The State of Domestic Commerce in Pakistan Study 7 - An Overview of the Transport Sector

THE STATE OF DOMESTIC COMMERCE IN PAKISTAN

STUDY 7

AN OVERVIEW OF THE TRANSPORT SECTOR

For

The Ministry of Commerce Government of Pakistan

November 2007

By

Innovative Development Strategies (Pvt.) Ltd. House No. 2, Street 44, F-8/1, Islamabad.

Table of Contents

List of Abbreviations ............................................................................................................... i Glossary of terms .................................................................................................................. v Acknowledgments ............................................................................................................... vii Executive Summary ........................................................................................................... 3 Section 1: Introduction .................................................................................................. 7 Section 2: Methodology ................................................................................................ 9 2.1 Road ...................................................................................................................... 9 2.2 Data Reliability ........................................................................................................ 11 2.3 Rail, Aviation, and Ports .......................................................................................... 11 Section 3: Transport Indices ....................................................................................... 13 3.1 Output index ............................................................................................................ 13 3.2 Weights for value added index ................................................................................ 16 3.3 Weights for price index ............................................................................................ 16 3.4 Tackling scarcity of data in future attempts .............................................................. 17 Section 4: Road transport ........................................................................................... 18 4.1 Output 18 4.2 Price, Cost, and profit margin estimates .................................................................. 18

4.2.1 Freight services ........................................................................................... 18 4.2.2 Passengers .................................................................................................. 20

4.3 Time estimates ........................................................................................................ 21 4.4 Characteristics of the Road Sub-sector ................................................................... 22

4.4.1 Road Network and Administration ................................................................ 22 4.4.2. Structure of the Road Sub-sector ................................................................ 23 4.4.3 Composition of the Freight Market ............................................................... 25 4.4.4. Financing and Contractual Arrangements .................................................... 27

4.5 Determinants of Growth in the Road Sector ............................................................ 28 4.5.1 Infrastructure Issues .................................................................................... 29 4.5.2 Competition .................................................................................................. 33 4.5.3 Regulatory Framework ................................................................................. 33 4.5.4 Governance Issues ...................................................................................... 35 4.5.5 Access to finance ......................................................................................... 36 4.5.6 Travel restrictions due to zoning and law and order situation ....................... 37 4.5.7 Owners’ Prior Experience & Skill Level ........................................................ 37

4.6 Enhancing efficiency of road transport ..................................................................... 39 Section 5: Railways ..................................................................................................... 41 5.1 The PR network ....................................................................................................... 41 5.2 Share in the market ................................................................................................. 42

5.2.1 Value added in the rail sub-sector ................................................................ 44 5.2.3 Commodities carried .................................................................................... 44

5.3 Constraints to growth ............................................................................................... 46 5.3.1 The governance of PR freight ...................................................................... 47 5.3.2 Lack of a competitive environment ............................................................... 48

5.4 Building on the strengths to enhance competitiveness ............................................ 48 Section 6: Aviation ...................................................................................................... 51 6.1 Aviation Network and Administration ....................................................................... 51 6.2 Freight and passenger handling .............................................................................. 52 6.3 The way forward ...................................................................................................... 55 Section 7: Ports ........................................................................................................... 56 7.1 Port administration, makeup and network ................................................................ 56 7.2 Costs 57 7.3 Port Clearance times ............................................................................................... 58 7.3.1 Customs clearance: ..................................................................................... 59 7.4 Potential avenues for improvement ......................................................................... 61 Section 8: Major Government Initiatives .................................................................... 62 Section 9: Conclusion ................................................................................................. 65 Annex 1 ................................................................................................................... 69 Annex 2 ................................................................................................................... 72

List of Boxes Box 1: Relative weights to compute output index ................................................. 14 Box 2: Relative weights for value added index ..................................................... 16 Box 3: Relative weights for price index ................................................................. 17 Box 4: Interaction of road carriers with public sector representatives ................... 35 Box 5: Major constraints at land borders ............................................................. 60

List of Tables Table 2.1: Sampling details ............................................................................................ 9 Table 2.2: Interview details for rail, aviation, and ports sub-sectors .............................. 12 Table 3.1 Total, freight, and passenger indices............................................................ 14 Table 3.2: Annual growth rates of transport output index and national GDP ................. 15 Table 4.1: Total passenger and freight output for road.................................................. 18 Table 4.2: Freight prices for major routes ..................................................................... 19 Table 4.3: Freight transporter costs for major routes .................................................... 19 Table 4.4: Profit margins estimates for freight carriers (PKR) ....................................... 20 Table 4.5: Passenger fares for major routes (PKR) ...................................................... 21 Table 4.6: Passenger transport cost and profit margin estimates (PKR) ....................... 21 Table 4.7: Estimates of times taken for transportation .................................................. 22 Table 4.8: Transport density estimates (2005) .............................................................. 22 Table 4.9: Type of workers in the transport industry (%) ............................................... 24 Table 4.10: Gap between business services required and used ..................................... 25 Table 4.11: Mode of payment of transport deals ............................................................. 27 Table 4.12: Average time to have credit cleared? ........................................................... 28 Table 4.13: Respondent views on Various Contractual Statements ................................ 28 Table 4.14: Cross-country comparison of rural accessibility ........................................... 30 Table 4.15: Transport Access and Service Availability in Rural Pakistan. ....................... 30 Table 4.16: Selected Human Development Indicators and Road Access (%) ................. 31 Table 4.17: Start-up capital requirements for road transport enterprises ......................... 36 Table 4.18: Major Problems in accessing credit (% of respondents) ............................... 36 Table 4.19: Reasons for acquiring informal loan ............................................................. 36 Table 4.20: Medium of learning management and technical skills .................................. 38 Table 4.21: Level of education of enterprise owners ....................................................... 38 Table 5.1: Classification of PR lines (2004-05) ............................................................. 41 Table 5.2: Pakistan Railways: Core and Non-Commercial Networks ............................ 42 Table 5.3: Passenger volume revenue and fare............................................................ 42 Table 5.4: Pakistan Railways: Freight Data .................................................................. 43 Table 5.5: Pakistan Railways: Network Costs FY2004 (PKR million) ............................ 44 Table 5.6: Pakistan Railways’ Basic Rate Scale for Freight Transport .......................... 44 Table 5.7: Commodity Volume Carried ......................................................................... 45 Table 6.1: Domestic Air Traffic of Passengers and Freight of Pakistan International

Airlines ......................................................................................................... 51 Table 6.2: Aircraft Landing Charges at Various Airports in Pakistan ............................. 54 Table 6.3: Aircraft Housing Charges at Various Airports in Pakistan ............................. 54 Table 7.1: Cargo handled at Karachi Port and Port Qasim ........................................... 57 Table 7.2: Port Tariffs at KPT and Port Qasim .............................................................. 57 Table 7.3: Free storage periods at KPT and Port Qasim ............................................... 60 Table 7.4: Estimates of informal costs associated with custom clearance ..................... 61

List of Figures Figure 1: Plot of GDP growth against transport output index growth (%) ..................... 15 Figure 2: Forecast for output index movement ............................................................ 16 Figure 3: Fuel costs relative to total cost (%) .............................................................. 20 Figure 4: Type of Ownership in the truck industry ....................................................... 23 Figure 5: Relative size of firms in the road industry ..................................................... 24 Figure 6: Share of road freight trips by commodity type (%) ........................................ 26 Figure 7: Reasons for Damage to Perishable items .................................................... 26 Figure 8: Preference among available dispute settlement mechanisms ...................... 27 Figure 9: Key Constraints to Growth ........................................................................... 29 Figure 10: Perception of state of the road network (% of respondents) ......................... 32 Figure 11: Average time lost due to condition of roads (hours/trip)................................ 32 Figure 12: Reasons for not registering a transport enterprise (% of respondents) ......... 34 Figure 13: Relative importance of constraints due to lack of education (% of

respondents) ................................................................................................ 38

Innovative Development Strategies (Pvt) i

List of Abbreviations

ABAD Association of Builders and Developers

ADB Asian Development Bank

ADBI Asian Development Bank Institute

APCA All Pakistan Contractors Association

ATT Afghan Trade Transit

BAF Bank AlFalah

BCI Business Competitiveness Index

BOR Board of Revenue

CAA Civil Aviation Authority

CBM Cubic meter

CBR Central Board of Revenue

CDA Capital Development Authority

CIB Credit information bureau

CMR Contract for the International Carriage of Goods by Road

CPI Corruption Perceptions Index

CPIA Country Policy and Institutional Assessment

DFID Department for International Development

DHA Defense Housing authority

EDF Export Development Fund

EIU Economist Intelligence Unit

EOS Executive Opinion Survey

EPB Export Promotion Bureau

ESCAP Economic and Social Development in Asia and the Pacific

FBS Federal Bureau of Statistics

FCL Full Container Load

FDI Foreign Direct Investment

FIAS Foreign Investment Advisory Service

Ft Foot

FY Fiscal Year

GCI Global Competitiveness Index

GCR Global Competitiveness Report

GD Goods Declaration

GDP Gross Domestic Product

GoP Government of Pakistan

GOR Government Officials Residences

GRT Gross Register Tonnage

GST General Sales Tax

HBFC Housing Building Finance Corporation

HBL Habib Bank Limited

HDR Human Development Report

HFIs Housing Finance Institutions

IFC International Finance Corporation

IFS International Financial Statistics

IMF International Monetary Fund

ISAL Informal Subdivision of Agricultural Land

ISO International Standards Organization

IT Information Technology

ITU International Telecommunications Union

http://en.wikipedia.org/wiki/Gross_Register_Tonnage

Survey Report on Domestic Commerce

Innovative Development Strategies (Pvt) ii

KBCA Karachi Building Control Authority

KDA Karachi Development Authority

KESC Karachi Electric Supply Corporation

KM(s) Kilometer(s)

KPT Karachi Port Trust

KSE Karachi Stock Exchange

LCL Less Than Container Load

LOA Length Overall

MCB Muslim Commercial Bank

MENA Middle East and North Africa

MOC Ministry of Commerce

MOD Ministry of Defense

MTDF Medium Term Development Framework

NBP National Bank of Pakistan

NCS National Conservation Strategy

NER Net Primary School Enrollment Rate

NHA National Highway Authority

NIE Newly industrialized economy

NIT National Institute of Transport

NLC National Logistics Cell

NTN National Tax Number

NTRC National Transportation Research Center

NTTFC National Trade and Transport Facilitation Committee

NWFP North West Frontier Province

PASSCO Pakistan Agricultural Storage and Services Corporation

PEC Pakistan Engineering Council

PHDEB Pakistan Horticulture Development and Export Board

PIAC Pakistan International Airlines Corporation

PIDE Pakistan Institute Of Development Economists

PIHS Pakistan Integrated Household Survey

PKR Pakistani Rupee

PQA Port Qasim Authority

PR Pakistan Railways

PREF Pakistan Real Estate Federation

PSDP Public Sector Development Program

R&D Research and Development

REER Real Effective Exchange Rate

REITs Real Estate Investment Trusts

RICS Royal Institute of Chartered Surveyors

SAI Social Accountability International

SBP State Bank of Pakistan

SKAA Sindh Katchi Abadis Authority

SME Small and Medium Enterprises

SPS Sanitary and Phytosanitary

SRO Statutory Regulation Order

Std Standard

TEP Total Factor Productivity

TEU Twenty-Foot Equivalent Units

TI Transparency International

TOR Terms of Reference


Innovative Development Strategies (Pvt) iii

TSDI Transport Sector Development Initiative

TTFP Trade and Transportation Facilitation Program

UK United Kingdom

UNDP United Nations Development Program

US United States

USA United States of America

USC Utility Stores Corporation

USD United States Dollars

WAPDA Water and Power Development Authority

WDI World Development Indicators

WEF World Economic Forum

WGI Worldwide Governance Indicators

WTO World Trade Organization

Innovative Development Strategies (Pvt) v

Glossary of terms

Aadaa Transport hub/station

Bilty Local term for receipt given to the shipper upon booking any transport

consignment

Maal gari Pakistan Railway’s dedicated freight wagon

Passenger-km Standard unit for measuring passenger output; it is calculated as the product

of the total number of kilometers traveled and the number of passengers

traveling the total distance

Ton-km Standard unit for measuring freight output; it is calculated as the product of

the total number of tons carried and kilometers traveled

Innovative Development Strategies (Pvt) vii

Acknowledgment

The IDS team owes a debt of gratitude to the officers of the Ministry of Commerce for their

guidance, assistance and feedback during the course of this study. Our special thanks go out,

in particular, to Syed Asif Ali Shah, Secretary; Mr. Naseem Qureshi and Mr. Ashraf Khan,

Additional Secretaries; Mr. Abrar Hussian, Joint Secretary; Syed Irtiqa Zaidi, Consultant and

Mr. Qaseem Subhani, Section Officer, for sparing their precious time and efforts for the

study.

