Commercializing Pakistan Railways - I

Pakistan Railways (PR), a State-Owned Enterprise (SOE) under the Ministry of Railways (MoR), which has been working as a natural monopoly has not been able to pay adequate attention to improving its service for consumers - passengers and freight - for the longest time now. This has happened overall at the back of lack of institutional and infrastructural development.

Specifically, the underlying reason is the lack of needed incentive structure that would align the overall goal of PR to commercial and people's interests, both in terms of enabling generation of profits, and in meeting consumer satisfaction. According to World Bank's (2017) report titled 'Railway reform: toolkit for improving rail sector performance', "State-owned and heavily regulated railways tend to pay attention to government units, not to customers - railway management is evaluated on its attention to political concerns. Meanwhile rail services for customers stagnate or decline. In response, many governments have reorganized state-owned railways to operate as commercial entities." This appears to be the main reason for PR's decline, and the need to move towards becoming a commercial entity should be the goal.

In the case of operation on commercial lines, the two main distinguishing features are introducing competition, and working on the basis of profits. Hence, a commercial railway competes with other modes of transportation to attract more customers, in turn allowing it to generate additional revenues. In doing so, a certain railways naturally looks to improve the quality of its infrastructure, but before that the efficiency of its organizational capacity. Here, while government may still provide "some or all of the capital needed to build new railway lines or even renew existing lines, but most commercially oriented railways operate both government-owned and railway provided assets for profit."

The primary focus of a commercial railway is oriented towards 'customer', while in many developing countries like Pakistan "most railways organized as government departments focus on politicians, other government departments, or internal functions designed to meet internal needs or the needs of other government units." Hence, given this focus, a commercial railway contracts with the government, whereby through these 'government contracts', which are also called public service contracts (PSCs) or public service obligations (PSOs), the railways provide services that the governments want to provide to the customers of railways.

Such services include for instance, providing a) low-price passenger services that are deeply discounted for eligible travellers, b) below-cost freight services for certain commodities of essential nature, for instance fertilizer or grains, which would be very helpful for reducing the component of their transportation costs, and in improving availability of these in a predominantly agrarian economy like Pakistan, and c) open routes on otherwise light density railway routes for achieving broader goals of economy, welfare, and environment.

In addition to entering contracts, at the same time, moving towards becoming a commercial railway means working on the principle of profit and loss basis. Here, "commercial railways try to price each service to cover its costs and earn a return on asset investments. In the case of PSOs or PSCs, the government is a customer like any other, and pays commercial market rates for contracted services. Hence, commercial railway operations minimize or eliminate the need for railways to cross-subsidize loss-making state services by overcharging for other services, usually freight.' This focus is needed for PR to allow it to break its need to rely, year after year, on governments to bail it out of its huge liabilities.

In order for PR to stand on its own feet by becoming commercially viable, requires changing its organizational structure. Hence, being a non-commercial entity, the organizational structure of PR is similar to any typical government department or enterprise. Here, it is important to understand the features of a non-commercial organizational structure, before approaching that of a commercial one. The two main features that distinguish a non-commercial railway organization from that of a commercial one are: "first, the organization is designed to respond to government-not customers. Second, below the GM [general manager] and maybe the management board, no organizational unit is responsible for profit and loss, service versus cost trade-offs, service levels, or revenue. No department is responsible for investment trade-offs or return on investments."

Here, the structure is basically divided into three layers vertically, whereby on top is the GM, while below this post there may be post of 1st deputy general manager (DGM). Both of them, in turn, are responsible for the management board (MB), which usually contains the following departments: a) finance, b) technical, c) operations, d) HR (human resources), e) development, f) commerce, g) IT (information technology), and h) law and administration.

According to the same World Bank report, "Usually, the Ministry of Finance or Ministry of Economy supplies the GM with budget allocation information; the Ministry of Transport directs railways policy and development; and another ministry or entity, independent of the railway, regulates prices. In this organizational structure, most staff are in the technical division, which includes engineering, design, (sometimes depots and drivers) and operations, which includes dispatchers, on-board staff, and station staff. Typically, the commerce unit handles waybilling, and some station staff. Only much farther down in the railway structure are major market segments seen." On the other hand, the organizational structure of a commercial railway primarily gears all its activities towards customers and markets.

(To be continued)

(The writer holds PhD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund. He tweets@omerjaved7)