Why State Owned Enterprises(SOEs) Underperform ? Case of Pakistan Railways-2 /The Way Forward
In our last post we discussed the issues and problems of Pakistan railways and highlighted the factors responsible for its decline over a period of time. In this 2nd and last piece we will present a plan of action for its revitalization.
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 familiar route i.e. running it as commercial organization by bringing in professional management ,concentration on core activities while disinvesting peripheral business, outsourcing of maximum core activities through induction of private sector, creation of independent regulatory authority to ensure healthy competition etc.
Before prescribing a plan of action for revitalization of Pakistan Railways, let us carry out its SWOT analysis pinpointing its strengths and weaknesses as well the opportunities available and the threats posed by the exogenous factors.
- Despite widespread dissatisfaction regarding its substandard quality of services, Pakistan Railways has been able to maintain its passenger traffic, due to increased population and cheap fare policy
- Its work force consists of experienced and well trained officers and staff who are still motivated and serious about improving its performance
- Geography of Pakistan provides it with profitable long haul passenger and freight corridor with good permanent way despite maintenance backlog.
- It has well equipped and well staffed loco and rolling stock maintenance facilities
- Availability of a modern container terminal enables it to successfully compete with the private sector
- Its assets i.e. rolling stock, telecommunications and signalling networks are rapidly depleting due to lack of funds for their maintenance
- 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 have serious implications for future profitability
- Political necessity to operate even those services which can never cover their costs is biggest source of its losses
- Extensive network, built by the British for their colonial imperatives, served well in the past in the absence of roads, cannot be commercially viable to maintain in the face of tough competition from road and resource constraints
- Over staffing in certain categories, while under staffing in critical areas is serious challenge for a safe and efficient rail network
- MIS and financial reporting system needed for a modern, commercial organization is lacking
- Pakistan Railways is poorly connected with other modes of transport to make it a part of multi-modal transport system due to non- formulation of a comprehensive national transport policy
- Increasing passenger and freight traffic due to increasing population and prosperity provide opportunities for profitable train operations
- Increased demand for cross border regional linkage
- 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 railway
- 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 commercialisation 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 outsourcing
- 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 be a disaster if no carried out without proper planning
- Claims of the provincial governments on its land can stall any efforts to modernize it by commercialization of its lands not needed
Keeping in view the above mentioned analysis we can enumerate the multifarious challenges Pakistan Railways has to tackle in its road to recovery. These are
- How to increase the profitability of Pakistan Railways by improving its operational efficiency and reducing its costs
- How to gain consumer loyalty by offering quality services at affordable prices without adversely affecting its profitability
- How to modernize Pakistan railways at a speed and cost which is realistic yet enough to keep it relevant in the rapidly globalizing world
- How to stop attrition of essential staff and attract the best talent through proper incentives and rewards
Plan of Action
In order to tackle the above mentioned challenges and bring a turnaround, the following plan of action can be the starting point;
1. Envisioning the Future
For making Pakistan Railways relevant in the rapidly prospering Pakistan, it must have a very clear vision of where it is heading. We can formulate its vision statement as
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, rationalising its operations and efficiently managing its resources
In order to achieve the above vision, it can adopt the following mission statement
- Enhancing safety and security of the trains by continuously training the staff, maintaining its infrastructure and moving assets and developing new technologies
- Promoting technological innovations by increasing investment in research and development
- Unifying social benefits and economic benefits by putting convenience of the public first and reducing operational cost
- Strengthening energy conservation and environmental protection by developing eco-friendly technologies
2. Formulation of National Transport Policy
It is a pity that even after six decades of independence we have not been able to formulate a comprehensive national transport policy. It becomes all the more depressing to know that a draft policy, prepared by the foreign consultants in consultation with all the stakeholders, has been lying in the Ministry of Communications for years. There is an urgent need to formulate a comprehensive transport policy which should indicate the broad long term direction for the sector, create institutions and define their respective roles, make rules for coordination, set safety standards and provide an incentive and rewards system for various stake holders. Within this framework the Government’s role will be confined to legislation, policy development, regulation, capacity building and facilitation, while the private sector will take the lead in entrepreneurial investment and infrastructural development. Within the national policy settings, transport sector will be developed on the basis of public-private partnerships and a supportive policy framework and institutional arrangements to achieve the following strategic objectives;
- 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
Needless to emphasise, formulation of a comprehensive transport policy 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 as every mode of transport i.e. rail, road, aviation and marine would know where it stands respectively in the overall national transport perspective. Additionally and most importantly, 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.
