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he Centre for Policy Studies on October 9, 2013 organized a video lecture on “Railways: Is

Privatization the Best Approach”. The lecture was delivered by Prof. Mark Fagan who is

an Adjunct Lecturer in Public Policy and former Senior Fellow at the Mossavar-Rahmani Centre

for Business and Government at Harvard Kennedy School. He has written about the impact of

deregulation in the railroad industry including a recent paper published by Transportation

examining the impact of regulatory differences on rail freight share between the United States

and the European Union. At the Harvard Kennedy School, Mr. Fagan teaches Operations

Management and Lobbying: Theory, Practice, and Simulations. At the seminar, officials from

Pakistan Railways, Mr.Khalid Saeed (Director, Centre for Policy Studies, COMSATS Institute

of Information Technology CIIT, Islamabad), researchers and advisors from the Centre as well

as faculty members at university were present at the occasion. The purpose of this lecture was to

get insight from the experiences of railways of developed countries and make a policy brief for

Pakistan Government to pursue privatization in that pattern.

Prof. Fagan talked about the Railroad system in the US that started its operations in early 1800s.

He mentioned that there are seven classes of railroads in North America, earning revenue of

about $ 81.7 billion and 200 routes for more than 173,000 miles of 567 tracks, with 150,000

miles in the United States alone. As an industry, US Railways is enormous, generating around $

81.7 billion (2011) in annual revenues with capital expenditures of $11.6 billion, 31,875

locomotives are run by more than 215 thousand employees. Warren Buffett, the billionaire

investor acquired one of the United States' largest freight railway firms, Burlington Northern

Santa Fe (BNSF), for $25 billion. High productivity in railroads came from variety of sources

provided for instance low cost, safety, reduction in number of accidents, and superior quality.

Comparing the US Railways with the British Railways, Prof. Mark Fagan mentioned that the

privatization in the UK in 1993 with formation of two operation units; infrastructure (track

operation) and above rail operations. Prof. Fagan highlighted that initially there was a single

Guest Lecture by Prof. Mark Fagan on the topic “Railways: Is Privatization the Best Approach”

T

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operator of track operations however later it was controlled by four corporations, which in his

view, was a poor mistake and lead the organization near to bankruptcy. However in the case of

Japan Railways, things were different. He mentioned that there are six regional passenger

companies in Japan railways and one freight company. It was privatized in 1997 with vertical

integration that improved performance due to increase labour productivity, efficiency, active

competition and finally lower fares. Japan Railways also offered lump sum subsidies for low

density railway tracks whereas unemployed labour was also given unemployment benefits.

Among the developing countries, Prof. Fagan highlighted the example of Brazil Railways that

was created in 1967 and privatized in 1996. According to Prof. Fagan, privatization of Brazil

railroads was accomplished through concessions contracts. The reason for concession was that

private sector does not actually wish to take over the ownership of assets concerned. He

mentioned that in general (the British Railways’ experience is the exception), ownership of fixed

infrastructure has remained with the state, although concessions typically involve some private

investment in parts of the infrastructure as well as privately operated services.

Similarly, Argentina also underwent privatization of Farrocarailes Argentinos (FA) during 1990s

through concessions contracts. In this case, government selected concessionaires for bidding and

bidders submitted proposals after which the winners were selected. As a result, the immediate

benefit of privatization was the improvement of freight services and freight rates that declined

substantially. As benefits of the privatization of railways, Prof. Mark Fagan stressed that the

privatization has its benefits, only if pre and post-process planning is done with extreme caution.

Some of the benefits are performance improvement, innovation and change, reduction in need

for government subsidies, de- politicization and management efficiency.

On questions arising from the officials of Pakistan Railways, Prof. Mark Fagan advised that the

most suitable option for privatizing Pakistan Railways shall be the horizontal approach. By

dividing the whole system into geographical zones and then addressing the problems step-by-

step will give desired results. However, the Pakistan Railways should also plan diligently while

using the decision support systems like decision tree that can help to overcome pitfalls of the

process. In his view, the first and foremost step is proper planning. By proper planning, he meant

that is executed by policy makers that focus on improvement of infrastructure, follow models for

better performance, focus on the down side, and create the exit strategy by considering the “if

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and then”. Then is the Benchmarking. He mentioned that for a better foundation of the

privatization policy, evaluation of the success stories of railways privatization around the globe

should be analyzed extensively and then only the best option should be considered while

customizing it to the local challenges and issues.

