Government Failures in Transport: Government Failures in Transport:

The Case of Bangladesh RailwayThe Case of Bangladesh Railway

South Asia Region Economist South Asia Region Economist Retreat Retreat

Lahore, PakistanLahore, PakistanMarch 13March 13--14, 200714, 2007

Traditional Market Failure Arguments for Traditional Market Failure Arguments for Government InterventionGovernment Intervention……

Transport infrastructure is subject to Transport infrastructure is subject to large economies of scale (railways) large economies of scale (railways) network economies (roads)network economies (roads)Operation is imperfectly competitive: Operation is imperfectly competitive: some degree of spatial monopolysome degree of spatial monopolyAddress externalities: Pollution, Address externalities: Pollution, Congestions and Safety Congestions and Safety Equity consideration: Affordable prices Equity consideration: Affordable prices and guarantee of minimum level of and guarantee of minimum level of services; regional integration services; regional integration

Government Regulation or Ownership Government Regulation or Ownership characterizes governance for transport around the world characterizes governance for transport around the world

……but Government Failure is also but Government Failure is also UbiquitousUbiquitous

Poor service qualityPoor service quality in government owned in government owned railway and port operations; poor railway and port operations; poor maintenance of road networkmaintenance of road networkIneffective regulationIneffective regulation of privately managed of privately managed trucks and busestrucks and buses•• Under pricing of truck and bus fares Under pricing of truck and bus fares •• Low capacity (small) truck and buses Low capacity (small) truck and buses ––

congestions and overloading congestions and overloading •• Poor Logistic Operations Poor Logistic Operations •• Unable to control externalities: safety and Unable to control externalities: safety and

pollution major problems; axle load control pollution major problems; axle load control lackinglacking

Bangladesh Railway: Some Bangladesh Railway: Some Background Background

Government Department in Ministry of Government Department in Ministry of CommunicationsCommunications•• Railway Board (from Subcontinent) abolished in 1973Railway Board (from Subcontinent) abolished in 1973

Vertically Integrated Monopoly Vertically Integrated Monopoly –– Sole provider of Sole provider of infrastructure and train operations infrastructure and train operations Operates many nonOperates many non--core services (education, core services (education, health, real estate, etc)health, real estate, etc)Has over 35,000 staff (after 20,000 reduction in Has over 35,000 staff (after 20,000 reduction in 1999) 1999) Has about 2800 routeHas about 2800 route--km track km track Carries about 3.2 million tons and 43 passengers a Carries about 3.2 million tons and 43 passengers a year year Small railway system by regional comparison Small railway system by regional comparison Carved out of the subcontinent railway system and Carved out of the subcontinent railway system and inherited a disjointed networkinherited a disjointed network

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BR NETWORK, HISTORICAL CONTEXTBR NETWORK, HISTORICAL CONTEXT

INHERITED NETWORK

• Route length:2800 km

• BG: 953 km,originallyoriented towards Calcutta.

• MG:1847 km originallyconnecting northeastern Indian states with Chittagong Port.

Political Economy Reasons for Political Economy Reasons for Government ControlGovernment Control

Promote national identity in postPromote national identity in post--independence Bangladeshindependence BangladeshPromote staff and managers Promote staff and managers –– political political patronage patronage Provide cheap transport for foodProvide cheap transport for food--aid, aid, fertilizers and petroleumfertilizers and petroleumControl investment decisions, including Control investment decisions, including source of funding and contractingsource of funding and contracting

Choice of Governance Structure (railway Choice of Governance Structure (railway department vs. board vs. regulated monopoly) department vs. board vs. regulated monopoly) suggests it was not to fix market failure, but to suggests it was not to fix market failure, but to control railway directly control railway directly

Bangladesh Railway Performance Under Bangladesh Railway Performance Under Government Control: Precipitous Decline Government Control: Precipitous Decline

33% Decline in Freight Tones since 197033% Decline in Freight Tones since 1970•• From 4.8 m tons in 1971 to 3.2 m tons in 2005 From 4.8 m tons in 1971 to 3.2 m tons in 2005 •• 10% of containers go by train10% of containers go by train•• 7% market share in the total freight transport demand 7% market share in the total freight transport demand

42% Decline in Passenger Trips since 42% Decline in Passenger Trips since ‘‘70 70 •• 72 m passenger in 1971 Vs. 42 Passengers 72 m passenger in 1971 Vs. 42 Passengers •• Predominantly second/third class passengers Predominantly second/third class passengers •• 15% market share on total passenger transport 15% market share on total passenger transport

demanddemand

17% Decline in punctuality17% Decline in punctuality (Service quality)(Service quality)•• 72% trains running on time in 1971 Vs 60% in 200572% trains running on time in 1971 Vs 60% in 2005•• Travel time Travel time b/nb/n DhakaDhaka--Chittagong increased at least Chittagong increased at least

