SITUATIONER: Delay in Chinese financing leaves Railways in limbo
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• During PML-N’s term Railways earning increased to Rs50bn from Rs18bn
• Railways pension bill has ballooned to Rs38bn against its regular salary bill of Rs27bn
• Decline began with the rise of NLC in the late 1970s
RECENTLY, new Railways Minister Azam Khan Swati revealed that the Pakistan Railways had suffered accumulated losses of Rs1.2 trillion in the last 50 years. “The company has incurred 90 per cent of these losses in last two decades alone,” he told journalists in Peshawar weeks ago.
“The average loss is between Rs35-40 billion a year,” he said, adding the government planned to revive the collapsing organisation sooner than later. But how? He didn’t elaborate.
Official rhetoric aside, the cash-strapped PTI administration seems as clueless about its strategy for the railway’s revival as any previous administration. It has, apparently, put all its eggs in the Chinese basket, hoping that the investment of $6.8bn on upgrade of the Main Line-1 (ML-1) connecting Peshawar with Karachi would resuscitate the dying company.
That may do the miracle. But for now the project has already hit snags on terms of Chinese financing for the project, delaying work on it.
Restoring profitability
The project was billed to be launched from January this year. Lack of money to outside the ML-1 is keeping it from rehabilitating old, rundown tracks, bridges, signal system and other infrastructure to improve passenger safety and service, and, more importantly, increase freight business, the main revenue earner for any railway in the world. “Efforts have been made to restore the railway’s profitability in different periods but those fell through in midway because of lack of their continuity,” Nisar Memon, railway’s CEO, told Dawn, blaming decades of underinvestment in infrastructure, corruption, mismanagement, political interference, over-employment and loss of freight business to competing road transportation owing to lack of a national transportation policy as major factors for deteriorating railway infrastructure and service and loss of freight business.
An audit conducted on the Supreme Court’s order in 2018 showed the company had incurred losses to the tune of Rs155bn in five years to FY17 despite its earnings of Rs147bn. The previous government of PML-N took some drastic decisions to raise the railway’s earnings from its freight and passenger operations from Rs18bn to nearly Rs50bn during its tenure. The revenues grew by 10pc to Rs55bn in FY19 under the PTI, according to the available information.
In September last year, the government informed a Senate panel the railway had inflicted losses of Rs187bn on the national exchequer in last five years. The railway posted the highest ever deficit of Rs50.1bn in FY20, up from Rs32.8bn a year before. In FY18 it reported losses to the tune of Rs36.6bn.
“The company has for years been receiving money from the government to pay its pension bill, which has ballooned to Rs38bn against its regular salary bill (of 80,000-odd employees) of Rs27bn,” Mr Memon said, adding the government had injected Rs42bn to make up for its FY20 losses.
Bureaucracy key hurdle
According to the 2019-20 Economic Survey, the railway owns 474 locomotives (458 diesel engines and 12 steam engines) for 7,791km length of the track. During the first eight months of FY20 (July-February), the number of passengers decreased to 39.4 million against 39.9m from the previous year.
Do the railway authorities have a plan to make the company profitable? “We are hopeful that the ML-1 project will help revive the company. Additionally, the government is also investing Rs16bn this year in infrastructure and purchase of coaches and wagons. Our near-term goal is to focus on revenue growth through an increase in the freight business, which we plan to raise to 30pc of our total revenues,” the CEO said.
A small but similar experiment was implemented under the last PPP administration when a private consortium was allowed to run a passenger train from Lahore to Karachi. But the experiment failed because of snags created by the railway bureaucracy as well as continuous payment defaults by the private operator. The PML-N administration cancelled the contract.
Pakistan’s railway industry was at its pinnacle until the mid 1970s when its decline began mainly due to under investment in infrastructure, lack of long-term planning, political interference, mismanagement, corruption, and the rise of the same-sector competitor, the National Logistics Cell (NLC), says a 2015 research report.
“The company went into the red in the 1970s from being a profitable organisation after the government deregulated road sector and started investments in highways, totally ignoring the railway infrastructure,” a retired railway official said.
Competition in freight business
“The entry of NLC and private transport owners in freight business broke railway’s monopoly. It’s share in freight was reduced from 70pc to negligible because the bureaucracy-heavy railway failed to compete with new rivals or adapt to emerging business environment.”
Ever since, successive administrations have done many experiments to revive the railway starting from induction of private sector people on its board, he said. In the early 1990s, the government decided to privatise it as advised by the World Bank. Later it decided to privatise only the freight business.
A senior serving official, who has been associated with the railway freight service for the last two decades, was of the view that the government would have to swallow many bitter pills before it could put the railway back on track.
“The most popular model practiced around the world today is the state controlling the railway infrastructure and private companies operating freight business and passenger trains in exchange for a fee for using the tracks and other facilities. But this shift is going to be hugely painful and the government must be ready to face strong resistance from within.”
However, everyone agrees on one thing: you can’t make railway profitable without increasing freight business revenues to at least 65pc of its total earnings. The other important thing is automation of railway operations and giving it complete monopoly over dirty cargo movement in the country.
Another official, who also requested anonymity, pointed out 80-85pc of the total railway costs are fixed expenditure. The remaining 15pc are variable. “In other words, we need to ensure the use of the capacity to the full to recover the costs. For example, only one train runs on the Quetta-Taftan route every 15 days. How can the fixed expenditure of that route be met without increasing traffic on this route? Only those passenger routes like Lahore-Karachi should be focused where people have fewer alternatives rather than launching trains on loss-making branch lines.”
“There is no dearth of revival strategies to pull the company out its troubles. What we do not have is political will and professionals to implement any of them,” the serving official remarked.
Published in Dawn, February 16th, 2021