Prof. Fagan also stressed the need for competent, devoted and informed leadership for

improvements. It is the only leadership that can bring a change in people reaction. It can provide

them with resources for improvement and direction for positive action. He also stressed that once

leadership is in place; there need to be a political will that ensures desired results of privatization

are achieved. He reinstated the fact that political will is prerequisite for Pakistan. He mentioned

that railway system of Brazil is one such example where due to the lack of political will railway

sector faced terrible economic crisis. Thus for Pakistan it is important that experts having

extensive geographical studies must be involved in the process of decision making for

privatization of Pakistan Railways. Moreover, subsidies must be provided to labor that may lose

their jobs as a result of privatization and the leaders must be able to face the unions and

customers during the transition period.

On a question related to the infrastructural improvements in Pakistan, Prof. Mark Fagan said that

for improvement in existing infrastructure of Pakistan Railways, concessioners around the world

can be approached. For example, China can be approached as an investor in the infrastructure.

For that an attractive policy can be drafted involving sensitivity analysis, monitoring and

evaluation of performance of Ministry of Railways, productive research and acceptable toll for

return on investment. Furthermore, for return on investment, revenue can also be generated by

yearly negotiating service charges with customers in return to improved service. Moreover, on

question whether commuter railway be used for improvement, Prof. Mark said that commuter

railways can be a good source of improvement and generation of capital but if those do not cause

congestion to the existing highways traffic and whether the existing infrastructure can be used

for those, is the major concern. All in all, the take home lessons for Pakistan are to be cautious

and should spend ample time and resource to properly plan pre-privatization and post-

privatization phases. He also stressed that incremental privatization should be carried out, with

informed planning and analysis, leadership, political will, benchmarking, and performance

measurements.

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Mark Fagan Adjunct Lecturer in Public Policy Taubman Center for State and Local Government Phone: 617-384-8154 Email: Mark_Fagan@hks.harvard.edu

Profile Mark Fagan is an Adjunct Lecturer in Public Policy and former Senior Fellow at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School. The focus of his research is on the role of regulation in competitive markets. He has written about the impact of deregulation in the railroad industry including a recent paper published by Transportation examining the impact of regulatory differences on rail freight share between the United States and the European Union. He has also examined the impact of electricity restructuring in the United States. The research in electricity markets has been published in the Electricity Journal and cited in the New York Times. Other research papers include the role of government in the financing of small and medium size enterprises to foster growth in China and the need for institutional innovation to support technology and globalization, a collaboration between Mr. Fagan and the Vice Minister for Science and Technology in China. At the Harvard Kennedy School, Mr. Fagan teaches Operations Management and Lobbying: Theory, Practice, and Simulations. He also is a Lecturer in Law at Boston University School of Law where he teaches Securitization, Lobbying and the Law, and Trust and Honesty in the Real World. Mark Fagan is a founding partner of Norbridge, Inc. a general management consulting firm that has a distinctive competence in the transportation sector. Mr. Fagan specializes in helping companies solve operations management challenges. He works with clients in the transportation, telecommunications and utility industries as they grapple with increasing shareholder value in a deregulated world. Mr. Fagan earned a Masters Degree in City and Regional Planning at Harvard University and a BA at Bucknell University. Conflict of Interest Disclosure: Mr. Fagan consults to an array of private sector clients. A list of active clients will be provided upon request.

Recent Publications

"Trust and Honesty in the Real World," Fagan and Frankel, Fathom Publishing, 2007. "Law and The Financial System: Securitization and Asset Backed Securities," Frankel

and Fagan, Vandeplas Publishing, 2009.

Guest Lecture of Prof. Mark Fagan Page 6

Book review: Public Administration and Law, Rosenbloom et al, Third Edition, Public Organization Review, Volume 11, March 2011.

Introducing Competition into Natural Monopoly Industries: An Evaluation of Mandated Access to Australian Freight Railroads, Regulatory Policy Program Working Paper RPP-2007-05, MR-CBG Kennedy School of Government, Harvard University.

Nature versus Nurture: Why do Railroads Carry Greater Freight Share in the United States than in Europe, Jose Vassals and Mark Fagan, Transportation, 34:177-193, 2007.

Catalyzing Institutional Innovation, Shang Yong and Mark Fagan, International Journal of Technology and Globalization, Volume 2, Nos. 3/4, 2006.

Measuring and Explaining Electricity Price Changes in Restructured States, Mark Fagan, The Electricity Journal, Volume 19, Issue 5, June 2006.

Understanding the Patchwork Quilt of Electricity Restructuring in the United States, Mark Fagan, Law and Society Review, School of Law at Pontifical Universidad Catholic del Peru, 2006.

SME Financing in China: Current Situation, Problems and Possible Solutions, Shanghais Zhao and Mark Fagan, Working Paper No. 2, Financial Sector Program Center for Business and Government, Harvard University, June 2005.