We feel a deep sense of gratitude for the Minister for Commerce. Mr. Humayun Akhtar

Khan, who took out considerable time from his busy schedule to guide us. It was his sincere

and deep conviction which enabled us to conduct and compile this detailed and

comprehensive study on Domestic Commerce of our country. His apt guidance and keen

analytical oversight were extremely helpful in finalizing the study and formulating the policy

recommendations.

This study has benefited from comments received from the following:

1. State Bank of Pakistan, Karachi.

2. Federal Board of Revenue, Government of Pakistan, Islamabad.

3. Planning and Development Division, Government of Pakistan, Islamabad.

4. Trade Development Authority, Government of Pakistan, Karachi.

5. (Management Consultants) Establishment Division, Government of Pakistan,

Islamabad.

6. Finance Division, Government of Pakistan, Islamabad.

7. Pakistan Institute of Development Economics, Islamabad.

8. NTTFC, Karachi.

9. FPCCI, Karachi.

10. Planning and Development Board, Government of Punjab, Lahore.

11. Planning and Development Board, Government of NWFP, Peshawar.

12. Planning and Development Board, Government of Sindh, Karachi.

13. Planning and Development Board, Government of Balochistan, Quetta.

14. Investment and Commerce Department, Government of Punjab, Lahore.

15. Ministry of Communications, Government of Pakistan, Islamabad.

16. Industries, Production & Supplies Initiatives, Government of Pakistan, Islamabad.

17. Statistics Division, Government of Pakistan, Islamabad.

1

AN OVERVIEW OF THE TRANSPORT

SECTOR*

by

MOEED YUSUF

For detailed survey results, please see separate volume entitled “Basic Statistics of the Sample Survey Data”.

Innovative Development Strategies (Pvt) 3

Executive Summary

1. The transport sector plays a pivotal role in Pakistan’s economy, both in enhancing the

global competitiveness of an economy as well as in ensuring efficient functioning of the

domestic commerce supply chain. It accounts for about 11 percent of the country’s Gross

Domestic Product (GDP), 17 percent of Gross Capital Formation, and 6 percent of

employment. However, much of the economic gains from efficient transport services are lost

in Pakistan’s case due to the overall poor performance of the sector. According to some

estimates, the economy suffers a loss of 8.5 percent of GDP annually. Such a grave situation

necessitates the need to analyze various facets of the transport sector to identify the key

constraints causing efficiency losses. The need for such an analysis is further underscored by

the fact that demand for transport is expected to double by 2015, thus requiring significantly

higher levels of service.

Methodology

2. The analysis benefits from a review of existing literature and information gathered

through primary sources. Findings from literature have been used to complement primary

information. Therefore, rather than reporting existing literature and findings from primary

data separately, the report combines the analysis to present a holistic overview of each sub-

sector.

Transport Indices

3. The Laspeyres fixed-weighted index has been used to derive the results. Three

separate indices have been generated: the total transport output index, the passenger output

index, and the freight output index. Relative weights for the index have been computed using

operating revenue estimates for passenger and freight services. No value added index could

be created owing to the lack of time series data on operating revenues and costs for the

transport sub-sectors. However, utilizing the sample data, relative weights have been

computed for the road sub-sector, using 2004-05 as the base year. Only weights for the road

sub-sector are generated to allow computation of a price index in the future. Reasons to

exclude rail and road, and for not being able to create an actual index are the same as those

stated in the discussion on value added weights.

Road transport

4. The annual growth in output rates for road transport closely approximate the increase

in the total transport index, pointing to the overbearing importance of road transport for the

sector as a whole. The mean prices of freight services for the major transport routes highlight

the substantial difference between inward and outward rates at the port city of Karachi.

Goods transported to other border towns do not experience such variations in transport

charges.

5. Transporter costs for goods per route are fairly low. The gross profit margins on

inward routes are relatively high. Passenger fares (prices) are fixed and do not vary between

inward and outward traffic. Longer routes have substantially higher per passenger profit

margins. The mean times taken for any given route are much lower for passenger vehicles

than for commercial goods carriers.

6. Large numbers of individual owners providing ‘for hire and reward’ services

dominate the trucking industry. Survey results depict that the vast majority of businesses are



organized as sole proprietorships. Majority of the businesses are small, employing less than

10 employees on average. Yet, vast majority of firms employ full-time paid staff. Only 8

percent of businesses surveyed had hired part-time personnel. None of these were large firms.

7. Firms in the road sub-sector have yet to fully embrace automation in their day-to-day

functioning. The make-up of the road industry does not incentivize automated services in any

way. There is a significant gap between business services required by a firm and the actual

services being used. Engineering, legal, marketing and insurance services were cited as being

highly sought after. While enterprises largely fulfill their engineering and to an extent, legal

needs, marketing, insurance and accounting requirements largely go unentertained. Word of

mouth is by far the most predominant marketing tool used by the transporters. Only a few

businesses use marketing agents. There is no organized database through which particular

transporters can be accessed.

8. The role of the local transport associations was greater than expected. Almost three-

fourths of the firms included in the survey were found to be members of transport

associations. There is a lack of standardization in the quality of road transportation services.

Clients in general receive a level of service commensurate with the amount they are willing

to pay. Shippers of low-value goods are more price sensitive and depend on the less reliable

services of the spot market.

9. In the freight market the private sector is the dominant player and handles 95 percent

of the total freight. Ballast, gravel, stone, cement, fruit, fertilizers and wheat are the most

important commodities in terms of tons transported by trucks . The transport volume of fruit

is the highest in terms of ton-kms. The country’s true potential to trade fresh foods is severely

undermined due to the lack of an adequate temperature controlled transport system.

According to survey findings, the incidence of loss or damage to perishable items is fairly

high. Lack of prevalence of insurance practices exacerbates the problems of transport related

losses in general. Cash is the predominant mode of payment in the road transport industry.

Only 33 percent of the enterprises buy their inputs on credit.

10. Various forms of contractual modes are functional in the industry as arrangements to

transport goods. Companies based in Punjab typically engage in contract arrangements more

often Sindh based enterprises. Almost 50 percent of contracts are simply statements written

on plain paper and signed by both parties.

11. According to the survey results, 96 percent of transport enterprises observed an

expansion/improvement in their business over the last year. A greater proportion of passenger

services reported to have expanded. Infrastructure development and a competitive

environment are key drivers of growth. The most important constraints of growth according

to the survey include the taxation and regulation system (licensing, permits, etc), law and

order, lack of access to finance, quality of public services (electricity, communications), and

corruption. Others that are obvious from literature are the low education/skill levels of

enterprise managers and miscellaneous governance concerns.

12. Given the road sub-sector’s overwhelming importance in the transport industry,

policy measures that manage to correct current constraints would impact the overall economy

tremendously.

Railways

13. Pakistan Railways (PR) is a subordinate department of the Ministry of Railways. It is

governed by the Railway Act of 1890. Rail accounts for less than 10 percent of the total

passenger traffic in the country. In the freight business, rail has an even lower and stagnant

market share. Out of the total transport output of approximately 123 billion ton-kms in the

country’s transport sector, rail accounts for a mere 5 billion ton-kms.

Domestic Commerce In Pakistan: An Overview Of The Transport Sector

Innovative Development Srategies (Pvt) 5

14. Major commodities carried by Pakistan Railways include petroleum and other non-

dangerous hydrocarbon oils (18.1 percent), chemical manures (9.9 percent) and railway

materials and stores (17.4 percent). A major reason for the steep decline in rail’s importance

as a freight carrier is the loss of oil transport as a major commodity. The growth in ATT

activity, which provided significant business to PR, has slowed down. This is partly due to

trade flows being diverted to Iranian facilities due to cumbersome procedures at Karachi but

more so because of a shift from rail to road as the preferred mode of transport of ATT goods.

The NLC now gets priority on this front. The railway plays an unimportant role in

transporting agricultural produce, it does not have any specialized containers to carry

agricultural goods and given the frequent delays, clients often prefer road to carry such goods

despite the lack of temperature-controlled road transport.

15. There are many constraints to growth. The organization’s management culture is non-

commercial and thus functional efficiency has always been a low priority. Like most other

mega-organizations in Pakistan’s public sector, PR suffers from tremendous political

interference both in deployment of personnel and in day-to-day management. Lack of a

principal focus on commercial viability has meant that PR has primarily remained a

passenger railway services. PR’s infrastructure and rolling stock have become aged and

decrepit. The PR is a monopoly. Being the only rail service in the country, no competition is

faced from within the sector. Lack of any compulsion to orient the service with market

realities is thus obvious. A direct outcome of these shortcomings and perhaps the most

significant constraint for PR is the inability to provide guarantees in terms of time needed for

consignments to arrive at the destination.

Aviation

16. The aviation industry is unique in that the pace of transportation offered by it cannot

be matched by any other sub-sector. It constitutes a miniscule share of the transport sector. In

2004-05, 6.94 million passengers traveled domestically by air out of which 0.08 million were

transit passengers. A total of 1.76 billion passenger-kms were flown. In addition, a mere

116,202 tons of cargo and 10,412 tons of mail were hauled. A total of 36.94 million ton-kms

were performed. These low volumes are despite the steady increase in air cargo traffic over

the years, save a minor decline during the 1990s.

17. Most of the aviation industry’s shortcomings stem from a highly bureaucratic and

discretionary regulatory authority, which has discouraged the industry from developing into a

truly competitive one. There is a need to allow civil aviation experts to take up key decision-

making positions in CAA, and to depute experts in MOD to deal with civil aviation in the

country. Such a development may allow better use of the existing liberal policy to allow new

passenger and cargo operators to enter the market.

Ports

18. It is impossible to reflect upon the transport sector’s impact on commerce without

dealing with the entry (for imports) and exit points (for exports) for the country’s external

trade. Efficiency of trade flows and that of the transport sector are complementary. Pakistan’s

1,100 km long coastline opens to the Arabian Sea. Karachi Port and Port Qasim are the two

major international ports. Other ports are relatively insignificant.

19. Port Qasim is operating as a landlord port, primarily serving the steel, petroleum, and

chemical industries. Karachi Port Trust (KPT) is also making progress towards converting

itself into a landlord port. The total cargo volume handled by the two ports in 2003-04 was

43.26 million tons. At the Karachi port, the total port traffic increased from 20.5 million tons



in 1991-1992 to 27.5 million tons in 2003-04. The total port traffic at Port Qasim rapidly

increased from 7.2 million tons in 1991-92 to 15.6 million tons in 2003-04, representing an

annual growth rate of 6.7.

20. Both the KPT as well as Port Qasim Authority (PQA) run on excessive profits. PQA,

for example, accumulated a net financial surplus amounting to PKR 1.08 billion at the end of

FY 2003-04. Port entry costs on average are 5-9 times higher than other countries in the

region. However Port entry costs on average are 5-9 times higher than other countries in the

region. The high costs are despite the fact that there is significant private sector involvement

at the ports.

