Commercializing Pakistan Railways - II

A 'line-of-business' structure is generally adopted by commercial railways to align markets in the rail industry towards achieving utmost customer- both passenger and freight related- satisfaction. Under this structure, while there may be one organizational unit to manage railways, the primary focus of the whole railways is on major markets, and possibly major customers.

The underlying main element of this structure is in the shape of a profit business unit, which works on the principle of profit and loss (P&L), through focusing on the revenue and expense aspects related with customers. Profit centres are created for all business lines involved in railways where, for instance, services connected with urban and intercity rail routes fall under two discrete business units, and would have separate profit units.

A typical commercial railway organization is, in turn, an alignment of customers and markets through a focused approach on services, their underlying discrete business units and connected P&L centres. Hence, in an overall vertical integrated organizational hierarchy, there is at the top a board of directors, under it is the president, and below is a horizontal layout of services/departments. These include; firstly, passenger business unit, with three sub-units, a) marketing, b) urban services, and c) intercity services; where each of the three has its own separate P&L centre. Secondly, there is the freight business unit with the following sub-units, a) marketing, b) bulk services, c) intermodal services, d) freight services, and e) rolling stock management.

Thirdly, there is the track and structure department, having three sub-units, a) design, b) track, c) structures, and d) signals and communications. Fourthly, there is the depots and workshop department, with sub-units as a) purchasing, b) backshops, and c) depots. Lastly, there is corporate administration department, which includes the following sub-units, a) finance, b) accounting, c) risk management, d) human resources, and e) information technology.

Here, while the first two are profit centres working on the basis of P&L, the three departments are cost centres, and according to World Bank's (2017) report titled 'Railway reform: toolkit for improving rail sector performance' these 'have budget responsibility for any costs under their control but are not responsible for generating revenue. Each department may have an investment program; some investments may support several business units or sub-units. For example, investing in track upgrades to increase train speeds may support a passenger business unit strategy and provide service improvement benefits for the freight business intermodal services group strategy.'

There are indeed a number of countries, which have successfully commercialized their railways, like CN (Canada), QR (Australia), and Conrail (US), and could provide a learning curve for Pakistan. The Ministry of Railways (MoR) in Pakistan could even look to forge a technical assistance programme with one or more countries with successful commercialization experiences. Moreover, the MoR could also look to learn from the commercialization experience of British Railways- which ran into a number of issues- to learn about some of the challenges that may arise during the process. In this regard, a good reading reference, as a starting point could be an article by Louis S. Thompson, titled 'Privatizing British Railways: Are There Lessons for the World Bank and Its Borrowers?' (the World Bank, 2004).

Moving towards a commercial railways is indeed rewarding in many ways. Firstly, a prominent feature of a commercial management structure is the deep-rooted sense of accountability. Here, according to the same World Bank report 'Commercial management structures introduce accountability for revenue, expenses, and investments to discrete railway business units or cost centers. They also distribute performance accountability downward in the organization and much closer to customers. P&L results, rather than production or output, can be used to evaluate railway business unit managers. Commercial orientation fundamentally changes how management performance is measured, because costs and revenues can be attributed directly to discrete business lines, thus permitting managers to recalibrate P&L components. Commercial organization structures also facilitate the introduction of incentive systems to reward improved financial performance.'

Secondly, there exists an incentive system which boosts the performance of business units 'by providing incentives for managers to reduce or reform loss-making services, and focusing management attention on improving customer services, increasing revenue, and reducing costs.'

Thirdly, such a structure focuses on watching the interest of the shareholder, whereby in a commercial management structure, at most one member is included from the railway executive on the board of directors. Rather there is a focus to 'include representatives from other commercial entities such as local business leaders. Many private commercial railways have at least one member who is a railway shipper or customer.'

Commercializing railways requires, overall, moving towards a commercial management system, and among other elements include 'developing a business strategy and management plans for investment, financial performance, marketing, and human resources.'

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