Saving the railways

RAILWAYS all over the world have an edge in long-haul and mass-scale transportation of both goods and passengers.

In Pakistan they were the primary mode of transport until the 1970s, but since then their share has declined due to a shift in government focus from rail to road transport. From 2005 to 2010, budgetary expenditure on railways was only Rs45.5bn compared to Rs155bn on the national highways.

But lack of resources is not the only problem. Only 42 per cent of total track length is currently being utilised, and this number is expected to fall even further after the closure of many routes in 2010. So what exactly is happening with the remaining 58 per cent? Most likely it is being sold on the black market or being left to degrade on its own.

We cannot expect Pakistan Railways (PR) to run the few locomotives it has left on all routes, as this is neither economically nor physically feasible. But there is at least one thing it can do without spending a single penny — give up its monopoly and open up tracks to the private sector.

PR is facing significant losses due to mismanagement, overstaffing, underinvestment, poor maintenance and weak ticketing checks that allow people to get away with not paying for their tickets. Over time there have also been political interventions in decision-making about which new routes to open. Furthermore, PR is not allowed to charge a market-clearing price; fares have always been dictated by the federal government.

But we have all heard about these problems time and again. What is more important is to focus on how to make things work, which is what the New Development Approach (NDA) team at the Planning Commission is currently working on.

To improve management, partial privatisation should be encouraged. In India this has given the railways sector a much-needed boost. PR can adopt similar measures, such as outsourcing stations management and rail hospitals, allowing companies to run their own container trains, and letting suburban trains run as separate companies. This will increase the private-sector participation necessary for promoting competition.

When outsourcing station management, some percentage share of the revenue from all tickets sold at a particular station should go to management. This would incentivise management to make sure the maximum number of tickets is sold through better provision of services, an efficient ticketing system and minimum free-riding.

Gradually PR should be unbundled and privatised completely. This may include privatising rail tracks, station management (as mentioned earlier) and separating passenger from freight services. Privatising tracks (including signalling), especially, will improve track utilisation and minimise the government’s ability to control competition. Furthermore, the earnings of the track operator would be solely dedicated to the maintenance and expansion of track infrastructure. Such unbundling would create a more mature market in the railways sector, which is necessary for efficient allocation of resources and hence for growth.

For successful results, however, two important conditions must be fulfilled. First, an independent regulatory body must be established with sole responsibility for promoting competition and implementing quality control. Currently all regulations are made by the railways’ ministry, which is also the PR’s parent body.

Existing financial and administrative linkages between PR and the ministry will never allow the latter to draft policies that do not favour PR. It is also widely accepted in international academic circles that improved private-sector participation and increasing competition results in greater benefits if an independent regulatory body exists.

Second, prices should be deregulated and market players should be given full power to charge a market-clearing price. Had the Pakistan Telecommunication Authority (PTA) not been established and prices not deregulated, we might not have witnessed the boom in the telecom sector.

Furthermore, to reduce corruption within PR, employees should be given performance-based remuneration and promotion. PR employs round 90,000 people and carries on average 65 million people annually. Indian Railways, on the other hand, employs 1.6 million people and carries 7.3 billion people annually. This gives us an annualised passengers-per-employee ratio of 722 for PR and 4,562 for IR. Given its massive losses, PR needs to better handle its employees and operations. The colonial tradition of seniority-based promotions has long failed and has even been abandoned by the country that propagated it.

The solution, then, is to unbundle railways infrastructure into rail tracks and signalling, station management, and services (passenger and freight). Privatise unbundled assets, especially rail tracks and signalling for increasing track utilisation and station management for making ticketing procedures and checks more effective. This gives us a clear-cut restructuring plan for one of Pakistan’s major state-owned enterprises.

The writer is an economics graduate from the University of Bath and is currently working as an economic consultant in Pakistan.

Written by Ahmed Pirzada

& published in DAWN (1st Feb, 2011)

Let's get it right this time

The favourite statements or slogans to divert attention from real issues and woo people during the election period to vote for this party or that: “We will bring the growth in double digits. We will bring in FDIs. We will create employment opportunities. We will provide housing for poor. We will develop a tolerant and talented society. We will alleviate poverty.” By now it is obvious; it very much sounds like a manifesto of a political party. Those who will cry these words out in a more enthusiastic way will surely win the elections. Fair enough! This is how elections are fought. But what is not fair is that our policy makers have also relied on similar statements without feeling the need to explain one critical question: how will they make all this happen?