21. Private sector involvement has ensured that the ship-shore handling speeds at Karachi

are in line with those at efficient international ports for all categories of cargo—containers,

bulk cargoes and general cargo. Despite the efficient ship-shore handling, overall container

dwell times in ports stand at 11 days on average. The major factor behind excessive times is

the tardy customs clearance process, which suffers from tremendous operational bottlenecks.

22. The main need with regard to port management is to instill a more commercial

approach in management and operations decisions. The ports have made progress in

modernizing internal procedures, at least at the ship-shore handling level. Now there is a need

to work towards creating robust down-stream linkages to integrate the entire commerce

supply chain.

Major Government Initiatives

23. The government remains cognizant of the multifaceted problems confronting the

transport sector. The irony is that majority of macro level initiatives undertaken by the

government often end up remaining mere visions. The lack of on ground impact is clear from

the fact that as many as 80 percent of our survey respondents said they were not aware of any

major public sector initiatives to improve the functioning of the transport sector.

Conclusion

24. It needs to be understood that while the road, rail and aviation industries are

competitors, maximum gains will be realized not by altering the market share of one sub-

sector vis-à-vis the other, but by ensuring that each sub-sector attains the primary market

share in commodities it is most efficient at transporting. Ideally, policy makers ought to focus

on devising incentives for each service to capitalize on its respective comparative advantage.

25. This report concludes that there are three major factors that determine the degree of

efficiency in each sub-sector. The biggest constraint afflicting the rail and aviation sectors is

the perverse governance protocols. The second major determinant of performance is the

degree of competition in the sub-sector. Finally, the transport sector is no exception to the all-

pervasive problem of the policy-implementation disconnect across Pakistan. The presence of

up-to-date and dynamic legislation is a necessity. The transport sector suffers from highly

dated legislations, which have little meaning under the present scenario. The interplay of the

three factors: bureaucratic governance, degree of competition and implementation

performance end up determining the output of the transport sub-sectors.


Section 1

Introduction

1. Pakistan attributes its recent macro economic success to its export-led model of economic

growth. The transport sector plays a pivotal role, both in enhancing the global competitiveness of

an economy as well as in ensuring efficient functioning of the domestic commerce supply chain.

Literature on global trade and domestic commerce highlights the multifaceted links between a

country’s economic growth and the performance of the transport sector1. This study is part of a

combination of eight sectoral studies covering the entire ambit of commerce activity in Pakistan.

The objective of these undertakings is to understand the dynamics of each of the major sectors

impacting commerce as well as to analyze the interplay between various components of the

commerce supply chain. The study focuses on the transport sector in the country, covering the

road, rail, aviation and ports sub-sectors.

2. Pakistan’s transport sector already plays a major role in the national economy. It accounts

for about 11 percent of the country’s Gross Domestic Product (GDP), 17 percent of Gross Capital

Formation, and 6 percent of employment2. It also receives 12 to 15 percent of the annual Federal

Sector Development Program allocations3. Notwithstanding, much of the economic gains from

efficient transport services are lost in Pakistan’s case due to the overall poor performance of the

sector. According to some estimates, the economy suffers a loss of 8.5 percent of GDP annually.4

Such a grave situation necessitates the need to analyze various facets of the transport sector to

identify the key constraints causing efficiency losses. The need for such an analysis is further

underscored by the fact that demand for transport is expected to double by 2015, thus requiring

significantly higher levels of service.

3. In this report, we have conducted an analysis of the road, rail, aviation, and ports sub-

sectors, identifying each one’s relative importance and major weaknesses and strengths. We

develop indicators of the sector’s growth, outline the structure and make-up of each sub-sector,

identify the various institutional and governance concerns relevant to the functioning of the

sector, and emphasize factors that are constraining or driving its growth. Much of the discussion

in the report is focused on the road sub-sector, which is warranted, given that road transport

constitutes an overwhelming majority of the sector’s output.

4. Section 2 presents the methodology for the analysis. In section 3, an output index is

developed for the transport sector. Sections 4, 5, 6, and 7 are devoted to an analysis of the road,

1 C. Carnemark,. “Some Economic, Social and Technical Aspects of Rural Roads”, ESCAP workshop on rural

roads, Dhaka, 10-23 January, 1979. 2 World Bank, “Pakistan Transport Sector: Overview”,

<http://web.worldbank.org/WEBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/EXTSARREGTOPTRANSPORT/0,,contentMDK:20694261~pagePK:34004173~piPK:34003707~theSitePK:579598,00.html> (accessed on 30 November, 2006).

3 Government of Pakistan, Pakistan Economic Survey 2005-06 (Islamabad: Finance Division, Economic Advisor’s

Wing, 2006). 4 Government of Pakistan, Annual Plan 2006-07 (Islamabad: Planning Commission, 2006).



rail, aviation, and ports sub-sectors. Section 8 highlights major macro level transport related

initiatives undertaken by the government in the recent past.


Section 2

Methodology

5. The analysis benefits from a review of existing literature and information gathered

through primary sources. Findings from literature have been used to complement primary

information. Therefore, rather than reporting existing literature and findings from primary data

separately, we have combined the analysis to present a holistic overview of each sub-sector.

Qualitative information was readily available on the road (freight) and rail (passengers and

freight) sub-sectors, but was scant on aviation and ports. To the contrary, sufficient quantitative

data to conduct the required statistical analysis was only available for rail. Virtually no detailed

data sets existed for road transport, a fact that necessitated undertaking an extensive survey

exercise. Our report has ended up adding tremendous value to previous knowledge. This is

especially true with regard to institutional and governance dynamics of the entire transport sector,

and quantitative estimates of price, margin growth, and other relevant indicators for road services.

Below, we detail our methodology for each sub-sector:

2.1 Road

6. A detailed structured questionnaire was prepared and a survey conducted in 14 locations

across Pakistan. Our sample size was 100, divided among freight and passenger carriers. The

sample size and locations were determined with the help of national level industry data acquired

from the Federal Bureau of Statistics (FBS). The final sample was both representative and

significant at the national level.

Table 2.1: Sampling details

Location No. of structured questionnaires

Freight services Passenger services

Punjab

Faisalabad 8 5

Lahore 15

Multan 3 2

Okara 4 3

Rawalpindi 4 5

Gujrawala 2 4

Sindh

Karachi 5 10

Hyderabad 4 2

Nawabshah 3 2

Sukkur 4 2

Continued…



Location No. of structured questionnaires

Freight services Passenger services

NWFP

Peshawar 4 3

Abbotabad 4 2

Balochistan

Quetta 4 3

Federal area

Islamabad 4 1

Total 68 44

Sigma total 1125

Source: Primary data analysis

7. A staged sampling procedure was implemented. To begin with, FBS estimates were

used to identify the proportion of respondents coming from freight and passenger services.

The higher number of respondents from the freight industry is an indication of its greater

relevance to commerce activity in the country. The FBS also identified the specific

cities/towns for the survey. Within each identified location, respondents were selected using

the snowballing technique, keeping in mind the need to conduct the exercise in multiple

markets within a selected city as well as to ensure variation among the size of the firms

interviewed. A random sampling technique was not feasible, as no ‘universe’ for the transport

sector exists for any of these locations. Moreover, the diversity of the selected locations and

the transient nature of most transporters (especially those without any physical hub) would

have made mapping a cost-prohibitive exercise.

8. Information requested from the respondents covered all aspects of the stipulated terms

of reference for the report. Specifically, we tracked information on the following:

Skill and education level

Structure of the firms

Ownership details

Size of the firms

Type of vehicles

Level of automation

Employment details

Firm expansion

Estimates of price, cost, profit margin,

and volume for both passenger and

freight services

Time estimates

Share of revenue from various services

Regulatory framework

Competition in the industry

Asset information

Availability of capital and financing

Use of credit

Investments

Banking and accounting procedures

Constraints and drivers of growth

Road infrastructure

Role of the government

Zoning restrictions

Rent control

Contractual arrangements

Payment arrangements

Property rights

Law and order

Losses and dispute resolution

9. The quality of the data obtained from the above exercise was fairly weak. This is

common for most transport surveys of this nature in Pakistan. The fact that an overwhelming

majority of the road transport sector forms part of the informal economy prompts transporters

to avoid providing insights into information relating to prices, costs, and revenues. While we

managed to obtain enough information on governance and institutional concerns to conduct a

5 The sigma total is higher than the sample size since 12 respondents dealt both with passenger and freight

services.



robust statistical analysis, the survey revealed little on the volume, costs, profit margins, and

revenues of individual enterprises. Since this information was critical for our analysis, we

ended up using an existing primary data set collected from transporters of coniferous timber

for 2004-05 and 2005-06. The data contains variables dealing with price, costs, and profit

margins for the major timber routes in the country. The sample size for the data set was 62,

which was representative of the timber industry in Pakistan. A total of 5 hubs of timber trade

in the country were surveyed. As with the data set collected specifically for the domestic

commerce exercise, respondents for the timber survey were selected through snowballing.

10. A statistical analysis was conducted on the primary data using the SPSS software.

Basic descriptive statistics for all variables included in the survey questionnaire and cross-

tabulations for several indicators were generated. The entire data set was treated at various

levels of aggregation. We used three base variables: passenger services, freight services

carrying agricultural goods, and freight services carrying all other (non-agricultural)

commodities.6 Analysis was conducted for the aggregated national data, as well as at the

provincial level (for Punjab and Sindh only). These statistics have formed the basis for the

discussion of the road sub-sector in this document. We have tried to highlight variations

among our base variables and/or among provinces where appropriate.

2.2 Data Reliability

11. The actual response ratio is much lower than expected. A number of ‘sensitive’ fields

in the questionnaires were left unanswered. Out of the total sample, NWFP and Balochistan

only contributed 9 and 6 responses respectively. While these results are included in the

aggregated data at the national level, provincial data generated to capture inter-province

variation was limited to Sindh and Punjab, where the respective number of observations were

34 and 50 respectively. Neither of the domestic commerce survey, nor the timber industry

data set distinguishes between various types of vehicles, a shortcoming that impacts most of

the quantitative estimations. Moreover, data on passengers does not generate any information

on for-hire and rental transport. The entire road passenger analysis is thus confined to

commercial services. Also, no information regarding tax regimes was obtained. In fact, we

had to drop tax related variables after the pre-test.

12. Data on prices, costs, and profit margins is always to be interpreted cautiously, given

the propensity of respondents to exaggerate costs and underestimate profits. Indeed, we have

recorded a number of instances of net losses, which clearly are a result of false responses.

Moreover, while we collected information for a total of 204 transport routes though the

domestic commerce survey, the number of observations and the extent of data for minor

routes were weak. We ended up dropping information for these routes. In the final analysis,

we have only included the major transport routes for commercial goods and passenger traffic

in the country. The final selection of routes is entirely a function of the extent of information

available for each one of the major routes.

2.3 Rail, Aviation, and Ports

13. Sections on the rail, aviation and ports sub-sectors primarily draw on secondary

literature. Information from key informant interviews was only utilized to substantiate

existing information and fill any gaps. Owing to the small number of interview respondents,

information from secondary literature was treated as sacrosanct wherever the two sources of

information tended to contradict each other. Interview respondents were selected purposively,

6 Any enterprise found to be carrying agricultural goods majority of times was considered an ‘agricultural

transporter’.



using relevance of respondents to the required information as the selection criteria. The table

below details the number of interviews conducted for each sub-sector. Table 2.2: Interview details for rail, aviation, and ports sub-sectors

# of interviews Location

Rail 8 Lahore, Islamabad

Aviation 3 Karachi

Ports 11 Karachi, Lahore


Section 3

Transport Indices

14. Before this study, no indices of the transport sector existed in Pakistan. This is largely

a result of lack of required data to develop such indices. While overall output figures exist,

the per unit prices, operating revenues and expenditures, and value added figures are missing

for one or the other sub-sector. Data on road transport, which is the mainstay of the sector, is

the most scant. In some cases, while data exists, it is not disaggregated to the necessary level.

