Report No. 36523- PK Pakistan Transport Competitiveness in Pakistan Analytical Underpinning for National Trade Corridor Improvement Program July 18, 2006 Energy and Infrastructure Operations Unit South Asia Region Document of the World Bank NTTFC NationalTrade andTransportFacilitationCommittee OECD Organization for EconomicCo-operationandDevelopment PACCS PakistanCustoms ComputerizedSystem PIFFA PakistanInternational FreightForwardersAssociation PIFFC PakistanInternational FreightForwardersCouncil PIL Pacific International Lines PNSC PakistanNationalShippingCompany NTCIP NationalTrade Corridor ImprovementProgram NYK NipponYusenKaisha PONL PONLRoyalP&O NedlloydN.V. PQA QasimPort Authority PR PakistanRailways PRCAS PakistanRailways Advisory andConsultancyServices PRAL PakistanRevenueAdministration Limited PRC PakistanRailways Corporation PSO Public Service Obligation QICT QasimInternationalContainerTerminal SME Small andMediumEnterprise TARP Tax Administration ReformProject TEU Twenty Foot Equivalent Unit THC Terminal HandlingCharge TIR TransportInternationaux Routiers(Frenchacronym) TRRL Transport andRoadResearchLaboratory TTFP Trade andTransportFacilitationProject UNCTAD UnitedNations ConferenceonTrade andDevelopment vss Voluntary SeparationScheme VTMS Vessel Traffic ManagementSystem WTO World Trade Organization CURRENCYAND EQUIVALENTS PakistanRupee(PKR) U S $ l = PKR 59.86 (February 6,2006) GOVERNMENT'S FISCALYEAR July 1-June 30 Vice President PrafulPatel, SARVP Country Director JohnW. Wall, SACPK SectorManager GuangZ. Chen Task Manager Simon Thomas - 3 - Acknowledgements This report summarizes the results of action-oriented modal studies to provide advice to the Government o f Pakistan (GOP) on enhancing the performance o f the Transport Sector and its contribution to the country's growth agenda. The analysis and recommendations o f this study underpin the Bank support and advice to GOP on the strategic framework for the National Trade Corridor (NTC) which was initiatedby the Prime Minister inAugust 2005. The data used to prepare the report were obtained through various studies conducted during 2004/2005 by individual international and national consultants. These studies collected information from public and private entities and benefited from extensive meetings with both the public and private sectors in Pakistan. The information provided and numerous discussions are gratefully acknowledged. The report has been prepared by a team of Bank staff led by Simon Thomas, Lead Transport Economist. The team included h e r Zafar Durrani, Cordula Rastogi, Mohammed Dalil Essakali, NavaidA. Qureshi, and Zafar Iqbal Raja. Shaukat Javed andRajesh Dongol provided administrative assistance throughout. The report benefited from studies undertaken by Edward T. Laing, Farooque Chaudhry, John Arnold, John Terry, Richard Bullock, and Sardar Humayun Khan. The report has been prepared under the general guidance o f Guang Z. Chen, Sector Manager for Transport South Asia 'Region. Peer reviewers were Michel Zarnowiecki (Sr. Trade Facilitation Specialist, former World Bank staff, currently France Customs staff) and Zhi Liu (Senior Infrastructure Specialist, EASTR). Table of Contents Abbreviations andAcronyms .......................................................................................................................... 2 - Acknowledgements ........................................................................................................................................... 4 - Table of Figures................................................................................................................................................ 7 - EXECUTIVE SUMMARY ............................................................................................................................. -8- CONCLUSIONSAND RECOMMENDATIONS ....................................................................................... - 13 - 1.A TRADEFACILITATIONAGENDA .................................................................................................. 1.1. INTRODUCTION........................................................................................................................... 17 1.2. EVOLUTION OF IMPROVEMENTSINTRADEAND TRANSPORTLOGISTICS............- 18 .-- 17--- 1.2.1. Pakistan's Export Characteristics ........................................................................................ Trade Facilitation and Logistics at the core o fNTCIP ....................................................... - 20 - - 18 - 1.3. DIAGNOSTICOF TRADE LOGISTICSINPAKISTAN.......................................................... 1.2.3. 21 - 1.3.1. Customs Modernization: Simplified Procedures............................................................... Ancillary Logistics Providers.............................................................................................. ..--22 - 1.3.2. ..-25 - - 23 - 1.4. THE WAY FORWARD: A TRADEFACILITATIONAGENDA ............................................. 1.3.3. Opportunities with respect to Supply Chain Security ....................................................... -- 26 - 25 - 1.4.1. Develop national trade facilitation strategy......................................................................... 1.4.2 Establish effective public-private partnership ..................................................................... - 26 - 1.4.3. Rapid roll out o f CARE approach andrefinement .............................................................. 27 1.4.4. Improve range and quality o f logistics services .................................................................. 28 1.4.5. Increase efficiency at dry ports ........................................................................................... 28 1.4.6. Establish systematic performance monitoring system......................................................... ---- 29 ---- 2. PAKISTANPORTSPOLICY ........................................................................................................... 2.1. INTERNATIONAL PORTREFORM.......................................................................................... ............................. - 30 - .......-- 30-- 30 2.3. NEEDFORFURTHERREFORM............................................................................................... 2.2. PROGRESSINPAKISTAN'S PORTREFORM...................................... 2.3.1 Port Authorities ................................................................................................................... 32 - .- 35 - -- 32 - 2.4. INVESTMENTREQUIRED.......................................................................................................... 2.3.2 Karachi Dock Labor Board................................................................................................ 2.5. OTHERACTIONS NEEDED........................................................................................................ 36 2.6. REGULATION................................................................................................................................ 2.7. SUMMARYOF MAINRECOMMENDATIONS........................................................................ 38 38 3. PAKISTANSHIPPINGPOLICY 39 3.1. INTERNATIONAL SHIPPINGTRENDS .................................................................................... 3.2. OBJECTIVESOF SHIPPINGPOLICY....................................................................................... 3.3. PERFORMANCEOFEXISTINGSHIPPINGSERVICES........................................................ ............................................................................................................ -----39-- --- 37 ---- 39 - 39 - 3.3.1. 3.3.2. BulkShipping Services ....................................................................................................... Container Shipping Services ............................................................................................... 41 3.3.3. -- 3.4. THENEEDFORGOVERNMENTINTERVENTION............................................................... Overall Assessment o f Shipping Services........................................................................... ----4391- 42 - 3.5. THE PROMOTIONOFNATIONALSHIPPING ....................................................................... ...--42 - 42 - 3.5.1. The Role o f the PakistanNational Shipping Corporation(PNSC) ................................... 3.5.2. Attempts to Promote Private Shipping................................................................................ 3.5.3. MerchantMarine ................................................................................................................. -- 43 -- 43 3.5.4. Recommendations for the Promotion o fPakistan's Shipping Industry ............................... - 44 - 4. THE RAILSECTORINPAKISTAN: POLICY AGENDA 45 4.2. EVOLUTIONOF PAKISTANRAILWAYS................................................................................ 4.1. INTRODUCTION........................................................................................................................... 45 - 4.3. PRESENTCHARACTERISTICSOFPAKISTANRAILWAYS ............................................................................................................. ...----47--- 45 - 5 - 4.3.1, Passengedfreight .......................................................................................................... - 47 - 4.3.2. 4.4. FINANCIAL POSITIONOF PAKISTANRAILWAYS............................................................. Two Railway Networks...................................................................................................... -- 49 -- 48 4.5. CORE AND NON-CORERAILWAYSINPAKISTAN ............................................................. - 49 - 4.5.1. Above-rail train costs andrevenues on the core andnon-core networks .......................... ..-50 - 4.5.2. Total cost recovery onthe core the non-core networks............................................................-51 - 4.5.3. 4.6. FUTUREROLEFORPAKISTANRAILWAYS......................................................................... Financial results on core network by business segment ...................................................... .-53 - -- 52 -- 53 4.6.1. A viable commercialrailway ............................................................................................. 4.6.2. Focused commercialrail investment program ................................................................... .- 54 - 4.6.3. Commercial focus for the commercialbusinesses ............................................................. .-55 - 4.7. A REFORMAGENDA TO REVITALIZE THE RAILWAY SECTOR ................................... 4.6.4. Freight the key to developing a commercial viability ......................................................... -- 56 -- 55 4.7.1. Financial Restructuring ...................................................................................................... .-58 Creationo f a focused railway enterprise............................................................................ .- 57 - 4.7.2. 4.7.3. 59 -- Detailedrestructuring program ........................................................................................... Institutional re-organization ................................................................................................ 4.7.4. 4.7.5. Rail cost reductionprogram................................................................................................ 60 4.7.6. Re-establishment o f rail freight credibility.......................................................................... ..-- 61- --- 60 --- 4.7.7. Opening access to the private sector ................................................................................. 4.8. RAILWAY REFORMAGENDA AND THENATIONAL TRADE CORRIDOR ...................- 62 - 64 5. MODERNIZATIONOF THE TRUCKINGSECTOR...... .................................................................... 5.1. PRESENTSTATE OF THE TRUCKINGINDUSTRY.............................................................. 66 5.1.1. Dominance ofthe FreightMarket ......................................................................................... 66 5.1.2. The Structure ofthe Industry................................................................................................ -- 66---- 66 5.1.3. Competition inthe Freight Market...................................................................................... - 67 - 5.1.4. Service Quality.................................................................................................................... 5.2. REFORMINGPAKISTAN'S ROADFREIGHT INDUSTRY................................................... 5.1.5. Contractual Practices ............................................................................................................ 69 - - 68 - - 70 - 5.2.1. 70 L o w Service Quality for High-Value Exports..................................................................... Low Vehicle Distance Productivity ................................................................................... 5.2.2. 5.2.3. -- 70 --- Under-Developed Cargo Insurance..................................................................................... Old Truck Technology......................................................................................................... 5.2.4. - 711- 7 5.2.5. 72 Low IndustryProfitability ................................................................................................... Serious Sector Externalities ................................................................................................ 5.2.6. 72 5.3. ACTIONS TO MODERNIZE THE TRUCKINGSECTOR ....................................................... 5.3.1. 5.3.2. Highway Conditions andManagement ............................................................................... Status Enhancement ofthe Trucking Sector ......................................................................... 5.3.3. Relaxationo fImport Restrictions and Tariffs.................................................................... .-- 73 - --- 73 ---- 74 - 5.3.4. Modernize Existing Domestic Manufacturing Industry ..................................................... .-75 - 76 5.3.5. 76 - 5.3.6. Increasing the Effective Role o fthe Insurance Industry..................................................... Improved Access to Formal Sector Financing ..................................................................... 77 5.3.7. 77 - 5.3.8. Driver Educationand Licensing.......................................................................................... Carrier Registration............................................................................................................. 5.3.9. Truckparks and Stands....................................................................................................... - 78 --- 78 --- 5.3.10. IncreasedRailParticipationinFreight Sector ..................................................................... - 78 - 5.3.11 FormulateandAnnounce Pcikistan's RoadFreight IndustryPolicy.................................... - 78 - - 6 - Table of Figures Tables Table 1: 18 20 - NTCIP: Performance measures/targetsfor Trade FacilitatiodLogistics...................... Pakistan: Costs andTime of logistics services for exports........................................... Pakistan's Principal Exports and Export Growth, 2004-05/2003-04 ........................... Table 2: Table 3: Table 4: ---- 21 - 24 -- Pakistan's Port Efficiency comparedwith comparablebenchmarks............................ Size DistributionandProfitability of Logistics Providers,2004.................................. Table 5: - 31- Table 6: Income andExpenditures:Port QasimAuthority (fiscal year 2003) ........................... -- 40 ---- 32 Table 7: Trends inContainerFreight RatesonMajor Routes 2000-2004................................... Comparisons of ContainerTariffs to Europe ............................................................... Table 8: 40 Table 9: 46 Table 10: PakistanRailways Traffic (million units) ..................................................................... MarketShareinPakistan's TransportSector................................................................ -- 47 -- 48 Table 12: PakistanRailways: Core andNon-CommercialNetworks........................................... Table 11: Passenger: Freight ComparativeRevenueYields ........................................................ Table 13: PakistanRailways: Finances FY2004 andFY2005 ..................................................... -- 48 --- 49 Table 14: Table 15: PakistanRailways: Above Rail Financial Analysis FY2004 (Rs. Million).................. 50 Core PRNetwork ..........................................................................................................- 50 - Table 16: PakistanRailways: NetworkCosts FY2004................................................................. Table 17: PakistanRailways: Business Analysis of CoreNetworkFY2004 ............................... Table 18: -- 51 --- 52 Table 19: Truckload freight rates, 2002 ....................................................................................... Trucking costs andrates in1984and2004 (2004 prices) ............................................. Table 20: .-68 - - 68 - Table 21: Truck Composition on N5............................................................................................ Textile Company Transport Costs............................................................................... -- 70 -- 71 Table 22: Market Rates for 40ft Containerbetween 10 and 25 tons (May 2005) ........................ 73 Table 23: PakistanNorth-SouthHighway Links........................................................................... 74 - Figures Figure1: RailTraffic: International Comparison........................................................................ Figure 2: RoadFreight andGDP ................................................................................................. Figure 3: Share ofroad freight trips by commodity type............................................................. --- 66 --- 47 67 - 7 - EXECUTIVE SUMMARY 1. The report is neither a transport master plan nor an encompassing policy framework for the transport sector. Rather, it examines the performance o f Pakistan's terrestrial links with the global market place, identifymg their strengths and weaknesses, providingpolicy suggestions and, insome cases, broad investment priorities to ensure that the fulfillment of Pakistan's economic potential is not constrained by its trade andtransport systems'. Inmany respects, the theme o f this report mirrors the National Trade Corridor Improvement Program (NTCIP). The analysis andrecommendations formed the basis for the World Bank support and advice to Government o f Pakistan (GOP) on the strategic framework for the NTCIP. 2. The strategic framework for the NTCIP was initiated by the Prime Minister o f Pakistan on August 18, 2005. The National Trade Corridor (NTC) links the Afghan border, close to Peshawar, through Lahore to Karachi andPort Qasim and includes the linkto Khunjrab; the corridor handles the major part o f Pakistan's external and internal trade. The concept o f the NTC takes a holistic and integratedapproach to reducing the costs of doing business by raisingthe trade and transport logistics chains in Pakistan to international service levels. Under this Government driven framework, recommendations o f the report provided analytical underpinning for targets set and achieved under NTCIP. 3. At the request ofthe Prime Minister, a Task Force was set upunder the Deputy Chairmanof the Planning Commission, with dedicated representatives from the Ministry o f Commerce, Ministry o f Communications, National Highway Authority, Ministry o f Railways, Ministry o f Ports & Shipping, Central Board o fRevenue, Ministry o f Petroleum, Ministryo f Defense and the WorldBank. The conclusions and recommendations provided in this report have been incorporated into the Government's NTCIP interventions (please see the Government's matrix indicating proposed targets for the NTC program inBox 1). This report thus largely summarizes what might be termed analytical underpinning for the Government's NationalTrade Corridor Program. As the NTCIP proceeds further, the World Bank will continue its support and partner with the various stakeholders as indicated by the Government of Pakistan. 4. The studies were initiated inresponseto the increasing recognitionthat the pace o f Pakistan's economic growth and development will be strongly influenced by its competitiveness in world markets. This was the central theme o f the recent World Bank Report "Pakistan: Growth and Export Competitiveness Report" (Box 2). As competition for global market share intensifies, it i s essential for Pakistan to develop a carefully managed strategy for increased competitiveness and enhanced global integration aimed at accelerating industrialization and growth. Identifying and analyzing the elements that significantly impact the competitiveness o f actual andpotential export industries should facilitate the design o f sector policies to improve export performance and ultimately overall economic growth. 5. Overall, determinants o f export performance can be split into external and internal factors. External factors are mainly related to market access conditions. Internal factors refer to supply side conditions. Supply capacity i s affected by transport costs and service quality (including speed and reliability o f delivery), entrepreneurship, capital and labor costs, and product quality as well as the role/performance o f the export promoting institutions. These supply capacity elements have a significant and positive impact on export performance and thus, in turn, on the competitiveness o f export products. 6. The cost and service level provided by the internal and external transport systems is just one element o f a country's competitiveness. As tariff levels fall, the economic distance to market 'The transportsector inthis report covers roads, roadtransport, railways, ports and shipping. - 8 - (definedas the sum of all time and cost expenditures for movinga consignment to amarket,including freight rates, handling costs, transit times, delivery predictability, loss and damage, insurance costs, etc.) plays a more and more critical role in determining competitiveness. While freight rates are still important in the final price o f the product, the other elements o f generalized costs, such as predictability and reliability, become increasingly important in the composition o f total distribution costs. 7. An efficient, low cost trade and transport system, offering high levels o f reliability and service standard, will not guarantee export success and the attraction o f large scale inward direct investment.But,the obverseis likelyto ensurethat participation inmodemhighvalue, time-sensitive manufacturing will either be deterred entirely or confined to enclaves around international airports, dependent on air transport for export delivery, ifnot also the supply o f imported inputs. Transport at internationally competitive levels may not be sufficient for the success o f the development strategy adopted by Pakistan, but it i s a pre-requisite for Pakistan to become globally competitive, as outlined inthe MediumTermDevelopmentFramework (MTDF), 2005-2010. 8. In many respects, Pakistan's external transport and trade facilitation systems provide an adequatelevel o f connection with the global economy: ... . Sea freight rates for both container and bulk cargoes are in line with regional and international levels, taking into account the size o fthe container flows; Sea transit times are slightly better to some major markets than for its competitors andworse for others, but this is largely a feature o f geography anddistance; There i s an adequate supply o f road transport which, for break bulk and bulk cargo, offers some o f the lowest road freight rates inthe world, but with very low service levels; Where service quality i s important, Pakistan's exporters have improvised relatively effective (ifratherad-hoc) arrangementswiththeroadtransport industryto monitorthe flow ofexports and ensure delivery times at port, though at significantly higher freight rates than are normal; While Customs was traditionally a major constraint, with very cumbersome and time- consuming manual systems, it is beginning to achieve significant improvements inclearance times and i s in the process o f further major streamlining o f procedures. It i s however still perceived as a problemby port users. 9. Clearly, the state o f Pakistan's transport systems has not deterred rapid growth inthe export oriented manufacturing sectors, particularly intextile and clothing. However, while the systems may have beenadequate, they are often far from international standardsandcouldprovide lower costs and further improved levels o f service to Pakistan's external sector, thus enhancing its competitiveness and growth prospects. Pakistan has also to adapt to the changing structure o f the global transport system to ensure that it does not become a relative economic backwater, served only by feeder shipping. International levels o f efficiency and service will increasingly be needed if Pakistani s to sustain its growthrates andbecome a truly major player inworldmarkets. 10. The main weaknesses o f the present transport system in relation to what might be termed "international norms" can be summarized as follows: . High port costs and high port profits, resulting in higher charges to users than might be considered as desirable interms o f overall economic policy, increasing openness to the world economy andstimulating trade; 1 Long dwell times for inbound containers, resulting in congested terminals and the need to construct additional facilities; - 9 - Ports with relatively shallow draft, which will increasingly limit shipping connections as the size o f container vessels on direct services increase; A weak, fragmented andrelativelyunder-developed freight forwarding/logistics sector, which has yet to provide the breadth o f services and levels of vertical integration which are increasingly found elsewhere; A fragmentedapproachtowards trade facilitation with improvements to bemade inthe public private forum on trade facilitation issues, the National Trade and Transport Facilitation Committee (NTTFC); A main road infrastructure which requires major investment to provide the capacity and quality required for rapid andreliable road services; A truckingsector, operating old andtechnologically outdatedtrucks, which offers low freight rates but long transit times and unreliable service quality unless shippers are prepared to introduce additional andcostly measures; Import regulations and tariff structures that inhibitthe modernization ofthe trucking fleet; A trucking sector which has low private costs but high external costs in terms of vehicle overloading, leading to road damage andhighaccident rates, andcongestion; A rail system with the haul distances and engineering standards which should provide the potential for rail to take a substantial share o f the long distance freight market but carries insignificant levels o f freight traffic andhas beenlargely abandoned by the private sector. 