August 11, 2022: The Asian Development Bank (ADB) has identified six policy reforms to strengthen the railway system in Pakistan and across the Central Asian Regional Economic Cooperation (CAREC) region saying that railways across the region must consider implementing key reforms that would make them more efficient and financially sustainable.
A new study by the Asian Development Bank (ADB) assessed the state of CAREC railways and identified opportunities for investment, commercialization, and reform.
By implementing key reforms, railways across the region can help increase economic growth and improve the lives of ordinary people.
According to the study, Pakistan railways have 466 locomotives and 16,159 freight wagons out of which 23% of locomotives and 24% of wagons are unserviceable.
The study said most of the regional railways currently use accounting systems that do not follow internationally recognized commercial standards. These old systems cannot accurately measure the true financial performance of railway entities or separate the financial performance of each business activity.
The region’s railways must develop modern commercial accounting systems that provide reliable and transparent real-time information about costs, revenues, and financial performance. Strengthening staff expertise in operating the system and using it to analyze railway performance is also crucial.
Furthermore, railways need to introduce enterprise resource planning systems to help them adopt more commercial approaches that would increase productivity and profitability.
These systems also help railway planners to maintain an overview of existing railway resources such as staff or rolling stock and determine more efficient ways of using them.
They can be used to determine the full cost of operating railway services and routes, which is necessary to optimize tariff levels and understand which routes are most profitable. They are used to monitor and improve productivity and asset utilization, and ultimately increase profitability.
Likewise, nearly all the CAREC member countries regulate railway freight tariffs. While CAREC railways do not face competition from other railways operating in their domestic market, they compete with road transport and long-distance railway freight services using other railway corridors.
For railways to operate in this competitive setting, CAREC countries should consider liberalizing tariff regulations so the railways can adjust their tariffs in line with market conditions. This will help them to attract more customers and optimize revenues.
Most CAREC governments require their railways to continue providing services, especially passenger services, even if they are loss-making. This also leads to more unprofitable passenger traffic and less profitable freight traffic. As a result, some railways cannot generate enough retained earnings to regularly upgrade their assets.
To address this, CAREC governments can consider introducing a public service obligation. This could, for example, take the form of a contract between the government and the railway operator obliging the latter to offer certain services, while the government reimburses the operator for any losses incurred in running those services. Since accurate information is needed on costs and revenues of particular services, introducing this kind of reimbursement mechanism should go hand in hand with the establishment of modern commercial accounting and enterprise planning systems.
The regional countries need to examine the non-core activities of their railways and progressively separate or privatize them so that operators can focus on running railway services on a commercial basis. Non-core activities may include health services and housing, and various non-railway businesses. Since many non-core activities are loss-making, they are often a significant drain on the railway’s limited financial resources.
The study added that including private companies in the operation of freight and passenger services can create competition within the railway market, leading to improved efficiency and service quality. But to establish a fair and transparent basis for competition, most CAREC countries will need to reform their policy and legal frameworks to allow the private sector to perform additional roles in the railway sector.
Many CAREC railways have aged rolling stock fleets that need to be upgraded or expanded to meet demand. Due to their poor financial performance, railways generally lack sufficient funds to finance the needed investments. A possible solution is to invite the private sector to supply rolling stock on a lease or rental basis.
Overall, as markets change over time, railways also face further competition from other modes of transport. Implementation of reforms can lead to railways that are commercially fit and ready to adapt to changing markets.