While we have managed to prepare an output index, only weights have been computed for the

value added and price indices since no time series data for value added and prices for

previous years is available.

3.1 Output index

15. We have used the Laspeyres fixed-weighted index to derive our results7. Three

separate indices have been generated: the total transport output index, the passenger output

index, and the freight output index. Relative weights for the index have been computed using

operating revenue estimates for passenger and freight services. Data was available for rail,

but had to be computed for road. The aviation sector has not been factored into the index.

While data on the operating revenue of the air sub-sector is available, but it does not

differentiate between domestic and international output. Data on price per unit, the other

necessary variable to calculate relative weights (in the absence of revenue information) is

altogether missing. Nonetheless, since aviation’s total share in the transport sector is less than

one percent, its omission should have no significant impact the final index.

16. To compute the weights for road, we calculated the price per passenger-km and ton-

km for passengers and freight services respectively from the primary data. Mean values for

number of passengers and tons were used to calculate the per unit price wherever such entries

were missing in the primary data. Then, using published output figures for each of the two

services, we arrived at their respective operating revenues (see annex 1 for an illustration of

the methodology used to compute per unit price estimates).

The formula for the Laspeyres index is as follows:

X

PQ

PQ

PQI ii 0

00

01

= 033022011

1PQPQPQ

X

7 The Lapeyres index is frequently used for intermediate sectors of the economy. Pakistan’s CPI is also

calculated using this index.



= 3

03

2

02

1

01 QX

PQ

X

PQ

X

P

= 332211 QWQWQW

where,

I= Index

P0= Base year price

Q0= Base year output

Q1, Q2, Q3= Outputs in other years

W1,, W2, W3= relative weights in the respective years

The relative weights computed for each sub-sector are provided below:

Box 1: Relative weights to compute output index

Road Passenger 0.5101 Freight 0.4146

Rail Passenger 0.0452 Freight 0.0301

Total 1.00

17. Using time series data on passenger and freight output for the road and rail sectors,

the following indices were generated. The base year was taken to be 2004-058.

Table 3.1 Total, freight, and passenger indices

18. The transport output index has grown steadily

over the past decade. The total, freight and passenger indices track extremely closely with

each other. This points to the similar growth patterns of the passenger and freight services.

Overall growth rates for transport were consistently high in the late 1990s. The year 2000-01

saw a drastic decline. Since then, growth has picked up gradually. Yet, the rate of increase in

the transport index since 2000-01 is much lower than average growth in the late 1990s.

8 While it is not usual to consider the last year computed in an index as a base year, we did not have the

required data for any of the previous years.

Years Total Output Index

Passenger Output Index

Freight Output Index

1995-96 67.28 66.67 68.77

1996-97 71.16 70.60 72.55

1997-98 75.49 74.90 76.97

1998-99 80.36 79.76 81.84

1999-00 85.30 84.64 86.98

2000-01 90.33 89.66 92.02

2001-02 91.10 90.14 93.51

2002-03 93.45 92.96 94.68

2003-04 96.59 95.94 98.20

2004-05 100.00 100.00 100.00

60

65

70

75

80

85

90

95

100

1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05

Total Transportation Index Passenger Transportation Freight Transportation Index



19. A very interesting relationship is witnessed between the output index and national

GDP growth. In the late 1990s, when GDP growth rates

had plummeted, the transport sector’s output growth was at

its peak. The situation has reversed completely since 2000-

01, where GDP growth rates have accelerated but increases

in the transport index have slowed down. The relationship

points to a lag in the movement of the transport index in

comparison with GDP growth. An analysis of the GDP

growth trends since the late 1980s suggests an average lag

of 3-5 years. Two complete cycles can be identified in the

past two decades. Relatively high growth rates in the mid

to late- 1980s and early 1990s were reflected in the

transport index post-1993-94 (not shown in the index). The

slump in GDP growth from 1996-97 to 2000-01 does not

impact the transport index till 2001-02. Also interesting is

the fact that the duration of an economic upturn or downturn in the past two cycles has been

approximately the same as that of the upward and downward movements of transport output.

Figure 1: Plot of GDP growth against transport output index growth (%)

0

1

2

3

4

5

6

7

8

9

10

1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05

Growth Rate GDP Growth

20. The trend in the increase in the output index can be used to predict future growth

patterns. We conduct a simple forecasting exercise for the transport sector’s output index till

2009-10. Two estimates are provided, the first without considering the lag, and the second

with the lag factored in. Forecasts are made separately for the total, passenger and freight

indices. While a static average of the last three years has been taken to forecast growth of the

total and passenger indices (without lag), for the freight index, a moving average of the last

four years has been used to compensate for the fluctuation in the past trend. Our forecasts

suggest that passenger services are likely to grow at a faster pace than freight services. Such a

trend is already underway, as confirmed by our survey results. The majority of the enterprises

transporting both goods and passengers have witnessed an increased share of revenues

flowing from passenger services in the past three years. Owing to minor difference in per unit

prices between freight and passenger carriers (see discussion on prices in section 3), this

could reasonably be expected to be a result of increased passenger volumes.

21. The dotted line in the chart below represents the potential change in the forecasted

growth trends were the lag element factored in. It has only been depicted for the total

transport index. The higher forecast comes from our expectation of an upturn in the transport

sector within the next two years. This is borne out of the fact that national GDP growth rate

Table 3.2: Annual growth rates of transport output index and national GDP

(%)

Year Output Index

growth

GDP growth

1996-97 5.8 1.7

1997-98 6.0 3.5

1998-99 6.4 4.2

1999-00 6.2 3.9

2000-01 5.9 2.0

2001-02 0.8 3.1

2002-03 2.6 4.7

2003-04 3.4 7.5

2004-05 3.5 8.6



have been remarkably high since 2002-03. Given the average lag of 3-5 years, one should

witness an accelerated positive movement in the output index in the near future. The lagged

line has been included in the chart simply to indicate the higher growth trend. It has not been

calculated precisely. Time series data stretching back at least 5-6 complete economic cycles

is required to conduct such an analysis.

Figure 2: Forecast for output index movement

60

70

80

90

100

110

120

130

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

2008

/09

2009

/10

Total Transportation Index Passenger Transportation Index Freight Transportation Index

3.2 Weights for value added index

22. No value added index could be created owing to the lack of time series data on

operating revenues and costs for the transport sub-sectors. However, utilizing our sample

data, we have computed relative weights for the road sub-sector, using 2004-05 as the base

year. Both rail and aviation have been eliminated since cost estimates disaggregated by

passenger and freight services were not available. For road, total per annum revenue and

equivalent costs were calculated using per trip revenue and cost estimates and adjusting for

the number of trips conducted in a given year per route. The revenue and cost estimates (on a

per-km basis) were used to derive relative weights. These are provided in the table below: Box 2: Relative weights for value added index


Total 1.00

23. As for the output index, the relative weight for passenger services comes out to be higher

than that for freight. However, the difference is quite small, suggesting comparable value added

potential of freight and passenger services.

3.3 Weights for price index

24. Only weights for the road sub-sector are generated to allow computation of a price index

in the future. Reasons to exclude rail and road, and for not being able to create an actual index are



the same as those stated in the discussion on value added weights. For the price index, the per km

price for passenger and freight services is calculated using the sigma total of the price and

distance traveled in our sample. The variation in tonnage and passenger volumes has not been

considered owing to the lack of variation in our sample (with respect to unit passenger and freight

volume). Weights for the price index are reported below:

Box 3: Relative weights for price index


Total 1.00

25. The weights are higher for passenger services in this case as well. However, the

difference is even smaller than for the value added index. This is consistent with our per unit

price estimates for freight and passengers generated from the sample data (see section 3). These

have turned out to be similar.

3.4 Tackling scarcity of data in future attempts

26. The indices computed should be interpreted cautiously. Data sets have been combined,

and in places mean values have been used to fill missing data. Lack of variation in the load

factors of timber carriers (price and cost data has come from the timber industry data set) would

have also skewed the weights slightly, although the impact is likely to be small. Moreover, the

lack of accuracy of data on loaded weights, number of passengers, and the operating hours, might

also have raised the error percentage marginally.

27. Since the domestic commerce survey is planned to be an annual exercise, there is a need

to ensure that all relevant information is gathered annually. Nationally representative figures for

revenues, costs, per unit prices, tonnage, average number of passengers by vehicle type, and other

such variables needed for computing indices must be collected. A much larger data set should be

gathered, with a proportionate mix not only between freight and passenger services, but also

among the various sub-sectors within each service. It would be highly interesting to have a

detailed index that distinguishes among agricultural, industrial and other commodity carriers.

Passenger services could also be divided into inter-city and intra-city transport. Other such

disaggregations could be thought of. Collecting such information will allow for the formulation

of comprehensive time series data set over the years. Such data could also be used to generate

other indices such as tonnage, among others.

28. Data on rail and aviation is also incomplete. Aviation data must be differentiated by

domestic and international services. Currently, no such data exists for operating revenue and

costs. In fact, only Pakistan International Airlines Corporation’s (PIAC) statistics are readily

available, but those too are at an aggregated level. Moreover, there are no estimates for the per-

unit price for domestic aviation services in the country. The same is true for rail, although rail

services do provide operating revenues, prices and total output figures that are disaggregated for

freight and passengers. No information is available for equivalent disaggregated costs however.


Section 4

Road transport 4.1 Output 29. Road transport constitutes the backbone of Pakistan’s transport system. The road sub-

sector comprises 96 percent of the total freight services and 90 percent of the total commercial

passenger services in the country9. The following table provides the overall ton-kms and

passenger-kms traveled by road over the past decade. The annual growth in output rates closely

approximate the increase in the total transport index discussed earlier, thus pointing to the

overbearing importance of road transport for the sector as a whole. The similar pattern of growth

for passenger and freight industries over the stated period is also obvious. Table 4.1: Total passenger and freight output for road

Year Passenger traffic (Million Passenger-km)

% change Freight (Million Ton-km)

% change

1995-96 154,566 5.8 79,900 5.5

1996-97 163,751 5.9 84,345 5.6

1997-98 173,857 6.2 89,527 6.1

1998-99 185,236 6.5 95,246 6.4

1999-00 196,692 6.2 101,261 6.3

2000-01 208,370 5.9 107,085 5.7

2001-02 209,381 0.5 108,818 0.2

2002-03 215,872 3.1 110,172 1.2

2003-04 222,779 3.2 114,244 3.7

2004-05 232,191 4.2 116,327 1.8 Source: Government of Pakistan, Pakistan Economic Survey 2005-06.

4.2 Price, Cost, and profit margin estimates 4.2.1 Freight services

30. An analysis of the price statistics on commercial goods transport shows some interesting

features. The mean prices for the major transport routes highlight two facts worth noting. First,

there is a substantial difference between inward and outward rates. For example, the inward

movement from Karachi to Lahore costs PKR 57,000, while the mean outward charge for the

same route is PKR 27,500, an amount less than half of the inward costs. Second, such a

difference is only applicable to the port city of Karachi. Goods transported to other border towns

like Quetta, from where part of the trade between Pakistan and Afghanistan and the Afghan

Transit Trade (ATT) facility flows, does not experience such variations in transport charges. The

mean charges for Quetta-Lahore and Lahore-Quetta for instance, are almost the same. In absolute

terms, the per ton per km prices in Pakistan turn out to be extremely low.