11. Some o f these shortcomings can only be removed by investment, others (for example, the revitalization of the railways) by both investment and policy change, while others require mainly policy change and the freedom for the private sector to make their own decisions and investment. Investments are relatively uncontroversial, given that they only require funding and funding sources. On the other hand, many o f the policy changes, necessary to streamline systems, may be more difficult to agree and implement as they may adversely impact entrenched interests in maintaining existing systems. Investments alone are, however, unlikely to bring the level o f change required where policy change i s essential to achieve the full potential. -10- Box 1:Summary of WorldBankReporton"Pakistan: GrowthandCompetitiveness"(2006) Pakistancould see realpercapitaGDP growthaverage morethan 5 percent over the next decade, but suchprogressis far from automatic. Itwill require not only soundmacro-economicpolicies but also the investmentandbusiness environment that will developandnurture new competitive strength. To achieve and Sustain such growth, national savings will need to increase fiom the present 17 percent of GDP to, at least, 21 - 23 percent but perhaps as much as 27 29 percent if - capitalandfactorproductivity continueatpresent levels. The Growth and Competitiveness Report, preparedby the World Bank during 2005, provides a comprehensive assessment ofboththe macroandmicro-economicpoliciesthat the Governmentof Pakistan(GOP) should consider indevelopingits framework for acceleratingeconomic growth. The Report combines the analysis inrecent macroeconomic studies with fm survey data from comparator countries, a cross-countryquantitativeframework (including 78 countries) to analyze the impactsof investment, governance and stabilizationpolicies, andvalue. chainanalyses of five products which are either major export items or potential export items to identify those factors which do greatestharmto competitiveness andthe priority remedialactions required. The Report stresses the macro-economicfoundations for growth and competitiveness: low fiscal deficits, price stability, positive interest rates and an appropriate exchange rate policy. But, the principal focus i s overcomingthe weaknessesinthe business andinvestment environments. The remedialmeasures that it identifies aim at: reducingthe cost of doing business and increasing market competition; increasingfactorproductivity; and strengtheningexport competitiveness and the export base throughreducingcosts throughout the supply chains. Success inachievingthese objectives, andthus helpingto accelerate growthandemployment, will dependonthe consistency of government actions. Steady improvements in the business environment would encourage increaseddomesticandforeignprivateinvestment. Some of the praposedreform agenda may havea significant gestationperiod, such as reform of the labor andlandfactor markets, butthere are highp areas for early action. Inparticular: 0 Addressingthepricingandstructuralissues 0 Improvingthe accessofsmallandmediumsizedenterprisesto financing 0 Developinghumancapitalandincreasingthe supply o fskilled manpower 0 hprovingthe efficiency ofthe duty drawbackandsalestax rebate systems 0 Streamliningtrade/!mnsportlogisticsandenhancingthe administrationoffoodqualityand safety standards. CONCLUSIONS AND RECOMMENDATIONS 12. In some elements of the external transport and trade system, change is already taking place and the momentum of change needs to be maintained and possibly increased and extended to cover the entire system. Inother areas, Government has made announcements o f its intention to introduce major changes but has yet to implement them. There are also aspects where changes have yet to be agreed, let alone implemented. TRADE FACILITATION AND TRADE LOGISTICS 13. Efforts to increase Pakistan's competitiveness, especially of its exports, require a systematic approach that takes into account both common and trade specific impediments to efficient trade and transport logistics. Such efforts must look beyond improvements intransport infrastructure towards a general strengthening o f the entire supply chain while incorporating three elements o f trade facilitation, namely harmonization, simplification and standardization o f trade procedures, and improvements in logistics. The efficient functioning and market structure o f the ports, railways and road system as well as improvements ~II procedures and logistics services are at the heart o f trade increasing competitiveness o f exports, thus improving the general trading environment. Proposed actions include: e Reducing port dwell time and charges by (i) out Pakistan Customs Computerized rolling System, (ii) completing the study identifying pre- and post-customs delay incargo clearance, (iii)improving Afghan trade and transit procedures, and (iv) clearing full container loads (FCL) at their destinations; e Strengthening the public-private partnership on trade facilitation, the National Trade and Transport Facilitation Committee (NTTFC), by enhancing its current institutional setup, structure and source of funding; e Enhancing services in the logistics sector, mainly by (i) changing customs procedures with respect to bonded warehouses and movements o f goods in bond and (ii) enhancing cargo consolidation, cross-docking, andinventory monitoringservices; e Enhancing trade facilitation by (i)developing and finalizing a trade facilitation strategy (discussed at the Trade Facilitation Conference in March 2006), and (ii) simplifymgtransit procedures for cargo destined for Afghanistan by renegotiating the Afghan Transit Trade Agreement (ATTA); e Increasing eflciency at dry ports through (i)the formulation o f standard operating procedures, (ii)the roll out of customs reform and implementation, (iii) examination customs o f FCL cargo on customer premises, and (iv) the fast-track loading o f exports cleared by customs at Karachi port; e Establishing per$ormance monitoring indicators and benchmark, PORTSAND SHIPPING 14. The basic policy decision to make the port authorities landlords rather than service operators has already beentaken and extensively introduced. But, the port authorities (particularly the Karachi Port Trust) are still overstaffed and unnecessary labor regulations (the Karachi Dock Labor Board) still persist, raising the cost o f services to the users. While cargo handling charges are comparable with international ports, shipping charges are high and the port authorities are very profitable. Government needs to assess whether such financial transfers from users to the ports are really inthe best interest o f development or whether lower charges and lower port profits would have a more - 1 3 - positive impact on trade and economic development. Ports & shipping reform should include such actions as: 0 Improvingport managementby (i) reducing port charges by 15 percent2, (ii) appointing port management specialists, (iii) reducing port staff by 25-40 percent, (iv) phasing out `double charging' to streamline container handling charges, (v) outsourcing o f port services to the private sector, and (vi) making navigationavailable on a 24 hours 7 days a week basis; Updating the National Ports Master Plan to re-evaluate the appropriate roles of the Karachi Port Trust WT), the Port Qasim Authority (PQA) andPort o f Gwada?; 0 Closing the Karachi Dock Labor Board (KDLB) by using a mutually agreed separation scheme; 0 Improvingport infrastructure to modernize and meet international standards by investing in bothcargo handling capacity and draft depthto cater for larger vessels; 0 Completing the transformation of the KPT to landlord status. Inthe longer term, GOP may also wish to consider whether a restructuring o f the KPT to provide greater focus to both port andproperty activities would increasethe effectiveness ofboth; 0 Raise the level ofport and commerciaVmarketingprofessionalism at bothports; 0 Establishingpe@ormance monitoring indicators and benchmarks. 15. Sea freight rates are determined in a competitive market and Pakistan can do little to affect them, other than ensuring that the ports charge-appropriate rates, provide the draft necessary to maintaidencourage direct calls, and ensure rapid turnaround. At the present time, international shipping provides Pakistan with comparable service times andrates to its main competitors. The role o f Pakistani-owned vessels i s strictly limited to the Pakistan National Shipping Corporation (PNSC), which enjoys a privileged and profitable position through its monopoly over the import o f bulk petroleum oils. Increased participation o f Pakistan-owned vessels might be encouraged by the privatization o f PNSC, removal o f cargo reservation, and the maintenance o f the existing tax incentives. However, the commercial benefits to the external sector would be limited as Pakistani- owned shipping would follow world market rates. The economic benefits would also be rather ' limited as the foreign exchange component for shipping services (capital cost, fuel, spares, etc.) i s high. RAILWAYS 16. Pakistan Railways (PR) i s a reasonably large passenger railway which carries some, largely public sector, freight. The quality o f its mainline infrastructure and the geographical configuration of economic development and freight demand (large, long distance flows concentrated on very few origiddestination points) should mean that rail has the potential to be a substantial player in the freight market which it has largely ceded to road transport. Infrastructure investment in communications and signaling i s required but the primary investment priorities for a substantially * A 15 percent reduction o f port charges is a first stage inmaking external transport costs and thus Pakistan trade more competitive. OnApril 27,2006, the KPTBoardo fTrustees approved a 15 percent reduction inKPT Port charges effective fiom July 1,2006. The KPT earlier reduced 15 percent o f its charges inFY04, which was first reductioninits history. The cumulative 30 percent reductioninUT'Swet charges shouldbenefit traders at large andmake port more cost-effective. This incentive should also result inmore trade through the Karachi Port which is premier port o fPakistan, handling almost 70 percent o f external trade. A corporate planwas prepared for a proposedports project in1999/2000. This needs to be updated witha revised master planfor the sector. - 14- increased freight presence are some additional motivepower andthe replacement o f the four-wheeler wagon fleet. 17. Jnvestment will, however, have a limited impact unless the underlying business and management environment within the railway sector i s fundamentally transformed. PR is a government department with operating priorities set by passengertraffic, a large network of lines and services operated for social or strategic reasons or sheer institutional inertia, and a management outlook dominated by public sector constraints. If PR i s to compete effectively and the railways to regain its role as a primary transport mode for long distance freight, substantial changes will be required inits governance, finances andoperation management/priorities: e Establishing a reform team andpreparing a restructuringplan by (i) appointing a CEO and railways reform team (and transitional support consultants), (ii) preparing a rail restructuring plan and advising on the new structure of autonomous board, and (iii) completing a human resource audit; e Developing a Business Plan and Marketing Strategy; e Transforming its present departmental structure and governance to meet commercial management and priorities. State Corporation status may be necessary, but other measures will also be needed to provide the requiredcommercial management; e Separating core and non core sewices by establishing separate holding companies for freight, passenger and non-core activities and land assets with an increased operational and management priority to freight (freight shouldhave its ownaccounts, dedicated motive power and trainpaths); e Treating infrastructure cost recovery on an equal bassfor road and rail. While commercial rail services should fund their above rail costs and track maintenance, major track rehabilitation and new investment should be funded by GOP. PR should also be relieved o f its past sunk costs (debt servicing and existing pension obligations) as rates should be based on long-term future avoidable costs; e Introducing modernJinancial management and accounting through I A S accounting designed on a business lines approach; e Resolving the social and strategic cost of keeping loss-making linedservice open for business. 18. Structural changes inthe organization, management andgovernance ofthe railways shouldbe accompanied by efforts to ensure that the right labor and skill levels are available for efficient present and future operations. The present productivity levels and past restrictions on recruitment make it very possible that present overstaffing may co-exist with impending staff shortages incritical areas. TRUCKING 19. Present trucking services are largely low cost and low quality, provided by the informal sector. Such services are unlikely to sustain the growth and development o f an increasingly complex externally-oriented manufacturing sector operating to international standards, competing in internationalmarkets and required to meet international delivery times and reliability. A competitive trucking sector will normally attempt to accommodate changing customer requirements and preferences, but such.adaptation can be greatly facilitated by the appropriate policy framework and enabling highway infrastructure. 20. Policies should be established which encourage the growth o f a modem trucking sector, enhanceservice speed andreliability andreduce the htghexternal costs o fthe present trucking sector. - 1 5 - Reforms should include: Rationalizing truck import tarifs and removing the deletion policy to encourage the re- equipping o f the fleet with larger, modern vehicles appropriate to providing high service levels; Allowing import of second hand equipment to allow small operators to re-equip their fleets at reasonable cost. Secondhand trucks are the traditional route for small operators inalmost all countries; Improving trucking regulations by (i)agreeing on TIR implementation modalities, (ii) rationalizing MVT, registration and inspection systems administered by the provinces, (iii) enforcing axle load control plan, and(iv) increasing numbers o f formal truck operators which will reduce highexternal costs ofthe sector (interms ofbothroaddamage and safety); Initiating and implementing truck modernization to achieve EU compliance, de-link and corporatize NationalLogistics Cell's Trucking Unit,revise national truck specifications for 2, 3, andmulti-axle primemovers, andpropose a diesel quality plan. OVERALLASSESSMENT 21. Although major investment in Pakistan's main transport infrastructure i s still required, especially in the highway sector, much o f the essential capital assets for an efficient, competitive transport sector already exist. The port infrastructure i s adequate for present demand and the main line rail track infrastructure would support a much higher level o f freight operations. Policy and institutional changes inthe way that the transport sector i s organized and managed would result in substantial gains in productivity and cost reductions as well as establishing the basis for increased private sector investment inthe sector. Introducing such changes may not be easy as some may be at variance with entrenched interests, but they are needed to provide the transport industry necessary to support a rapidly growingeconomy competing inthe global market. 22. The presented package o f changes represents the basis for the World Bank's involvement in the NTCP, which relates proposed changes to envisaged outcomes and develops potential savings related to improvingthe business environment inPakistan. -16- 1.A TRADE FACILITATIONAGENDA 1.1. INTRODUCTION 23. The importance o f trade facilitation4to Pakistan's competitiveness forms the background o f this chapter. Over the past decade, the Government o f Pakistan (GOP) has done muchto improve the country's trade procedures (particularly Customs clearance) and logistics services. GOP has also been a main proponent of addressing trade facilitation under the auspices of the ongoing WTO negotiations, playing animportant role inhelping to bringtrade facilitation negotiations back ontrack after Cancun, and bybuildingconsensusonthe establishment of aNegotiating Group onTrade Facilitation. 24. While Pakistan supports the general trade facilitation agenda within WTO negotiations, as it believes trade facilitation can improve trading principles', it underlines that there must be anadequate linkage between any new obligation and the implementation capacity o f developing countries. The real challenge of trade facilitation i s to minimize transaction costs andthe complexity o f international trade for local businesses, without compromising efficient and effective levels o f collection o f customs revenues and other border controls. 25. Morethanever, the sustainedeconomic growth andtrade competitiveness o f Pakistan heavily depend on improvements to its trade environment through harmonization, simplification and standardization of trade procedures, and improvements o f logistics services. The GOP has significantly liberalizedthe country's trade regime since 1998, through tariff cuts andrationalization, and exports have increased substantially and the export basket has shifted from primary exports to manufacturing and non-traditional exports. 26. The pattern of demand for trade related procedures and logistics services are, in turn, changing as trade moves from low value and time insensitive primary products to higher value products. Increasingly, attention is shifting to more effective supply chains and more efficient order cycle times as the means o f increasing competitiveness. Lead times have always been critical for high-value goods andperishables, which form a small but rapidly growing part o f Pakistan's export. They are becoming increasingly critical for medium and low value goods where large wholesalers and retailers want to minimize inventory and the risk o f overstocking, while still ensuring product availability. 27. The bulk o f Pakistan's international trade, about 40 milliontons per annumo f dry and liquid cargo, i s transported by road along the main corridor, Peshawar-Lahore-Karachi, called the National Trade Corridor (NTC). Almost all o f this trade (95 percent) i s handled by the two seaports o f Karachi and Port Qasim, located about 50 km from each other. Pakistan's trade is characterized by a concentration o f movements within the country (mainly along the NTC), small numbers o f export destinations and import origins (mainly three regions) and a simple supply chain structure6. This should provide ideal conditions for improvingtrade procedures andlogistics services. ~~ Although there is no agreed single definition o f trade facilitation, in this chapter trade facilitation is seen as creatingan efficient environment for trade and transport. This is done through simplification, harmonization and standardization of international trade procedures and improvements in trade logistics services (such as warehousing, consolidation, etc.). Pakistan has put forward two proposals in the Trade Facilitation Negotiation Working Group, namely TNITFIZO andTNfTF63. Thesupplychain most ofteninvolves direct movement betweenthe factory andport or via aninlandcontainer depot. -17- 1.2. EVOLUTION OFIMPROVEMENTS INTRADE AND TRANSPORTLOGISTICS 1.2.1. Pakistan'sExportCharacteristics 28. Pakistan`s economic reforms have done muchto boost its share o f total trade as percentage o f GDP (rising to 30 percent in2004-05) and underscore the growing importance o f merchandise trade for its economy. Pakistan's exports have strongly performed inrecent years, risingto about US$14.4 billion in 2004/05 (Table 1). Imports have also increased rapidly, reflecting higher oil prices and strong demand, inparticular for machinery. ~ ~ Table 1:Pakistan's PrincipalExports andExport Growth, 2004-05/2003-04 (US$ billion) %oftotal %growth Commodities 2004-2005 exports (previous year) 29. Pakistan's exports, interms o f value, are highly concentrated ina few items, namely textiles and clothing, cotton, rice, other textile and garments, and leathedleather products. Exports o f textile manufactures (62 percent) are undergoing a structural transformation from low to higher value added itemswith the shares o fknitwear (12 percent), readymade garments (13 percent) and, to some extent, bed wear (10 percent) showing significant increases compared to 2003-04. Other export commodities with high growth rates to the previous year include furniture and mattresses (270 percent), footwear (174 percent), and chemicals and pharmaceuticals (72 percent). - 1 8 - 30. The export growth o f Pakistan's manufacturing sector i s characterized by two main features: the manufacturing sector is mainly driven by SMEs7, and the main exports, such as textiles and clothing as well as other core categories (leathedleather products, etc.), are characterized by a buyer driven supply chain. Insuch chains, productioni s organized and controlled by the final, mainly large buyers who do not directly organize productionthemselves, buthave key first tier suppliers'. 31. Interms ofgeographic location, productionofknittedandwovengarmentsisconcentratedin Karachi and Lahore, whereas firms in Faisalabad cater mainly for home products (Le. bed linen, towels, and other textile made-ups). InKarachi, the factories are specialized in producing fabric, dyeing or manufacturing garments. Other core categories (i.e. sports goods, surgical instruments which represent 2 and 1percent o f total exports, respectively) andpart o fthe leather garment industry and development categories, such as cutlery, are located inthe city of Sialkot. 32. Although Pakistan trades with a large number o f countries, its exports and imports are nevertheless highly concentrated with a few countries. About one-half o f Pakistan's exports went to seven countries, namely, the USA, Germany, Japan, the UK, Hong Kong, Dubai and Saudi Arabia, and one-half of imports originate fromjust seven nations, namely, the USA, Japan, Kuwait, Saudi Arabia, Germany, the UK andMalaysia. 33. Pakistanhas achieved considerable progress insimplifyingits tariff structure and reducing its tarifflevels, andthe shareoftrade inGDP has increased from 24 percent inthe late 1990sto close to 30 percent by the end o f FY2005'. Generally, Pakistan's applied tariffs are below WTO-bound commitments, and the weighted average applied tariff is currently 16 percent down from 56 percent in 1994. The tariff on most consumer goods has been reduced to 25 percent, on most intermediate goods to 10percent and on raw materials to 5 percent. 34. The relatively low tariffs on imports o f raw materials (Le. cotton) are mainly based on the dependency of Pakistan on these imports as inputs for its export products (textile and clothing). In Pakistan, as in other countries, there are a number o f schemes to put the exporters on a duty/tax free basis in order to compete on a level-playing field ininternational markets. These include (i) the duty drawback mechanism, which facilitates the rebate o f customs duties collected on import inputs; (ii) a program to refund sales tax collected; and (iii) the duty andtax remissionfor exports scheme. Major inefficiencies inthese systems, particularly with respect to SMEs, still remain". 1.2.2. Trade Facilitation and Logistics requirements of Pakistan's major exporters 35, The larger exporters (mainly multinational companies) have established relatively simple and efficient supply chains, both inbound and outbound, and have direct contracts with the buyers. The SMEs exporters, including those producing garments, surgical suppliers and sports equipments, leather goods and other non-traditional exports, do not have these advantages.Ingeneral, their supply chains are more complex; they have more difficulty with custom facilities for importing required raw materials as input for export products andlack direct access to markets. 36. Services provided by the logistics sector in Pakistan, in particular freight forwarders, are fairly simple. These services involve direct movement from the factory and port or via an inland There are approximately 3.2 million private business enterprises. These enterprises (mainly SMEs employing up to 99 persons) constitute nearly 78 percento fthe non-agriculturallabor force. *In garments such buyers include department stores like Debenhams in the UK or JC Penney in the US, speciality stores such as Gap, brand names without production or major retail outlets o f their own such as Liz Claiborn, discount stores such as Walmart, supermarkets like Tesco, andmail order houses. Pakistan's share inglobal trade has inchedup from 0.15 percent to close to 0.2 percent. loRemedial actions include: (i) continue simplifying duty drawback rules and documents, (ii) provide to to importerdexporters with easy to use information on procedures, (iii)to intensify efforts to shorten the processing of submissions by new export f m s and SMEs, which are facing particular large delays. - 19- container. Although 100 percent o f shipment consolidation i s handled by freight forwarders, the constraints on establishing bonded storage and the limitations on who can operate such facilities has halted further development inthe industry. 37. Ingeneral, it is difficultto generalize about the impact ofthe costs for logistics services on the competitiveness of exports goods becauseo f the wide range o f exported goods and the differences in their sensitivity to delivered cost and time. An attempt to estimate and apportion the costs of logistics was made in a 1996 study; the results show the relatively low proportion of costs for customs' clearance but a highpercentage for the total logistics' service, especially the landand ocean transport. The intervening years have seen a reduction in their importance as a result of increasing value o f exports and improvements in the transport infrastructure/services. Inorder to understand the relative contribution o f different logistics services, the costs for a sample container shipment from Sialkot to Europewere estimated and are shown inTable 2. Note:Not included are taxes and duties. 1.2.3. Trade Facilitation and Logistics at the core of NTCIP 38. Reflecting the high priority assigned to supporting sustained growth and competitiveness o f Pakistan's economy, the Government has launched an integrated corridor management program, called the National Trade Corridor Improvement Program (NTCIP). The NTCIP focuses on the corridor linkingPakistan's major ports in the south with its major cities in the North, namely, the Peshawar-Lahore-Karachi comdor. 39. The vision for trade and transport logistics under the NTCIP i s the establishment o f an efficient and integrated system that will facilitate the transformation o f the present levels o f services to international standards while ensuring safety in mobility. The objective o f the program i s to develop an integrated approach to planning, investing and managing the NTC logistics system with the strategic thrust for the optimal utilization o f the existing capacity, improvement management of maintenance and operations, and the coordinateduse ofthe available modes of transport. - 20 - 40. It is widely recognized that an integrated ~ ~ ~ ~~~~~ corridor management program in Pakistan must Box 2: Measurixg NTCIP P and look beyond improvements in transport TargetsonTradeFacilitation infrastructure to the general strengthening o f the entire supply chain, including trade logistics. The The average custom processing time should only focus o f these efforts i s on the effectiveness and measure the duration of Customs processing ffom cost of procedures and services available to the lodging of the Customs declaration until its international trade. The efficient hctioning and release (inclutkg the duration of the physical market structure of the ports, railways and transport system and their ancillary services is, in turn,critical for efficiency oftrade movement. 41. Key outcomes will be significant the goods have been reductions in the time and cost o f moving goods customsprocessing is co along the corridor. Under the NTCIP, the Prime domestic market. In many cases, pre- and post- Minister has indicated a desire for the reduction in customsde dueto losggraceperiods customs clearance time to two days, a reduction of granted to 01% or border crossing. ports free storage period and a decrease in port Such is the w e for ports' free storage period at dwell time by June 2006. In view o f the Karachi Port. The measurement of p e ~ o m c e importance of the program and its direct correlation with the economic growth strategy devised by the government, implementation is being personally monitoredby the Prime Minister. A list of indicators on trade facilitation and logisticsto be monitoredunder the NTCIP and their respective targets i s presented inTable 3. Measure To date June 2006 Average Customs clearance time 4 days (1) 2 days(2) Ports' Free Storage Period 7-9 days 4-5 days Source:Presentationto the P Mby the Taskforce, January 2006. Note: (1) This is basedon a survey undertaken by a consultant hired by the World Bank (see Box 2 for details on methodology). (2) This is inline with the Bankfunded Tax Administration ReformProject (TARP). TARP has set negotiatedtargets for Customs performance interms o f trade facilitation. These consist o f a reductiono fthe average customs clearance time to less than one day by end o f 2006, and to less than 4 hoursby end o f the project, at designated sites. 