State Intervention

#StrikeSL; A call for rail privatization?

Originally appeared on The Daily Mirror and Daily FT

By Anuki Premachandra and Dilshani Ranawaka

THE BACK STORY

The Railway strikes are over. At least for now. On August 8, several railway unions called a sudden strike in the afternoon hours, right before tired office commuters would flock the Fort railway station to head home after a long day’s work. For the rest of the week, the railway trade unions crippled a key part of the transportation system in the country. The headline “Railway strike continues” overwhelmed papers, news and social media alike.

This was the 14th time since 2017 the railway unions decided to strike, putting their demands ahead of the needs of more than 350,000 daily commuters. But this time, commuters have had enough! Angry commuters turned against the unions and the government, some even calling for the privatisation of the train service. This most recent 5 day strike is said to have caused a departmental loss of 64 million rupees leading to an increase in future railway ticket fares by 15%.

Is the call for rail privatisation practical? Financials of Sri Lanka Railways (SLR) for the past few years show that the losses made are as persistent and routinely as the losses made by Sri Lankan Airlines.

If SriLankan airlines is in “restructuring” basket, why isn’t Sri Lanka Railways?

DECIPHERING THE FINANCIALS

Sri Lanka Railways Performance Reports and Central Bank Annual reports show that SLR has been incurring operating losses of 7.7 billion rupees in 2015, 6.8 billion rupees in 2016 and 7.5 billion rupees in 2017.

A big component of Recurrent Expenditure, that makes up a portion of ‘Operating Expenditure’ is salaries and wages. This recent train strike by railway trade unions erupted due to a demand for higher salaries for railway staff. Recent pay sheets published by the Ministry of Transport’s Media Division, shared vehemently via Social Media, show that the monthly earnings for certain categories of staff at Sri Lanka Railways are many times the wages of the average worker in the private sector.

Sri Lankans are naturally outraged that the money pumped into the system both as commuters and taxpayers are having such a poor return of an inefficient service and sudden strikes.

Another side of the coin are the low fares charged by the commuters. Fares per kilometre range from 50 cents to a maximum of Rs.2 for 2nd and 3rd class travel. 1st class fares range from Rs.1.60-3.60 per kilometre.   

The result is that railway revenues are not even sufficient to cover the salaries of workers.  In 2016, salaries exceeded revenue by 32%. This is not a recent problem. Expenditure of the railways exceeded revenue by 52% in 1968, roughly the same as 2016.

Successive governments have preferred the status quo over bold reform, which will face resistance from both unions and commuters.  

But reforms are needed. What are the options?

IS THERE A SOLUTION IN PRIVATISATION? 

Given political realities, wholesale privatisation is not a realistic option. Even if politics can be maneuvered - an unlikely scenario - the government would be hard pressed to find a private investor willing to take on such a large and risky investment.

The World Bank in a discussion paper on railway restructuring and privatization, identified certain significant models driven out of case studies of the developing world, that could be applicable to Sri Lanka. A few successful reforms are to offer stocks to separate companies (based on various scenarios such as geographical factors, purpose etc.), design multi-phase enterprise development programs and, restructure and concession loss making SOEs.

In the case of SLR, the restructuring process could be through Private-Public Partnerships (PPPs). Realistically, short-term reform objectives should be to introduce competition where possible, and structural reforms that increase accountability.  Private sector involvement could help in areas such as freight, real-estate management, catering, and tourist or “luxury” coaches as experimented earlier. A system that welcomes private involvement and breaking the state monopoly is the long-term solution to service delivery issues on railways.

A likely success strategy is to get the private sector involved in a more advanced train service altogether. Work on the Colombo Light Rail project is currently underway and this is an example of where the asset’s ownership will lie with the state, but the private sector will run the operation of it.

Currently,  the SLR operates as a monolith department.  It’s official classification makes it a notable absentee from the list of 55 ‘strategically important’ state enterprises compiled by the Finance Ministry.  