Well some might already be thinking of ways the government can bring this change. Many would know for sure that all this can not happen in the parliament’s lifetime. Or some may be thinking that some of these may be possible probably by initiating various mega projects, focusing on trade and not aid, giving subsidies to lets say textile sector, and so on. Unfortunately we do not have enough money for the mega projects, developed countries prefer to give aid than removing trade barriers to foreign goods and we have been giving subsidies to various sectors for the last six decades, but they have still not developed enough to sustain themselves without needing financial help.

In recent conferences organised by the Planning Commission to debate on the New Development Approach (NDA) being developed internally, some many interesting questions were raised by civil society, donor agencies and the Planning Commission itself. Just to give you a taste of it let me state a few over here:

Everyone talks about promoting public-private partnership but has anyone pondered on what does it mean? Or do we have set rules defining public-private partnership necessary to send some sort of a signal to the private sector?

We often say that the government should do this and that. But who is the government and what exactly should its role be?

One way is to keep looking for all these answers which we might never find given inefficient bureaucracy, frequent changes in political setup and deficit of constructive thinking. Second is to get the government out of all the sectors through deregulation and privatisation and let the markets work on competitive basis. At least going with the latter option, we would not have to waste time in finding incomplete answers.

To ponder a bit more, let’s focus on our current growth cycle. We get foreign aid which gets spent on fiscal incentives leading to rapid growth. Now when we should introduce market reforms we prefer to relax and wait for the fiscal pressure to build up, which when gets coupled with some external shock bringing us back to where we started from. Making foreign trips to look for financial aid! Honestly, it sounds more like our CRISIS CYCLE? I will leave it to the readers to decide.

YES, some of you are right. If we replace aid with more consistent investment, we might manage to move out of this low level equilibrium trap. But why should anyone invest in our market which is marked by government presence in all the sectors? This is not all, inefficient infrastructure and law and order, unskilled workers and acute energy shortage are enough to keep the investors away. Furthermore, would you like to compete against Pakistan Railways which is also responsible for devising rules governing railway business in Pakistan? Or what about the aviation industry where the national carrier gets preference in route allocation? In energy sector, we have been trying to resolve circular debt for last three years. How is it even possible to achieve that when the sector is not being allowed to charge enough to cover its cost? Similarly, why shouldn’t our refineries decide the price themselves? Can our government determine the prices more efficiently than the markets? Looking at our history, governments have always been quite determined to outsmart the market. So far the results have been a bit disappointing for the public but perhaps stock brokers can learn a trick or few.

These are some of the important issues which NDA tries to resolve. It offers private sector led growth through well functioning deregulated markets, software development, rezoning cities, community participation and useful connectivity. But before we move towards implementation, we really need to make our mind if this is what we want or are we better off sticking with the old model?

Written by Ahmed Pirzada

& published in Business and Finance Review (31st Jan, 2011)

Survey reveals key citizens' issues: Connectivity of Pakistan

WEEKEND MAGAZINE  (January 22, 2011) : A survey was conducted on the transport sector of Pakistan to get first hand experience of citizens' problems. Out of all the surveys distributed randomly in various universities, engineering firms and government agencies located in either Islamabad or Rawalpindi, 83% response rate was achieved.

Targeting universities provided us with easy access to youth belonging to different areas of Pakistan and therefore helped us in significantly eliminating the sample bias problem. In the sample, 52% of the respondents were from the age group of 21-25 years followed by 30% from the age group of 26 and above. Remaining 18% were between 17-20 years of age. Similarly, 38% were fully employed including 1% not in paid employment, 58% were students while 4% were both student and employed.

It was found that only 26% of the respondents use public transport on daily basis. However, there is considerable demand which is visible from 41% respondents using it at least once or twice a week and 60% using it at least once in two weeks. On the other hand, only 21% respondents said they never use public transport. Main problems faced while commuting are quality and lack of transport. 51% reported that they think quality is the major issue while 36% view it to be lack of transport.

Of the female respondents, many reasoned security related to quality and overcrowding to be the main reason for their reluctance to travel on buses. On the contrary, only 13% reported higher prices to be their major concern. This highlights that currently insufficient routes are being served with inadequate number of buses. It, therefore, makes it necessary for the regulators to realign existing routes and ensure minimum number of buses per route.