1.3. DIAGNOSTIC OF TRADELOGISTICSINPAKISTAN 42. The Government o f Pakistanhas made significant progress inthe facilitation of international trade. These improvements include measures taken to simplify and modernize customs procedures, and to increase the quality o f logistics services. It has also focused on the infrastructure side o f the supply chainbyupgrading roads andports facilities, inparticular along the Peshawar-Lahore-Karachi corridor. -21 - 43. Transport services, with the exception o f rail, have benefited from a reduction inpublic sector participation and an increase in competition (see subsequent chapters for details). The logistics services industry, inparticular freight forwarding, has to some extent increased the range of services offered and improved the quality of these services through interaction and cooperation with international service providers. 1.3.1. CustomsModernization:SimplifiedProcedures 44. The simplification, modernization andharmonization o f procedures and documents are at the heart o f the trade facilitation agenda with customs clearance being the main focus. There are several areas where interventions and reforms have been implemented and/or initiated in Pakistan: (i) the introduction o f a S A D as the standard for the Pakistan Goods Declaration (GD) and (ii) computerized reorganization of clearance. 45. The GD is based on the United Nations Layout Key prescribing a standard layout for all international trade documents. The GD i s the equivalent o f the single administrative document (SAD) used internationally and was gradually introduced to replace various forms for goods clearance such as the bills o f entry, shipping bills, baggage declarations, transshipment permits etc. The introduction o f the GD" has brought Pakistanat par with international standards, reducing the costs o f transaction andlogistics. 46. Inparallel with the development of the GD, a major effort was made to improve areas of customs and collection of duties. As previously detailed, the Government has been reducing customs duties and simplifying their structure over the last few years12. At the heart o f the Customs Administration Reform (CARE) was the development o f a comprehensive single window for all clearance operations (Pakistan Customs Computer System, PACCS), which took place between February 2002 and March 2005. PACCS was launched in Pakistan as a pilot project starting at Karachi International Container Terminal (KICT) inMarch2005 to set up electronic filing o f the GD from the premises o fthe authorized consignors, consignees and the customs agents. 47. If/when hlly implemented, the system will allow the clearance procedures to be movedaway from the border while, at the same time, reducing opportunities for informal payments and providing incentives for importers and exporters to obey existing regulations. PACCS replaced the former manual clearance system (still in place in other customs stations around the country), which was characterized by multiple windows, numerous official signatures and verifications (up to 36 signatures and62 control steps) and an environment with limitedaccountability and tran~parency'~. The system i s currently being implemented in the pilot project at KICT for all types of declarations including imports, exports andtransshipment. 48. The estimated processing for Customs at KICT in 2005 is reported to be around 3 days, according to consultant estimates. A pilot survey'4 undertaken by a consultant in2004 indicated that average processing time for customs at KICT was about 4 days, 53 percent o f total dwell time (see 11The GD was launched at Port QasimCollectorates of Customs as a pilotproject for imports. After successful implementationo f the pilot project for imports at the Port Qasim the use o f the GD has been extended to Export Collectorates andhas now been successfully implementedthroughout the country. l2In 1995, the Pakistan Revenue Administration Limited (PRAL) system was first introducedand followed by a broader effort aimed at reforming collection o f duties and taxes, the Customs AdministrationReform (CARE). l3For example, all documents were previously hand carried by clearing agents from one desk to another, and the entire processing chain encouraged discreet interface between customs officials and importers. PACCS offers a virtual single window environment. l4This is time reported by the private sector which tends to count additional delays aside from the actual customs processing time, such as those due to the port authority or the customs brokers. The estimated processing for customs at KICT in2005 i s five hours, according to figures provided by the CBR CARE team. - 22 - Box 2 for methodology o f measurement). The time between clearance and exit from port, which was on average seven and a half days has, with the introduction of PACCS, been cut to one day or less, because importers no longer have the incentive to use the port as a convenient storage area. In addition, the time between the landing o f the containers to declaration lodging has come down from two days to none (declarations can be lodged inadvance), and the time between declaration lodging and release o f goods is now, on average, under five hours. This makes the progressive rollout of PACCS, to the rest o f Pakistan a very highshort-term priority. 49. Though Customs i s beginning to achieve improvements in clearance times and the further streamlining o f procedures, port users at bothKarachi and Qasim still perceive customs processing as a problem. Thisperceptioni s due to the long dwell times for containers inports, which are well above international norms. Post-customs delays are on average 4.3 days which include the time containers spend inthe terminals after the completiono fcustoms formalities. 50. Since the average time for customs processing was established to be about 4 days, it would be fair to conclude that customs processing at KICT generally exceeds 24 hours. Yet, according to the survey, the shortest clearancetime was about 3 hours and shortest pre-Customs delay was less than an hour; these times provide sufficient grounds to conclude that it i s theoretically possible for overall customs processing to be completed inless than 24 hours. 51. The long customs processing time is related to the fact that at the time o f survey, all shipments were inspected. Best practice in risk management used by Customs suggests that selectivity and targeting o f inspections have yielded noticeable successes. In addition, once trade intensifies it may not be physically possible for Customs staff to examine all shipments as they did at the time o fthe survey. 52. Post-customs delays represent major impediments and include excessive free storage periods''. While this i s certainly a welcome advantage for importers and a desirable feature inmany ways, it is however an obstacle to efficient port operations and utilization. Other delays are attributable to the shortages o f road transport; lack o f rail services and logistical facilities to take containers out o f the port; a weak business sector; uncollected cargoes due for auction remaining in port for longperiods; government interference; and fumigation procedures. 53. The long dwell times effectively reduce the capacity o f the container terminals to less than half their potential. Ship-shore container handlings speeds are up to international levels, but on-shore container processing times are more than twice as long as at efficient international ports. The consequences are clear during visual inspections o f the terminals. At both the KICT and the QICT, the berthoccupancies are low while the stacking areas are full, evenwith 4 highstacking. The Indian Nhava Sheva International Container Terminal (NSICT) handles about three times as many containers as the KICT and the QICT, with a berth o f similar length. Failure to solve the dwell time problem will entail unnecessaryduplication of investment incontainer terminals. 1.3.2. Ancillary Logistics Providers 54. There are a number o f logistics services, like consolidation, freight management, warehousing, etc., needed to facilitate trade inbound and outbound movements. Critical among these are logistics services providers such as freight forwarders and clearance agents. While the logistics industryinPakistan has experienced significant improvements over the last decade, most o fthe effort has been to improve the efficiency o f the existing activities. In order to improve Pakistan's trade l5The free storage period o f 7 days (effectively 9 days), including weekends, should probably be reduced to about 4 days soon after the customs bring in a comprehensive set o f reforms scheduled for 2005. Most o f the terminals inthe Gulfhave free dwell times o f 10 days, but much o f the traffic i s transshipment, which is not the case inPakistani ports. -23 - competitiveness, it is necessary to focus on adding value by increasing the quality of the services provided. The services currently provided by the industry depend mainly on the existing market structure and its functioning. 55. The logistics industry inPakistan includes a large number o f freight forwarders and clearance agents offering individual services and a combination o f services through subcontracting. Most forwarders coordinate less than container load (LCL) shipments, for both imports and exports by negotiating for the services o f the consolidators and clearance agents. To a lesser extent, freight forwarders also handle full container load (FCL) shipments, about 20 percent o f all FCL shipments. 56. Ingeneral, the services provided are simple because of the simple structure of the supply chain (direct movement between the factory and port or via an inland container depot). While the forwarding industry in Pakistan has a significant role in providing logistics services to importers, much o f their growth has come from handling exports, especially for the growing clothing and textile industry. 57. The common arrangement i s for exporters or local forwarders to deliver shipment to either the port of Karachi or Port Qasim (rarely to airports) where foreign buyers take receipt o f f.o.b. shipments and complete their movement using nominated forwarders. Some buyers use nominated logistics providers to extend their involvement backwards through the supply chain and provide consolidation services, i.e. distribution centers or buy ex-factory. Meanwhile, some exporters sell on C&F basis services with the delivery to the foreign port being managed by local forwarders operating through joint ventures or partnerships with foreign forwarders or by acting as agents for international logistics companies. 58. Generally speaking, the freight forwarding industry i s highly Table 4: Size Distribution and Profitability of Logistics competitive (with downward Providers,2004 pressure on profits). There are an IFirms IMarket share INet Profit estimated 456 (mainly small) l6 (%oftotal) (% of total) Margin(%) freight forwarders operating in Brokers 55% 18% 1.O% Pakistan (see Table 4). But, 11 3PL 34% 36% 2.5% percent of all freight forwarders services (exclusively the larger ones) offer 4PL 11% 41% 4.0% services integrated logistics services (4PL) and have captured almost half o f the market. Many o f these are local Note: 4PL services are fully integratedlogistics services which offices or representatives o f large include coordinationof other logisticsand transportationproviders. international companies (e.g. 3PL services includetransportation, warehousing, order DHLDanzas, Bax Global). Others managementand other logisticsactivitiesincluding light assembly. are part o fjoint ventures or have established associations with forwarders in other countries so as to offer internationallogistics services. 59. The situation in the local freight forwarding industry is improving, albeit slowly. Only recently has the government recogruzed forwarding and logistics as an industry, allowing forwarders to engage in foreign exchange transaction^'^. Ths followed the transformation o f the industry's representative body, which represents about 80 percent o f the freight forwarding companies, from a council under the Federation o f Pakistan Chambers o f Commerce and Industry to an independent l6The majority of Pakistan's freight forwarders have fewer than 15 employees and over half are sole proprietorshipsor partnerships.Despitetheir size, mosthave at least 10 clients and about halfhave 30 or more. l7Ministry of Commerce, Trade Policy 2005-06, Speech by HumanyanAkhtar Khan, Minister of Commerce, July 21Sf,2005. - 24 - association (PIFFC to PIFFA). The industry in now positioned to introduce a well-defined trading environment andpushfor effective government support. 60. Because o f the simple structure o f the supply chain inPakistan, there has beenlittle incentive for the development o f integrated logistics services or the introduction o f services other thantransport and storage. Clearance agents and freight forwarders have always offered trucking and storage services, usually through subcontracting, but only now are attempting to integrate these services. The use of subcontracting i s one approach, given that the core business o f 4PLs is to coordinate the various activities o f the supply chain. The local industry has however failed to provide the development and promotion o f the value-added services that have become the hallmarks o f modem logistics, e.g. tracking and tracing, cross-docking, vendor managed inventory, global door-to-door delivery andembedded enterprise software. 61. The consolidation business has also been slow to evolve largely because forwarders are not allowed to move the container out o f the port except to the nearby container freight stations or the dry ports and then only after customs clearance. Mand movements to the dry ports are primarily FCL shipments. The current constraints on establishing bonded storage facilities andthe limitation on who can operate them hasplaced serious limitations on the development o fthe logistics services' suppliers. 62. The role o f the industry and trade associations, which hold consultative sessions with regulators on a periodic basis, i s also important as an avenue to influence the GOP's policy on trade facilitation and logistics issues. A platform o f interaction between the public and private sector on trade logistics issues has been established under the auspices of a collaborative framework, the NationalTrade andTransport Facilitation Committee (NTTFC). 63. The NTTFC and its secretariat, established as part o f a World Bank project (Trade and Transport Facilitation Project, TTFP), has been recognized by the industry for its achievements in establishing professional standards for freight forwarders, and contracts o f affreightment. While responsibilities for implementing improvements in the logistics sector remains with the relevant Government agencies and the private sector, the N?TFC's role i s to facilitate the dialogue and, most importantly, provide the technical support for proposed innovations. The introduction o f the GD was mainly promotedby Customs, with training support from the TTFP. 1.3.3. Opportunities with respectto Supply ChainSecurity 64. One o f the most significant development inthe international transportation o f goods in the last few years has been the proliferation o f security initiatives affecting the modem supply chain, most o f which have been introduced for trade with the United States. Pakistan has reached an agreement with US Customs andBorder Protection authority onthe container security initiative (CSI). This represents an important incentive to both consolidate and integrate the logistics industry, and seek M h e r partnerships between the trade and Customs, enabling the introduction o f the concept o f approved importers/exporter. 1.4. THE WAY FORWARD:A TRADEFACILITATIONAGENDA 65. A trade facilitation agenda for Pakistan needs to recognize that (i)competitiveness in Pakistan is a b c t i o n o f export price and, equally important, the trade environment, o f which trade facilitation and logistics i s a part, and (ii)the need to be flexible and ready to respond to changing priorities as new problems replace older ones. The lessons o f trade facilitation initiatives aimed at reducing time delays, costs and potentials for alterations inthe trade logistics chain in other parts o f the world can be summarized as follows: - 2 5 - e Excessive regulation by the public sector holds back private sector participation and competition, thereby overwhelming entrepreneurship andprivate investment; e Streamlining and upgrading information technology, while simplifying customs and other regulatory procedures i s at the heart o f trade facilitation (developing electronic linkages betweenvarious stakeholders); e Care should be taken to avoid overly optimistic goals and to develop realistic timetables for implementing trade facilitation measures; e Detailed indicators, such as increasing outputs, government revenues, cost savings, consumer satisfaction, productivity gains, job creation and more efficient public institutions, should be usedto monitorperformance; e Improving the enabling environment through infrastructure modernization and regulatory reforms, particularly in the transport sector, increases the ability o f a country to improve efficiency, andto attract and retain appropriate private investors; e Capacity buildingefforts are critical in particular for logistics services providers for timely andeffective implementationoftrade facilitation andreformmeasures; e Ownership andpolitical commitment are key to ensuring strong local leadership, availability o f funds, andclear delineationo fministerial responsibilities. 66. Efforts to increase Pakistan's export competitiveness require a systematic approach that takes into account both common andtrade specific impediments to efficient trade facilitation and transport logistics. Constraints related to the public sector require coordination between government agencies and oftenbetweenpublic andprivate sector while private sector initiatives need further development through incentive-creation. 1.4.1. Develop national trade facilitation strategy 67. Formulating a national trade facilitation strategy i s at the forefront o f trade facilitation initiatives. This represents also one o f the objectives under the NTCIP. The strategy should be developed as an integral part o f Pakistan's trade policy, optimizing the use o f trade infrastructure and complementingtrade promotionefforts. 68. To be effective, such a trade facilitation strategy needsto address the following issues: e Identification o f trade facilitation priorities as part o f the national development strategy and NTCIP program e Application o f WTO disciplines in trade facilitation with focus on costs and benefits for Pakistan e Provision o f a reasonable schedule o f implementation o ftrade facilitation priorities e Projection o f financial support for priority areas, includingbut not limitedto WTO provisions 1.4.2 Establish effective public-private partnership 69. A public-private partnership between the three main players involved in trade facilitation, namely the Government agencies, private sector logistics service providers and traders has been established, and its contribution to the trade facilitation agenda has widely been recognized. But, NTTFC's role needs to be further strengthened as the focal point on trade facilitation in Pakistan; presently, its institutional setup, structure andsource o f funding are weak. - 26 - 70. To make NTTFC a more effective forum with the aims o f raising trade facilitation issues, proposing solutions and supporting the implementation o f these solutions, further ownershp, commitment and financial contributions from both the industry and the Government are needed. The level o f contribution to the Secretariat should be sufficient to support at least three professional staff and provide funding to support seminars, training andprepare technical reports. 71. Given the high priority for sustained growth and competitiveness and the Government's launch o f the NTCIP, NTTFC needs to expand its role as coordinator of technical assistance and research on trade facilitation to become a real service center in support o f the development o f the National Trade Corridor (NTC). 72. A follow up project on Trade and Transport Facilitation, prepared by the Ministry of Commerce in cooperation with the Planning Commission and approved by Central Development Working Party of the Planning Commission proposes, amongst other activities, to upgrade the staffing, and broaden the mandate o f the NTTFC Secretariat. An increasingly important ongoing role for NTTFC and its Secretariat will be to establish itself as a reference point for NTCIP, regional chambers o f commerce and other business associations on trade facilitation issues, in general, and, in particular, as they are negotiated within the WTO. The proposed follow up project also includes additional technical assistanceto underpinNTCIP with analytical work. 1.4.3. Rapidroll out of CARE approach and refinement 73. Improvements in customs clearance procedures create the potential for substantial gains in trade facilitation. Whde Pakistan has started customs modernization under the CARE system, it i s important that the efforts now underway to introduce computerization and specialization be continued through a rapid roll out o f PACCS, together with modifications to make it more effective. For speedy implementation o f the plan, the Central Bureau o f Revenue (CBR) has issued instructions to all Collectors o f Customs. According to the CBR, it i s imperative that the collectorates undertake a thorough analysis o f their existing clearance procedures and devise a strategy to identifyand remove hurdles to the swift clearance o f goods. 74. Serious efforts are undergoing at KICT with the introduction of a modem approach to customs clearance, but customs clearance procedures are fragmented throughout the country. Both transit and clearance at up-country locations i s slow and inefficient for reasons that are related to the current manual customs procedures in addition to non-factor services, poor physical logistics, and overall transport costs. These procedures also represent major impediments to transit to Afghanistan w h c h i s currently covered bythe ATTA''. 75. As renegotiation of the ATTA cannot be undertaken by Customs, given its status as an international agreement, negotiations between Customs o f the two countries are underway inorder to change the current Afghan Transit Trade Invoice (ATTI) to a single transit document, the Customs Transit Declaration, accepted by both Pakistan and Afghanistan Customs. The Goods Declaration could then be used as the Unified form o f Goods Declaration inorder to avoid the double capture o f similar information requested for Customs transit procedures. This would mean that the Afghanistan Customs Clearance Document (ACCD) would be aligned with the Goods Declaration. Inthis respect, the CARE approach, notably through PACCS, i s an opportunity to develop the entire trade corridor. Such plans already exist in customs, where the Afghan transit document will be replaced by electronic interface between the Pakistan and Afghan Customs administrations. An adequate integration o f the customs modernization plan into the integrated trade corridor management approach, suggestedby NTCIP i s therefore necessary. '*The ATTA requiredthat &eightbe movedby the railways betweenthe port ofKarachi (this was the only port inoperation at thetime of signatureofthe Treaty) andthe railheadsat ChamanandPeshawar.At these railway terminals, cargo intransit to Afghanistan are to be loadedon trucks for delivery into Afghanistan. -27 - 76. While PACCS is well developed, andprovides for streamlined operations, it may need further refinement intwo areas, namely risk management and post release checks. A team working on the Tax Administration and Reform Project identified the following issues: (i) the on-line updating of PACCS may result in possible changes in duties or regulatory requirements during the interval between lodging and assessment o f declarations; (ii) the direct entry o f rules and rates by other, non Customs users can pose a threat interms o f data integrity, (iii) the payment o f duty when declaration lodging, as early as ten days before the arrival o f goods, can have an impact on revenue collections due to fluctuations in the exchange rate, and (iv) post-release audit functions, an indispensable counterpart to expedited release, do not appear to have been addressed. The following steps are suggestedto refine PACCS: (i) update the entire files o f PACCS only once a day, (ii) validation by Customs o f all entries and changes before becoming effective, and (iii) simulation on recent a transactions, showingthe impact o fthis measure on financial statistics. 1.4.4. Improve range and quality of logistics services 77. GOP needs to recognize that without a strong freight forwarding industry, export targets are unlikely to be achieved. The freight forwarding industry in Pakistan still operates under major constraints, like establishing bonded storage facilities. Various efforts are underway to upgrade the skills o f the logistics services suppliers mainly through training inbasic skills. This has, however, not impacted the quality o f services and created the value additions required for further trade competitiveness. There i s a need to create incentives for the industry to develop additional value- added services. 78. The interface functions offered by PACCS such as online connectivity between traders, electronic documentation filing, no requirement for the export manifest, and advance cargo handling instructions represent steps towards a more integrated supply chain management and further integration o f customs functions with logistics services. The potential role o f Government and NTTFC in promoting added-value to freight forwarding industry services should be the key to the future growtho fthe industry. 79. This will require changes in customs procedures regarding bonded warehouses and movement o f goods under bond. The limited shipment consolidation services provided by small freight forwarders in Pakistan are still prevalent due to limitations o f bonded storage facilities and issues o f ownership o f these facilities. Until this issue i s resolved, the development o f the freight forwarding industry and the flexibility o f merchandize exporting will continue to be constrained. It will also require better cargo consolidation, cross-docking, and inventory monitoring services, and more efficient data interchange between shippers and logistics providers. 80. Under international practice, bonded warehouses are usually categorized as (i) publicly owned warehouses, usually owned by a Chamber of Commerce or a port authority, where all operators can store goods (subject to specific conditions), and (ii) private warehouses, which can be used either for the sole purpose o fthe owner, or can be rented out to other operators. This practice has enabled consolidators and freight forwarders to use their warehouses for freight consolidation purposes. It is unclear why this i s not possible inPakistan. 1.4.5. Increase efficiency at dryports 81. At present, only about 10 to 15 percent of the import and export cargo are being handledby the 12 dry ports o f the country, whereas the volume o f work should be more than half according to international standards. This considerationleads to the further development o f the existing dry ports, shuttling goods between Port Qasim or Karachi Port and dry ports as efficiently as possible. This, however, presupposes appropriate regulatory arrangements, inparticular with customs, to allow for quick removal of imported goods from the port grounds, final clearance takingplace at the dry port, - 28 - or even later at the final destination. The formulation o f standard operating procedures for dry ports and the roll out o f CARE initiative to dry ports as well as the introduction of customs examination o f FCL export cargo at factory premises would help increase efficiency o f dry ports. 