A first step towards accountability is to split the rail track and station operations from the actual running of train services. This allows for an environment where private operators could enter into train operations and other services on their own terms, resulting in a more competitive system. Competition will no doubt increase service delivery and choice.  

The alternatives are not entirely new and like in the past, even this limited proposal will be opposed by the unions. But, reforms tend to happen in crisis; when people reject old ideas and look for new ones. With organic calls for privatisation, that time may be approaching for Sri Lanka’s railways.

Sri Lanka Railways: A snapshot of issues and ideas for improvement

Originally appeared on Daily News

By Ravi Ratnasabapthy

Several railway trade unions launched a lightning strike last Wednesday over salary anomalies. The strike was called off after four days but hundreds of thousands of commuters were stranded. Angry commuters took to the streets, some called for privatisation of the railways.

Sri Lanka faces a huge problem with public transport which is driving commuters to use private transport. A study by W.J. Weerawardana [1] estimates that 65% of the road space is used by 38% of the passengers; the increase in the use of private vehicles is the major cause of traffic congestion.

At rush hours and school times the traffic is almost at the point of gridlock. Parking is a also a problem. If even a half-decent public transport option were available many more commuters would use it

Standards of service at the railway are shoddy and reforms to railways must form a part of a larger plan to fix public transport. A summary of some key issues follows, with some ideas for improved services.

SLR Financials Table
  • The railways lost 6.7bn in 2016 (7.7bn in 2015). The railways appear to have been losing money since 1947 [2]. The expenditure of the railways exceeded costs by 10% in 1950 but by 1968 this had grown to 52.4%. The wages policy of the government and the policy limitations imposed by the government in the pricing of passenger and goods transport were factors that contributed to this situation [3]. This has not changed much: in 2016 costs exceeded revenues by 49.4% (2015: 45.09%) for broadly similar reasons.
  • Fares per kilometre range from 50 cents to a maximum of Rs.2.00 for 2nd and 3rd class travel. 1st class fares range from Rs.1.60-3.60 per kilometre.
  • Revenue does not cover even salaries. Salaries exceeded revenues by 31.89% in 2016 (28.9% in 2015).  
  • Only 42% of the trains run on time (39% in 2015). Delays exceeded 10 minutes for 43% of the trains (46% in 2015).
  • The assets of the railway or poorly utilised. Income from leases of railway land was Rs.119.58m in 2016. Lease arrears not collected amounted to Rs.1.8bn at end 2016 [4]. The Auditor General notes [5]: “Lands  about 12,000 acres in extent belong  to  the Department  of  Sri  Lanka Railways had remained idle for about 150 years without giving on lease or utilizing for another purpose”

COMMENT:

Fares are priced well below operating costs, the trains grimy and overcrowded. Maintaining rail fares at uneconomically low levels is politically attractive but has lead to the deterioration of the rolling stock and infrastructure due to a lack of funds for new investment.

There has been a steady increase in passenger numbers from just under 100m in 2011 to 136m in 2016, but the service does not appear to have been able to respond adequately to new demands for expanded services or improved quality.

Based on the current operating and cost structure fares would need to double to just to meet recurring expenses and rise still further if the capital expenditure is to financed.  The Government spent Rs.30bn on capital expenditure in 2015. (2014: Rs.34.6bn, 2013: Rs.20.2bn). While a significant fare increase is needed and may be accepted if accompanied by improved service, passengers cannot expect to pay for inefficiency. For example, the COPA [6] has questioned excess staff recruitment (of 1588) and payment of overtime in contravention of the Establishment Code.

Thus there is a need to restructure of operations to improve service quality and efficiency. In a lecture delivered last year at the Chartered Institute of Logistics & Transport, Dr Priyanka Seneviratne claimed SLR’s weaknesses stem mainly from lack of timely investment in fleet replacement, technology, and workforce development in the past. The Ministry of Internal Transport [7] confirms that 65% of the rolling stock is over 30-35 years old which increases the likelihood of breakdowns, increases maintenance costs and impairs service quality.