9 Government of Pakistan, Pakistan Economic Survey 2005, 2006.



Table 4.2: Freight prices for major routes PKR

Routes Mean price Price/ton/km

Peshawar to Rawalpindi 7000.00 1.14

Peshawar to Lahore 8945.00 0.57

Peshawar to Karachi 18666.67 0.30

Peshawar to Quetta 22666.67 0.38

Lahore to Karachi 27500.00 0.58

Karachi to Lahore 57000.00 1.19

Lahore to Quetta 40000.00 0.90

Quetta to Lahore 41000.00 0.92

Karachi to Rawalpindi 58000.00 1.38


31. It is important to mention that our results are somewhat lower than existing estimates. To

some extent, the difference could be attributed to our data set being specific to softwood

transport, where load factors on average are higher than other industries. Still, our estimates are

realistic for two-axle and three-axle rigid trucks, which constitute two thirds of the entire truck

industry. In order to confirm the accuracy of our findings, we conducted a simple verification

exercise in Rawalpindi, Lahore, and Jehlum, and found out estimates to be fairly precise for

trucks carrying weights between 35 and 50 tons.10

32. Transporter costs for goods per route are fairly low as well. What is interesting to note is

that even in the case of costs, there is a marked difference between inward and outward traffic

from and to Karachi. While counterintuitive, such a scenario is largely a result of the additional

costs associated with heavily-loaded vehicles traveling inward. As the majority of the outward

traffic moves with lower load factors, bribe costs, permit fees, overloading fines, and fuel costs

are lowered substantially. Among the various costs incurred on all routes mentioned, data

suggests that on average, fuel costs constitute a staggering 63.49% of the total costs incurred per

trip. This proportion has increased in recent years owing to the hike in fuel prices. Table 4.3: Freight transporter costs for major routes

11

PKR

Routes Mean cost Cost/ton/km






Quetta to Lahore 18000.00 0.40

Karachi to Rawalpindi 40000.00 0.69


10 We simply contacted a handful of transport services in the three cities to get price quotes for the routes

included in this analysis. The cities were not selected through any sampling procedure since our objective was only to roughly confirm our estimates.

11 The routes mentioned here are less than those mentioned in table 4.2 (prices) since we could not acquire complete information for all routes.



Figure 3: Fuel costs relative to total cost (%)

0%

10%

20%

30%

40%

50%

60%

70%

Fuel costs Other costs


33. Naturally, the gross profit margin reflects the trends in the prices and costs of freight

transport. Consequently, the profit margins on inward routes are relatively high. Margins on

relatively shorter routes such as Peshawar-Rawalpindi, and outward routes are substantially

lower. The profit/ton/km for outward routes is minimal. On the Peshawar-Karachi (outward)

route, the profit/ton/km is lower than the profit margin for the Karachi- Rawalpindi (inward)

route by a factor of 17. Table 4.4: Profit margins estimates for freight carriers (PKR)

Routes Mean profit margin Profit/ton/km






Quetta to Lahore 23000 0.52

Karachi to Rawalpindi 18000 0.31


4.2.2 Passengers

34. Passenger fares (prices) are fixed and do not vary between inward and outward traffic.

The per passenger fares reflected here are mean values for a variety of transport vehicles12

.

However, as the data shows only buses with seating capacity of more than 30 were captured

in the sample. This is because most of the routes we have considered are above 400 kms in

distance and thus involved larger vehicles. The price/passenger/km estimates fall within the

lower and upper bounds of the price/ton/km for freight for the same routes. However, there is

less variation in per unit passenger fare estimates across routes than was witnessed for

freight.

12 While ideally one would have liked to see these differentiated by seating capacity of vehicles, we have not

managed to obtain information at such a disaggregated level.



Table 4.5: Passenger fares for major routes (PKR)

Routes

Mean Price/Passenger

Mean Price/Passenger/Km

Karachi To Rawalpindi 1000 0.64

Karachi To Muzafarabad 1000 0.59

Peshawar To Lahore 250 0.57

Quetta To Karachi 500 0.70

Rawalpindi To Lahore 220 0.80

Rawlapindi To Peshawar 75 0.45 Source: Primary data analysis

35. Our cost estimates have clearly suffered from respondent bias, as at least two routes

are showing a net operating loss. The only reasonable estimates available are those for

Karachi-Rawalpindi, Karachi-Muzaffarabad, and Rawalpindi-Lahore. Per passenger costs

incurred by transporters as a percentage of the per passenger fares charged are much lower

for longer routes. Consequently, the longer routes have substantially higher per passenger

profit margins. This is reflected in the figures for profit margins/passenger/km. Table 4.6: Passenger transport cost and profit margin estimates (PKR)

Costs

Profit Margins

Routes Mean

Cost/Passenger Cost/Passenger/Km

Mean Profit /Passenger

Profit Margin/Passenger/Km

Karachi To Rawalpindi 515.83 0.33

484.127 0.31

Karachi To Muzafarabad 571.43 0.03

428.57 0.25

Peshawar To Lahore 273.81 0.63

-23.81 -0.05

Quetta To Karachi 714.29 1.00

-214.29 -0.30

Rawalpindi To Lahore 150.79 0.55

69.21 0.25

Rawalpindi To Peshawar 70.71 0.42

4.285714 0.03 Source: Primary data analysis

4.3 Time estimates

36. As is to be expected, the mean times taken for any given route are much lower for

passenger vehicles than for commercial goods carriers. The former is higher by a factor of

1.5-2 for most routes. The average speeds of passenger vehicles fall in the range of 55-71

km/h, although the estimate for the Karachi-Rawalpindi route seems somewhat exaggerated

given the poor condition of the roads in Sindh. Speeds of freight carriers average between 28

and 40 km/h. In absolute terms, these are extremely low. Our findings conform with existing

estimates which point to Pakistan’s transportation times over long distances to be twice as

long as the equivalent times in Europe or East Asia13

. Average speeds for freight carriers in

Pakistan are lower by a factor of 2 to3 than in Europe, where speeds approximate 80-90

km/h14

. The Karachi-Rawalpindi route registers the highest average speeds for goods

transport as well. This is despite the fact that traffic density on the N-5, the major transport

13 World Bank, “Unlocking Pakistan’s Potential”, Presentation on the Indus Trade Corridor, 2005. 14 World Bank, “Pakistan Transport Sector: Overview”,

<http://web.worldbank.org/WEBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/EXTSARREGTOPTRANSPORT/0,,contentMDK:20699058~menuPK:869060~pagePK:34004173~piPK:34003707~theSitePK:579598,00.html> (accessed on 16 August, 2006).



link between Punjab and Sindh, is one of the highest in the country15

. This anomaly begs

further investigation.

Table 4.7: Estimates of times taken for transportation

Passenger Goods

Routes Distance

Mean time/route

(hours)

Average speed (km/h)

Mean time /route

(hours) Average speed

(km/h)

Karachi To Rawalpindi 1567 22 71.23 38.67 40.53

Karachi To Muzafarabad 1709 27 63.30

Rawalpindi To Lahore 275 5 55.00

Rawalpindi To Peshawar 167 3 55.67 5.75 29.04

Peshawar To Lahore 436 7.5 58.13

Lahore to Karachi 1292 45 28.71

Lahore to Peshawar 436 11.25 38.76


4.4 Characteristics of the Road Sub-sector 4.4.1 Road Network and Administration

37. Currently, Pakistan’s road network is 258,340 km in length. Approximately 165,762

km are of the high-type variety and the remaining 92, 578 km are of low-type variety16

.

Nearly 60 percent of the network is paved17

. There are 14 National Highways (8,600 km), 5

motorways (767 km), and 2 Strategic Roads (207 km)18

. The motorways and highways

comprise only 3 percent of the total road network. However, 80 percent of the commercial

traffic is dependent on them19

. The 1,760 km Karachi-Lahore-Peshawar (M9/N5) serves as

the main domestic artery.20

With regard to inter-city transport, the road section between

Rawalpindi and Lahore along N-5 has the heaviest traffic.

Table 4.8: Transport density estimates (2005)

National Highway Code Road Section

Traffic volume (No. of

Vehicles)

Increase 2005/1995

(%)

Composition (%)

Car Bus Truck

N-5

Peshawar-Rawalpindi 12,827 1.31 39.1 25.2 35.7

Rawalpindi-Lahore 17,287 1.56 47.7 17.9 37.4

Lahore-Multan 8,080 1.01 28.6 16.1 55.3

Multan-Sukkur 6,814 0.75 9.8 9.6 80.6

Sukkur-Hyderabad 7,332 N.A. 19.6 12.0 68.4

N-25

Hub-Khuzdar 1,733 1.17 16.1 21.2 62.7

Khuzdar-Quetta 3,813 1.32 21.3 26.3 52.4

Continued…

15 Japan International Cooperation Agency (JICA), National Transport Research Centre and Ministry of

Communications Government of Pakistan, “Pakistan Transport Plan Study in the Islamic Republic of Pakistan. Final Report”, Nippon Koei Co., Ltd. Almec Corporation, 2006.

16 Government of Pakistan, Pakistan Economic Survey 2005-06.

17 Japan International Cooperation Agency, 2006. 18 Ibid. 19 Government of Pakistan, Pakistan Economic Survey 2005-06. 20 Asian Development Bank, “Proposed Multitranche Financing Facility and Loan to Islamic Republic of

Pakistan: National Highway Development Sector Investment Program”, Report and recommendations of the President to the Board of Directors, Project No. 37559.

http://www.finance.gov.pk/survey/sur_chap_05-06/14-transport%20communication.pdf



National Highway Code Road Section

Traffic volume (No. of

Vehicles)

Increase 2005/1995

(%)

Composition (%)

Car Bus Truck

N-35

Hasanabdal-Abbotabad 8,112 1.46 44.7 34.0 21.3

N-40

Lakpass-Noshki 916 1.66 18.7 27.0 54.4

N-50

D.I.Khan-Zhob 238 6.46 22.7 23.9 53.4

N-65

Hacobabad-Sibi 2,997 1.03 14.7 21.1 64.2

N-70

D.G. Khan-Loralai 1,392 1.31 11.7 17.8 70.4

N-55

Peshawar-D.G.Khan 7,452 1.36 33.4 31.7 34.9

D.G. Khan- Jacobabad 1,924 1.09 11.7 23.5 64.8

Jacobabad-Hyderabad 1,353 0.49 30.6 39.5 29.9 Source: Japan International Cooperation Agency, 2006.

4.4.2. Structure of the Road Sub-sector

38. Large numbers of individual owners providing ‘for hire and reward’ services

dominate the trucking industry. Survey results depict that the vast majority of businesses are

organized as sole proprietorships. Partnerships, while less prevalent, are a more favored mode

of organization, especially of enterprises that transport non-agriculture commodities. Most

partnerships consist of enterprises being run by two individuals with a few businesses having

as many as four to five partners. Modalities for sharing of profits vary between distributing

profits according to size of investment of each partner and dividing gains equally. Majority of

the firms opt for the former. The mean percentage share of the biggest partner comes out to

be 32 percent. Property rights do not appear to be a problem. Ninety-three percent of the

respondents stated that the ownership of their vehicles was clearly defined.

Figure 4: Type of Ownership in the truck industry

85%

1%

11%

2%1%

Proprietorship(sole/one owner) 1 Partner 2 Partners 4 Partners 5 Partners

Source: Primary data analysis.



39. Majority of the businesses are small,21

employing less than 10 employees on average.

Yet, vast majority of firms employ full-time paid staff. Only 8 percent of businesses surveyed

had hired part-time personnel. None of these were large firms. An interesting revelation is the

relatively low number of family workers in transport enterprises, a highly unusual situation

for an industry that is predominantly informal in nature. The few family workers that are

present are crowded in small enterprises transporting freight. Passenger services tend not to

have family workers. Figure 5: Relative size of firms in the road industry

0%

10%

20%

30%

40%

50%

60%

70%

Small Medium Large


Table 4.9: Type of workers in the transport industry (%)

Small Medium Large Full Time 51.1 90.5 100.0

Part Time 7.6 9.5

Full time family workers 30.5

Part time family workers 10.7

Total 100.0 100.0 100.0 Source: Primary data analysis

40. Firms in the road sub-sector have yet to fully embrace automation in their day-to-day

functioning. Hardly any enterprises currently use either a website or e-mail to interact with clients

and suppliers. A very small proportion of the firms use a computer regularly as part of their work.

This is interesting given the relatively high level of education of transport owners (see section on

“owners’ previous experience and skill level). It points to the fact that the make-up of the road

industry does not incentivize automated services in any way. Arguably efficiency gains are

comprised due to lack of automation.