1.4.6. Establishsystematicperformancemonitoringsystem 82. The sustainability o f N T C P and continued financial support by the Government and international donors will largely depend on positive outcomes. The establishment o f performance indicators to monitor and measure the progress inthe work program endorsed each year i s critical to provide the basis for continuing support. GOP may wish to identify the outcomes that the country expect from the major initiatives and suggest qualitative and quantitative indicators that can capture the achievement o f desired outcomes. For trade facilitation, the indicators should measure and assess the efficiency, accuracy and speed with which various steps in an international trade transaction is carried out. 83. Reliable performance indicators for Customs activity should cover two areas: (i) performance at selected locations, considered as representative o fborder or inlandclearance office activity, and (ii) national values used to assess the overall performance o f the Customs administration, compared to international or regional benchmarks. Local performance indicators include (i) overall time between arrival and release o f goods, (ii)rate o f physical examination, and (iii)rate o f detection o f irregularities. Under the Tax Administration Reform Project, the following pilot locations for local performance monitoring were discussed: (i) KICT, where a fxst survey was carried out in summer 2004, and where on-going monitoring is possible, using PACCS hctions, (ii)Lahore inland clearance terminal, where paper procedures are still in operation, (iii) Kham (main border Towr crossingwith Afghanistan), which i s pairedwith the corresponding border stationin Afghanistan, and (iv) Sost (main border crossing with China). - 29 - 2. PAKISTAN PORTSPOLICY 2.1. INTERNATIONAL PORTREFORM 84. Thirty years ago, ports were major barriers to trade inmany countries, andthis ledto pressure for radical reforms. These reforms have been very successful in increasing efficiency and reducing costs. The current consensus favors the abolition of government monopolies and the introduction o f competition wherever possible. This generally entails the promotion o f private sector operation; deregulation of entry, investment and tariffs; and also government measures to tackle labor problems, especially those o f over manningandrestrictive practices. There i s general agreement onthe desirability of the withdrawal of port authorities to a landlord role, with most/all operations carried out by private companiesina competitive environment. 2.2. PROGRESS INPAKISTAN'SPORTREFORM 85. Pakistan has been making steady progress in port reform and improving port performance. Since it opened in 1980, Port Qasim has operated as a landlord port, serving the steel, petroleum, chemical and other industries.The majority o f the cargo i s handledat independent terminals. It also has a privately operated container terminal. Karachi is also making progress towards converting itself into a landlord port. Although most o f the cargo is still handled at government berths, the Karachi Port Trust (KF'T) has now privatized most o f the container operations and i s planning further privatizations. There i s now strong competitionbetween the two ports' four container terminals which handle the majority o f Pakistan's international seaborne trade, in terms o f value. As a result, Pakistan's ports now rate quite highly on the two most important performance indicators: handling speeds are generally up to international standards and tarzfs are only slightly high by international standards (a) Handling speeds 86. The ship-shore handling speeds at Karachi are in line with those at efficient international ports for all categories of cargo - especially containers, but also bulk cargoes and general cargo. Containers are handled at over 25 moves per craneiberth howl9, bulk cargoes are handled at approximately 3,000-9,000 tons per ship day, depending on the commodity handled, and general cargo at 2,500 tons per ship day. These high handling speeds reflect the fact that the operations are already run mainly by the private sector. The Karachi Dock Labor Board (KDLB) does not detract significantly from ship-shore handlingefficiency, simply because its workers do not participate inthe actual cargo handlingwork. 87. The operations at Port Qasim are also generally up to international standards. Handling speeds for containers are around 22-24 moves per craneiberth hour; and handling speeds for non- container cargoes are inline with standards at efficient ports elsewhere. Productivity per ship-hour, however, is not quite as impressive as productivity per crane-hour. A major international shipping line reports about 55 moves per ship hour for the large direct-call ships, and this is slightly below the international standards expected. Internationally, ship-hour productivity can reach 125 moveshow, but these levels are only reached on very big vessels with large numbers o f box exchanges. - 3 0 - (6) Tariffs 88. Total container handling charges at port Karachi's specialized terminals are onrather the high side by international standards. They are estimated at US$113 per twenty foot equivalent unit, TEU (US$122 per 20 foot container and US$210 per 40 foot container)20. There are two main reasons for the relatively highcharges. Firstly, the shipping lines impose several additional charges including, in some cases, a shipping surcharge whose justification is now no longer clear. Secondly, a "terminal handling charge" (THC) is effectively charged twice: (i) bythe shippingline and(ii) the container by terminals. If the THC were charged only once, the cost would be around US$88 per TEU, which is more inline with internationalcharges, includingthose inIndianports. 89. Charges for handlingbulk cargoes and the residual general cargo, however, are relatively low by international standards. They are negotiated at levels o f around US$4-6 per ton, which often include additional services such as bagging on the quay or re-handling. Container handlingcharges at Port Qasim are slightly below the KPT levels, averaging about US$l05 per TEU compared with US$113 per TEUat Karachi. (c) Comparison with Other Countries in the Region 90. Pakistan's port reforms compare relatively well with those o f the other Indian Sub Continent countries. India's reforms have been generally limitedto container terminals, and the government has failed to develop capacity inline with rapidly growing demand. Also, the port authorities have failed to tackle the staffing problem at existing ports, and are now saddled with large numbers o f surplus employees. InSri Lanka, reforms have beenlimitedto the privatization o f one container terminal; and the Colombo port authority has the burdeno f a vast labor force (13,000 employees). Bangladesh has made very little progress in port reform. However, Pakistan's main exports are trading in an increasingly competitive market and Pakistan needs to ensure that its ports fully support its external trade position with the highest efficiency at the lowest cost. Table 5 summarizes port efficiency at KPTwith comparable internationalbenchmarks (PQA's performance is similar to that ofKPT as seen inthetable). Table 5: Pakistan's PortEfficiency compared with comparable benchmarks Source: Consultant's estimates 2o Tariffs at the non-specialized KPT berths are about US$30 per TEU lower. - 3 1 - 2.3. NEEDFORFURTHERREFORM 91. Despite the recent progress inthe reform o f Pakistan's ports, further reform i s still desirable intwo mainareas: (i) portauthorities; and(ii) KDLB. the the 2.3.1 Port Authorities (a) StaffNumbers 92. Both ports are overstaffed. The KPT has made bold progress, reducing staff numbers from 14,000 inthe late 1990s to 5,000 in 2004, but still needs further streamlining to bring staffing levels in line with KPT's new role. Port Qasim seems to also be overstaffed (with 1,600 employees), althoughnot to the same extent as the KPT, and it may actually require additional staff insome areas. But even the largest landlord ports in the world generally employ fewer staff than the PQA. Rotterdamhas 1300, h t w e r p has 1600. (b) Typeofstaff 93. The main need within the port authorities' management and operations i s for a more commercial approach. The ports have made progress in modernizing management procedures, including computerization o f financial transactions and automatic security systems, but need to strengthen contacts with port users. The emergence o f competition between Karachi and Port Qasim (andinthe future from Gwadar) makes the introduction of active marketing departments even more necessary than before, when the only non-captive traffic was transit traffic. Such departments will needto be staffed withthe necessary commercial management skills. (c) Port Finances 94. The ports make excessive profits. The KPT's budgeted revenues o f US$l50 million for 2004-5 are more than twice as highas its budgeted costs. A surplus o f this level is unusual inthe port industry, as is the very high level of income from investments (43 percent)21. The Port Qasim Authority (PQA) also makes a large profit, with operating revenues o f US$32.1 million compared with operating costs of US$21.2 million in fiscal year 2003 (see Table 6). This shows that about 40 percent of the net surplus comes from income from investment, property and storage while about 60 percent comes from operations. Revenues(Total) 1,924I 32.1 Operating Expenditure(Total) 1,274 21.2 OperatingSurplus 660 11.0 Incomefrom investment, 429 7.2 property, storage Net Surplus 1,089 18.2 "The KPT has extensive landholdings inKarachi City and makes large non-port property investments as, for example, the Port Tower (Pakistan Economic Survey 2004-5). It might be desirable to separate port and non- port landand activities into separate enterprises to allow a completely port focused authority to manage the port. - 32 - 95. Highport profits are not a "good thing" per se. They reflect port charges that are higher than necessary; these are additional costs which are passed on to importers and exporters. This i s not necessarily a "zero sum" game from the viewpoint o f the economy as a whole; lower port charges and increased incentives for trade may have a much more positive impact on the overall economy than high port profits. A substantial reduction in port revenues and surpluses would be desirable, particularly ifthis was achieved via port tariffreductions (see next paragraph), which are passedon to the wider economy. (d) Tar,@ 96. Port entry charges are highat bothKarachi and Qasim. The combinedKPT charges on ships for port entry, tugs, pilotage and berth hire amount to about US$0.82 per GRT. This would be equivalent to US$26 per TEU on the assumption o f a 35,000 GRT shp handling 1000 TEU. Although these charges are well above international benchmarks, they are not significantly higher than at the main Indianports. But they are over five times higher than those at the dominant container transshpment ports o f the region - Colombo, Dubai and Shalala. The KPT is aware that their charges are high, and has reducedthe average port entry cost from over US$1per GRT to US$0.82 inthe last year. 97. The PQA's port entry charges are slightly lower than those of the KPT. The combined charges on ships for port entry, tugs, pilotage and berth hire at PQA amount to about US$0.72 per GRT. These tariffs contribute to large financial surpluses for the KPT andthe PQA. They deter lines from calling with large ships; and they are the main reason for the Pakistan Port Surcharge. The PQA has reducedport charges by 15 percent duringMay 2005. (e) Promotion of Competition 98. Competition between the two port authorities so far has been limited. The ports are not permitted to discount tariffs to attract customers. The port authorities do not have marketing departments. Competition inthe port sector occurs mainly at the terminal level. The terminals are free to negotiate tariffs, while the port authorities are not. Inthe crucial container sector, competition between Qasim International Container Terminal (QICT) and the three KPT container terminals i s already intense. It resulted in QICT taking several customers away from Karachi in 2004. The container terminals at Qasim andKarachi have different cost advantagesanddisadvantages.The costs o f container operations at Qasim are lower than they are at Karachi, becausethey do not have to pay for a dock labor board and they pass only 60 percent o f the wharfage charges back to the PQA. (the PQA's wharfage charges are also lower thanthose o f the KPT). 99. These savings reduce costs by about U S 2 9 per TEU (US17 for the Dock Labor Board and U S 1 2 for the lower wharfage) compared with KPT. On the other hand, QICT has the additional costs o f inlandtransport to/from Karachi and the cities to the north: the weighted average additional landtransport cost o fusingQasimrather thanthe KPT is about US$31per TEU. The net result is that Qasim suffers from a cost disadvantage o f about US$2 per TEU, which is trivial inrelation to total costs andthe importance o f service quality. flAccelerationof Reform 100. Until the late 199Os, the KPT lagged behind world trends inport reform. But, it has now completed the most important task inprogressing towards a landlordrole, by introducing competing private container terminals. Two thirds o f Karachi's dry cargo, in terms of tonnage (and a much higher percentage interms o f value), is shipped incontainers. 101, There are now two private container terminals at Karachi and one at Port Qasim. Inaddition there i s a low cost option for container handlingat the KPT berths. Consequently competition i s now - 33 - strong. Karachihas avoidedthe "second best" form o f privatization, via utility style concessionswith regulated tariffs and productivity levels. The KPT i s committed to the continuation o f reforms, and i s planning further introduction of the private sector -in bulk handling, marine services and the engineering department I 102. The most important area under the KPT, which would benefit from further privatization, i s the handlingo f geared container ships, mainly feeders. Almost all these ships are handled at the KPT berths, which still handle over 40 percent o f Karachi's containers. The services at KPT are reportedto be about US$30 per TEU less expensive than those at the KICT and QICT. Their productivity, however, i s lower, at about 17 moves per crane hour compared with about 25 at the specialized terminals. The largest o f the operators at the KCT berths has rented an area o f 4 hectares, which reportedly handles 180,000 TEU per annum. The ship-shore charge is low, and is kept low by competition from other stevedoring companies. The shore handling is, however, still carried out by the KPT staff. 103. The compulsory shifting o f the feeders to the KICT and QICT berths i s being considered by the KPT.This is not recommended; the low cost alternative has demonstrated its commercial viability by attractingover 40 percent o fthe containers handledat Karachi. It is comparable with the low cost "midstream operations" at Hong Kong, which continue to handle about a quarter o f the port's containers. These low-cost, low-technology options are used particularly by small businesses/traders andmaythus indirectly benefit lower income groups2*. 104. The weak points o f these low-cost operations are that (i) the stevedores do not have their own quays, and (ii) the KPT i s still involved in shore handling. It i s recommended that the stevedores shouldbe allowedtheir own separate berths andthat the KPT should withdraw from operations. 105. Port Qasim has not had to embark on a major reform program comparable with KPT's because: 0 Port Qasim has always been a landlord port. The operations are carried out efficiently by private sector companies or industrialplants; 0 Ithasnot beenburdened with a dock labor board(seethe next paragraph); and The staff surplus is far smaller that at the KPTs. 106. There is, therefore, no need for a privatization program at Port Qasim. The port has only one publicly owned terminal and the operations are carried out efficiently by 10-15 private stevedoring companies who have purchasedtheir own equipment. (` ReductioninContainerDwellTimes As discussedinChapter 1,one o fthe mainproblems at Pakistaniports is the dwell time for containers inport, whichiswellaboveefficientinternationalnorms. Thelongdwelltimes effectively reducethe capacity o fthe container terminals to less thanhalftheir potential. Ship-shore container handling speeds are upto international levels, but on-shore container processing times aremore thantwice as long as those at efficient internationalports. At bothKICT andQICT, the berthoccupancies are low while the stacking areas are full. Failureto solve the dwell time problemwill entail unnecessary duplication o f investment incontainer terminals. Conversely faster dwell time tailoredwith customs reformshall helpcapacity increase o f QICT. It i s therefore imperative that customs reforms such as CARE andPACCS, tailored with increased automation, be invariably launchedat the port to reduce dwell time at Port Qasim. 22 Ithas been suggested that these small traders serve the less formal sector and thus impact lower income groups inPakistan. - 3 4 - 2.3.2 KarachiDockLabor Board 107. There are no significant problems with the terminal operators' own labor. The problems are caused by the KDLB, whose registered dockers the terminal operators are obliged to employ and subsidize. The original aims o f the KDLB,when it was set up in 1973, were reasonable. Like similar schemes in other countries, the KDLB was established to provide regular work and income for dock workers who hadpreviously beenemployed on a casual basis; 108. Inpractice, however, the scheme started badly and it has become more unsatisfactory over time. Its maindeficiencies are: 0 It was overstaffed from the start. When the KDLB opened in 1973, 8598 dockers reported for registration. This was more than had beenexpected, andalmost twice the requirement; 0 Dockers were guaranteed employment at a time when containerization and other forms of mechanical handling were reducingthe need for manual workers; 0 The reduction o f the KDLB via natural wastage was slowed by the introduction, in 1987, o f the hereditary right o f a son to replace a retiring dock worker (phasedout in2000); 0 The wages for the dock workers rose to levels several times higher thanthose for workers in comparable work elsewhere in Karachi; and the cost of medical and other benefits for relatives as well as the dockers have increased steadily; 0 The KDLB staff receives further payments under an incentive scheme. These are based on very low, outdated "norms" for cargo handling, which result in the dock workers getting bonuses even if handlingspeeds are very low; The registered dock workers, however, do little work on the quays. Infact, they do not have the skills for modemcargo handlingoperations. They are trained mainly for outdated general cargo, break-bulk operations, while two thirds o f Karachi's dry cargo is containerized. The port operators, however, are obliged to employ the KDLB gangs, and to pay for them essentially to watch the operations. The general consensus within the port i s that the KLDB staff are neither needed nor wanted; 0 Worse, the manning levels for the KLDB gangs are several times as high as would be necessary, even ifthey worked (e.g. KLDBcontainer gangs consist o f 24 menwhile only 4-6 are needed). They are based on outdated productivitynorms. 109. The main effects o f the KDLB on efficiency and costs at Karachi can be summarized as follows: 0 The KLDB does not detract significantly from port productivity, because its members do not participate significantly inthe work; 0 The KLDB adds significantly to costs. Firstly, the cargo handlingcompanies are obliged to employ the unnecessary KDLB gangs and, in most cases, pay unnecessary incentive payments. Secondly, the cargo handling companies have to pay a cess (i.e. a levy) to provide minimum salaries for KDLB staff when they are not "working", as well as medical and other benefits. 0 The KLDB impairs the level playing field competition between Karachi and Port Qasim, as Port Qasim does not have a DLB. 110. The abolition o f the KDLB has almost unanimous support amongst port users and there are many international precedents for such a move. Similar schemes have been closed in many other countries, as they are now regarded as obsolete. The DLBs were originally set up to provide guaranteed employment and incomes to the casual labor that used to predominate inports. But, the trend i s now towards permanent employment, especially in container terminals. A recent L O study reported that two thirds o f a large number of ports, replying to a questionnaire, stated that casual - 35 - workers accounted for less than 10 percent o f their requirements. Wherever possible, permanent employment shouldbe encouraged at Karachi. 111. The key to facilitate KDLB's abolition i s the availability o f funds for worker pay-offs. There appears to be a consensus that about Rs. 1 million per employee would be required, i.e. just over Rs.4.2 billion, or US$70 million. This would be equivalent to a minimum o f seven years' salary. This would be extremely generousby international standards (for example, the UK dock workers got a maximumo f about 15 months salary). It would have to be available as a lump sum, enabling those who wished to set up other businessesto do so. 112. There are three possible sources of finance for funding KLDB's closure: 0 The continuation o f the cess for, say,, 3 years to repay a bank or other loan, e.g. from the KPT surpluses, which would be used to pay the lump sums now, with future cess payments as security. This would not be anunacceptable burden inpractice, as the cess would have to be paid ifthe KLDBwere retained; 0 The sale o f DLBproperty; and/or 0 GOP funding or, alternatively, a World Bank loan or a commercial bank loan. The World Bank, as well as being a possible source of funds, has anextensive track record of assisting with sensitive labor reductions, e.g. incoal mining inRussia. The World Bank could also assist with a social audit o fthe likely consequenceso f closing the KLDBandmake provision for worker counseling, retraining, andother social safety net measures. 2.4. INVESTMENTREQUIRED 113. The private sector has already taken over most o f the responsibility for investment in the terminals. The container terminals at Karachi and Qasim are being expanded with private funding. There are also private sector plans to buildnew specialized facilities, an LPG terminal and an edible oil terminal at Qasim, financed mainly by Malaysian interests. There is, however, a need for investment inbasic infrastructure, inparticular for dredging23. 114. At the KPT, capital dredging of at least 1.5 meters is necessary to accommodate direct calls by the container ships which will be introduced inthe near future. Direct calls have already largely replaced feeder services at the top Indianports as a result of: (i) the growth o f traffic volumes, and (ii) sharpriseinportefficiencyfollowingprivatization.Pakistanisnowstartingtofollowthe the same trend, but the current draft restriction at Karachi, 10.5 meters in practice, i s too shallow to accommodate the ships which are now beingphased in. Two top shippinglines have already moved from Karachi to Port Qasimbecause Karachi does not have sufficient draft. But,Port Qasim has only a minor advantage. Shipping lines c o n f mthat they planeven larger ships on the routes. 115. At PQA, there are plans to dredge the entrance channel to 13.2 meters, with 17 meters at the entrance. The project includes work on the banks and areas for ships to pass. The objective i s to accommodate 85,000 DWT vessels and stimulate direct calls from shipping lines. The costs are estimated at about U S 9 0 million; andthe PQA has already approached the government for approval. 116. The consequences for the economy o f Pakistan o f being served only by feeder vessels inthe mediumto longtermwould be serious. They would include: 0 Additional costs o f feeder services to and from regional hub ports such as Salalah, Colombo or Singapore, to connect with trunk route services; 23 A contract has been signedfor the procurementof dredging atPort Qasim. - 3 6 - 0 Longer transit times and delays, which &e very injurious to the export markets, especially for delivery sensitive commodities such as garments andtextiles; and 0 The loss ofpotential international investors who include frequent, direct shippingservices on their check list o f preconditions for locatingina country. 117. Other investment requirements listed by the PQA operational staff included buoys for night navigation all along the 43 kmlong channel, especially at sharp bends, to demarcate the bank limits; dry-docking facilities for tugs, which currently have to use the government owned and operated Karachi dry-dock, where naval vessels get priority; procurement o f a dredger for regular maintenance o f the long channel; replacement o f floating craft, includingtugs and pilot boats; and a Vessel Traffic Management System(VTMS)24. 2.5. OTHER ACTIONS NEEDED 118. Other requirements include a Master plan, development o f marketing capability, release o f statistics, and consideration o f the role o fthe Navy inthe ports: A revised national ports master planwould seem advisable. The original master planwas carried out in 1994, while Port Quasim's master planwas updated during 200125. A revised master planshould examine Karachi, Port Qasim andthe new port at Gwadar which will soon be open for commercial traffic. It should determine (i) the need for dredging at the separate ports; (ii)the effects o f world shipping trends on port requirements, including the consolidation o f shipping lines, larger vessels and the possible trend away from hub and spoke services to direct calls; and (iii) potential o f Pakistan's ports, particularly Gwadar, the to act as gateways to/fiom the economies o f Central Asia; 0 The port authorities require marketing departments, with the ability to negotiate terms and discount tariffs, where necessary, to attract traffic. This i s necessary for enhancing competitionbetweenKarachiandPort Qasim for the benefit o fthe overall national economy; 0 The port should compile and publish regular statistical reports, covering cargo traffic, shippingtraffic, cargo handlingspeeds, shiptimes at berth, waiting times, financial indicators, etc. They should be reported in a statistical yearbook. It is unusual for major ports not to prepare such documents; 0 The dominance o f the Navy inport management i s unusually highby international standards. Many of the top positions are occupied by naval officers on short term assignments, from which they either return to the Navy or retire. While these officers may well be o f high caliber, this practice may have two rather negative effects. Firstly, the officers may be less commercially minded than will become necessary for future port operations (modern ports are intensely competitive); secondly, the predominance o f short term Navy assignments in highpositions may well limit the incentives of the permanent port staff to perform well in order to advance their careers. The KPT i s aware of these problems andhas emphasized that the assignment o f naval staff to senior positions i s a short term solution a consequence o f - expertise not being available within the KPT. The KPT's stated intention i s to have KPT officers occupy all positions. 