A regulatory framework for Pakistan Railways — I

VIADr Omer Javed
SOURCEBusiness Recorder

Pakistan Railways (PR) is a state-owned enterprise (SOE) under the Ministry of Railways (MoR). While up till the 1970s it operated as the main mode of transportation, both in terms of freight and passenger transport, but over the years since then, its deteriorating performance led to a substantial reduction in its operations particularly freight transportation. This, in turn, negatively impacted its revenue generation capacity.

The factors such as lack of institutional and infrastructural improvements and sub-optimal hiring cycles at the back of politically influenced decision-making in this regard resulting in significant loss-making, and subsequently, consistent built-up of substantial contingent liabilities for the government, for many years now are behind this mega SOE’s plight. At the same time, lack of ‘electrification’ of railways has not only meant trains functioning at low speeds, but also the cost of diesel burdened the current account. Moreover, as the government pushes for gaining momentum on its ‘Clean and Green Pakistan’ drive, it is important to understand the significance of railways in reducing the carbon imprint, which due to its lack of performance over the years, caused a substantial increase in road traffic, and with it negative consequence on environment.

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The poor state of affairs has also been due to the inability of PR to consistently a) reduce project-related ‘funding gap’ so that the projects remained financially viable, b) diminish financial risks on the back of making projects technically sound, and bringing reliability of rules governing projects over their life-cycle and corporate governance of PR, and c) engage the private sector, especially through forging public-private partnerships (PPPs).

International best practices underline the importance of a strong regulatory framework for railways. Unfortunately, however, the absence of such a regulatory framework has remained a weak link in the overall functioning of PR, and has been a source of many of the issues and lost opportunities indicated above. Overall, while regulation should bring more efficiency to the functioning of PR, it should look to create conditions that attract private sector further. In this regard, the World Bank in its (2017) report titled ‘Railway reform: toolkit for improving rail sector performance’, highlighted, ‘In many countries, the ministry responsible for transport has been replaced as regulator by a body that is independent of government. Regulation is then separated from the government, which retains administrative oversight and its roles as policymaker, owner, and financier.’

Here, it is important to understand the underlying need for regulation, which arises when the public interest is expected to differ materially from the commercial interests of service providers—usually private companies. This situation is often referred to as “market failure”. In this regard, ‘…public interest is compromised if the market fails to deliver on government objectives, such as national security, national cohesion or social policy objectives. It is then up to the government to set out what it requires the railways to do and to pay for the cost of doing so. These are essentially public sector obligations (PSOs). Administering public sector obligations is a form of regulation… .’ Therefore, regulation is basically to correct market failures, so as to achieve PSOs. Moreover, primary public interests in PR, safeguarding of which needs regulation, are discussed below.

It is needless to say that over the years public interests have not been met by MoR and PR with any success.

PR functions as one dominant operator of vertically integrated railways under the overall MoR; where MoR handles most aspects related with quality and price. This means that PR is basically under the political control in the shape of MoR, with a high likelihood of running into conflict with it; for example, MoR may decide upon lower tariffs, while PR being the operator would not agree. Yet the stance of PR would not prevail, since MoR is the regulator. It is therefore important to have an independent regulator, which may for example be named ‘Regulator of Railways (ROR)’. An independent regulating set up would also enable more technically suitable hiring, under the overall technical supervisors of ROR in the first place. Moreover, for proper functioning of ROR, it is of foremost importance that it is adequately legislated with needed safeguards and authority, so that it functions sustainably and effectively.

Within the overall ROR, there should be establishment of three linked but separate regulating authorities, a) ‘Economic Regulator of Railways (EROR)’; b) ‘Safety Regulator of Railways (SROR)’; and c) ‘Environmental Regulator of Railways (ENROR). Here, the role of the ROR would be of overall supervision and coordination with regard to the three underlying regulatory authorities; which although separate are linked because ‘…safety and environmental requirements affects technical standards and all of these shape requirements for economic regulation because they influence competition in rail services and the commercial aspects of railway performance’. Here, once again, the same approach of legislation needs to be in place for these subordinate regulating authorities, as adopted with regard to ROR for their effective functioning.

While there is no single preferred model of economic regulation, yet it should be designed in such a way as to be able to a) achieve objectives with regard to overall national transport sector; for example, moving considerably more towards those modes of transport that are lesser reliant on imported fuel to reduce burden on foreign exchange reserves, and have lower negative environment related externalities; b) attain specific objectives related with railways, like MoR’s policy on the participation of private sector; and c) improve ‘railway market’ to ensure, for example, that i) there exists adequate competition; and ii) new lines are being planned to be built over time.

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Under these overall considerations, highlighting the scope of economic regulation, following should be included among the main responsibilities of EROR, whereby ‘a) Regulating tariffs and services, if there is little or no competition; b) Developing competition; c) Ensuring non-discriminatory access; d) Determining access charges; [and] e) Ensuring infrastructure investment’.

(To be continued)

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund)

He tweets @omerjaved7

(This news/article originally appeared in Business Recorder on December 6th, 2019)

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