41. There is also a significant gap between business services required by a firm and the actual

services being used. Engineering, legal, marketing and insurance services were cited as being

highly sought after. While enterprises largely fulfill their engineering and to an extent, legal

needs, marketing, insurance and accounting requirements largely go unentertained. Less than a

quarter of the firms develop an annual financial statement to summarize the operations of the

establishment. Companies engaged in transporting passengers are relatively more particular in

preparing financial statements. Punjab based enterprises turn out to be more organized than firms

in Sindh, as the per firm usage of such services is much higher in the province.

21 Small=<10 employees; Medium= >10<25employees; Large= >25 employees



Table 4.10: Gap between business services required and used

Needed (% of respondents saying yes)

Used (% of respondents saying yes)

Engineering Services 63.4% 61.5

Legal Services 51.2% 41.0 Marketing Services 43.9% 26.8

Insurance Services 43.9% 20.5

Accounting Services 22.0% 5.1

Management consultants

19.5% 12.8

Information Technology Services

2.4% 0


42. Most transporters have no marketing mechanism to speak of. Word of mouth is by far the

most predominant marketing tool used by the transporters. Only a few businesses use marketing

agents. Majority of these are passenger services. As for the clients, most of them usually end up

contacting the concerned transporter directly. Use of agents or transport ‘addas’(hubs) is not as

common. This could be a result of a client being more comfortable with a previously tried

transporter, or a way to avoid the small fee transport agents change for acting as middlemen.

Responses were categorical in pointing to the absence of any organized database through which

particular transporters could be accessed. However, many respondents maintained that large

companies have an advantage due to a greater human and financial capacity. On an optimistic

note, most enterprises are conscious of the need to streamline the communication modalities by

developing standard operating procedures for the industry.

43. Interestingly, the role of the local transport associations turns out to be greater than

expected. Almost three-fourths of the firms included in the survey were found to be members of

transport associations. A higher proportion of Punjab based enterprises tend to be members of

transport associations than their counterparts in Sindh. Transporters of agricultural commodities

are more active in associations in their area of operation as compared with transporters of non-

agricultural goods and passenger services.

44. The largely traditional patterns of organization of the transport industry are obvious from

the above discussion. Such an industrial structure results in the lack of standardization of the

quality of road transportation services. Existing literature suggests that clients in general receive a

level of service commensurate with the amount they are willing to pay. Shippers of low-value

goods are more price sensitive and depend on the less reliable services of the spot market. Clients

shipping higher value goods usually tend to have formal arrangements22

.

4.4.3 Composition of the Freight Market

45. As mentioned, road transport caters to 96 percent of freight traffic. The private sector is

the dominant player and handles 95 percent of the total freight23

. Ballast, gravel, stone, cement,

fruit, fertilizers and wheat are the most important commodities in terms of tons transported by

trucks24

. The transport volume of fruit is the highest in terms of ton-kms25

. The importance of

basic manufactures and general merchandise has steadily increased over the years.

22 World Bank, “Pakistan-Transport Competitiveness in Pakistan: Analytical Underpinning for National Trade

Corridor Improvement Program”, Energy and Infrastructure Operations Unit, South Asia Region, 2006. 23 Asian Development Bank, “Proposed Multitranche”, 2005. 24 Japan International Cooperation Agency, 2006. 25 Ibid.



Figure 6: Share of road freight trips by commodity type (%)

0

5

10

15

20

25

30

35

40

Agriculture, Food

& Animal

Mining &

Quarrying

Raw Materials &

Bulk

Manufactures

Fuel & Lubricants Basic

Manufactures &

General

Merchandise

1982 (NTRC-65) 1990 (NTRC-155) 1998 (NHA-1998)

Source: World Bank, “Transport Competitiveness”, 2006.

46. Despite the limited availability of refrigerated vehicles, perishable goods such as

fruits, vegetables, meat, eggs, and milk, among others are transported over long distances by

road26

. Yet, the country’s true potential to trade fresh foods is severely undermined due to the

lack of an adequate temperature controlled transport system. The existence of specialized

haulage, customized to meet specific market requirements, while existent, only caters to a

miniscule percentage of consignments at the very high-end of the value ladder27

. According

to survey findings, the incidence of loss or damage to perishable items is fairly high. The

majority of respondents declared that 10 percent of their consignments ended up having such

problems. Key reasons cited for the losses, in order of importance, were long travel times due

to poor transport infrastructure, poor packaging, unhygienic carrying conditions, and

inadequate facilities (temperature control, etc.). The concern about packaging is exaggerated

in the case of Punjab, as compared with Sindh. Figure 7: Reasons for Damage to Perishable items

10%

17%34%

39%

Inadequate infrastructure Unhygienic conditions

Long travel times due to poor transport Poor packaging


47. Lack of prevalence of insurance practices exacerbates the problems of transport

related losses in general. The industry lacks both cargo insurance and consequential third

26 Japan International Cooperation Agency, 2006. 27 World Bank, “Transport Competitiveness”, 2006.



party liability insurance28

. Our survey points to a mere 10 percent of clients who have some

form of insurance coverage. Coverage is normally obtained through brokers or freight

forwarders. The option of holding the trucker responsible for damage/loss does not exist.

Consequently, shippers push for the need for freight transport operators to be registered as it

would assist in allowing carrier responsibility for cargo loss/damage and render them less

dependent on the brokers29

. Interestingly, we found that in cases where insurance coverage

was obtained and a claim filed, no major problems in settling claims were experienced. In the

event of a dispute, the vast majority of enterprises utilize an informal resolution mechanism

or look towards the dispute resolution mechanism of the local transport associations. Only 12

percent of companies considered lawsuits as a viable means of settling their disputes.

Figure 8: Preference among available dispute settlement mechanisms

12%

41%

47%

Law suit Transport association has dispute

An informal mechanism is operational


4.4.4. Financing and Contractual Arrangements

48. Cash is the predominant mode of payment in the road transport industry. Only 33

percent of the enterprises buy their inputs on credit. The majority of transporters even buy

vehicles either solely on cash payment or through some combination of cash and credit. Very

few companies were found to have purchased vehicles solely on credit. Companies based in

Sindh typically purchase more of their inputs on credit as compared with Punjab based

businesses. Likewise, companies that transport passengers purchase significantly more of

their inputs on credit compared with enterprises transporting commercial goods. As for the

payment modalities related to transporting consignments, the use of cash is equally

predominant. Nearly 85 percent of the respondents suggested that transport deals are paid for

in cash. A number of enterprises, which do conclude transport deals on credit, reported

problems with clearing credit dues. Majority of businesses usually have to wait for an

extended period of time to clear credit accounts.

Table 4.11: Mode of payment of transport deals

Percent

Cash 86.6

Credit 11.3

Other 2.1 Source: Primary data analysis

28 Ibid. 29 Ibid.



Table 4.12: Average time to have credit cleared?

# of Days Percent

1 thru 8 40.0

10 thru 18 22.2

20 thru 30 26.7

45 thru 60 11.1 Total 100.0


49. As for arrangements to transport goods, various forms of contractual modes are

functional in the industry.30

Companies based in Punjab typically engage in contract

arrangements more often Sindh based enterprises. Almost 50 percent of contracts are simply

statements written on plain paper and signed by both parties. Other contract forms include

receipts, arrangements written on stamp papers and signed by both parties, witnesses included

in the contract, ‘bilty’, and verbal agreements in the presence of witnesses. In addition, a

small minority of firms still operate without any contract arrangements what so ever. The

latter is usually confined to arrangements between clients and transporters with an established

professional relationship. In cases where no contract exists, the transaction is certified by

paying in advance, or based on a system of honor where a mutual verbal understanding holds

sacrosanct status.

50. Most transporters are enthusiastic about the ability of contracts to protect them from

being cheated or to allow them to challenge any dispute through the legal system. Other risk

mitigating factors focus mostly on informal social linkages between actors within the sector.

These include obtaining references before trading with a client and holding agents

responsible for ensuring payments. Transporters tend to rely heavily on the reputation of

clients. Table 4.13: Respondent views on Various Contractual Statements

Strongly agree

Agree Disagree Strongly Disagree

Must rely on the reputation of those I enter into agreement with

49.5% 40.7% 9.9%

A contract will protect me from being cheated

24.2% 56.0% 19.8%

The legal system will uphold my contract and property rights in business disputes

12.1% 58.2% 27.5% 2.2%

People from other community/biradari groups are more likely to cheat me

6.6% 31.9% 52.7% 8.8%

People from other cities are more likely to cheat me.

8.9% 26.7% 54.4% 10.0%


4.5 Determinants of Growth in the Road Sector

51. According to the survey results, 96 percent of transport enterprises observed an

expansion/improvement in their business over the last year. A greater proportion of passenger

services reported to have expanded. Forty-four percent of the large enterprises in the transport

industry have branches in more than one location with most operating in either the same

town/city or in a different town/city of the same province. Within the past twelve months, 26

percent of enterprises invested in their companies, a reasonably high figure for a largely

30 Responses received on survey questions relating to contractual arrangements focused on freight only.

Passenger services are thus not addressed in this discussion.



disorganized sector. The confidence in the sector and the potential for further growth is

reflected in the fact that 70 percent of enterprises are operating at full capacity. Clearly, a

number of ‘push factors’ must be at play to ensure the remarkable growth in the road sub-

sector. Our analysis points to infrastructure development and a competitive environment as

key drivers of growth. Certain aspects of these drivers however, can also act as constraints in

some cases.

52. Quite to the contrary, empirical results also point to the presence of several constraints

that have prevented the sector from reaching its full potential. All respondents pointed to the

presence of major hindrances to growth in the sector. The most important constraints

highlighted include the taxation and regulation system (licensing, permits, etc), law and

order, lack of access to finance, quality of public services (electricity, communications), and

corruption. Others that are obvious from literature are the low education/skill levels of

enterprise managers and miscellaneous governance concerns. In the discussion below, we

discuss the positive and negative determinants of growth, and the role each one plays in the

road sub-sector. We only focus on factors for which information was either generated through

the domestic commerce survey or sufficient knowledge could be borrowed from existing

literature. Figure 9: Key Constraints to Growth

0%

5%

10%

15%

20%

25%

Taxation and

regulation

systems

Quality of

public

services

Lack of

access to

finance

Lack of clear

regulations

for property

rights

Corruption Law and

order

situation

4.5.1 Infrastructure Issues

53. Pakistan’s road infrastructure development has been remarkable in some ways. The ever

expanding road network and the relatively better infrastructural conditions, as compared with rail

have played a significant role in the rapid increase of road traffic. Pakistan’s Normalized Road

Index31

of 415 is amongst the highest in the world32

. One positive major development has been

the dualization of a significant proportion of the national highway network, which has facilitated

freight movement tremendously.

31 The Normalized Road Index attempts to gauge the adequacy of the stock of paved roads in a country at a

given level of development. Normalizing variables consist of population, population density, per capita income, urbanization and regional characteristics. The Index has been developed by the World Bank and is reported in the World Development Indicators.

32 World Bank, “Pakistan Transport Sector Assistance Strategy Note”, Report No. 24354-PAK, Energy and Infrastructure Unit, 2002.



54. Road infrastructure in the rural areas, which is key to ensuring farm-to-market access, has

improved significantly as well. In absolute terms, rural road expansion, averaging over 2,000 km

annually in the last two decades, depicts that Pakistan has made significant progress in connecting

rural areas with the rest of the country33

. A cross-country comparison of rural roads accessibility

ranks Pakistan favorably.