24 The economic/fmancial feasibility o f these proposed investments has not beenassessedfor this policy note. 25 The Masterplanwas prepared by Engineering Consultants Internationalin collaborationwith M / s Maunsell Consultancy Services and included (i) a review and analysis o f existing facilities, (ii) transportaccessto Port Qasim, (iii) institutional framework, (iv) Port's operations, and (v) landmanagement issues. The Master Port's Planis currently beingupdated. - 37 - 2.6. REGULATION 119. The Ministry o f Communications i s the effective regulator o f the ports industry. Its main controls are over port authority tariff changes and investment, which have to be cleared by the Director General, Ports and Shipping. The Ministryhas allowed the ports to buildup unusually large financial surpluses. The long term aim should be to minimize regulation, relying wherever possible on competitionto reduce tariffs andincreaseport efficiency andcustomer service. SUMMARY OFMAINRECOMMENDATIONS Improving port m&nagement/operations by (i) reducing port charges by 15 percent, (ii) appointing port specialists, (iii) port staff by 25-40 percent, (iv) phasing out `double reducing charging' to streamline container handlingcharges, (v) outsourcing o f port services to private sector, and(vi) makingnavigation available on a 24 hours 7 days a week basis; Updating National Ports Master Plan to re-evaluate the appropriate roles o f the KPT, the PQA andPort o f Gwadar; Closing the KDLBusingthe retrenchment option; Improvingport infrastructure to modernize and meet international standards by investing in both cargo handlingcapacity anddraft depthto cater for larger vessels; Completing the transformation of the KPT to landlord status and raise the level o f port and comrnerciaharketing professionalismat bothports; Establishing peflormance monitoring indicators and benchmarks. - 3 8 - 3. PAKISTANSHIPPINGPOLICY 3.1. INTERNATIONALSHIPPINGTRENDS 120. Twenty five years ago, international general cargo shipping was dominated by self-protecting shipping`conferences', which limitedcompetitioninthe industryandfixed freight rates at highlevels. These cartels often contained state-owned national shipping lines, which were allocated cargo under UNCTAD's 40/40/2026cargo sharing code o f practice. Today, international general cargo shipping i s much more competitive. Although the industry i s dominated by a relatively small number o f international shipping lines", the decline o f the conferences and the increased level o f competition have resulted in a fall in freight rates to levels well below those of the late 1980s. Almost all of the state runnational shipping lines have dropped out, unable to survive inthe competitive market. 3.2. OBJECTIVESOF SHIPPINGPOLICY 121. This report assumesthat shippingpolicies inPakistanhavetwo mainaims: 0 To promote efficient, low-cost shipping services to support Pakistan's internationaltrade; and 0 To promote the national shipping industry inorder to minimize the loss o f foreign exchange on payments for international shipping services. The cost o f international shipping services to Pakistan is probably over US$2 billion. Moreover, ina volatile region, a national shipping industrymayhelpprovide security for strategic imports. 122. This reportregards the first objective as being, by far, the most important. 3.3. PERFORMANCEOFEXISTINGSHIPPINGSERVICES 3.3.1. Container ShippingServices 123. The two most important dimensions for container shipping services are the tariffs and the service quality: (a) Tarfls 124. Pakistan's freight rates are broadly in line with those o f its international competitors for exports - in particular India, Sri Lanka and Bangladesh. There are, however, some differences, as shown inTable 7. Pakistan's freight rates are lower thanChina's freight rates onthe routes to Europe and the U S East coast - because of the shorter distances. But, Pakistan has slightly higher freight rates thanthe west coast o f India. This i s to some extent inevitable in a competitive market, because Indiancontainer volumes are very muchgreater andthus containers handledvessel call are higher. 26 Cargo sharing: 40 percent to ships of exporting nation, 40 percent to ships of importing nation, and20 percent ''toAt thirdparty ships. the beginning of 2004, the top 4 container shipping companies controlled 31percent of the world market, and the top 25 companies controlled 79 percent of the market. Industry concentration has increasedwith the acquisition ofP&O Nedloyd by Maersk. - 3 9 - US$ per TEU, to Europe Pakistan 1,350 IndiaWest Coast 1,250 IndiaEast Coast 1,300 Bangladesh 1,400 China 1,650 Colombo 900 125. All o fthe world's top eight container shippinglines provide services to Pakistan's ports. The lines callingare, indescending order o ftheir share inPakistan's export market, Maersk-Sealand, APL, MSC, PONL, Safmarine, PIL, Yang Ming Line, NYK, C M A CGM, Hanjin, United Arab Shpping Company, and Evergreen2*.No Pakistanishippinglines provide container services. 126. The services are hghly competitive, reflecting recent developments in the international shippingindustry: decline in"conference" power and disappearanceof national cargo reservation. In addition, shipping services in the region have received a boost from the liberalization o f the Indian ports and their increased efficiency. Previously, the ports were so inefficient that no major container lines would call. Overall, there has been a radical improvement inefficiency and a major reduction in container tariffs, during the last twenty years. Container rates reflect market conditions inthe world economy and are thus subject to significant movements, Table 8: Table 8: Trends in Container Freight Rates on Major Routes 2000-2004 (US$per TEU, figures are for December) 2000 j 2001 I 2002 I 2003 I 2004 I Asia to Europe 1,600 I 1,296 1,208 1,672 1,826 Europeto Asia 800 I 688 694 795 735 Average, bothdirections 1,200 992 951 1,234 1,28 1 Asia to US (Pacific) 1,950 1,624 1,476 1,995 1,946 U S to Asia (Pacific) 850 801 757 871 838 Average, bothdirections 1,400 1,213 1,117 1,433 1,392 Note: These rates includeCAFs, BAFs andalso THCs (unlike the previoustable ) Source: ContainerizationInternational I 127. The increased demand from the rapid expansion o f Chinese manufacturedexports has raised rates recently but a big expansion in the number or container vessels under order may result in downward pressures on rates inthe near future. 128. The container shpping rates for Pakistan's exports are negotiated mainly by the large importers inthe U S and Europe (e.g. WalMart, Target, etc) who have formidable bargaining power. They arrange the sea transport because a highpercentage o f textile exports (70 percent of Pakistan's exports) are sold f.0.b. 28The containershippingindustryis consolidatingbut, evenwith the purchase ofPONLby Maersk, the top five shippinglines serving Pakistanstill lift <50% of the export containers shipped. - 40 - (b) Service Quality 129. The transit times from Pakistanare satisfactory. The fastest times are 19 days to Europe and 22 days to the USA. Interestingly, the best transit time to Europe is achieved by a feeder operator rather than a direct call service. The Europe Pakistan India Consortium's (EPIC) direct service takes longer as it i s rather a "milk run", calling at Jebel Ai, Qasim, Nhava Sheva, Mundra, Aqaba, Port Said, Cagliari, Tilbury, Antwerp and Hamburg. Exporters also point out that feeder services give greater frequency than direct calls. Maersk has two feeder services, both o f which call at Qasim once a week, while the EPIC direct service to Europe calls only once a week 130. Incomparison with its major competitors, Pakistan shipping time advantage/disadvantage depends critically onthe destination: . For European destinations, Pakistan's transit times are slightly faster than those from Hong Kong, andvery slightly slower than slower thanthose from India; . For U S East Coast destinations, Pakistan's transit times are faster than those from Hong Kong, and similar to those from India; For US West Coast destinations, Pakistan's transit times are much slower than those from HongKong, and similar to those from India29. 131. The exporters express general satisfaction with the quality and level o f services. Their complaints are limited to shut out times, etc. and the seemingly arbitrary additional charges applied bylocalagents. 132. There is, however, the danger that limited port drafts may leave Pakistanas the poor relation inregional shippingservices, with larger andmore economic ships calling at Indianports but not at those o f Pakistan. 3.3.2. BulkShippingServices 133. The bulkships bringingcargoes to Pakistanare chartered onthe open market. Their costs are therefore dependent on the charter rates andworld economic conditions. The rates are normally low, but have beenhighfor the last two years, as a result of the extraordinarily highdemand for shipping to China. These costs cannot be much influenced muchby the GOP, except insofar as it can promote a larger user-owned national fleet (see below). 134. The bulk ships do not face significant bottlenecks or inefficiencies in Pakistan's ports. Port handlingspeeds are adequateto turnthe ships roundquickly, andthere is no significant queuingtime for bulk berths. The available water depths limit the size o f vessels. While this may not affect some traffic, importers o f petroleumproducts, iron ore and coal report that they would use larger vessels, if they could. 3.3.3. Overall Assessment of Shipping Services 135. The costs, transit times andreliability o f container services to/from Pakistanare satisfactory, despite the lack o f participationbyPakistanilines. 136. The costs o f bulk shipping services are dependent on international freight rates, which have been low for manyyears, but are highat present. Service quality i s satisfactory 29 However, exportsto the East Coast are four times higher than those to the West Coast. -41 - 3.4. THE NEEDFORGOVERNMENTINTERVENTION 137. The scope for government policy to reduce freight rates or increase efficiency in shipping services i s limited, other than by ending its protection o f an inefficient public sector shipping corporation. As described previously, the container services calling at Pakistan's ports are efficient andtheir tariffs are inline withthoseto competingcountries. Their efficiency andlow tarifflevels are a result o f a highlevel o f competition inthe shippingsector; government interventionor regulationin this area i s unnecessary. 138. Bulkfreight rates arehighat present.This is, however, the result ofunusual conditions inthe international charter market; and, again, there i s little scope for government intervention to improve the situation. 139. The main measures that the government could take to reduce freight rates are, for both container andnon-container cargoes, to: (i) Dredge entrance channels and berths to allow larger vessels and thus obtain the economies o f vessel size. The current channel depths at bothKarachi and Qasim are well below the Panamax depthwhich i s now the standard at many major international The diseconomies o f limited ship size are a direct cost to the economy and will become increasingly serious as the size o f container vessels rise. (ii) Reduce the high port entry charges although these high port dues are not a cost to the Pakistaneconomy, rather a transfer from importers to the port authorities. 140. Inaddition, as the next section will suggest, the dismantlingofthe protectionenjoyedbythe state owned Pakistan National Shipping Company (PNSC) and the promotion o f private Pakistani shipping lines would be desirable. But it is emphasized that a large national fleet is not a necessary condition for efficient shipping services and reasonable tariffs, these are already providedby foreign shippinglines. 3.5. THE PROMOTIONOFNATIONALSHIPPING 3.5.1. The RoleofthePakistanNationalShippingCorporation(PNSC) 141. The role o f Pakistani entities in international shipping has become limited in recent years. The only significant company, with Pakistaniregistered ships, i s the PNSC, which i s state owned. It has 14 ships o f which 4 are oil tankers and the remainder old, out-dated general cargo ships. I t has no container ships. Twenty five years ago, PNSC had a fleet of 50 ships. By the late 1990's, PNSC had lost most o f its liner cargo andwas makingregular losses. 142. Privatization o f PNSC was seriously considered inthe early 1990s, but was reportedly vetoed on the grounds that a national fleet, under state control, was necessary for "strategic control". This argument may seem less justified today, given the improvements in regional political relations. It might also be noted that the policy o fattempting to maintain a strongnational liner shippingindustry, via state control, has effectively destroyed the rest o fthe national shipping industry. 143. In2001, PNSCwas givenanewleaseoflife,whenitwas awardeda 10year contact to carry all crude oil imports to the national oil refineries (about 8 million tons per annum), despite owning only one tanker. On the available evidence, the tariffs charged by PNSC are well above market rates 30Pakistani ports have depths o f 10.5 m (KPT) and 11.5 m (PQA), well below those of China and the Red Sea (14 - 16 m) and evenbelow those of the west coast o fIndia (12 m) and Colombo (12.5 m). See also Chapter 1. PakistanPortsPolicy. - 42 - and these have allowed PNSC to make large profits inthe last few years. They were sufficient, for example, to allow PNSC to buynew tankers from its accumulated financial reserves. 144. This monopoly has effectively prevented the growth o f private shipping. There is now no effective shippingindustry inPakistanoutside PNSC. This problemhas persistedfor many years, but this should not be a reasonto allow it to continue. It has become more urgent as the aftermath o f 9/11 has left three quartersof Pakistan's large seafaring community unemployed (see section 3.5.3). 145. It is emphasized again, however, that a national fleet innot essential for competitive shipping services. 3.5.2. Attemptsto PromotePrivate Shipping 146. Shipping was nationalized in 1971, when the ships o f several private companies were taken over by the PSNC. Since then, the role of Pakistaniprivate shippinghas been minimal. 147. There was an attempt to revive the sector inthe 199Os, but the outcome was disappointing. Initially, three companies (Tristar, Ray and Milwala Shipping) bought ships. Two years later, the government announced retroactive import duties and other taxes, totaling 34 percent. Two o f the new ships, which were located inPakistan and unable to pay the taxes, were arrested. As a result, all the other ships were sold. The liability of imported ships to duty was later cancelled but the incident left a legacy o f distrust regardingthe stability o f government shippingpolicies. 148. There was a second attempt to promote private shipping in 2001, when the government introduced several financial incentives. These included income tax, import duty and surcharge exemptions, an annual tonnage tax o f one dollar per gross ton, and the easier movement o f foreign exchange. But these financial incentives have had no effect. The private Pakistani shipping fleet i s still more or less non-existent. This is partly attributable to distrust but also to (i) reservation o f the government cargoes for PSNC (private operators have to obtain a "no objection certificate" from PNSC, which has the right o f first refinal for government cargoes); and (ii) residual problems with the ability o f lines to transfer foreign exchange. 3.5.3. Merchant Marine (a) Seafarer Employment 149. According to the Ministryo f Ports and Shipping, Pakistanhas 20,000 trained seafarers and, in the past, their incomes were a major earner o f foreign exchange. Little o f this employment was on Pakistani ships, with almost all the Pakistani seafarers employed abroad on foreign ships. PNSC now employs only about 600 people. 150. Before 9/11, about 90 percent o f Pakistani seafarers were in employment, now only 25 percent are employed. The main reasons are the problems inobtaining visas and the impositionby the U S Homeland Security Department o f the need for security guards at ports where Pakistani sailors land. The Director General o f Ports and Shipping considers this very unfair, as there have been no cases o fterrorism amongst sailors. The Ministryhas taken upthis issue with the IMO, who have duly raiseditwiththe U S authorities, butwithout any success, so far. (b) Trainingof Seafarers 151. The Ministry o f Communications i s currently upgrading the Marine Academy, which annually trains 100 officers and 100 engineers. It requires fundingto replace equipment, particularly simulators, which were originally purchased with assistance from JICA, 15 years ago .The equipment i s now outdated, and it i s difficult to get spare parts. Such investment would become particularly urgent if Pakistan's seafarers again become accepted internationally and if Pakistan's national fleet expanded. - 43 - 3.5.4. Recommendationsfor thePromotionofPakistan's ShippingIndustry 152. The following measures mightbe introducedto promote a sustainable private sector shipping industry: ... Privatization o f PNSC Continuation o fthe tax concessionswhich have beenintroducedinrecent years Continued attempts to reassure prospective investors who have lost confidence in the ' government's commitment to a private shippingindustry Permanent removal of all reservation o f cargoes for PNSC, especially government cargoes; . and all bulks, includingthose for government agencies (iron ore, coal, wheat, fertilizers, etc), andthe final abolition ofthe waiver system. Lobby abroad to have visa problems for Pakistani sailors removed Freemovement o f foreign exchange 153. However, a successful Pakistaniprivate shippingindustrywould not necessarily lower freight rates, except where the ships are owned by the importers (e.g., the oil or steel industries). Independent private Pakistani lines would almost certainly charge market rates, as do the shipping lines inother countries. 154. The main benefit would be reduced foreign exchange payments to foreign shipping lines, probably amounting to over US$2 billion per annum. However, a large part of vessel costs (fbel, vessels, spare parts, etc) are incurred in foreign exchange, so the net foreign exchange saving would be muchless. - 44 - 4. THE RAIL SECTOR INPAKISTAN: POLICY AGENDA 4.1. INTRODUCTION 155. Pakistan's population and geo-economic development is largely located within the influence area o fthe Indus.80 percent o f the population lives and 85 percent o f its GDP i s generatedwithin the provinces o f Sindh, primarily around Karach, and Punjab. The economic centers o f these two provinces are separated by -1,000 k m s o f relatively flat terrain and connected by both highway and rail. Large volumes o f long distance passengers and freight move along this north-south axis. This spatial distribution of population andeconomic development should be ideal for railtransport: 0 highpotential levels oftraffic 0 longhaul distances over flat terrain 0 limited number o ftraffic centers 156. There should be great potential for regular point-to-point unit/block services with the minimumof interchange and intermediate marshalling - the operating configuration most suited to the provisiono f efficient andcost-effective rail services. 157. Pakistan's economy has, inthe past few years, become muchmore outwardlooking andmore open to private sector investment and initiative. Growth has shifted to a higher trajectory, and the economy i s diversifymg with a substantial export-oriented manufacturing sector. Exports have increased and shifted from primary products to manufactures; in the early 198Os, primary products accounted for a third o f exports and manufactured goods for a half, the proportions are now ten percent andover seventy five percent, respectively. 158. The growth in incomes and higher value production i s beginning to change the pattern o f demand for transport, with increased emphasis to higher service (lower transit times, increased reliability and efficient door-to-door services) rather than simplylow fareshariffs. 4.2. EVOLUTIONOFPAKISTANRAILWAYS 159. The rail network was constructed when rail provided the only means o frelatively highspeed, highcapacity inlandtransport. The railways were built to meet a range of objectives: administrative, securityhtrategic, social as well as economic and commercial. Untilthe advent o f commercial long distance road transport, the authorities were able to maintain the network and services by exploiting rail's effective monopoly over longer distance transport. Non-commercial lines and services were fmanced from the earnings on the commercial lines and services. 160. The construction o f a modem highway network, almost throughout Pakistan, andthe growth o f the road transport industry has fundamentally changed the transport sector. Demands which could previously only be met by rail can now be served more conveniently, at lower cost andhigher service standards, by road. Over the last 30 years, road transport has progressively become the dominant means o f motorized transport within Pakistan (Table 9), as it has in almost all developed and developing countries. - 45 - Passengers Freight Rail Road 1 Rail Road 1955-1960 1 41 1 59 73 1 27 I 161. The dominance o f roadtransport has resulted from: 0 Private sector ownership andmanagement; 0 No effective regulatiodcontrol o faxle-loads, vehicle weights or condition, or driver hours; 0 Flat terrain, onthe mainroute, allowingtrucks to carry very heavy loads at slow speeds; 0 Intense competition, resultinginamong the lowest truckingrates inthe world31; 0 Private transport agents coordinating contracts andarrangingbackhauls; 0 Simple vehicle technology, easily maintained, often with locally fabricated parts; 0 Customers, untilrecently, primarily interested invery low rates rather thanhighservice. 162. Like most public sector railways, PRdid little, untilrecently, to respondto the competition: 0 It continued to operate the entire network, even though the rationale for many lines has effectively disappeared; 0 Itcontinued to try andcross-subsidize passengersfromfreight andthe non-core networkfrom the core network; 0 Itcontinued to offerthe traditionalpatternof supply-driven services; 0 Itfailedto downsize staff substantially, streamline operations andreduce costshariffs. 163. Total rail traffic declined, financial results deteriorated and PR has became dependent upon the Government (GOP) for: 0 Investment; Debt servicing andpensionpayments; 0 Operating losses (inmany years). 164. While PR retained a significant share o f long-distance passenger traffic, it effectively lost private freight traffic. Rail freight is now largely confined to segments where rail i s protected by regulation (e.g., Afghantransit traffic, bondedcontainers, andpublic sector entities). Rail carries such a small proportion o f freight that, objectively, closure would hardlymatter to the national economy. Rail has commercial potential and could play a valuable transport role but it i s not an economic necessity. 165. PR's problems developed gradually but eventually a major structural change was recognized as necessary. Inthe late 1990s, the policy was to privatize PR. Passenger and freight divisions were created and the private sector was invitedto operate trains. Public investment was severely curtailed, on the expectation o f future private sector investment, and locomotive and rolling stock fleets suffered. Then the government changed, policy was reversed and privatization was abandoned. The 31The low rates are primarilyfor buWloose cargo. Nevertheless, rates for containers are significantly higher in the trucking than rail sector as the ability to overload trucks i s effectively constrained. But container traffic is the market segment for which higher quality service is demanded. - 46 - privatization policies had little ownership within PR and they had little impact on the traditional priorities and management practices. Little was achieved other than to deepen the equipment crisis and intensify distrust o f reform andrestructuring. 4.3. PRESENT CHARACTERISTICS OF PAKISTANRAILWAYS 4.3.1. Passengedfreight 166. Over the last 30 years, passenger numbers have fallen but passenger-kms have increased and are now at record levels (Table 10). Freight levels have fallen almost continuously, interms o f both tons and ton-km (though there has beena slight increase duringthe last few years32). I Table 10: PakistanRailways Traffic (million units) 167. Ininternational terms, PR is a medium sized passenger railway which also carries some freight. Infact, few European railways carry as many passengersas PR (Figure 1). Figure 1:Rail Traffic: InternationalComparison 60 50 - 40 n - $E30 0 P 20 10 0 0 5 10 15 20 25 Passenger-km(bn) 168. Passengerservices receive total priority within PR: train paths, locomotives, management, etc. An entire class of GE locomotives (the Blue Tigers), with high levels o f reliability, are reserved for the express passenger services. Freight services get the less reliable locomotives and lose their 32The recent growth has been reversed inFY06 with a decline o f 15 percent inthe number o f loaded wagons duringthe first six months, mainly the result o f oil traffic dropping by almost 50 percent. - 47 - locomotives, if passenger locomotives fail33, While PR acknowledges that more freight would improve its financial results, the priorities have still beento improve the passengerservice. 169. The scale and quality o f PR's freight services are constrained by: (i) its low track priority, only the parcel and the container services are timetabled; (ii) its low priority for motive power; and (iii) antiquatedrollingstock,mainlyfour-wheelerwagonswithhightare/loadratios,lowrunning the speeds (40 km/h) and poor reliability. PR has very few high-speed, high capacity modem wagons, hardlymorethanto runa dailyKarachi-Lahorecontainer service. 170. Passengertraffic accounts for over 80 percent o f PR's operations but only 56 percent o f total revenue. Unit passenger revenue i s much lower than average freight revenue. PR's pricing policies are muchcloser to IndianRailways thanChina Railways (Table 11). RailwayNetwork Yield Pass-Wield ton-km China 2.23 India 0.38 Pakistan 0.40 171. IndianRailways (IR)andPR have continuedto charge relatively highfreight rates inorder to keep passenger fares low. China railways, on the other hand, has rebalanced its pricing structure and shifted to muchhigher passenger fares, which now cover passengercosts. 4.3.2. Two Railway Networks 172. PR has a network of 7,791 route-km, including 1,040 km o f multiple-track, effectively combining two rail systems: 0 The core railway: primarily the main north-south route34,45-5OkgJmrail, 23 ton axle-loads, maximum speeds o f 100-110 km/h, good track condition and very few temporary speed restrictions; and 0 The non-commercial railway: a collection o f little used strategic and branch lines, 37kg/m rail, track often in poor condition (about a third o f the network under temporary speed restriction), maximum speeds o f 40-70 km/hand axle-loads restrictedto 17 tons. 173. Invery broad terms, the core railway encompasses about a third of the total network but carries threequarters o f the total trains, andover 85 percent o f freight traffic (see Table 12). Percentageo fNetwork Percentageof Trains per day Route-km 1 Track-km Passenger 1 Freight 1 Total Core 33 41 73 86 76 Non-commercial 67 59 27 14 24 The revenue generated on a small core commercial network i s use to try and support a non- commercial network, twice its length. ~~~ 33 PR staff estimatethat locomotive failures onpassengertrains occur about three times per day. 34 Not quite the core commercial railway as it also includes the strategic linkto Quetta. - 48 - 4.4. FINANCIALPOSITIONOFPAKISTANRAILWAYS 174. PR is not profitable andmight be considered technically insolvent, unable to service its debts and often unable to fund fully its operating costs and pension payments. There was, however, a marked improvement inPR's financial results duringFY05 (see Table 13Q5. Table 13: PakistanRailways: FinancesFY2004 andFY2005 (Rs. Million) I Revenue 2003-2004 2004-2005 %change Passenger 7,939 9,002 +13 hreight 4,343 5059 +16 Coaching & Military 1,363 1419 +4 Sundry 923 2790 +202 Total 14,568 18270 +25 OperatingExpenditure 16,857 17991 +7 SurpludDef cit -2,289 279 4.5. COREAND NON-CORERAILWAYSINPAKISTAN 177. The core railway analyzed i s detailed in Table 14. The network includes the Quetta line though, under a PSO regime, the Quetta line would undoubtedly be a candidate3'. The passenger services on the core network include a number o f services which only use the network for part o ftheir journey (e.g., the Khushhal Khan,Karachi-Peshawar, travels from Multanto Peshawar via Kundian). 44 pairs o f trains (64 percent o f passenger train-km)use the core network exclusively, these include 17 of the 20 mail and express services and generate 81 percent o f passenger revenue. The core network carries 86 percent of freight train-km and 92 percent o f wagon-km3*, but these include wagons which also use the non-core network for part o f the trip. If freight traffic i s restricted to the core network exclusively, freight would be reduced by about 24 percent. 35Passenger revenues have been increasing at 11-19 percent duringthe 2000s. Freight revenues were adversely affected by the loss ofpetroleum withthe opening o fpipelines. 36Passenger railways, ingeneral, receive significant subsidies from government. 37Costs on the Quetta line are highbecause of the steep gradients andneed to split trains. 