Dr Senevirate identified the following measures to enhance revenue:

  1. adjusting fares and tariffs to better reflect costs and improved services;
  2. leasing more real estate and advertising space at market prices, and
  3. partnering with the private sector to provide freight and ancillary services such as catering, courier, and real estate management.

The railway currently partners with the private sector to provide a luxury carriage on selected routes. This could be expanded to cover other routes or possibly even to a whole train, covering for example additional services at peak times to cater to office commuters. Service contracts where, for example, railway catering is contracted out could provide increased revenues and improve service. Operations of toilets, canteens could be handled in a similar manner. Idle land could also be redeveloped in partnership with private developers. 

The dilemma is ensuring that a public-private partnership is beneficial when corruption is endemic and state capacity is limited. The following principles are an outline of process that should be followed:

  1. Open bidding- public-private partnerships must be procured by competitive tendering.
  2. Public consultation: submission of the draft invitation to tender and the draft contract to public consultation, which should be advertised in the newspapers and in electronic media, informing the arguments for contracting a partnership, the scope and term of contract, its estimated value, setting a minimum period of thirty days for comments and suggestions.
  3. Capacity and institutional integrity in contract design. Some PPP contracts can be extremely complex and public officials may be overwhelmed. Capacity building within the public sector is essential. Setting up an independent PPP advisory unit within government staffed by competent people is advisable. Judicious use of external advisors may be necessary, depending on the nature of the contract.
  4.  Where possible standardising parts of the contract reduces conflict, enhances, predictability, minimises misspecification and reduces transaction costs. 
  5. Public disclosure of principal contract terms.
  6. Post implementation monitoring of contracts to ensure value is delivered.

Sri Lanka’s railways are a drain on the treasury. With tight budgetary constraints the Government will face increasing difficulties in allocating adequate resources to maintain, let alone develop, the railways.  The railway is an important component of transport infrastructure and improving its efficiency will contribute to the overall productivity of the economy.

Creating competition and private participation in the in the supply of services, utilisation of idle assets and supply of railway infrastructure could enhance efficiency and improve service. The Government should explore these options.

[1] Weerawardana W.J., Reduction of traffic congestion in Colombo city by improving public bus transport.

[2] Enhancing the Efficiency of the Sri Lanka Railways and its Contribution to Transportation, Sisira Kumara, Economic Review Aug/Sept 2011

[3] Ibid

[4] Auditor General’s Department, Annual Report 2016

[5] Report of the Auditor General on Head 306-Department of Sri Lanka Railways-Year 2015

[6] First Report of the Committee on Public Accounts (from 01.01.2016 to 07.04.2016).

[7] Ministry of Internal Transport, Performance Report 2014

Do we need more people in public service?

Originally appeared on The Daily FT

By Shyranthi Dhurairaj

Additional secretary National Policies and Economic Affairs, Mr Asanga Dayaratne announced recently that the government will be appointing 20 000 graduates as Development Officers (DO) this month. This decision was taken after interviewing 57 000 graduates who had graduated on or before 31st December 2016. Additionally, the Cabinet will recruit 7500 more graduates after the elections in August 2018 who will also be absorbed in as DO’s later. 

Why are these graduates being hired? It appears that this is a make-work programme. As per recent press reports, it appears there are no real vacancies to hire people but since these graduates are demanding jobs, jobs are being created by the state. The number of DO’s in Sri Lanka is 50 904 (2016 data). This new recruitment drive will increase the number by almost 40%. Such a sharp increase may mean other costs – they will need office space, furniture, computers and other facilities.

We may view this charitably, why not give the unemployed jobs? The question is who pays for this?

Sri Lanka’s budget is already overstretched, the country has run a persistent budget deficit, averaging over 7.7% of GDP since 1990. The deficit has been met partly by borrowing, which is why the debt-to-GDP ratio has averaged 89.1% during the same period, almost double that of our peer group. The recent increases in taxes, VAT, income tax and others were needed to bridge the deficit. If more people are to be recruited, the salary bill will rise and there will be a need for increases in taxation. It will not be immediate, the tax increases will come a little later, but eventually it will need to happen, just as the recent tax increases followed increments given to the public sector in 2015.