Problems facing rail travel are also very similar but of greater magnitude. Almost all the participants complained for poor services. However, 55% thought of it as their major problem while 16% opted for long delays. It was found that 57% of the sample had never travelled via rail. Out of the university students, who represent the newer generation, only 36% had ever used railways.

This is again due to poor services and long delays which 78% of all the students considered to be their immediate issues. Air travel is considered to be the most attractive mode of travel for long distances but is the least used due to higher prices. Only 36% had ever experienced air travel and 86% find it expensive. Of the employed class, 41% do use it at least once a year but this significantly does down to 31% for students.

When asked 'how should we improve Pakistan Railways and Pakistan International Airline?', 36% preferred privatisation over any other solution. 26% were in favour public-private partnership and 27% want the government to run the affairs of these enterprises on commercial basis.

Most importantly, only 5% wants government to continue giving them subsidy. This is a major finding and is against the general perception of possible public anger against privatisation. Another critical issue which deserves to be highlighted is limited role of universities in career counselling. Only 20% of the students said that they received some job related information from their respective universities. Out of those working, only 3% received help from their educational institutions when looking for a job.

Internet has come to the forefront in helping students looking for jobs. 29% of the respondents find role of internet to be the most important in their job hunt. Newspapers, however, still play a lead role with their share of 31%. Remaining 26% prefer relying on their friends and family. Significant use of internet for this purpose, despite limited employment information available online, provides the labour market with a much transparent platform which is all set to be fully exploited. Dedicated job portals along with online career counselling can play a significant role in ensuring efficient signalling.

Use of Internet has also started to become visible in the professional spheres of people's life, 62% of the respondents said that they mostly use internet for work or study purposes. This percentage is almost the same for both employed and students. These findings have been taken into account when proposing key reforms on connectivity of Pakistan in the work of New Development Approach (NDA) undertaken by the Planning Commission.

Written by Ahmed Pirzada
& Published in Business Recorder - Weekend Magazine (22nd Jan, 2011)

Understanding key issues in financing infrastructure projects

With increasing cost of construction, frequent occurrence of large-scale natural disasters, and ongoing fight against insurgents, it has become impossible for the government to continue financing infrastructure projects. This can be seen from the recent reductions in the budget of public sector development projects (PSDP). Historically, PSDP has been the main source of finance in addition to foreign loans. Much of the international aid, however, was directed towards social sector projects which were arguably of temporary relief.

To deal with these challenging circumstances, IMF has highlighted some key issues which need to be looked at when undertaking any infrastructure development project. These include: what investments offer the biggest boost to growth? How much investment is needed and by whom? How to finance this investment without taking on too much debt? Without looking at these issues, there remains a much higher probability that the project will get delayed to an extent that it no longer remains needed. If the project does get completed, long delays will push the cost to an extent that the cost-benefit analysis done when the project was conceived is no longer valid. Countries like Pakistan which are very much financially constrained must realise these issues and bring out policies aimed at utilising their full strength.

In answer to the first question, National Trade Corridor Management Unit (NTCMU) was established to come up with projects which help improve trade-related infrastructure facilities with the end goal of making Pakistan a regional trade hub. However, projects are still being approved in isolation with no broader vision of achieving sustainable growth. Ideally, a strategy should have been prepared by now and we should have moved on towards implementation stage.

Similarly, there is a need for improving PC-I with respect to involving private sector in development projects. The entire PC-I documents, expect the project to be fully financed from the PSDP. Instead, it should be made sure that first the project is floated to the private sector for take up with full ownership and if not successful, only then the government is approached for funding. Another section on ‘Public-Private Partnership (PPP) Option Analysis’ in the PC-I document, as suggested by the Infrastructure Management Unit (IMU), can be a good addition.

IMU (2007) has also done an extensive and useful study on constraints to private sector investment in infrastructure. But much needs to be done in removing these constraints. Some of the key constraints highlighted by the study are related to ‘procurement laws’ and ‘procurement processes’. Existing procurement laws do not include a requirement for the public body to consider infrastructure service delivery through the private sector. Procurement processes, on the other hand, are too centralised. All procurement decisions for a value as low as US $4-5 million are made at the highest level of the government. This is the case even for projects which are 100 per cent PPP and will not require any public expenditure.