50%50%

BR Performance ContBR Performance Cont’’dd

42% Decline in Labor Productivity (Despite 42% Decline in Labor Productivity (Despite 20 000 staff reduction in 1999)20 000 staff reduction in 1999)•• Labor productivity is the lowest in the region Labor productivity is the lowest in the region •• 3 times lower than Pakistan and 5 times lower 3 times lower than Pakistan and 5 times lower

than Indian than Indian Operating Ratio increased from 97% Operating Ratio increased from 97% (profit in 1971) to 127% (loss in 2005)(profit in 1971) to 127% (loss in 2005)•• 40% of cost goes to pay for labor40% of cost goes to pay for labor•• 36% of operating cost covered by government 36% of operating cost covered by government

subsidy subsidy 163% increase in accidents: 163% increase in accidents: •• 17 incidents per M 17 incidents per M trntrn km in 1995 Vs. 46 in km in 1995 Vs. 46 in

20052005

Explaining Performance: Direct Explaining Performance: Direct Government Control Exasperates Market Government Control Exasperates Market

Failure Failure Lack of commercial focusLack of commercial focus•• Maximize production, rather than revenue and customer Maximize production, rather than revenue and customer

serviceservice•• Geographic, rather than functional/business, management Geographic, rather than functional/business, management

structure structure •• Inability to respond to new market nichesInability to respond to new market niches•• BR only able to capture 10% of the growing container BR only able to capture 10% of the growing container

businessbusinessNo performance incentives and accountability for No performance incentives and accountability for managers managers •• promotion done through the normal (archaic) civil service promotion done through the normal (archaic) civil service

rules rules Lack of transparency in the cost of service: subsidy Lack of transparency in the cost of service: subsidy arbitrarily determined arbitrarily determined No differentiation between service segmentsNo differentiation between service segments•• West and East zone have the similar number of staff, West and East zone have the similar number of staff,

equipment, even though the West zone carries only 10% of equipment, even though the West zone carries only 10% of traffic, but it has 60% of the costtraffic, but it has 60% of the cost

Continue to maintain large labor force Continue to maintain large labor force

Explaining Performance: Transport Sector Explaining Performance: Transport Sector Policy favored the road sectorPolicy favored the road sector

RoadRoad--biased investment policy biased investment policy •• 80% of transport expenditure goes to roads 80% of transport expenditure goes to roads •• Road network expanded from 7,000 km (1970) to 274,000 Road network expanded from 7,000 km (1970) to 274,000

km (2005)km (2005)•• Succeed in reversing its historical legacy/geography in road Succeed in reversing its historical legacy/geography in road

transport transport Tariff for railways kept low and not changed for 15 Tariff for railways kept low and not changed for 15 yearsyears•• Bus transport able to skirt around regulation by offering Bus transport able to skirt around regulation by offering

unregulated coach service and increasing market share unregulated coach service and increasing market share •• Trucks carry beyond their axle load limit to make extra Trucks carry beyond their axle load limit to make extra

profit on the regulated tariff profit on the regulated tariff Operation of thinOperation of thin--density and nondensity and non--remunerative rail remunerative rail branch lines branch lines •• Bus operators can adjust the size of vehicles (minibus in Bus operators can adjust the size of vehicles (minibus in

thinthin--markets)markets)

Attempts at Reform: Political Attempts at Reform: Political Failure and Reversal Failure and Reversal

Railway Board was reRailway Board was re--established in 1976 and 1996, but established in 1976 and 1996, but were reversed through Ordinance (1983) and Administrative were reversed through Ordinance (1983) and Administrative (Minister) circular (2002)(Minister) circular (2002)Major beneficiary group (transport users) was happy with Major beneficiary group (transport users) was happy with road transport road transport •• Transport demand was simple: focus on access and mobility Transport demand was simple: focus on access and mobility

Labor was the main stakeholder in railways Labor was the main stakeholder in railways (beneficiary/loser) from status quo/reform (beneficiary/loser) from status quo/reform Railways did not attract attention from the public/media/civil Railways did not attract attention from the public/media/civil society society Donors showed very little interest in railways Donors showed very little interest in railways Only ADB was pushing reforms (but program was not Only ADB was pushing reforms (but program was not sustained and had small investment component) sustained and had small investment component) Government was happy to continue with benign neglect of Government was happy to continue with benign neglect of railways railways ---- not ready to take politically difficult reform with not ready to take politically difficult reform with out apparent payoffout apparent payoff

Is there a need for Government Involvement Is there a need for Government Involvement in Bangladesh Railway ? in Bangladesh Railway ?