What is happening here?

The government is giving jobs to graduates, but then taxing people to pay for it. All that is happening is money is being transferred from the general public to newly-hired graduates. The graduates will be happy but the public who sympathise with their plight may not realise that the salaries of these people will eventually be paid by them.

People forget that they pay tax every time they go to the market. VAT, import duties add a lot to the cost of a shopping basket, or to a meal in a restaurant. 

Are people getting richer? No. Will the graduates who get jobs be better off by having the public pay for this?  What if the private sector creates jobs? Salaries would then be paid by businesses that hire people from the profits that they earn. The public will not be paying the salary bill. Instead the businesses will, from whatever they earn from their customers.

In fact there are many unfilled vacancies in the private sector. While the public-sector is overstaffing, there are 497 302 open vacancies in the private-sector. A local agricultural entrepreneur based in Polonnaruwa stated, “It is very difficult to find semi-skilled workers to operate our machinery, because their attitude is such that they would rather stay home until they get a government job”.

The problem is that the jobs available don’t meet the expectations of the graduates or that graduates lack the needed skills for these jobs currently open in the job market.

What the government could do is assess the skills demanded by the job market, and invest in retraining these graduates. The retraining will be a one-off cost but, the graduates will have a productive job – in places where they are actually needed and there are no long term costs burdened on the public.

Some graduates don’t like jobs in the private sector. An unemployed graduate from Ruhuna University stated, “I am a graduate from Ruhuna University. I’ve been unemployed for three years and is waiting for a government job. I am not interested in a job from the private sector, so I have never applied for one. Government jobs are secure and unlike private jobs, they provide a pension.”

What they, and the public must understand is that taxpayers cannot finance this anymore. There are many other problems that also burden taxpayers including losses in State-Owned Enterprises (SOEs).

To create better jobs, the Government can facilitate new investment; especially in new sectors by cutting red tape and improving the business environment. The sustainable way to better jobs is through new investment, not make-work programs.

Overstaffing infographic.png

Killing aspirations by regulating tuk-tuks

Originally appeared on The Daily FT

By Dhananath Fernando

What do regulations enforced after the 1st of August mean for tuk-tuks?

I live in Moratuwa, down Diggala road, a 2 km by-road from Keselwaata Junction on the Old Galle road. In my little hamlet, there are only two mini Lanka Ashok Leyland busses that operate in synchronization with the train time table from the Moratuwa Railway station to Diggala Road. Regardless of this inefficient bus operation, my saviors are an efficient and unique operation of tuk-tuks that cover a 2km radius from the railway station, enabling the commuting needs of the neighborhood. 

MAPPING OUT THE TUK-TUK OPERATION

In terms of the cost, the three wheelers engaged in this operation on this route only charge a ‘per passenger’ rate instead of a ‘per Km’ rate or a standard hire fare like almost all other tuk-tuks in the country. This means that each person has to only pay a fare of Rs.20 (despite the distance) and they take 3 passengers at a time in a single tuk. In simple words, it is a three-passenger bus system operating at every 10-minutes intervals. Their services are available until about 11.00 pm and I am very grateful to all the drivers operating their three-wheelers in the route and for providing us daily commuters with such an honorable and sustainable service.

You could even call me an over-satisfied customer as the journey is comfortable than the bus in many aspects. Seating facility, availability, frequency, reliability and ability to get off the vehicle right near the gate of my house are just a few advantages of this service. All this, is just Rs.5 higher than the bus fare (which is unreliable and mostly unavailable).

This is one, of the many services rendered by tuk-tuks that fail to reach mainstream newspaper headlines. Hence why it worries me of the adverse impacts that would overcome the industry when strict regulations are imposed by the “National Council for Road Safety” where they plan to regulate three-wheelers to have a meter with printed bills starting from the 1st of August, 2018. On the surface it looks like a step right direction as it seems to protect a consumer using this service, but in a practical world there would be many unintended consequences. Let’s analyse how these regulations would affect the tuk-tuk service in my area.