38No detailed origin-destination data are available andsome approximations havehadto be used. - 49 - 1 Lahore IRawalpindi IPrimaryA I287 I302 I 21 I 3 1 24 I Rawalpindi Peshawar PrimaryB 175 189 8 4 12 Khanewal Lahore via Faisalabad Primary A 304 304 30 3 33 ISanglaHill IWazirabad IPrimaryA I109 I109 1 8 1 2 1 9 I ~~ ~ Total 2,612 3,575 22 6 28 % oftotal network 33 41 73 86 76 Note: PRtrack classification * 4.5.1. Above-rail train costs and revenues onthe core andnon-core networks 178. The financial positions ofthe core andnon-core railway networks were estimated onthe basis of a cost model usingthe FY2004 PR Accounts. The analysis breaks down costs betweenpassenger and freight services, core andnon-core networks, andabove railtrain costs andthose costs associated with the provision, maintenance and management of the Depreciation on passenger and freight services use accepted international provisions, rather thanthe low depreciation provisions included inthe PRAccounts. The results of fmancial analysis are outlined inTable 15. -~ Table 15: Pakistan Railways: Above Rail FinancialAnalysis FY2004(Rs. Million) PassengerServices Freight Services Total Core Non-core Total Core Non-core Total Core Non-core Revenue 6,673 1,548 8,221 3,450 1,115 4,566 10,123 2,663 Traincost* 4,944 2,044 6,988 2,635 926 3,561 7,579 2,970 rsurZs I 1,729 I -496 I 1,233 I 815 I 189 I1 , ~ s 2,544 I I -307 I Depreciation 1,984 1,071 3,078 471 210 681 2,455 1,281 Surplus -255 -1567 -1845 344 -21 324 89 -1,588 179. The results of the analysis can be summarized as follows: 0 Both passengers and freight cover their direct train-related operating costs and generate a surplus. Non-core passenger services runat a deficit; 39 Pension payments to past employees have been excluded from the cost analysis as they are unaffected by presentoperations. - 50 - 0 Once deprecation i s included, the total system runs at a substantial loss, although the core network still covers its costs; 0 Passenger services on the core network fail to cover their depreciation costs but, with higher train speeds, the burden of depreciation will decline and passenger services should generate some surplus to be set against access andinfrastructure costs4'; 0 Core freight services already generate a surplus toward access and infrastructure costs and even freight onthe noncore network almost covers its long-run direct costs; 0 Taken together, services on the core network run at a small surplus, services on the non-core networkrunat a substantial direct deficit. 4.5.2, Total cost recovery on the core the non-core networks 180. Direct train costs are only part o f the total costs for providingtrainservices. Inaddition to the motive power and rolling stock costs, there are also the costs of signaling, track maintenance, train control and corporate administration. Eventually, rail and sleepers have also to be replaced and, for long-term sustainability, provision has to be made for track replacement (see Table 16). Core Non-core 1Revenue I 10,123 I 2,663 I Train costs 7,579 2,970 Direct short-run surplus 2,544 -307 1Access costs I 1,489 I 1,265 I Network short-run surplus 1,105 -1,572 Train deareciation 2,455 1,281 ITa c k depreciation I 1,720- T - 6 1 8 - 1 Network long-run surplus 1 -3,O 70 -3,471 181. The analysis indicates: 0 The core network covers all its short-run costs (costs excluding depreciation) and generates a surplus; 0 The core network i s not sustainable, once depreciation i s included. Revenue has to be increasedby about 30 percent to cover total costs; 0 The non-core network operates at a short-run deficit, equivalent to almost 60 percent of revenue. Ifdepreciationi s included, the deficit i s significantly greater than its total revenues; 0 PR's financial results would be significantly improved if the non-core network and its serviceswere closed, the operating assets redeployed andthe surplus staff retrenched. 40Timetabled speeds for passenger trains average 43 km/h, and even the mail, express and intercity trains averageless than 50 kmlh. Freight trains averageabout 25 kmih. - 51 - 4.5.3. Financialresults on core network by businesssegment 182. Inaddition to passenger andfreight services, there is also "other coachingincome'' derived almost entirely from the core network. This income includes the dedicated parcels' service o n which the wagons are subcontracted to freight forwarders (Table 17). Table 17: PakistanRailways: BusinessAnalysis of Core NetworkFY2004 r (Rs. Million) 1 Passenger I Othercoaching 1 Freight I Total I Revenue 6,673 925 3,450 11,048 Train costs 4,944 797 2,635 8,376 1,729 128 815 2,672 IDirect short-run surplus Access costs 1 866 I 190 I 574 1 1,630 I Network short-run surplus 863 -62 241 1,042 Train depreciation 1,984 385 471 2,840 backdbreciation I 997 I 251 1 723 I 1,971 I Network long-run surplus -2,118 -698 -953 -3,769 Long-run operating ratio 1.32 1.75 1.28 1.34 41This method of cost allocationwas usedon BritishRail, prior to privatization, as part o f its lines of business approach - 52 - 4.6. FUTUREROLEFORPAKISTANRAILWAYS 4.6.1. A viable commercialrailway 186. The core businesshetwork comfortably covers its above-rail operating expenses but the surplus i s only sufficient for about 40 percent of its access and depreciation costs. The unit costs o f PR are comparable with those o f many efficient railways and suggest that the main thrust to improving the business performance o f PR should be directed toward the improved utilization o f its capital assets4*.Increasing levels o ftraffic would use the track assets more intensively andreduce unit track access costs. Higher utilizationo f the operating assets, particularly its passenger coaches, could be achieved through increased operating speeds. Raising operating speeds by 20 percent would reduce depreciation by broadly the same level, though with a small increase infuel costs. This should easily be within the capability of the system as the main line i s improved and more wagons, capable o f higher operating speeds, are introduced. 187. While increasing traffic and asset utilizationmay be the primary route to commercial viability there are opportunities for reducing costs: 0 Track replacement costs can be reduced by introducing modem maintenance procedures, such as rail grinding onthe higher density lines, which would enable track life to be extended considerably beyond the 400 million gross tons now assumed; Substantially increased labor productivity should be possible. PR has a large staff, with far too many grades and levels. Though unit costs are low, overstaffmg may encourage inefficient management, reduced,staff performance as well as poor motivation. Streamlining staff levels and deployment could result in significant direct and indirect benefits, but may require a generous labor adjustment program; 0 Streamlining operating practices could reduce costs as well as increase asset utilization.PR is a diesel system with one relatively short route section which was electrified many years ago. This configuration increasesbothoperating and asset costs: o Delays to trains at the change of traction, resultingin reduced asset utilization and lower service levels. The high priority maiYexpress passenger trains use diesel traction throughout and only goods trains and minor passenger services change traction; o Small fleet of under-utilized electric locomotives. In FY2003, the average hourly utilizationo f electric locomotives was only 60 percent o f diesel locomotives, and the distanceutilizationonly 36 percent; o Additional locomotive maintenance facilities, increased stockholdings o f locomotive spares andthe requirement o f additional staff skills. PR is comparable with both China and India, two o f the world's major passengerrailways, for its main traffic, passengers.It compares less well for freight. This largely reflects the lack o f investment infreight, which in bothJawa and Pakistanwas untilrecently operated with obsolete rolling stock. While labour productivity inPR has plenty o froom for improvement (about one-third of India) the overall financial unit costs are comparable withthe world's major railways. - 53 - Electric traction has traditionally been considered as more energy efficient and justified at high traffic levels. But, this may no longer be the case with the fuel efficient diesel locomotives developed inthe past few years. 4.6.2. Focusedcommercialrail investmentprogram 188. PR can only become a commercially viable railway if it can substantially increase traffic and charge remunerative rates. Increasing the utilization o f existing operational assets has to be the first priority through, for example, reducingterminal times, faster wagon turnaround andhigher passenger load factors. However, such increased utilizationmay have a relatively limited impact and investment inthe commercial rail sector will be necessary. Investments need to be subject to critical financial examinationto ensurethat they add to capacity inthe most effective manner: 0 Wagons: under-investment inprevious years has resulted inPR owning a very small fleet o f modem, high capacity wagons able to run at the speeds necessary to compete with road transport. A substantial investment inmodem wagons will be necessary ifthe rail sector is to cany more freight. While the investment is undoubtedly required, the source of the investment andthe ownership o f the wagons neednot necessarily be the public sector. Many railways, even those within the public sector, operate with wagons owned by customers. Within the appropriate commercial andlegal frameworks, private sector investment inrolling stock mayhave potential inPakistan; 0 Locomotives: locomotive utilization on PR, given the average haul lengths, is low, averaging only about 350 kmper locomotive in service. The very slow speed o f freight trains reduces average locomotive ~ t i l i z a t i o nand~more modem wagons should raise locomotive utilization. ~ More locomotives will be required but, to achieve the reduced transit times and improved reliability o f the freight services, a change in locomotive allocation will be needed, giving muchhigher priority to freight traffic; 0 Track capacity and quality: PR's present plans allocate substantial investment to track improvements. These should perhaps be re-assessed according to such criteria as cost- effectiveness andthe policy support to givingpriority to freight: o Given the reductioninthe numbero ftrains operated, since the peak levels ofthe past, the immediate priority for substantial additional track capacity may appear somewhat uncertain. Could the required capacity and improved train service levels be provided bymodemtraincontrol systems at lower cost?44 o Are the signaling and train communication investments included inthe investment plancost-effective interms o f their likely impact on rail safety, given the number o f trains runon the system?45 o Does the investment required to raise maximum permissible train speeds from 110 km/h to 140 km/h support PR's commercial viability? Such speeds are not required for the freight business, are PR's passengers willing to pay the fare premiums necessarytojustifjdfinance such investment? Express, Mail andInter City trains average <50km/h, could significant average speeds be raised without major track investment? 43 Utilization o f locomotives hauling freight trains average 240 kmper day. 44 Inthe longer-term, however, completing the double track from Karachi to Lahore may well be necessary. 45 Similar concerns have been expressed regarding the cost-effectiveness o f new safety investments on railways inthe UK. Railinvestment decisions madeafter major accidentsoftenimplicitly value life atvery substantially higher rates than applied inother sectors. - 54 - o I s the rehabilitation of the existing electrified track section, and its extension, cost- effective in terms o f cost andor energy efficiency, in comparison with using the same resources to invest inmodem, fuel efficient diesel locomotives? Some, at least, o f the proposed investments still seem to reflect the priorities o f an engineering-ledpassengerrailway, rather than a business-led transport enterprise. 4.6.3. Commercial focus for the commercialbusinesses 189. Removing the burden ofhistory: PR's core commercial businesses are presently heldback by the legacy o f history (the need to cross-subsidize a large network o f lines which are no longer commercially viable nor, perhaps, socially/strategically necessary). To achieve commercial viability andmeet their potential objectives inPakistan's transport sector, the commercial rail-businesses need to be able to compete without these costs. Rail's commercial businesses shouldbe placed onthe same commercial basis as its road competitors. IfPR's core freight and passenger services are to compete effectively on the basis o f current avoidable costs, they needto be relieved o f 0 The costs of operatingthe large non-commercial networko f lines andservices; 0 The costs of providingpensions to past employees. 190. Inaddition, the financing for infrastructure costs andtreatment for taxation inthe roadand rail sector should be placed, as far as possible, on an equal basis. 191. Some form of financial restructuring will be necessary, but such restructuring needs to be undertaken within the framework o f modern commercial cost accounting and financial targets for management. PR should be expected to make adequate provision for the replacement o f its operating assets andmeet normal financial returns onthe commercial assets employed. 192. Rebalancingfreight andpassenger priorities: Restructuring PR's finances i s unlikely to raise significant issues within PR; rebalancing the priorities accorded to freight and passenger businesses may be more problematic. It i s clear that freight i s much closer to covering its costs than passenger services. Moreover, there is a very large freight market within which the railways should be able to compete. Recapturingthe long distance freight market will require not only the provisiono f attractive rates and conditions o f service, but also re-establishing market credibility for delivering reliable services. Separating the finances o f the freight and passenger businesses, should allow both businesses to focus on their strengths, allowing them to take decisions on the basis o f realistic financial information. Eliminating the subsidies should allow the freight business to offer more attractive rates, but regainingmarket confidence may be more difficult. 193. The new container train services connecting Karachi and the Punjab are a start but they have yet to offer guaranteed delivery times which may be critical to regaining the market, especially for export traffic46. To provide guaranteed delivery times, the freight business has not only to have reliable motive power but also guaranteed train paths and an equal priority to passenger services, so that locomotives are not switched from freight to passenger services if passenger locomotives fail. It i s very difficult to see how the freight service will re-establish such credibility if the present organizational structure continues. Operational and commercial autonomy, together with effective control over its assets, appear to be basic conditions. 4.6.4. Freight the key to developing a commercialviability 194. Substantially increased freight traffic and earnings i s the key to a commercially viable railwaynetwork inPakistan: 46 Delays to imports can be accommodated by higher inventory levels, delays to export cargo results inmissed shipments andsubstantial market penalties. - 55 - 0 Long haul, dense freight market between limited points, allowing regular point-to-point services; 0 Very small share of the existing freight market, large market potential under the right conditions; 0 Freighttraffic already covering its full above-rail operating costs; 0 Mainline infrastructure already available for commercial freight operations; 0 Ability to reduce significantly unit operating costs and increase service standards with the introductiono f modernrolling stock, reliable motive power and higher operatingpriority; 0 Limited scope for road transport to reduce costshates (the introduction o f effective axle-load control would raise trucking costshates substantially) though scope to increase service standardsfor higher value cargo with improved roads andmoderntrucks. 195. Passenger traffic will clearly retain importance but will face challenges from coaches for its mass market and low cost air transport for its high-end market. To achieve commercial viability, almost a paradigm shift in political/governmental attitudes toward the railway and its management will be necessary. 4.7. A REFORMAGENDA TO REVITALIZETHE RAILWAY SECTOR 196. A reform agenda for the Pakistan railway sector can be broadly identified. The agenda is based on the premise that the Government of Pakistan (GOP) wants the core railway sector to move toward becoming a viable commercial enterprise, able to compete inthe transport market andperform its potential role in the National Trade Corridor (NTC) and the economy, more generally47. The reform agenda requires difficult issues to be faced, major decisions to be taken and changes to be implemented which may be at variance with established interests. Crucial to implementing any major reform i s fm, high-level commitment, careful preparation, the introduction o f effective change agents, generating acceptanceby involvingthose within the system and responding to their concerns, as well as possibly the redeployment o f those that resist change. Previous attempts at major reform seem to have failed because there was insufficient commitment to change, too little implementation planningand/or communication to achieve acceptance, andtoo little follow-through. 197. The agenda consists o f a set o f inter-related activities which can be grouped under the following broad headings: 0 Creation o f a focused railway enterprise; 0 Financial restructuring; 0 Institutional reorganization; 0 Detailed restructuring; 0 Rail cost reductionprogram; 0 Re-establishment o frail freight credibility; 0 Opening access to the private sector. 198. Each of themes i s discussed in more detail below. Development and implementation o f the reform agenda will involve both GOP and railway management. GOP has to establish the overall objectives and reform framework, rail management needs to translate these to detailed plans and implementation. 47Commercial viability for the core railway does not equate with complete self-financing o f the sector. As with the road sector, some public funding o f infrastructure may still be required as well as deficit financing for the non-core railway, if the GOP decides to maintainthe network andservices. - 56 - 4.7.1. Creationof a focused railway enterprise \ 199. At present, PR encompassesa wide range of assets andactivities, large non-operational land holdings, factories, extensive workshops, schools, housing, hospitals, sports facilities, etc. Such a spectrum distracts management from its core business o f operating the railway and providing transport services. 200. As a first step to restructuring the rail sector, GOP should create an enterprise whose sole function i s the provisiono f efficient rail services: 0 The operational rail assets should be separated from the non-core assets. Separate institutions should be created for the rail assets/activities and the non-rail assets/activities with their own managements,finances, operatingtargets andgovernance arrangements; 0 Only operational land should be transferred or leased to the new railway enterprise. The development o f non-operational land canbe very remunerative, but i s a quite separate activity from runninganefficient railway; 0 A system of transfer prices will need to be established for transactions between the two institutions. 201. The decisionto create separate institutions has already beentaken, inprinciple, by GOP with the proposed establishment o f PakistanRailways as a state corporation. Though the draft bill may be a little ambiguous, the intention i s to create Pakistan Railways Corporation (PRC) as a focused railway enterprise, and transfer all the non-core activities and assets to a Holding Company. Eventually, the non-core assets may be established as separate enterprises, sold to the private sector or transferred to more appropriate departments. The management/development o f the extensive landholdings may require very careful consideration given their value, scope for misuse and the interest o f the Provinces. 202. With the establishment of PRC, the role o f the Ministryof Railways (MOR) should change from day-to-day involvement to highlevel policy. With these more limited functions, it maybe more efficient to incorporate the MOR into a Ministry o f Transport with a broader mandate. 203. Converting PR to a state corporation i s an important step but it i s unlikely to be the panacea for the sector. The management problems o f operating as a department are, as often, raised with regardto state corporations: 0 Political interference in management and operating decisions, particularly passenger fares, movement priorities, special treatment for favored groups/commodities, recruitment, station closure, etc.; 0 Lengthy bureaucratic systems for investment decisions andprocurement; 0 Lack o f clear management objectives; 0 Politicalappointment o f senior management; 0 Inadequate management incentives with salary structures subject to inflexible public sector regulations. 204. Whether as a government department or State Corporation, railways inthe public sector are often expected to respond to political rather thanbusiness priorities andare thus unable to achieve the financial viability which can lead to greater management autonomy4*.Attempts were made, inmany 48Public sector ports have often much greater management autonomy than the railways, because they make money and are thus not dependent on annual subventions fiom government and the negotiations necessary to obtain suchsubventions. - 57 - countries, during the late 1980s and early 1990s to provide autonomy through contract plans or performance contracts; they all failed4'. 205. Whether PRC will succeed has less to do with its governance status, and much more to do with GOP policy for the railways, the translation of this policy into clear financial and management objectives against which management and enterprise performance can be realistically measured and assessed, andthe real degree o fcommercial andoperational autonomy allowedto rail management. 4.7.2. FinancialRestructuring 206. The financial restructuring o f the railway sector has been under discussion for some considerable time, largely with respect to GOP formally takingover the debts andliabilities for which it has already taken effective responsibility. Clearly, financial restructuring needs to accompany the creation o f PRC which should start with a viable financial structure and a balance sheet with an appropriate level o f debt. However, financial restructuring should go much further than simply writing offthe debts o f the railway sector: 207. Separation of the assets and accounts of the core and non-core railways: if the railways are to compete effectively on the main transport routes, they need to be able to adopt pricing policies similar to its competitors, i.e. based on the actual costs incurred in providing services on particular routes. Road transporters do not charge higher rates on the Karachi- Lahore route inorder to cross- subsidize rates on minor rural roads. Similarly, rates on the core railway network should be based on the costs o f providing services on the core network. The non-core network should be financed by other means. 208. Introduction of lines of business accounting: management decisions should be guided by accurate informationonthe costs andprofits o fprovidingthe different services offeredbythe railway. Presently, there i s information on the revenue generated by the different services but very little information on the costs o f providing individualor classes o f services. Lines o f business accounting should allow the determination o f costs and revenues by route and by type o f service (express, mail and local passenger services, freight by broad commodity, such as the dedicated express container trains). 209. More detailed accounting is an imperative inthe competitive market. Railway management needs to establish rates and make decisions on the level o f services knowing both the costs o f providing these services and the rates charged by their competitors, expanding services with large surpluses, cutting back where there i s no competitive advantage. Such accounting would support a move from a deficit subsidy to targeted subsidies for specific activities. Government needs to understand the costs o f its decisions and the basis for the subsidy payments should be explicit and derived from accounting information. Lines o f business accounting is also necessary if greater autonomy i s to be given to the freight and passenger businesses and if a more flexible approach to service provision, involvingoutside parties, i s allowed. 210. Elimination of cross-subsidies: PR has a monopoly on rail services in Pakistan", but no transport monopoly. The pervasive but implicit system o f cross-subsidization within the railway sector should be replaced. Targeted subsidies (whether for lines, services or fare levels) should replace the internal cross-subsidies and deficit subsidy to cover overall losses. Such subsidies should be structured so as to create incentives for PRC to reduce costs/increase yields, such as an explicit subsidy per seat-km offered. With the detailed accounting proposed above, GOP will have the 49 Boards consisting primarily of independent members drawn fiom the private sector may assist inproviding managementautonomy fiom politicalinterferencebutthey are certainly no guarantee. 50 Ithas recently contractedout the marketing and organization of a few services to its consultancy group. - 58 - information available to make informed decisions on whether to close services/lines, scale back the services andior provide explicit subsidies5*. 211. Debts and Pension Liabilities: while financial restructuring should be far wider than simply GOP's assumption o f PR's debts andpension liabilities, some restructuring o f the debts is desirable if PRC i s to be established on a sustainable basis. Placing rail and road services on the same basis suggests that, at the very least, any debts attributable to infrastructure investment should be assumed by GOP. Moreover, in view of GOP's perceived requirement to continue the present passenger services and fare levels, there may well be an argument for GOP to assume the debts attributable to providing PR's passenger services (both locomotives and coaching stock), though explicit subsidies, based on the actual cost of providing services, would very probably be a preferable approach. 212. Pension payments are already a substantial part o f PR's total operating expenses, slightly under 20 percent, and the pensionpayments are likely to rise with rising numbers of pensioners and increased life expectancy. Pension payments for past and present employees are unfunded, resulting inlarge unfunded liabilities. GOP's assumption of present liabilities and the introduction of revised funding for future pension liabilities should form part o f the financial restructuring for the establishment o f PRCS2.Whether this should also be accompanied by a shift to a contributory pension scheme and defined contributions rather than defined benefits is a much wider issue with ramifications throughout the public sector. 213. PR's debts and pension liabilities are sunk costs which cannot be escaped and are already effectively financed by GOP. N o resource costs will be involved inGOP's formal assumption of the debt servicing and pension liabilities. It i s necessary, however, that structures and processes accompany any financial restructuring to ensure that, having been relieved o f one set of debts, the railway sector does not accumulate further debt and obligations which cannot be serviced by operations. 