Natural Monopoly Argument is no longer valid Natural Monopoly Argument is no longer valid •• Unbundling is possible (e.g. infrastructure and Unbundling is possible (e.g. infrastructure and

operation of services; core and nonoperation of services; core and non--core services, etc)core services, etc)•• Scale economies may be present in infrastructure and Scale economies may be present in infrastructure and

signaling, but not in operations and nonsignaling, but not in operations and non--core servicescore services•• Multiple railway operators on the same track is possible Multiple railway operators on the same track is possible

Competition between modes (road Vs. rail Vs. Competition between modes (road Vs. rail Vs. airline) makes regulating fares and service airline) makes regulating fares and service quality redundantquality redundantNew Government Role New Government Role •• Regulating Access for competitive rail serviceRegulating Access for competitive rail service•• Infrastructure Development (finance, maintain)Infrastructure Development (finance, maintain)•• Providing subsidy to lossProviding subsidy to loss--making passenger servicesmaking passenger services

……but, sector and political factors will keep but, sector and political factors will keep government hold in Bangladesh Railway government hold in Bangladesh Railway BR will still be lossBR will still be loss--making operation even making operation even under private operation under private operation •• Passenger prePassenger pre--dominance dominance Need Subsidy and/or high tariffs to be Need Subsidy and/or high tariffs to be viable viable •• Both politically controversial Both politically controversial •• Perception of private sector getting money Perception of private sector getting money

from the public from the public Requires large investment Requires large investment •• Susceptible to regulatory, macroeconomic and Susceptible to regulatory, macroeconomic and

forecasting risks forecasting risks Major labor retrenchment necessary under Major labor retrenchment necessary under private operationprivate operation

BR Reform Agenda: Fixing Government BR Reform Agenda: Fixing Government Failure Under Political ConstraintFailure Under Political Constraint

Internal management restructuring Internal management restructuring •• Line of Business reorganizationLine of Business reorganization•• Outsourcing/divestiture of nonOutsourcing/divestiture of non--core service core service

New cost accounting system New cost accounting system •• Railways to know cost of each service Railways to know cost of each service •• Determine subsidy requirements more transparently Determine subsidy requirements more transparently

MarketMarket--based Human Resource Policybased Human Resource PolicyCorporatization of Bangladesh Railway Corporatization of Bangladesh Railway •• Increase autonomy, clarify roles and responsibility and Increase autonomy, clarify roles and responsibility and

establish armsestablish arms--length relationshiplength relationship•• Allow access to thirdAllow access to third--party freight service operatorparty freight service operator

Major infrastructure investment planned: Overcoming Major infrastructure investment planned: Overcoming historical legacy, gauge harmonization and improving track historical legacy, gauge harmonization and improving track capacity capacity Supporting multimodal transport policy: truck axle load Supporting multimodal transport policy: truck axle load controlcontrolReform and Investment supported through multiReform and Investment supported through multi--donor donor partnership (US$800 million planned)partnership (US$800 million planned)

Risks and Prospects: Turning The Risks and Prospects: Turning The Reform EquationReform Equation

•• Government will reform if the benefits from Government will reform if the benefits from reforming are greater than its costs reforming are greater than its costs Paradigm Shift in donor and government Paradigm Shift in donor and government strategy in the sector strategy in the sector –– road expansion is road expansion is saturated saturated Respond to stakeholders Respond to stakeholders –– more sophisticated more sophisticated and complex transport demandand complex transport demand•• logistics and multimodal transport important for trade logistics and multimodal transport important for trade

competitiveness competitiveness •• Investment Climate Survey: 80% unsatisfied with the Investment Climate Survey: 80% unsatisfied with the

available transport in Bangladesh available transport in Bangladesh •• Address road transport externality Address road transport externality –– safety and safety and

pollution are major concerns pollution are major concerns Develop a neglected sector through a large Develop a neglected sector through a large donor support donor support Stakeholders (railway labor and management) Stakeholders (railway labor and management) support reform; media exposure is highsupport reform; media exposure is high

Conclusions and Policy Conclusions and Policy ImplicationsImplications

Government failure can exasperate market Government failure can exasperate market failure failure Choice of Governance Structure is more political Choice of Governance Structure is more political than market failure argument than market failure argument There is no such thing as There is no such thing as ““secondsecond--best solutionbest solution””if working under political economy constraintsif working under political economy constraints•• Maximize reform within the available political spaceMaximize reform within the available political space

Bring the labor on board Bring the labor on board Broaden the stakeholder: involve users Broaden the stakeholder: involve users (garment producers and passengers); Ministry (garment producers and passengers); Ministry of Finance; Media of Finance; Media Demonstrate quick results to prevent reversal Demonstrate quick results to prevent reversal Conditionality (policy loan) and donor Conditionality (policy loan) and donor coordination to prevent reversalcoordination to prevent reversalAddress all binning constraints, including Address all binning constraints, including infrastructure infrastructure