Table 4.14: Cross-country comparison of rural accessibility

Country Rural Access Indicator (%) Year

Bangladesh 37 2000

Ethiopia 27 1998

India 69 2001

Indonesia 94 2003

Nepal 14 1995

Pakistan 80 2002

Vietnam 73 1997

Yemen 50 1998 Source: Essakali, 2005. Note: A higher percentage reflects greater rural accessibility

55. The 2001-02 Pakistan Integrated Household Survey (PIHS) shows that 85 percent of

the rural population has access to all-weather motorable roads, while 91 percent of the

population has motorable access.34

Paved access however, is only available to one third of

rural population. Out of the four provinces, Punjab has the highest access rate35

. Seasonal

inaccessibility is not a significant constraint for most parts of Pakistan either. The extreme

roughness of driving over rocky terrain and the challenges of driving through sand however,

raise inaccessibility and add to time and cost estimates. One other concern is that provincial

disparities notwithstanding, the nearest transport service, on average, lies 8.2 km away from a

village36

.

Table 4.15: Transport Access and Service Availability in Rural Pakistan. Proportion of

rural population with all-weather

motorable access

(%)

Proportion of rural

population with

motorable access

(%)

Proportion of rural

population with paved

access

(%)

Proportion of rural population with bus/wagon

stop within village

(%)

Average distance to bus/wagon stop for

rural population without stops within

village

(km)

Punjab 91 (92) 95 (95) 76 (78) 66 (66) 3.8

Sindh 84 (85) 86 (86) 63 (63) 83 (83) 4.1

NWFP 80 (82) 86 (88) 68 (70) 62 (63) 5.7

Balochistan 72 (64) 86 (84) 27 (23) 74 (69) 30.9

Other regions 57 (58) 84 (80) 31 (29) 69 (73) 4.9

Pakistan 85 (81) 91 (89) 68 (62) 69 (70) 8.2

Source. Federal Bureau of Statistics, PIHS 2001-02. Numbers in () show data for communities or villages instead of population.

56. Despite the reasonably optimistic outlook, one cannot be oblivious to the need to

further enhance rural-urban connectivity. The overbearing importance of adequate rural

transport infrastructure is evident from its correlation with access to health and education

services.

33 M.D. Essakali, “Rural Access and Mobility in Pakistan: A Policy Note”, Transport Note No. TRN-28, The

World Bank, Washington, DC, 2005. 34 Federal Bureau of Statistics, Government of Pakistan, “Pakistan Integrated Household Survey 2001-02”,

Statistics Division, 2002. 35 Ibid. 36 Ibid.



Table 4.16: Selected Human Development Indicators and Road Access (%)

Indicator Villages with all-weather motorable roads

Villages without all- weather motorable roads

Girls Net Primary School Enrollment Rate (NER) 41 27

Bovs Net Primarv School Enrollment Rate (NER) 56 49

Females Literacy Rate (10 years and above) 23 13

Males Literacy Rate (10 years and above) 53 44

Immunization Coveraqe 54 46

Contraceptive Prevalence Rate 19 12

Pre-natal consultation 28 14

Births assisted by skilled attendant 58 39

Births at home 85 91

Post-natal consultation 7 5 Source: Essakali, 2005.

57. While quantitative expansion is being undertaken aggressively, the added liabilities

stemming out of increased maintenance requirements have not kept up with the rate of

expansion. Several highway projects have been undertaken without a corresponding rise in

maintenance expenditures. As a result, significant backlog of maintenance work has caused a

loss of highway assets and has necessitated major rehabilitation or new construction. It is

estimated that 50 percent of the National Highway Authority’s current network requires

major rehabilitation, a task that will cost PKR 35 billion37

. A welcome development in this

regard is the recent shift in the focus of the road development strategy from increasing the

network to expanding the capacity and enhancing the quality of the current network.

58. Lack of adequate maintenance of road infrastructure causes tremendous losses in

terms of time and monetary costs. Interestingly, our empirical findings suggest that freight

carriers view the state of road infrastructure more favorably than passenger carriers, with

most goods carriers terming the road infrastructure as ‘good’ or fair. The relatively negative

perception of the passengers could be attributed to the respondents who manage intra-town

travel services only. They have rightly pointed to the poorer conditions of intra-town

infrastructure as compared with inter-city highways. Poorer conditions are accentuated within

small rural towns. Notwithstanding, almost all respondents (both freight and passengers)

suggested that maintenance problems did add to the carrying cost for enterprises. Average

time lost for non-agriculture goods carriers is highest at 4.7 hours per trip. The equivalent

time losses for agricultural goods and passenger services are 4.2 and 3 hours per trip

respectively. These figures do not reveal much except to establish significant time losses

since ‘trips’ are not specified in length. Given the relatively high mean loss times however,

one could safely assume that these represent long-range distances.

37 World Bank, “Highways Rehabilitation Project,” Project Appraisal Document, Report No. 27281-PAK Energy

and Infrastructure Sector Unit, 2005.



Figure 10: Perception of state of the road network (% of respondents)

0

5

10

15

20

25

30

35

40

45

50

Excellent Good Fair Poor

Passenger Non-Agriculture Agriculture

Figure 11: Average time lost due to condition of roads (hours/trip)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5


59. Losses in terms of time and costs are exacerbated by the aging trucking fleet in the

country. The restrictive industrial and import policies relevant to the road transport sector

have impeded the modernization of the trucking industry. Although local production benefits

have accrued from such restrictions, they have ended up undermining the potential for

transfer of new technology and modernization of the fleet.38

Currently, load capacities of

trucks are increased multifold by modifying truck bodies and axle weights in factories in

Pakistan. Moreover, a common complaint of shippers is the periodic shortages in the

availability of trucks, which is partly a result of increased demand, but partly of the

frequently breakdown of vehicles. The import of used trucks, even 2-axle and 3-axle trucks,

albeit with age and/or other restrictions, is an urgent need.39

Interestingly, the situation is

quite the opposite with regard to passenger services, where the bus fleet, especially that

hauling longer distances has been modernized in the past few years.

38 World Bank, “Transport Competitiveness”, 2006. 39 Ibid.



4.5.2 Competition

60. Pakistan’s road transport sector is one of the most competitive service sectors in the

economy. The trucking industry faces minimal entry barriers, as is evident from the

extremely large number of existing operators and frequent new entrants. More than 25

percent of the companies surveyed were established in the last five years. The age of an

additional 25 percent of the firms was less than ten years. The vast majority of businesses

have been established from scratch, with only a minor proportion either being inherited or

bought as a running business.

61. Majority of the competition for transport enterprises comes from both small and large

private-owned transport companies. On average, enterprises transporting goods have to deal

with more than 25 competitors in their area of operation. Competition for inter-city passenger

services of comparable quality is less severe. Competition levels are reportedly greater in

Punjab as compared with Sindh. The National Logistics Cell (NLC)40

is the only public

sector company in the road transport sub-sector and enjoys preferential treatment from the

government, at least on ATT products, despite its poor services and relatively higher rates41

.

Notwithstanding, it is a minor player in the market, accounting only for about 5 percent of the

total intra-country freight volume42

.

62. Although barriers to entry are minimal in absolute terms, minor irritants include large

capital requirements, corruption, and government tariffs. In Sindh, the level of required

capital was reported to be an especially important concern, perhaps because an extremely

high proportion of the province’s enterprises are ‘small’ and are thus capital constrained. A

few companies surveyed stated that personal contacts in the industry were necessary to enter.

Even fewer reported that the ‘transport mafia’ played a role in restricting new firms from

joining the business. However, such rare experiences (the percentage of respondents

suggesting this was very small) could be discounted in the macro picture.

4.5.3 Regulatory Framework

63. Survey respondents cited regulatory systems and taxation as one of the most

important constraints to growth. The problem is more exacerbated in Sindh than in Punjab.

Firms transporting agricultural commodities are particularly affected by the poor regulatory

systems. Lack of standard operating procedures is one major regulatory issue that authorities

have failed to address. This in large part is a result of the fact that a significant number of

enterprises in the transport sector are not formally registered. Unregistered companies claim

that they are unaware of any requirement to register. The lack of government effort to

formulate and implement a concerted regulation drive is thus evident. Other survey responses

point to the relatively high registration and license fees as reasons for not registering. Yet

others pointed to the fact that there was no incentive or fear of reprisal with regard to

registration. A few enterprises indicated numerous administrative procedures and high tax

rates as reasons for not registering.

40 The NLC was created for emergency transport of wheat and fertilizer in 1978. 41 World Bank, “Transport Competitiveness”, 2006. 42 World Bank, “Pakistan Transport Sector Assistance”, 2002.



Figure 12: Reasons for not registering a transport enterprise (% of respondents)

0

5

10

15

20

25

30

Not Required Registration and

license fee are too high

Need to go through too

many administrative

procedures

Tax rates are too high No penalty if not

registered

Others

Business registered with Gov

64. The second major concern with regard to the regulatory framework is the dated

transport regulations. Regulations that remain most relevant to transport carriers are the

National Highway Safety Ordinance, the 2000 Road Safety Act, and till a few months back,

the 1865 Carrier’s Act. Underpinning most of the regulatory bottlenecks in the road transport

sub-sector are dated legislations. The Carrier’s Act 1865, which governed the carriage of

goods by roads in Pakistan till April 2006, was in dire need of reform. Liability ceilings had

remained fixed at PKR 100 per item43

. Moreover, the Act did not include any incentive

structures designed to ensure conformance with laws and to enhance efficiency levels of

carriers. A draft law, modeled on the CMR Convention 1956 has been under consideration

for some time. The draft law seeks to introduce legislation that is particular to the current

requirements of road carriers and provides them sufficient protection with regard to definite

limits on their liabilities. The draft also pushes for the issuance of electronic documentation.44

For now, Carriage of Goods by Roads (Liabilities) Act No. 21 has taken over from the 1865

Act45

. However, for all practical purposes the regulations of the 1865 Act continue to

dominate the scene. The government, apart from having delayed updating of legislation has

persistently failed to widely disseminate information on changes in legislations and rules

governing the industry. Ideally, any changes should be conveyed to all registered enterprises

to ensure enhanced conformance levels and fair implementation practices.

65. Finally, the lack of regulation and failure to address issues of frequency of

distribution, operation, construction and transport operation on rural routes is also worrisome.

Even though the market naturally offers competitive rates and efficiency, not enough is being

done to regulate such measures. In some areas the provision of public transport is absent

altogether. Few vehicles are sensitive to the cultural needs of female travelers, and this affects

the decision of women to travel. Regulation to eliminate any gender bias is essential for a

greater contribution of women as clients of the road industry, as well as to the overall

economy.

43 Zahid Jamil and Shahid Jamil, “Modernizing Pakistan’s Carriage of Goods Legislation”, National Trade and

Transport Facilitation Committee, 2003. <http:// www.nttfc.org/proceed03/proc03-jamil.htm>. 44 Ibid. 45 ENHESA, “Pakistan Monitoring Reports”, 2007.

<http://www.enhesa.com/enhesa/en/global/country.asp?CountryCode=PK> (accessed on 20 December, 2006).



4.5.4 Governance Issues

66. A major governance bottleneck that permeates every sector of Pakistan’s economy is

the disconnect between policies envisioned on paper and their implementation in practice.

The road industry is no exception. For instance, road safety protocols are completely ignored.

In 1992, Pakistan’s road fatality rate stood at 18.6 fatalities per 1,000 vehicles, reflecting the

highest rate in Asia46

. Economic losses due to lack of safety measures are estimated at over 2

percent of GDP47

. Forty-three percent of rear axle trucks regularly indulge in exceeding the

12- ton legal axle-load limit mandated by the Road Safety Act 2000. Two-axle trucks, which

constitute over 50 percent of truck traffic, have a higher relative frequency of overloading.48

Local truck manufacturers produce wider and elevated truck bodies in order for truck owners

to be able to overload and consequently minimize haulage costs. The tires of overloaded

trucks are also over-inflated. Primary adverse effects of overloading include loss of transport

time for trucks having to be off road for repairs and overloading fines. The National Highway

and Motorway Police, while being mandated to enforce axle load control to prevent

commercial vehicles from overloading, lack retention powers and tend to evade participation

in enforcement issues in which retention and/or legal proceedings appear to be involved.