4.7.3. Institutional re-organization 214. The freight business i s the key to improved rail finances; almost invariably, freight makes money, passengers lose money. Inhis discussions on NTC, the Prime Minister was very explicit that expanding freight was the way forward. Presently, however, PR i s primarily a passenger railway and passenger services receive priority. The establishment o f separate businessunits for the passenger and freight sectors, with separate managements and control over their own resources, should accompany the creation o f PRC. The lines o f business accounting would provide the financial information necessary for such separate business units. GOP might decide that a more formal separation was desirable, inwhich case the freight andpassenger units couldbe established as subsidiaries o f PRC. 215. Such separation was attempted previously but with little will to make it work. Greater participation withn the railways in planning the separation, more effective communication on the reasons for change and a hgher level of commitment by both top railway management and GOP are probably all necessary, but the failure to achieve change within a unitary organization may suggest advantageina more formal separation, as subsidiarycompanies. 216. Further separation of functions within the sector may be desirable depending partly uponthe requirements for specific subsidies and partly on policy decisions regarding the outside provision o f 51For m a l branch lines, the Provinces may be the appropriate level o f govemment to determine priorities and fundsubsidies. 52World Bank hnding o f PR's pension liabilities would be a possibility under a DPL for the railway sector. 5 Present obligations on pensions and related services (health care, travel, etc) are thought to total about the equivalent of US$450 million. - 59 - rail services. Both infrastructure and motive power could be established as separate businesses with their own accounts: 0 Infrastructure: the separation o f infrastructure from operations is now common, with rail services charged an access fee. Infrastructure becomes a business unit rather than simply a cost center. For PRC, such separation would facilitate a system o f targeted subsidies - there would be auditable transactions for the provision o f train services and a much clearer d e f ~ t i o no f the costs. Such separation would provide a defined basis for more equal treatment o f the rail androad sectors with regard to infrastructure financing and cost recovery. Infrastructure separation and access charges would also provide the basis for allowing other providers to runtrain services over the network; 0 Motive power:,while coaching and wagon fleets should be transferred to the passenger and freight businesses, locomotives are more non-specific. One possible arrangement would be to transfer locomotives to the business units, including the infrastructure unit for running engineeringtrains. An alternative would be to establish motive power as a separatebusiness, hiring motive power to the business units. Both arrangements have been successfully employed. British Rail used the former approach, prior to privatization. Spoornet (South Africa's railways) adopted the latter and the operating divisions discovered that, when faced with specific hiring charges, they needed far fewer locomotives and Spoomet found itself with a substantial motive power surplus. The business unit approach would also facilitate the introduction o f the private sector, reducing substantially the entry costs by providing a source o f hiredleased locomotives. 217. PRC could thus consist o f the central administration and services and four self accounting businesses: passenger, freight, infrastructure, and motive power. Each o f the operating businesses should have clear and measurable management objectives and prepare annual business plans indicating how these objectives will be attained. 4.7.4. Detailed restructuring program 218. The reform agenda deals with the broad changes required inthe sector, implementing such changes will require a much more detailed restructuring implementation plan. Once PRC i s established, its management should be expected to prepare, within a specified period o f time, a restructuring plan for the railway sector. Such a plan would include the detailed framework for the operatingbusinesses, the pricingrules andpolicies to govern the relationships betweenthe businesses, the implementation o f the revised accounting rules, the identification o f the un-remunerative lines and services and PRC's proposals to deal with such activities, etc. The restructuring plan should put the body to the bones o fthe reformagenda. 4.7.5. Rail cost reductionprogram 219. Railways have greater control over their costs than their revenues, which depend crucially uponthe reactions/choices o f the users, the state o f the economy and the actions o f competitors. PRC needs to identify a coherent planto streamline operations, increase efficiency and reduce costs. The elements o f such a planmight include such measuresas: 0 The closure o f loss-making lines and/or services unless required for socialhtrategic reasons and specific subsidies provided (GOP, ineffect becomes PRC's customer); 0 The reduction o f costs on lightly used making lines: this might be achieved by modified operating practices andrules - conversion to siding status with consequent changes in train control, removal o f station staff, ticket sales on the trains, replacement o f permanent track maintenance gangs by mobile gangs, etc.; - 60 - 0 Streamlined staffing: enhanced human resources deployment could, but need not, include immediate staff reduction, through either early retirement or retrenchment. It should include greater staff flexibility by amalgamation o f grades and functions (multi-tasking), retraining and deployment to where staff shortages are expected, longer term staff rightsizing through adjusting recruitment to eventual staffing needs through natural staff attrition and selective recruitment, etc. Overall cost savings may be relatively small as increased incentives may be desirable for remaining staff; the real benefit is in terms of increased efficiency and productivity; 0 Open procurement for locomotives and rolling stock: the creation of PRC and the transfer o f the factories to a separate enterprise should allow arms length procurement and greater competition. Giventhe scale of the capacity needs inthese areas, especially modem wagons, international competitive bidding would appear the most effective stratagem perhaps accompanied by openingthe factories to private sector investment and participation; 0 Outsourcing to the private sector: railways have traditionally been very self-contained, providing a very wide range o f activities and functions in-house, often because there was little or no alternative. With the growth inthe Pakistan economy and its diversification, many o f the activities now undertakenby PR could perhaps be more cost-effectively performed by others through outsourcing. 220. The details o f the plan will take new management time to develop and may require both initial studies, such as the proposed human resources audit, and time to implement giving, for example, the factories time to adjust to more open procurement and the potential for greater competition. 4.7.6. Re-establishmentof railfreight credibility 221. While there is considerable market potential in long distance freight, it may be difficult to translate potential into actual traffic and increased revenue. PR has lost the confidence/trust o f the private sector. Moreover, its low freight rates, flexible pricing, door-to-door delivery, increased control (by mobile phone) and easier integration into modem logistic systems give road transport a powerful competitive position. Though the supply-driven management approach i s beginning to change, a much greater customer focus will be needed if the railways are to recapture a significant share o fthis market. 222. Giventhe inherent advantages enjoyed by road transport, rail freight may needto be priced at a significant discount, but cost i s only one attribute o f shipper choice. PRC will need to understand not only the size and composition o f the market but, as crucially, the attributes valued by customers and rail's competitive position. Emphasizing lower rates may evoke little response, if guaranteed delivery is the critical dimension. Similarly, faster line-haul may not be sufficient, ifthe basic need i s factory delivery. One of the first actions o f a freight business should be to commission basic market research to identifythe scale o f the market, the most likely prospects for rail expansion and attributes o f the services that need to be provided. Such research would guide both marketing androlling stock acquisition. 223. ' Public sector railways are inan inferior position to road transport with respect to marketing. The marketing and pricing o f rail freight services is normally governed by rules and procedures that greatly limit commercial flexibility: 0 Oftenthere is a rate book which sets out the rates, rather than individual contracts negotiated with customers; Discounts are sometimes possible, but are often either very small or require sanction at very highlevels, whichprevents a rapidresponse; - 61 - 0 Rates are normally set by commodity, weight and distance. Back haul rates are rarely as extensive or as discounted as roadtransport rates; 0 Rates have to be formally changed; the railways cannot respond quickly to changes inlocal or national markets; 0 Inflexible, bureaucratic rules tend to a homogenous product at inflexible prices. 224. PRC should be able to improve many o f the basic attributes o f its freight services, such as speed and reliability, and improve customer information with tracking systems, but it will be extremely difficult for PRC to offer pricing flexibility. Long-term contracts for the provision o f regular bulk traffic seem most suited to rail, but much o f the expanding demand comes from smaller customers with a wider range o f requirements. Rail finds it difficult to market to such customers. 225. There may be greater scope for PRC to wholesale freight services and then allow the private sector to organize the details. PR is moving int h s direction already with the parcels train, wholesaled to freight forwarders, and has considered contracting the marketing and organization o f its scheduled container trains to PRACS, its consulting subsidiary. The division o f responsibilities inherent in wholesaling may match the potential strengths of the sectors. The railways can concentrate upon delivering efficient train services, while the private sector has the flexibility to differentiate pricing to maximize traffic, minimize empty runningand organize door-to-door collection and delivery. Such wholesaling may allow more freight forwarders/logistics suppliers to incorporate rail within their overall pattern o f operations. The railways would only have to deal with a limited number of primary customers which would simplify considerably the commercial aspects o f its expanded freight business. 226. It is likely, however, that customers would expect guaranteed delivery. Wholesaling would not remove this requirement. Whether through the railways directly or indirectly through the private sector, reliability o f delivery times has to be improved to the extent that delivery guarantees become possible. This will only be achieved with higher track priority to freight. 4.7.7. Openingaccess to the private sector 227. PR has a monopoly o f rail services in Pakistan, providing all the motive power and rolling stock. Wholesaling trains does not change this but may allow it to work more efficiently andcompete more effectively. All investment risk remains with the railway/GOP. The investment needs are large andthe risks high. 228. Most railways are now involving the private sector. This involvement ranges from the complete privatization o f rail operations through sale (UK and New Zealand) or concession (South and Central America, Africa, and East Europe), through the provision o f track access to private operators on publicly managed systems (Europe) to the private ownership o f wagons (most o f the world). Bringinginthe private sector can introducenew assetdinvestment andmanagement expertise. 229. The railways in Pakistan need both investment and modern freight management skills. Integrating the private sector may also help regain trust in the effectiveness o f rail for long distance freight. PR has already issued a request for expressions o f interest to runfreight services, but without specifylng the terms and conditions, under which such services might be operated or the commoditiedroutes for w h c h private services might be allowed. A number o f possible arrangements couldbe introduced: (i)Private ownership of rolling stock private investments in wagons, compensated by discounted rates, have been common for many years. Often, the wagons are o f a specialized nature. The arrangement seems to have had relatively little success in South Asia; perhapsthe discounts/rewards for investment were not sufficient; - 62 - (ii) Joint ventures involving both public and private participation: CONCOR, inIndia, has been very successful but it has also had an effective monopoly for the inland movement o f uncleared container^^^. CONCOR is, however, managed as a subsidiary o f IR though with significant management and financial autonomy; (iii)Private trains hauled by the railway: in essence this would extend the PRACS type o f concept. Instead, however, o f PR assets being under outside management, the private operator would provide the own rolling stock. The rolling stock would be hauled by PR (PRC) locomotives (hook and haul contracts). Pricing o f the freight services would determined by the outside provider and PR (PRC) would be paid both an access fee (for the track and its management) and a haulage fee. The private sector may be able to source suitable wagons at significantly lower cost than PR, possibly modifying wagons from broad gauge systems inEurope; (iv) Complete private trains: this would be a further extension, with the haulage o f the trains undirtaken by the outside operator as well as providing the wagons. The railway would still control the track and trainmovement for which it would charge the outside provider an access charge. The outside operator could either own its locomotives or possibly lease them; Individual freight concessions: the provision o f private freight services within the existing structure o f services could result in public and private freight services being offered in competition. Inview o f the marketing andpricing flexibility enjoyed by the private sector, it i s difficult to see the public sector services being able to compete successfully. Instead, therefore, o f private train provision, GOP might consider giving freight concessions to the private sector for the movement o f particular types o f traffic which either requires highlevels o f organization andor marketing or which generate little profit54.PR (or PRC) would receive access charges, lease fees for any equipment included, and receive royalty payments on the traffic carriedrevenue generated. Concessions would confer a monopoly but road competitionwould severely limit these powers; (vi) Concessioning PR 'sfreight business: rather than concessioning the movement o f individual commodities, GOP might consider concessioning PR's entire freight business. The efficiencies o f private sector management, marketing and investment would, therefore, impact all commodities and allow an integrated operation. Such a concession might well have the greatest impact on the transport sector and could be accompanied by open access to other train operators (though this would diminishthe likely financial value of the concession). It i s not clear, however, whether there would be private sector interest inmanaging such a large operation and making the necessary investment, given that track access and control would remainwith PR (PRC). 230. There may indeed be the potential to introduce several forms o f private sector participation - the provision o f both hook and haul services and complete train provision by the private sector. Similarly open access for some commodities and freight concessions for others. Open access for domestic container operations would, for example, be compatible with a freight concession for the movement o f Afghan transit traffic. Indeed, the private provision o f freight services for some commodities, freight concessions for other commodities/routes and an overall concession for residuaygeneral freight operations would be more complex but still possible. 53 There have been several announcements recently that other operators will be allowed to compete with CONCOR. The arrangements for new entrants have recently beenannounced. 54According to PR's freight management, container traffic i s not very profitable for PR, relatively low rates in comparison to oil products andhighempty running factors. - 63 - 231. Essentially the choices for opening the freight sector to private sector participation may depend uponfour factors: The arrangement which will result inthe largest increase inrail freight; 0 The arrangement which will result inthe largest inflow o f net revenue to the rail sector/GOP; The arrangement(s) which idare likely to evoke private sector interest andinvestment; 0 The arrangement(s) which is/are acceptable to GOP. 232. There i s private sector interest, for example, from the port terminal operators, but it i s not clear the extent to which the private sector i s prepare to invest rather than utilize PR's existing assets. While there may well be private sector interest inrunning individual freight services, the interest in taking a concessionfor the freight businessmay be very limited withthe risks perceived as being too greats5.IfGOP wishes to shift some o f the investmenthsk andutilize the private sector, opportunities exist but will require detailed analysis and extensive discussions with potential operators. GOP has advertised for expressions o f interest from the private sector to runtrain services and more than 50 responses were received. However, such investments would be restricted to Pakistani investors only, thus limitingsubstantially the range ofpotentialinvestment. 233. IfGOP moveddownthe route ofopening access to the private sector inthe freight sector, it might also consider introducing the private sector into the management/operations of the passenger sector, through some form o f concessioning or leasing arrangement. However, the demand from the private sector to become involved inpassenger services, even on the basis o f negative concessioning, i s likely to bemuch smaller. 4.8. RAILWAYREFORMAGENDA AND THE NATIONALTRADE CORRIDOR 234. Many of the highlevel proposals inthe reform agenda have been incorporated in the policy framework for the NationalTrade Corridor andbroadly endorsed by the Prime Minister: Establishing a reform team andpreparing a restructuring plan by (i) appointing a CEO and railways reform team (and transitional support consultants), (ii) preparing a rail restructuring plan and advising on the new structure o f autonomous board, and (iii) completing a human resource audit; Developing a Business Plan and Marketing Strategy; Transforming of its present departmental structure and governance to commercial management andpriorities. State Corporation status may be necessary, but other measure will also be neededto provide the required commercial management; Separating core and non core services and freighthassenger or non-commercial by establishing separate holding companies for non-core activities and land assets with an increased operational and management priority to freight (freight should have its own accounts, dedicated motive power andtrainpaths); Treating infrastructure recovery for road transport equal to rail while commercial rail services should f h d their above rail costs, including track maintenance, but not major track investment. PR should also be relieved o f its past sunk costs - debt servicing and existing pension obligations; Introducing modernfinancial management and accounting through I A S accounting designed on a business lines approach; 55 Ingeneral, railway concessions have generated relatively little biddinginterest. Two bids for a concession would be normal. - 64 - Resolving the social/strategic cost o f keeping loss-making lines open for business by insulatingthe cost burdeno f these activities. 235. A draft bill for the establishment of PRC has been drafted and submitted to the Cabinet for approval, andconsultants are being recruitedto assist with the introduction o f commercial accounting systems. 236. The issue i s not so much, therefore, the principles o f the broad policy agenda but very much the translation o f those principles into the detailed actions necessary to reform and restructure the railway sector and to buildthe organization and constituency which will be necessary to implement such actions. - 6 5 - 5. MODERNIZATION OF THE TRUCKING SECTOR 5.1. PRESENTSTATEOFTHE TRUCKINGINDUSTRY 5.1.1. DominanceoftheFreightMarket 237. Theroadfreight industry has achievedremarkablegrowthsince deregulationinthe mid- 1960s andnow totally dominatesthe domestic freight sector with >95 percentofthe market. Pakistan Railways (PR) failedto compete andis now largelyconfined to public sector traffic. Over the pastten years, roadfreight (ton-km) has grown at 4.8 percentperyear, significantly faster thaneconomic growth, 3.7 percent (Figure 2). Withthe increasingimportanceofexport-orientedmanufacturing, freight demand i s now likely to track GDP growth more closely. Landfreight transport i s expectedto doublewithin the next 10years inPakistan, andthe country's economywill stayreliant onthe trucking industryto accommodate muchofthis demand. Figure2: RoadFreightandGDP 170r- - - - 00 1084 1906 1OQO 1097 1008 1000 2000 2001 2002 2003 2W4 240. Trucks comprise close to halfnon-urbantraffic, comparedwith 30 percent cadlight vehicles and 20 percent buses. On some sections of N5, trucks reach 70 to 80 percent of the total flow. Approximately 30 percent of loaded trucks carry agriculture products or animals (Figure 3), but the importance of basic manufactures and general merchandise has been increasing steadily, reflecting the transformation of the economy. 5.1.2. The Structureof theIndustry 238. The truckingindustry is dominatedby large numbers of individualownersproviding "for hire and reward" services, coordinated by numerous small-scale transport agents. Four types of ownership/managementcanbe distinguished: e Small fleet owners, few own more thanten trucks; e Investors who purchase vehicles and lease them on installment purchase arrangements to operators; 0 Freightbrokers who are not ownersbut manage fleets; and 0 The drivedowner crew, estimatedto beabout 10percentofthe industry. - 66 - Figure 3: Share of roadfreight trips by commoditytype Dlstrlbution of TruckTrips by Commodity Type 40% 1 35% I1990(NTRC-I55) 30% 25% 20% 15Vo 10% 5% 0% ---- Agriculture, Mining 8 Raw Materlals & Fuel 8, Basic Food & Animal Quarrying Bulk Lubricants MLnufacturer & Manufactures General Merchandlse 239. This fragmented structure is common inmost deregulated trucking sectors, especially inthe full-load segment. Trucking companies inthe EU have an average o f only 3.9 employees, and only three OECD countries have trucking companies with an average size o f >13 workers. There are large trucking companies in deregulated markets but their market share is small. For example, the three largest trucking companies in Turkey have a market share o f 10.5 percent, six percent in the Netherlands, five percent inFinland, 3.8 percent in Canada, Mexico and Portugal, and 1.5 percent in France56. 240. By far the largest trucking fleet inPakistanis owned by the NationalLogistic Cell (NLC).It was established, in 1978, to move public imports o f wheat and fertilizer during a transport emergency. Until the mid-l980s, NLC accounted for 3-4 percent o f the market but, with the rapid growth in the sector, its share has been declining. Today, N L C operates some 1,400 modem high- poweredmodemtrucks andemploys more than 7,000 staffs'. 5.1.3. Competitioninthe FreightMarket 241. The customers for long-haul freight are relatively large enterprises. The great majority o f the cargo is shipped in full loads. Pakistan has avoided restrictive regulations and the industryi s highly competitive with minimal entry baniers andlarge numbers o f operators. Anyone with a licensedtruck driver anda registered truck can operate; rates are determinedby the market. 242. Competition has led to lower freight rates. Over the last 20 years, revenues per km have fallen, in real terms, by an average 1.4 percent per year (Table 18), while fuel prices, for example, have increased by an average 3.2 percent per year. '`''NLChas OECD, 2001. expanded into dry ports, engineering and construction, road toll collection, tire re-treading, etc. and has plans to expand into border terminals and security scanning. Unfortunately, NLC was unable to meet the mission undertalung the basic research and has disagreed with the comments made on NLC by other participants of the study. - 67 - 1984" 2004 Annualchange Meannew purchaseprice Tractor-Trailer 2,283,750 2,700,000 0.8% DieselPrice 16 29 3.2% Tire mice 8.313 14.000 2.6% RevenueDer Laded km I 22.65 I 17.14 I -1.4% I ~~ Revenueper day 7,005 5,408 -1.3% Estimated Rate ofReturn >15.5% lowtnegative India 0.019- 0.027 I Central Asian Republics I 0.035 - 0.085 I Australia 0.036 China 0.040 - 0.060 244. NLC has a privileged position for government cargo and politically sensitive commodities: over 80 percent of its trucks are moving government cargoess9. In open competition, NLC's performance i s weak, with high rates and poor service6', and none o f the major commercial organizations interviewed includes NLC in its plans. Public sector entities are directed to use NLC and cannot seek more competitive rates inthe openmarket. Their alternative is PR. 5.1.4. Service Quality 245. Shippers inPakistan generally receive the level o f service for which they are prepared to pay. Periodic supply shortages are a fairly common complaint o f shippers but in the competitive sector there is no reward for standby truck capacity. Large private bulk shippers such as cement manufacturers are generally very satisfied with both the rates and level o f service received. They generally demand low quality but powerful trucks. Major customers secure two to three-month contracts with local brokers (addas) to provide enough trucks at a fixed rate. One cement ''NLCdeniesthe 58 TRRI,ResearchPaper314byJ. Hine, adjustedfor inflation. privileges and direction o f government cargo and asserts that any cargo lifted by NLC is on the lowest ratesavailable inthe market. However, this runs counter to the generalview o f the sector. Certainly it appears, at the very least, to have a favored position with regard to the movement of Afghan commercial traffic. 6o Trucks, serving the private sector, may be withdrawn to meet demands for the movement o f public sector cargoes, primarilyfertilizer and wheat. -68- manufacturer interviewed has contracts with local brokers to supply 200 trucks daily for cement distribution as well as 25 to 30 trucks to move coal from Karachito the factory, some 850 kilometers. 246. Major exporters are satisfied with the rates but only to a certain extent with service. Inthe Punjab, exporters have largely overcome some o f the service deficiencies, without losing much o f the low rates, by setting up transport cooperatives and dry ports. These cooperatives share the cost of en- route monitoring o f their cargo. This is not the case inPeshawar, where there are many dissatisfied customers. Exporters complain about the shortage of suitable trucks for their high-value goods. They needtractor units that canpull containers, loadedwithheavy goods, at reasonable speed. Someuse an express service which provides a %hour transit from Lahore to Karachi, at higher rates, rather than the standard 42 h o d 1 . 247. There are customers who complain freight rates are too high.They are usually small shippers involvedinlocal freight. Although they pay the lowest rates inthe world, they have little negotiating power and are very exposed to seasonal fluctuations in the supply o f trucks and freight rates. Importers andtransit customers are satisfied with roadtransit times, 3-4 and4-5 days from Karachi to the Punjab and Peshawar, respectively. But they are extremely critical about the very long customs delays andthe poor train service beyondLahore. 