3. Restructuring Governance Mechanism
After the finalization of a cogent overall national transport policy, government should finalize and promulgate new legal framework for Pakistan Railways, envisioning respective roles of the private and public sectors. There is a need to establish a Railway Regulatory Authority (RRA) so that the multi-functional role of Ministry as administrator, operator, and regulator is segregated. Let the Ministry of Railways be responsible for policy formulation, assisted by high-powered Railway Advisory Board while a Chief Executive Officer (CEO), assisted by a technical committee consisting of senior railway officers, should look after the operational aspects of Pakistan Railways. Needless to reiterate, we cannot turn around Pakistan Railways without converting it into an independent corporate identity instead of its present status as a government department. Establishing it as Pakistan Railways Corporation (PRC) consisting of independent subsidiaries/companies grouped together on functional basis and operating on commercial basis is the only way forward for its survival and growth
4. Financial Restructuring
It is now time to decide whether Pakistan Railways should be run like a commercial organization or a government department. If the state wants to run it on commercial lines then it has to be given authority to stop those train operations which are not financially viable due to changed socioeconomic structure of the country. However if certain loss making train services are to be continued for strategic/social considerations, let the government compensate the Pakistan Railways 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.
On the other hand if Pakistan Railways have to be run as a government department as is the case now, 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
Pakistan railways needs to carry out four types of rationalizations to run on purely commercial considerations namely
- Tariff rationalization: Adjust tariff rates according to market conditions and replace across the board subsidy with targeted relief to passengers with limited means.
- Operational rationalization: retain only profitable railway trains and weed out the uneconomical ones.
- Human resource rationalization: weed out the unnecessary staff, retain the essential and recruit the ones critically needed after carrying out detailed need assessment in the wake of new operational requirements.
- Assets rationalization: concentrate on core activities and outsource the peripheral activities, i.e. education, health, sports etc
6. Governance Improvement
This is an area which can yield quick results because the present legal framework and institutional mechanism is robust enough to improve the governance if applied with commitment and dedication. Pakistan Railways still has the manpower which is technically qualified and proud of their institution. Give them authority with responsibility and proper incentives and rewards along with strict accountability and they will deliver the results.
Pakistan railways need massive investments just to arrest the fast depletion of its rolling stocks and fixed installation as well as up gradation of its signalling 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 145 locomotives, track maintenance, refurbishment of coaches etc. More than three 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.
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 signalling. 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
8. Outsourcing of Operations
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 build, 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 Pakistan Railways. Where private sector is not willing to run trains due to their being commercially not viable, Pakistan Railways should continue to operate on those routes as part of the Public Service Obligation (PSO) ,duly compensated by the state for the loss it occurs for these operations.
9. Commercialization of Assets
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 Railways will need 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.
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(SPV) 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 computerization 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
Pakistan Railways had to establish and maintain a large number of manufacturing and repairs facilities in the past because of shyness of the private sector to come forward in this field due to lack of expertise and resources. Some of these are
1. Sleepers manufacturing factories
3. Locomotives manufacturing unit
4. Railways Corporation
5. Pakistan Railways Consultancy Services (PRACS)
6. Track Maintenance Corporation
Now, 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. These need to be corporatised and incorporated as independent commercial organisations before their privatisation. Induct the private sector, starting with gradual manufacturing of spare parts, overhauling of the rolling stock 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 signalling 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
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. In order to do so, the government should immediately finalize the National Transportation Policy so that the funds allocated for transportation sector could be judiciously distributed among different modes of transportation. Within this national transport framework, 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