator is segregated

2.Restructuring governance mechanism

Let the Ministry be responsible only for policy formulation, assisted by a high-powered railway advisory board

Chief Executive Officer (CEO), assisted by a technical committee consisting of senior railway officers, will look after the operational aspects

Corporatize PR and establish it as Pakistan Railways Corporation (PRC) consisting of independent subsidiaries/companies grouped together on functional basis and operating on commercial basis as opposed to Government Department

2.Restructuring of governance mechanism

Resolve the issue of social obligations of the state vs commercial expectations from PR.

If the state wants to run certain loss making train services for strategic/social considerations, let her compensate the PR for the loss thus incurred as it used to do in early 1990s.

In fact the bulk of Indian Railways profit comprises the compensation paid to it by the government for operating loss making trains

If Pakistan Railways have to be run as a government department then it should be treated as such in terms of revenues it earns and expenditures it incurs.

Salaries, pension, operational ,maintenance and developmental expenditure should be considered as public expenditure and not as loss which is what in normal discourse is being stated. Similarly its loan liabilities be paid by the state and not be treated as loss

3.Financial Restructuring

Pakistan railways needs to be run on purely commercial considerations with due regard for social welfare aspects

Across the board subsidy needs to be replaced with targeted relief to passengers with limited means

  Operational rationalisation- retaining most profitable railway

trains and weeding out the uneconomical ones

Human resource rationalisation-weed out the unnecessary staff, retain the essential and recruit the ones cortically needed after carrying out detailed need assessment in the wake of new operational requirements

Functional rationalisation-concentrate on core activities and outsource peripheral activities, i.e. education, health, sports etc

4.Rationalization

This is an area which can yield quick results because bulk of the manpower is very technically qualified and proud of their institution

Even the present legal framework and institutional mechanism is robust enough to improve the governance if applied with commitment and dedication

Authority with responsibility and proper incentives and rewards along with strict accountability regime is essential for effective and efficient service delivery

Add transparency in procurement and sale, computerisation of income, expenditure and assets

5.Governance Improvement

Pakistan railways needs massive investments just to arrest the fast depletion of its rolling stocks and fixed installation as well as up gradation of its signaling and other electronics

The Federal cabinet in its meeting held on 29th December, 2010 approved, a bailout package of Rs 11.1 billion for rehabilitation of locomotives, track maintenance, refurbishment of coaches etc

Almost five years have passed since the Cabinet’s approval of the above financial package, but no relief has so far been provided.

The situation has gone from bad to worse and train operations are frequently disrupted due to deferred maintenance of rolling stock and infrastructure.

6.Investment

We need this investment funds even if we intend to privatise it. Privatisation doesn’t mean selling of railways tracks/stations which have to be maintained by the state to ensure high security standards

Some of the critical areas which need investment are purchase of locomotives, replacement of overage tracks and repairs of bridges, capacity building of the employees and modernisation of its signaling

All these funds are not necessarily to be provided by the state; private sector and foreign investors are willing to invest if provided with proper legal framework and adequate guarantees

6.Investment

One of the quickest and easiest ways to put the Pakistan Railways back on track is to outsource maximum number of its operations. There is no need to reinvent the wheel as Pakistan railways have been doing it in the past and is doing in some areas even now

For this purpose it should finalize and announce Public Private Partnership Policy for active participation of private sector in rail sector on design, finance, built, operate and transfer (DFBOT) basis or built, operate, transfer (BOT) basis

It should also introduce the Track Access Charges Mechanism to become a basis for private sector investment and partnership for freight & passenger operations of PR

PR should continue to operate on the routes having either less or nil

commercial value as part of the Public Service Obligation (PSO) ,duly compensated by the state

7.Outsourcing of Operations

Pakistan Railways have a dozen or so entities which are the legacies of an era when private sector lacked engineering capacity needed by the railway. Some of these are

1.Sleepers manufacturing factories 2.Workshops 3.Locomotives manufacturing unit 4.Railcop 5.PRACS 6.Track Maintenance Corporation

These need to be corporatised and incorporated as independent commercial organisation before their privatisation

8.Corporatization of entities

Everyone is after the land owned by the Pakistan railways and suggests its outright sale to generate funds for its revamping without realizing that one day Pakistan railway will be needing these lands for its expansion.

Pakistan Railways has assets other than land which could be successfully commercialized. One such asset is the railway stations in cities and big towns which can be converted into shopping malls

Similarly sale of advertising rights along the tracks, inside the passenger wagons etc can be gainfully utilized for earning revenues

9.Commercialization of Assets

Only those lands should be disposed of through leasing and not outright sale which ,after thorough analysis ,are in excess of short term needs of Pakistan railways.

For this purpose the newly created special purpose vehicle needs to be given proper directions and maximum autonomy

This SPV should immediately carry out the survey of the lands railways own, its proper record keeping and computerisation and take steps for the removal of any encroachments

It should also scrutinise the contracts awarded/ dining cars auctioned and revoke all contracts and auctions done illegally by observing all the legal formalities

9.Commercialization of Assets

Pakistan’s private sector in the manufacturing and services is robust enough to cater to most of the maintenance and operational needs of the Pakistan Railways. Induct the private sector starting with gradual manufacturing of spare parts, overhauling and finally complete manufacturing

Infrastructure maintenance should be upgraded, with greater use of mechanized maintenance where possible, contracting-out of major periodic maintenance and retraining the maintenance and operating staff.

For signaling and telecoms, even routine maintenance may need to be contracted to external organizations able to pay market rates and guarantee an assured supply of spare parts

Without adequate maintenance the effectiveness of these systems will otherwise steadily decline, with significant effects on the efficiency of the remainder of operations

10.Indegenisation

Keeping in view the strategic and commercial importance of an efficiently run railways as well as social obligations of the state to provide affordable and cost effective mode of transportation to the public, Pakistan railways should be given due importance

National transportation policy should be finalized as early as possible so that the funds allocated for transportation sector could be judiciously distributed among different modes of transportation

Pakistan railways should be run on purely commercial considerations and across the board subsidy needs to be replaced with targeted relief to passengers with limited means,

Outsourcing of operations, corporatization of its entities with subsequent privatization and a strict accountability regime are some of the other essential measures for effective service delivery

Conclusion

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