THE ADVERSE IMPACT OF REGULATIONS ON TUK-TUKS

If the tuks in my area were to adhere to new regulations and introduce a meter and a printed bill, they will no longer be able to charge a per passenger rate. Instead they have to charge a fare as per the standard meter rate. This results in someone like me, who initially only paid a Rs.20 for a one-way fare from the railway station to my house, now paying up to Rs.60 a ride, a price hike of 300%. Personally, I don’t think that I should bare this extra cost for the sake of receiving a standard fare rate and a printed bill. Eventually, this will result in me limiting my usage of tuk-tuks as a consumer. I know that the demand for tuks in my neighborhood would reduce and this isn’t a phenomena only limited to my area.

There is also a second possible outcome scenario of these regulations. The issue with regulations is the limited capabilities and downfalls of the government in terms of endorsing them. Most tuk-tuks will continue to operate as they do now, automatically creating a black market supply in tuk-tuk services. I am not arguing against regulations because of the inefficiencies in endorsing them, I am arguing against the case of regulations because regulations are not the best way to achieve the stated objectives; a standardized tuk-tuk fare across the country

UNLOCKING INNOVATION THROUGH COMPETITION, NOT REGULATION

Most Sri Lankan state institutions and politicians, across all parties, believe that state intervention and regulation is the only solution for public concerns as this. The practicality of regulations and its eventual reality does not agree. We often forget that the innovations made in the taxi services industry, like telephone call based taxi services such as “Budget Taxi”, “Fair Taxi” or taxi services utilizing the use of mobile phone and app technology, such as “Pick me” were not a result of regulation or strict control over the industry. These innovations were a result of minimum regulation and the presence of competition in the free market provision of tuk-tuk and taxi services. It was simply the freedom and space to innovate and serve customers and taxi drivers better to meet higher profit targets that drove these businesses to create such innovative solutions in the industry.

The world and markets evolve based on the needs of consumers and there needs to be market freedom to ensure innovative solutions to meet these needs. This is a fundamental in economics theory and not a concept of rocket science, or as some may call it, a “foreign conspiracy”.  

Additionally, according to the guidelines of the new regulations, every tuk-tuk must have a meter and should issue a printed receipt to the customer at the end of every ride. Does this mean that the many mobile app taxi services that generally provide an SMS receipt now require to provide a printed bill? When the entire world is going green, why an extra hassle for the driver to print a bill out at an extra cost?

As a passenger and a consumer there are services I expect a receipt for and there are services a receipt is not an expectation. If it is a household electronic item, I will definitely demand a receipt for warranty and returns purposes but from a taxi driver, the least I expect is a receipt. Rather I expect a safe and quick ride to my destination. This is not the first time the current government made attempts at regulating tuk-tuks. They imposed a minimum age ceiling for tuk-tuk drivers to be over 35 years of age. The justification behind this was apparently that three-wheelers contributed to the most number of road accidents of the recent past. However, as the data below shows, this was not the case.

  

 

 

LEAVE TUK-TUKS ALONE

Three-wheelers are not just merely a mode of transport. It means different things to those from different walks of life. For a rural commoner, it is an ambulance in a time of emergency. It is equivalent to a VIP Defender for an office worker, in a rush for his afternoon meeting. It is wedding car for a poor household. For entrepreneurs in urban and rural parts of the country, it is their mini lorry and companion. More than everything, it is an aspiration and product of pride for more than 1 million households in Sri Lanka. A poor man has to shoulder a tax of Rs. LKR 420,000 on a tuk-tuk. This tax, is then used to fund loss making state-owned enterprises; provide for the excess of government sector employee’s salaries and pensions; and a continuing list of unnecessary provisions. It is not rare to find tuk-tuks with logos of European cars pasted on its body. You’d see “Audi” to “BMW” stickers galore in some tuk-tuks. This sends a strong message to the rest of society. To a poor man, it is his BMW and his Audi. In other words, it is his aspiration and it is his world. Killing these aspirations with unnecessary regulations is never the solution, restructuring the service provided through competition and innovation, is.

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