5.1.5. Contractual Practices 248. Shippers62may arrange for transport services directly or rely on various "fee-people" who arrange the transport for a fee or undertake the transport management. The outbound shipper, either individually or through one o f the shipping cooperatives develops a small group of "base-load carriers." These are small tn\cking companies that own some trucks and charter in additional units until they can meet the customer need. These carriers also usually act as freight brokers, finding return loads for trucks unloading intheir locality. 249. The base-load carriers reach price and service agreements with the shippers that usually cover the bulk o f the shippers' transport need. While shippers may use other brokers to arrange additional trucks for "overflow" freight, they have a priority to reach as long a commitment as possible with the base-load carrier for both rates and capacity. Some large shippers mentioned monthly, quarterly and even annual commitments for rates andcapacity. The commitments usually include a roadtransit time andoccasionally an extraprice for expedited service. The shippers ofhigher value goods, like textiles and sportinggoods for exports, tend to have more formal agreements andcareful service monitoring. Overflow freight usually moves at the spot market price. 250. Shippers o f low-value goods rely more on the spot market and less dependable services. The lower the cargo value, the more price sensitive i s the shipper andthe more willing to compromise on transit time andservice quality. 251. The road freight industry also includes a segment of specialized haulage, tailored to meet specific market needs, primarily liquid and dry bulk. These segments are more organized and generate better revenues than general cargo. The four major oil companies ensure that their haulage contractors and their crews become more efficient and safety oriented. Such transport accounts for a relatively small percentage o fthe total trucking fleet. 61An additional driver is includedandthe truck is drivencontinuously. Shipper may be the consignor o f the goods or the transport agent, whichever exercises control over carrier selection. - 69 - 5.2. WFORMING PAKISTAN'S ROADFREIGHTINDUSTRY 252. To date, it is estimated that sector inefficiencies are costing the economy about Rs 150billion per year63,while low service quality i s impeding Pakistan's trade competitiveness (both internal and external). Key issues facing the trucking sector include: 5.2.1. LSW Vehicle Distance Productivity 253. Trucks are operated long hours and are modified to take excessive loads. Productivity is, however, constrained by low speeds, which have changed little over 20 years. Running speeds are between40 and50 km/h, andloadedtrip speeds are around 25 km/h. 254. Compared to India or Africa, annual vehicle mileage i s reasonable, 100,000 to 13(1,000 km. This is, however, less than half the utilization in industrialized countries, such as the USA. Low speeds are partly offset by the low empty load ratio, <20 percent. Transit times between Karachi and Punjab are around 48 hours, and between Karachi and Peshawar 72 hours. In comparison, transit times between Algesiras, in Spain, and Perpignon, inFrance, (1,320 km) are 15 hours, and between Algesiras andParis (1,855 km) 24 hours. 5.2.2. Low Service Quality for High-Value Exports 255. Although major shippers are broadly satisfied with service levels, the overall quality o f road freight services i s far from optimal, especially with regard to reliability and timely delivery. Manufacturerskeep a "buffer" o f one/two days to compensate for slow/unreliable delivery. 256. For exporters o f high-value goods, the cost o f the "buffer" is increasingly an issue. Private dry ports have enabled large exporters, in Faisalabad and Sialkot, to control transit time, reliability of delivery, and supply of capacity. The contract transit time is 48 hours but shippers who need faster service, can hire the same transporters for a delivery time o f 28 hours at a premium o f 50 to 60 percent. Table 20 shows transport choices o f three textile exporters. Table 20: Textile Company Transport Costs I Company"A" I Company"B" I Company"C" Total export value (US$) I 300,000,000 I 100,000,000 I 500,000,000 - ~~ Containers (FEU)/year 3,300 3,500 400 Average 40ft container value (US$) 90,909 28,571 1,250,000 %o ffreight using express service 3.50% 0% 25% Contract Transit Time (hours) 48 48 48 I Rate for Contract Time (US$)/FEU I 250 I 283 I 283 ~_ I ~~~~ Express (Potential) Transit Time 28 28 28 Rate for Express Transit Time (US$)/FEU 417 417 417 Express Service Premium (US$)/FEU 167 133 133 Inventow Saving (US$YFEU 21 7 285 63 The estimates include (a) extra &el costs and subsidies (Rs 60-90 billiodyear), (b) additional roaduser costs (Rs 30-35 billiodyear, and (c) contributions to the infrastructure deficit (Rs 25 billiodyear). - 70 - Only the exporter with the highcontainer value uses the express service significantly. Company A uses the express service when productiondelays threaten vessel loading dates at Karachi. 5.2.3. Old Truck Technology 257. The trucking fleet is mainly old, obsolete and under-powered. There are over 184,000 registered heavy commercial vehicles (exceeding seven tons payload), but such estimates should only be taken as suggestive as registration statistics are unreliable. It i s even harder to disaggregate the fleet by vehicle type and axles. About two thirds of the fleet i s outdated two/three axle rigid trucks with worn-out and underpowered engines. The fleet has not changed greatly in20 years; though there are more tractor-trailers, they are still a small percentage o f the total fleet. Traffic counts on N5, betweenLahore and Karachi, show a gradual increase inthe proportion o f articulated and 3-axle units (Table 21), and are suggestive of the transformation inthe long haul fleet. They are not, however, representative o f the overall fleet as small %-axleunits still dominate on localroutes. I Table 21: Truck Composition onN5 I 1988 84% 6% 10% 1998 62% 23% 15% 2001 55% 27% 18% 258. Fullefficiency gains onnew trucks havenot beenrealized. Nissan, Hino andI s m assemble trucks from imported kits, usingabout 30 percent local components. The vehicle design i s old anduse naturally aspirated engines which were replaced inindustrialized countries by turbo-charged engines some 30 years ago. More advanced truck technologies have almost doubled truck W l i t e r but Pakistan is still importing old technology for local assembly. 259. The import of secondhandtrucks, other than dump trucks, i s not pennitted, though many used dump trucks are soonmodifiedfor general freight. Over 3,000 suchunitsper year are imported, while localproduction is about 2,000 heavy vehicles per year. The illegal modificationof both imported and locally assembled rigidtrucks to under-poweredtractors is not uncommon. 5.2.4. Under-Developed Cargo Insurance 260. There i s a conspicuous absence o f cargo insurance. Some shippers buy coverage from the broker or freight forwarder but most shippers, especially for local cargo, carry the risk themselves There i s no regulated practice o f holding the trucker primarily responsible for damage/loss; there is thus little incentive for the trucker to take care of cargo. There is also no meaningful third party liability insurance. 261. Shippers can buy cargo insurance coverage from freight forwarders for 0.5-1.5 percent o f the invoice value. Inthe USA cargo losses are 1-2percent o f carrier revenues andthese revenues average about 3- 4 percent o f the cargo value, so the actual value o f goods lost i s extremely small. This is tremendously lower than the rates being paid inPakistan for cargo coverage. One shipper o f sporting goods calculated that the freight cost was about 2 percent o f cargo value and insurance could be 25- 75 percent o f the transport cost. - 71 - 5.2.5. Serious Sector Externalities 262. Indevelopedcountries, thereisgrowingconcernabouttruckexternalities: damagefromover- loaded vehicles, congestion, accidents, noise, pollution, and greenhouse gases. The focus o f policy has shiftedtowardinternalizingthese externalities through more economically efficient roadpricing. 263. Intense competition pushes truckers to cut costs by infringingregulations. This is.not unique to developing countries. A studya in France suggested that, if all carriers complied fully with their legal obligations, freight costs would increase by a third. Infringing the regulations can bring substantial operating benefits to noncompliant operators and, with competition, all operators then have to infringethe regulations. Overloading trucks bringsno additional profits to truck owners when all trucks are overloaded, but lower freight rates and higher roaddamage costs. 264. InPakistan, there has been littleho enactment or enforcement of regulations controlling overloading, safe operations, crew hours, truck modifications or trailer manufacture. Hazardous cargo i s treated no differently than other cargo and no efforts are made to control vehicle pollution. The major externality i s road damage from overloading; trucks are loaded to their maximum cubic capacity, irrespective o f axle loads or resulting vehicle speeds. Overloading causes excessive road damage and, along with excessive driving hours, presents a serious safety problem. The sudden enforcement of axle loadregulationsmay not be feasible as it would cause supply shortages and large and rapid increasesinfreight rates, but a strategy for the gradual reduction inoverloading i s required. 265. Various studies and reports suggest that about 25 percent of road accidents and fatalities in Pakistan involve a truck. The record for trucks may be better thanbusesbut i s still extremely poor. In more developed countries, the share o f trucks in road fatalities does not exceed 5 percent but the proportion o f trucks in total traffic is also very much lower. However, the fatalitiesA00 million vehicle kilometers are 10 - 20 times higher inPakistan than inEurope, North America or Australia. Overall, the safety record o f trucks is poor andcould be substantially improved by changes to vehicle standards, road improvements, reduced loadingandappropriate operatingregulations. 5.2.6. Low IndustryProfitability 266. The general cargo trucking sector has low profitability and a highrate of bankruptcy. Market rates inMay 2005 indicate an average freight rate o f Rs. 17.14per kmfor a 40ft container (10 and 25 tons), and Rs. 10.76 per km for a 20ft container (Table 22). Back-haul rates from Lahore, are 40 to 50 percent lower thanthe outward freight rates. 64 "Privatization andRegulationofRoadFreightTransport" ECMT Seminar. Paris, 5 September 1996". - 72 - From To FreightRate Distancekm FreightRate FreightRate (Rs/truck) (Rs/truckkm) (Rslton-km) Lahore Karachi 15,000 1,300 11.54 0.77 I Karachi I Lahore I 25,000 I I 19.23 I 1.28 1 ~~~ Peshawar Karachi 25,000 1,800 13.89 0.93 Karachi Peshawar 48,000 26.67 1.78 Faisalabad Karachi 17,000 1,200 14.17 0.94 Karachi Faisalabad 25.000 20.83 1.39 Siallcot Karachi 20,000 1,420 14.08 0.94 Karachi Sialkot 27,000 19.01 1.27 -~ ~~ ~~~ ~~ Rawalpindi Karachi 18,000 1,500 12.00 0.80 Karachi Rawalpindi 30,000 20.00 1.33 Average 17.14 1.14 267. Back-haul rates are not sufficient to cover all operating expenses. On the Lahore Karachi - route, for example, the fuel cost for a tractor trailer would be around Rs. 13,500 leaving only Rs. 1,500 for other expenses, just enough to cover the crew cost. Evenwith the higher front haulrate, overallprofitability is very low. 268. Low freight rates may be explained by the combined impact o f very low cost trucks, the massive overloading, low wages, and a truck technology which allows easy maintenance and locally fabricated parts. Overloading transfers part o f the trucking costs to the government in the form o f additional road costs and the low vehicle maintenance costs are a reflection o f low wages and labor productivity. But the small, old trucks are only cost effective because import restrictions unnecessarily inflate the cost o fbig, moderntrucks, As elsewhere, with less restrictive import policies and reasonable highway management, truckers would move to a tractor-trailer fleet, for long haul operations. While rates are low, the potential savings from more efficient equipment and better highway management are still available. 5.3. ACTIONS TO MODERNIZETHE TRUCKINGSECTOR 5.3.1. StatusEnhancementofthe TruckingSector 269. At thepresent time, thetrucking sector is perceived as operatingprimarilywithin the informal sector of the economy. Part o f modernizingtruckingwill require the shift ofthe industry more into the formal sector o f the economy. GOP can assist the formalization ofthe sector: 0 GOP shouldproceed, as a highpriority, withthe formal recognition ofthe truckingsector as an Industry. This recognitionwould, among other things, result inimproved financing possibilities. 0 The more `developed' truckers inthe industry are greatly interested inentering international transport, but this requires GOP ratification o fthe relevant international transport conventions (TIR & CMR). - 73 - 0 GOP shouldalso facilitate formation of aFederalRoadTransportAssociation (FRTA). As a nationwide non-governmentaltransportassociation, FRTAwould qualifLfor membershipof the International RoadTransport Union (IRU)andthus represent the interestsofthe Pakistan's roadtransport operatorsat the international level. Itwould also work with GOP, in implementation ofUNESCAP Resolution48/11 inPakistan. N5 N55 Karachi-Lahore-Peshawar Hyderabad-DGKhan-Peshawar Poor 850 450 On-going construction -Rehabilitation Rehabilitation (kms) 850 255 +Widening (kms) 216 319 Plannedconstruction** Rehabilitation (kms) 200 200 Rehabilitation +Widening (kms) 275 200 * 2-lanelans; ** Plannedto commencewithintwo years 271. These conditions substantially reduce incentives to modernize the fleet: why purchase an expensive, adequately powered truck to run behind very slow overloaded trucks and NMT? Roads provide maximumcapacity, and optimum fuel efficiency, when all traffic moves at the same speed. - 74 - A concerted move toward achieving this objective would increase transport efficiency, reduce fuel consumptionandimprove roadsafety. The following would help move towardthis objective: 0 A designated system o f Pakistan's existing highways canying the bulk o f the freight traffic shouldbe identified for upgrading; 0 Where there is substantial NMT, separate facilities should be constructed; similarly there should be bypasses around towns. As facilities are constructed, NMT shouldbe banned from the designated highways; 0 Existingregulations onconstructionencroachment withinthe highway right ofway shouldbe enforced; 0 Minimumas well as maximum legal speeds should be introduced on designated highways. The minimum speed should be gradually raised, helping to reduce overloading, increasing flow capacity andreducingtrip times; 0 Off-road vehicles (i.e. agricultural tractors and trolleys) should be prohibited from long distance hauls ondesignated highways. 0 Only National Highways & Motorway Police (NH&MP) be authorized to regulate traffic on the national highways. Check posts o f all other agencies like anti-narcotics force, customs, provincial police, etc. should be removed (only intelligence-based interventions allowed and incoordinationwithNH&MP). 272. The objective would be to ensure that the highcost highways provide the speed, capacity and level of service for which they were designed. 5.3.3. Relaxationof ImportRestrictions and Tariffs 273. Pakistan's industrial and import policies are disincentives to the modernization o f the trucking industry: 0 Import duties ontrucks andtruck components are very high; 0 The import of used trucks i s banned(except for constructionvehicles); 0 Preference, under the "deletion program" is given to raising the local component o f vehicle assembly. 274. These barriers may enable Pakistan to raise local industrial production but they block the transfer o f new technology and the modernization o f the fleet. Modemtrucks (EURO-2 or better) are essential to realize significant travel time and environmental improvements inPakistan. With annual local production o f 2,000 trucks, it is questionable whether the benefits to local industry out-weigh costs to the economy from anout-dated trucking fleet. 275. Highcustomduties on CompletelyBuiltUnit (CBU) andCompletely KnockedDown(CKD) kits provide protectionto the auto industrybut also leadto highcosts for the final customers. A 2002 study65found that local prices for imported automotive parts were 15-100 percent higher than their import costs and that the prices o f most locally-produced auto parts were higher than those o f imported parts. The same survey also showed very low capacity utilization in the vehicle-related manufacturing sector: 30-40 percent for vehicle assembly and30 percent for auto part manufacturers. 276. IfGOP wants a moderntruckingindustry, it has to review itspresent import policies which favor the continued import o f obsolete technology. The highimport duties on both vehicles andparts 65International Trade Center. 2002. "Demand Survey on Automotive Components." Pakistan.. - 75 - should be reduced substantially. Given the competitive nature o f the trucking industry, cost- savings will almost certainly bepassedto consumers/producers through lower freight rates. 277. GOP should also review its policy on secondhand trucks. The importation o f used trucks should be permitted, though possibly with age and/or other restrictions. Truck leasing companies in developed countries normally replace their vehicles after 4 or 5 years, andthe trucks are then bought by owner-operators, small companies or exported. Many successful trucking fleets inboth developed and developing countries have been established with imported secondhand vehicles. The practice is particularly cost-efficient in countries, like Pakistan, with an effective truck maintenance sector66. Truckers will take full advantage o f the remaining life o f imported usedunits and will soon focus on those manufacturers that provide training andparts supply. 5.3.4. ModernizeExistingDomesticManufacturingIndustry 278. The truck assembly plants (such as NISSAN, HINO, ISUZU, BEDFORD) in Pakistan assemble trucks with 1960 technology aspirated engines (HINO i s tryingto upgrade some engines to EURO-1standards).The GOP should provide import/manufacturing incentives to the domestic truck manufacturing/assemblingindustry to shift to assembly o f multi-axle trucks of EURO 3 standards to meet 60 percent of the capacity progressively over the next three to five years, while weeding out the existing assembly units. 5.3.5. ImprovedAccessto FormalSectorFinancing 279. Truck operators rely on the informal sector for vehicle financing. Loans are repaid through monthly installments, with interest rates o f around 20 percent. Commercial financing is very largely absent, especially for small andmediumsized operators. To modernize the truck fleet, it is imperative to shift to many more multi-axle vehicles inthe fleet, Small and medium truck operators' inability to receive credit lines andloans from commercial banks on normal or reduced (subsidized) interest rates with favorable payment terms makes it difficult, if not impossible, for these operators to purchase modem multi-axle road transport equipment. There are relatively few owner-drivers; the great majority o f drivers have almost no ownership interest inthe vehicles. Owner-operator financing is presently not available from the financial institutions but, inline with SME promotion, it may be an area inwhich GOP couldtake a sponsoring role. 280. GOP may consider: (a) formulating a Truck Leasing Concept involving commercial banks, (b) setting up a revolvingNational Guarantee Fund(NGF) to provide interest reducing incentives to the commercial banks. NGF may act as a guarantor inrelation to the commercial bank for part of the committed loan to the truck operator or, as a backup, may re-finance part o f the commercial bank's obligation andor (c) establishing a fund to purchase and scrap old but operational two-axle trucks, thusprovidingtruckers with the downpayment for newer trucks. However, financing fromthe formal sector would also result inthe trucker becoming part o f the formal sector, a major deterrent to truck owners unless there are other benefits. 281. Large commercial companies should, inprinciple, have easier and cheaper access to finance but there are no such trucking companies inPakistan. Large companies inother sectors are reluctant to enter into trucking because o f the intense competition, lack o f scale economies, the likelihood o f much higher overheads and low profitability. In highly competitive road freight markets elsewhere, such as the USA, owner-operators andsmall scale operators form the core o f the industry. 66Interestingly, NLC reports that, despite the official restriction, it is acquiring a fleet o f four year old Euro 2 prime movers, exactly the type o fpurchasethat shouldbe encouraged for the overall modernizationo f the fleet. - 76 - 5.3.6. Increasingthe EffectiveRole ofthe InsuranceIndustry 282. Effective insurance should play a critical role in underpinning the performance of the trucking sector. The insurance companies presently play no real role inthe road freight industry. 283. Third Party Insurance: There is no effective functioning third party liability insurance system: nominal insurance premiums are paid to meet legal requirements, but few claims for compensation are actually met. This i s a subsidy from thirdparties to the trucking sector. Inthe USA, public liability insurance costs, on average, around 4 percent o f trucking company revenues. But the costs for any individual company depend on accident experience and are thus an effective incentive for improving driving standards and safety records. A functioning third party liability insurance system should be a basic requirement o f GOP policy. 284. Collision Insurance:with no functioning third party insurance, there i s certainly little truck collision insurance. However, if formal sector financing of trucks is to emerge, collision insurance is certain to be a requirement o fthe financing package. 285. Cargo Insurance:GOP should encourage the private sector to develop the cargo insurance market by imposingcarrier liability for the losddamage to goods carried. Experience-rated insurance utilizes financial incentives to improve trucking discipline and reduce cargo loss and damage. Unfortunately, with the informalnature of the Pakistani trucking industry, insurance companies have a very limited ability to get any experience rating information. Some form o f carrier registration may be part ofthe solution. 5.3.7. Carrier Registration 286. Both freight carriers and shippers indicated the needfor the "registration" o f freight transport operators. The carriers would like registration as anentry barrier, similar to the restrictions onbonded carriers, to help reduce competition. Shippers would like registration to help provide carrier responsibility for cargo loddamage and make them less dependent on the brokers for guaranteeing the reliability o ftransporters. 287. The Government should consider introducing a voluntary national registration scheme for truck operators. Such registration should not act as an entry barrier into the sector and should impose no conditions other than "fitness" as a recognized freight transport operators. Registered carriers would need to operate to minimum national standards but would require neither bonding nor minimumfleet size. On these terms, there would be no reason for a carrier not to register beyond entering more into the formal sector. GOP should then work to make registration something that carriers found to be intheir own financial interest. 288. GOP could help put together insurance programs for cargo loss/damage andcollision damage which would be available to registered truckers. GOP could induce insurance companies to participate in insurance pools. This type o f insurance, with many small predictable losses, should be the type o fbusiness that insurance companies likebecause they are easy to operate profitably. 289. For the carrier, the availability o f physical damage insurance would both provide needed risk coverage and facilitate truck fmancing. Banks always want a carrier to have this coverage as a source o f repayment inthe event o f the vehicle beingwritten off. 290. Carriers, with reasonable cargo loss insurance, would find it easier to obtain higher-value loads. When enoughcarriers have such insurance, shippers usually demand this coverage. Cargo loss coverage would be extended while, at the same time, costs would be reduced in comparison to the present load coverage provided bybrokers andfreight forwarders. - 77 - 291, Voluntarily-registered trucks would have advantages in obtaining business and this should both stimulate their growthand encourage other truckers tojoin. Gradually, therefore, there should be anextensionof registrationandmore modembusinesssystems within the trucking sector. 5.3.8. Driver Education and Licensing 292. Shippers complain that truck drivers are not very client-responsive. In other countries with open markets, the alignment between drivers' incentives and customer service is quite close; drivers are paid for production and penalized for service failure67.InPakistan, few trucks are driver owned anddrivers are normally obtained from a labor contractor, not directly hiredbythe truck owner. The majority o f the truck owners/operators/drivers have little or no formal education andthe drivers work long hours under harshconditions. 293. Shell Pakistan has been successful inraisingdriver standards through education and training. T h i s approach may be successful when a large organization demands high standard from their contract haulers and are willing to support the training. It may not be easily transferredto the rest o f the industrywithout registration andthe support o fthe Government. 5.3.9. Truck Parks and Stands 294. The lack o f truck parks on the major freight routes imposes parking burdens on the cities/towns along the route. Clearing and paving some simple parking areas would provide public benefits at little cost. They would also provide the opportunity for focused healthinterventions (both treatment andprevention) on truckers who have a badreputation for the spread o f STDs. 295. Similar improvements could be made for the "addas" stands, where the trucks go for return loads. If government constructed parking lots, near the main freight routes, it would help reduce urbancongestion, facilitate the matching o ftrucks andloads, andprovide security for the industry. 5.3.10. IncreasedRail Participation inFreight Sector 296. The trucking sector carries a much larger share o f long distance low-value cargo thanit might be expected. Truckers term this "cheap freight." This traffic i s oftenrouted directly by the shipper to the individual truck operator; it moves very slowly in old, overloaded rigid trucks. The haulage o f such commodities would be better suited to rail and such cargo transfer would reduce pressure on the highway network. 297. But, at present, the private sector has no confidence inthe service provided by Pakistan Railways. Pakistan i s geographically well suited for rail freight, especially the 1,800 km comdor from Karachi to Peshawar. But it takes three weeks, sometimes longer, for PR to transit these 1,800 km, while it takes four days by road. Inefficiency and a focus on passenger traffic make PR uncompetitive in the freight sector. Major changes in railway operations and management will be requiredto reversethis situation. 5.3.11 Formulate and Announce Pakistan's RoadFreightIndustryPolicy 298. There i s a need to develop and formulate a Road Freight Industry (RFI) Policy (with caveats for those actions that will require political and legislative approvals) containing the above policy changes. This KFI shall be incorporated in the budget o f fiscal year 2006-07 as well as Pakistan's the Trade Policy. The RFIpolicy will be complemented with an `implementation strategy' inorder to seek anyrequiredpoliticalandlegislative approvals. `'InMalaysia, for example, most commercial trucking companies paid drivers no fured salary but a percentage of the truck's freight revenues. -78 - References Arnold, J. and Khan, S. M. H. 2005. "PakistanTrade Facilitation Audit." World Bank, Washington, D.C. Biggar, DarrylR.2001. "Competition Issues inRoadTransport." OECD, Paris. BTRE. 2003. "AnOverview of the Australian Road Freight Transport Industry."Working Paper 60. Australian BureauofTransport andRegional Economics, Canberra. Chilver, A. 1989. 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