Why State Owned Enterprises(SOEs) Underperform ? Case of Pakistan Railways-1 /The Way Forward
In every country, developed or developing, general public has been complaining against the state owned enterprises about their performance. Ranging from inefficiency, poor service delivery, non-friendly customer behaviour of the employees, inadequate complaint redressal mechanism to corruption and bad governance are some of the common allegations leveled against these enterprises.
In this series of articles we will be discussing the case of Pakistan Railways -nature of the complaints against its performnce, their underlying causes, structural, managerial or otherwise and suggest a way to improve its efficiency and service delivery. The lessons learnt, conclusions drawn and suggested way forward could be,more or less easily applied to other sate owned enterprises
Pakistan Railways is one of the most discussed state owned enterprises (SOE) in the country for incurring recurring annual losses running into billions of rupees and widespread dissatisfaction about its performance. This is really unfortunate and uncalled for criticism of an institution which 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 at least more than ten times, 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, a symbol of unity of the country and a vehicle of social and political integration. The geographical contours of Pakistan make it an excellent and most economical mode of transportation for long distance goods haulage.
One should not forget that 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. Contrary to common perception, rail fatalities are much lower than road even on a per PKM of TKM measure- average fatalities per year on roads are more than 10,000 per year 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.
Keeping in view the above mentioned significance of Pakistan Railways, there is a need to carry out a dispassionate analysis of its weaknesses and take remedial measures to improve its efficiency, rather than condemning it day in day out. After all, improving an institution with huge capital investment, decades of experience and massive expertise is more cost effective than establishing a new one. This article attempts to answer some of the questions routinely asked about Pakistan Railways i.e. what went wrong and why? Is there any hope of turnaround? What measures can be taken to arrest its further decay and put it back on track etc
What Ails Pakistan Railways?
There are four issues which are normally highlighted in any debate about the state of affairs prevailing in the Pakistan Railways, namely
- Continuous losses/huge subsidy being paid by the state to keep it afloat
- Widespread consumer dissatisfaction about its service standards
- Rapidly depleting assets
- Demoralized manpower
A. Continuous Losses
According to the figures released by the Ministry of Railways, every year Pakistan Railways earns almost two thirds of the expenditure it incurs on its operations, maintenance and development, thereby causing a loss of more than 30 billion rupees per year which is picked up by the state exchequer. 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 and very few, if any, trains are capable of operation on a commercial basis
Leaving aside the question whether all the above mentioned difference between revenue and expenditure is a loss or not, we should first diagnose the reasons for this recurring difference between its earning and expenses which is mainly due to two reasons- stagnant or falling revenue and increasing operational costs of Pakistan railways.
Constant fall in the 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. Firstly, reduced train operations either because of shortage of locomotives , goods wagons and passenger bogies or due to dwindling number of passengers who are opting to travel by road because of improved road network is the prime reason for decline in the revenue stream of Pakistan Railways. Secondly, almost stagnant tariff structure of Pakistan Railways due to social welfare and political considerations is eroding its revenue growth potential in the face of rising prices. Thirdly, leakages and wastages in revenue collection due to structural or managerial inadequacies are the third major reason for the revenues falling short of the targets fixed annually
The second reason for the shortfall between its earnings and expenditure is the increased costs of its operations which are in turn due to three reasons namely inflation, corruption and inefficiency. While inflationary pressures are eroding the purchasing power of railway to buy goods and services for running, maintaining and developing the railways operational network, underinvestment has now started yielding results in the form of low efficiency threshold of almost every railway activity. Lastly lack of proper checks and balances create loopholes for corruption even in the presence of best legal framework and institutional mechanism. However before condemning Pakistan Railways for incurring huge losses, we must know that while difference between revenue and costs is a profit and loss statement for a commercial entity, it is not for an organisation run as a government department which is the case now with Pakistan Railways. Expenditure incurred by the Pakistan Railways on salaries and allowances or paying pension is a public expenditure. Similarly development expenditure to rehabilitate the railway stations burnt during riots or damaged as a result of floods or sabotage cannot be counted towards its loss. All the above are public expenditure. If these are losses then we should treat similar expenses incurred by other departments as losses of those departments.
B. Consumer Dissatisfaction
Although Pakistan Railways has been successful in maintaining its passenger traffic mainly due to its cheap fare policy, number of complaints have been mounting for the last several years. 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 crises of confidence among the very loyal passenger base of Pakistan Railways.
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. Demoralization 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.
Every asset of Pakistan Railways is fast deteriorating as most of them have outlived their productive lives- infrastructure as well as in its rolling stocks. It is adversely impacting upon its operational efficiency, as it could not be upgraded as per technological requirements. 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 being carried out in other countries. A cursory look at the railway stations, examination of its infrastructure and number of suspended trains operations and engine failures on the way paint a gloomy picture of an elaborate structure crumbling, its finances collapsing, with services being suspended, assets deteriorating and debt spiral
One can count three main reasons for the present malady affecting the Pakistan Railways namely
- Institutional dichotomy
- Governance issues
Before 1973, Pakistan Railways were run as a commercial organization, having complete operational autonomy and financial independence. Its budget was formulated separately and presented before the National Assembly one day before the presentation of national budget. 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 woes 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.
On the contrary India invested heavily in railways and less on roads with the result that Indian railways are far better than their Pakistani counterparts in terms of profitability and customer satisfaction while our road sector is better than Indian one. 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. 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 the 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.
2. Institutional Dichotomy
Besides amalgamating the two budgets, the government also made Pakistan Railways a government department under the newly created Ministry of Railways with the result that it, instead of a commercial organization, 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.
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 cannot 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.
3. Governance Issues
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 employee’s morale.Corruption is widespread because those caught have long hands reaching the corridors of power.
In our next post,we will carry out the SWOT analysis of the Pakistan Railways to find out its strengths and weaknesses as well as the threats it is likely to face in future and the opportunities available for its development