Despite considerable realisation and wide consensus, Pakistan is still to come up with a detailed yet clear framework on PPP. This is mainly because the direction, content and the responsibility for the PPP framework still remains unsettled. Restriction on local governments against financing development projects through user charges or fees is also a major constraint to PPP at municipal level. Knowing that various amendments are being considered in local government law at provincial levels, these issues can be revisited with the approach of promoting private sector in infrastructure projects. Furthermore, land acquisition laws are currently in conflict with international norms. It is one of the major issues and has often resulted into delays and sometimes abandonment of the project.

National Highway Authority Act, which does not contain any requirement for PPP Option Analysis, also appears to discourage private sector participation.

It does not empower assignment of toll receivables in favour of the private project company executing the project. Another issue is that of competition with public sector construction firms. It is argued by the private construction companies that lucrative projects are always given to public sector corporations in a non-transparent and discriminatory manner. Such attitude discourages growth of private sector firms and hence their ability to undertake projects which are spread thin over the time horizon.

Written by Ahmed Pirzada
& Published in Business and Finance Review (24th Jan, 2011)

Islamic or Secular? May be Jinnah didn't find them different

It is often questioned that what exactly Jinnah wanted for Pakistan? Islamic state based on theocracy or Secular state with democracy? To put some guestimates to it, lets say that our 10% of total population (elite) propagates Jinnah's secular mindset while another 10% (mullahites) beat the drum using Jinnah's religious quotes. So who gets screwed? Sadly, it is Jinnah and remaining 80% of Pakistan. 

Those supporting secular view often quote:

If we want to make this great State of Pakistan happy and prosperous we should wholly and solely concentrate on the well-being of the people, and especially of the masses and the poor... you are free- you are free to go to your temples mosques or any other place of worship in this state of Pakistan. You may belong to any religion, caste or creed that has nothing to do with the business of the state... in due course of time Hindus will cease to be Hindus and Muslims will cease to Muslims- not in a religious sense for that is the personal faith of an individual- but in a political sense as citizens of one state. 

And the rival group will have the following up their sleeves: 

In an interview reported in the Press on 25th January 1948 Mr. Jinnah said that,

"he could not understand a section of people who deliberately wanted to create mischief and made propaganda that the Constitution of Pakistan would not be made on the basis of Shariat…"

There is a third dimension to this problem which never gets significant attention. Those missing this dimension will think of Jinnah as a cunning politician but other few aware of it will hold him in the ranks of wise. Jinnah found commonality between the platforms on which the two (Islamic and Secular) are based. This becomes very clear if one carefully reads his address to the Karachi Bar Association given on March 25th, 1948. 

"Thirteen hundred years ago he laid the foundation of democracy… The Prophet was a great teacher. He was a great lawgiver. He was a great statesman and a great sovereign who ruled. No doubt, there are many people who do not quite appreciate when we talk of Islam. Islam is not only a set of rituals, traditions and spiritual doctrines. Islam is also a code for every Muslim, which regulates his life and his conduct in even politics and economics and the like. It is based upon highest principles of honour, integrity, fair play and justice for all. One God and the equality of man is one of the fundamental principles of Islam. In Islam there is no difference between man and man. The qualities of equality, liberty and fraternity are the fundamental principles in Islam."

Also in the same speech,

"What reason is there for anyone to fear democracy, equality, freedom on the highest standard of integrity and on the basis of fair play and justice for everybody… Let us make it (the constitution of Pakistan). We shall make it and we will show it to the world."

Can you see it? He wanted to make the constitution of Pakistan (nothing coming off the shelf) based on Islamic principles which according to him were 'principles of honour, integrity, fair play and justice for all.' Focus! Focus! These principles are not wearing our trousers above the ankle height or confining women to walled compounds. He clearly expressed his views on the issues of women participation in economy but unfortunately it still remains an important issue in Pakistan.

We are victims of evil customs. It is a crime against humanity that our women are shut up within the four walls of the houses as prisoners. There is no sanction anywhere for the deplorable condition in which our women have to live.

Similarly he saw no contradiction between Islam and Democracy but instead went a step further and said:

On 14th February 1948 in Sibi Darbar,

"It is my belief that our salvation lies in following the golden rules of conduct set for us by our great lawgiver, The Prophet of Islam. Let us lay the foundations of our democracy on the basis of truly Islamic ideals and principles. Our Almighty has taught us that "Our decisions in the affairs of state shall be guided by discussions and consultations." 

And who will disagree with the ideology based on principles of equality, fair play and justice for all. A state where decisions are made through discussions and consultations. I am very sure about the 80% of population but at the same time very doubtful when it comes to the remaining 20%.