Box 4: Interaction of road carriers with public sector representatives

Businesses in the transport sector typically have to deal with the National Highway Authority (NHA) and representatives from the local governments. Provincial governments hardly interact with transport firms. Enterprises transporting commodities have greater interaction with the NHA and motorway police while those transporting passengers interact more frequently with local government officials. This could be a result of intra-town travel activities of passenger carriers. For goods carriers, interaction with NHA and motorway policy is mostly due to overloading concerns or vehicle breakdowns.


67. The transport industry, for its part is equally guilty of not engaging the relevant

authorities constructively in order to redress the institutional bottlenecks that cause poor

governance practices. Since the industry erroneously perceives lax implementation of laws to

be in its favor, many enterprises overlook the potential losses due to such laxity and the

macro level impact on the industry in terms of efficiency losses and thus higher costs for

operators.

68. For the most part, transport unions although active, are not effective. There is a high

propensity among transport unions, especially passenger carrier unions, to observe strikes to

soften the government’s stance on any particular issue. This often results in temporary

compromises, but at an exorbitant cost to the economy in terms of stalled economic activities.

Fortunately, strikes do not last long. The mean time per strike, calculated from the survey

responses, was less than a week in duration. In Sindh, the mean strike length is less than three

days. In any case, the country’s trade associations have failed to develop successful

institutional relations with the government, which would present a formal channel for

influencing policies and potentially decreasing trade and transportation facilitation

constraints49

.

46 Asian Development Bank, “Technical Assistance for Regional Initiatives in Road Safety”, Manila. 47 Ibid. 48 For a discussion on overloading of trucks see, Japan International Cooperation Agency, 2006. 49 World Bank, “Trade and Transport Facilitation Project”, 2001.



4.5.5 Access to finance

69. The requisite start-up capital for majority of the firms surveyed fell between PKR

10,000-900,000. Larger enterprises required capital as high as PKR 5-10 million. Enterprises

transporting goods generally have a lower start-up cost requirement than passenger carriers.

Table 4.17: Start-up capital requirements for road transport enterprises PKR Percent

10000 thru 200000 31.1

200000 thru 900000 28.9

900000 thru 1700000 16.7

1700000 thru 5000000 11.1

5000000 thru 10000000 12.2 Source: Primary data analysis

70. Most transport entities require loans to raise resources for the requisite start-up

capital. Currently, access to formal bank loans for commercial road operators is minimal.

Although about half of all the enterprises surveyed maintained a bank account for their

business, only 22 percent had an overdraft facility or line of credit available. No Sindh-based

company reported to have either of the two facilities. Enterprises transporting agricultural

commodities have the least access to such services. Small enterprises are especially

constrained. Conditions on formal loans such as the need for a guarantor, lack of collateral,

bureaucratic banking procedures, and high interest rates, short duration of loans, and high

costs of application act as additional deterrents to accessing formal loans. Such deterrents

have led transport companies not to consider formal loans as a viable option. Survey

responses suggest that majority of companies do not even consider taking loans from the

formal sector. Regardless, the few companies that do receive formal credit do not necessarily

receive the entire loan amount requested. Moreover, these companies have to bear high

interest payment costs on formal loans. Mean per annum interests payments from the sample

data amounted to PKR 20,000, with the maximum record suggesting an amount as high as

PKR 28,000.

Table 4.18: Major Problems in accessing credit (% of respondents)


Guarantor 52.4 48.0 52.6

Bank procedures

23.8 24.0 26.3

Collateral 9.5 20.0 15.8

Other 14.3 8.0 5.3 Source: Primary data analysis

71. By and large, informal avenues such as borrowing funds from friends or family tend

to be preferred. Over 70 percent of the survey respondents had borrowed informally during

2005. The majority of these loans were intended to expand existing enterprises. Only 20

percent of the companies took loans to actually startup a new enterprise. Non-agricultural

freight transporters are an exception, as most of them borrowed for startup capital. Table 4.19: Reasons for acquiring informal loan

Purpose of loan Percent

Startup a new enterprise

20.0

Expand existing enterprise

70.0

Working capital 10.0 Source: Primary data analysis



4.5.6 Travel restrictions due to zoning and law and order situation

72. It is rather peculiar to note that official regulations themselves undermine the potential

gains from the road network expansion and other related investment in transport

infrastructure by imposing artificial restrictions50

on movement. Travel routes are restricted

for transporters both within urban towns and on inter-city routes, amounting to both monetary

and time losses. The average additional costs incurred due to restrictions are higher for inter-

city route restrictions. Mean additional costs in Punjab are much higher than in Sindh.

Transporters of non-agricultural goods face the greatest number of restrictions in urban towns

followed by transporters of agricultural goods. However, additional costs because of the

restrictions were reported to be higher on average for agricultural commodity transporters.

With regard to constrained movement in inter-city routes, transporters of both agricultural

and non-agricultural goods faced many more restrictions than those for passenger services.

73. Like travel routes, permissible times for traveling are also restricted in both urban

towns and inter-city routes. Only goods transporters face such restrictions. These hindrances,

on average, cause about 17 hours to be lost per carrier per month. This estimate needs to be

treated cautiously given the variability in the type of service, routes traveled and the internal

variation in the data. Transporters in Punjab lose significantly greater time on average than

transporters in Sindh.

74. The above restrictions are partly warranted as a means to reduce urban city traffic

congestion and prevent accidents. However, in recent years, as Pakistan’s law and order

situation has deteriorated in terms of a backlash of anti-terrorism policies, security checks,

curfews, and route closures have become excessively frequent. The majority of the

respondents suggested that such ‘artificial’ restrictions have caused additional time losses.

Realistically, any end to these practices is unlikely until the law and order situation improves.

The short-term solution lies in devising better plans to better manage restrictive periods,

perhaps by planning better for ‘sensitive movements’ and increasing operational efficiency in

terms of time spent on physical inspections during security checks.

4.5.7 Owners’ Prior Experience & Skill Level

75. Most existing literature thus far has portrayed education and skill levels of owners of

transport enterprises to be low.51

While we find this to be true for the most part, our findings

are somewhat more optimistic with regard to the existence of management capacity among

owners, and also in terms of education levels of at least half the owners. Admittedly, the story

is highly pessimistic with regard to the actual drivers and conductors.

76. Survey results suggest that owners typically have several years of experience prior to

establishing or acquiring a business in the transport sector. Almost 90 percent of respondents

claimed to have greater than 4 years of experience in the industry before purchasing or

establishing their enterprises. Many had more than 8 years experience. Owners of companies

based in Punjab typically had greater prior experience in the sector compared with Sindh

based companies.

77. Management and technical skills related to the enterprise also existed. However, these

are learned primarily from relatives or friends, by working as an employee in the industry, or

through self-teaching. Formal education and training in the field is practically non-existent,

50 One ambiguity in this section is the type of restrictions being referred to. Survey responses do not

distinguish between various forms of travel restrictions, and thus these need to be taken in the broadest sense.

51 World Bank, “Transport Competitiveness”, 2006.



with an extreme minority of owners having learned through this medium. Therefore, while

skills may be present, the quality of skills could be expected to be fairly low.

Table 4.20: Medium of learning management and technical skills

Percent

Formal Education/Training (Technical Colleges, etc) 1.1

Working as an employee 34.4

From relatives/friends 36.6

Self-taught (TV, book, radio, newspaper etc) 22.6 Association/Group teaching 5.4


78. Perhaps the most interesting finding is the high level of education among 55 percent

of the owners. Over 35 percent of owners surveyed had completed their secondary education

and 19.2 percent had undergone post-secondary schooling. This still leaves a substantial 45

percent who have not gone beyond elementary education. Owners of freight-carrying entities,

especially those who were previously employees in the industry have significantly lower

mean education levels. Those who are uneducated or under-educated do acknowledge that

lack of education is a constraint with regard to: (i) developing marketing strategies; (ii) level

of understanding of tasks assigned; (iii) in adapting to new regulations; and (iv) ensuring

documentary conformance. In addition, despite the owners’ level of education, shortage of

both skilled and unskilled labor (drivers, conductors, etc.) is a constraint to growth.

Furthermore, lack of training institutes for drivers is also believed to hinder the development

of the industry. Companies transporting freight feel more constrained by the lack of training

institutes for drivers than those providing passenger services. Table 4.21: Level of education of enterprise owners

Level of education Percent

Uneducated 8.1

Primary 21.2

Elementary 16.2

Secondary 35.4

Post-secondary 19.2 Source: Primary data analysis Figure 13: Relative importance of constraints due to lack of education (% of respondents)

0

5

10

15

20

25

30

35

40

Documentary

conformance

Level of

understanding of

tasks assigned

Difficulty in adapting

to new regulations

Difficulty in

developing

marketing strategies




4.6 Enhancing efficiency of road transport

79. Given the road sub-sector’s overwhelming importance in the transport industry,

policy measures that manage to correct current constraints would impact the overall economy

tremendously. The incentive for policy makers to ensure well-crafted, and practically

implementable corrective measures is thus obvious. We are not in a position to provide

detailed suggestions on the modalities of various aspects that need revision. Our

recommendations flow directly out of the primary and secondary analysis conducted above.

Most of these are broad, and simply highlight the major aspects, which ought to be the focus

of official policies.

80. For the industry as a whole, a supply chain management approach with an intermodal

transport system attaining optimal productivity, and with each of its segments adapting their

operations to one another should be adopted52

. There is considerable scope for revision of the

regulatory framework directing the sector. The new road transport legislation seeks to address

many of the bottlenecks highlighted in the preceding discussion. Implementation of the

legislation should be strengthened with utmost urgency. There is also a need for the

authorities to ensure wide dissemination of any changes in the regulatory framework. This

could be done through distribution of leaflets/booklets sent directly to offices of transport

agencies or distributed during Transport Association and Chamber of Commerce meetings.

81. More important with regard to transport legislations is the need to tackle the perpetual

dilemma of the policy-implementation disconnect. While the transport sector still lacks an

exemplary policy, a number of other sectors in the economy have managed to produce

noteworthy promulgations. The irony is that none of them actually manage to impact on

ground circumstances, largely due to lax implementation. No quick fix solutions to this

dilemma can be provided. However, a strong political will combined with a transparent

regulatory framework could gradually lead to enhanced efficiency levels.

82. Moreover, measured steps should be undertaken to integrate trucking into the formal

economy. Currently, the government’s approach does not seem to recognize trucking as an

industry by itself. The shear volume of road freight traffic carried by trucks warrants such

recognition. In order to enhance functional efficiency, a revision of the current restrictive

industrial and import policies for vehicles and auto parts is in order. The Government of

Pakistan (GoP) applies excessive customs duties on Complete Built Units and Completely

Knocked Down kits. Moreover, import of second-hand trucks into the country is not allowed.

Not only does the import policy need to be relaxed, but the assembly plants for domestic

trucks need to be modernized. A simultaneous approach on both fronts is required.

83. One way of bringing the industry into the formal economy is by mandating a carrier

registration policy. Through this process, the road sub-sector’s services could be standardized

with relative ease. The government’s ability to ensure quality control would also be

strengthened through such a process. Collection of up-to-date data to feed into future policies

is another advantage of the sector’ shift to the formal economy. This said, realistically, a

registration drive would have to provide sufficient incentives to the transport entities to

register themselves. An incentive mechanism where benefits from registering would

outweigh the costs would be essential for successful implementation of a registration plan.

84. The change in the structure of the industry from a large number of small-scale

enterprises to well-organized large entities competing against one another requires attention

to ‘soft’ management issues such as automation, marketing, and availability of a well trained

labor force. The government could follow-up the registration drive by creating a national

database of freight and passenger services. Under an integrated domestic commerce structure,

52 Peter Faust, “Trade and Transport Facilitation: Global Issues and Highlights”, UNCTAD.



clients of the transport industry could be incentivized to utilize automated services to interact

with transporters. Transport firms could also be provided incentives to automate services,

perhaps by subsidizing their transition. The relatively high level of education of transport

owners should make such a transition simple on the technical front. Meanwhile, the non-

government sector could take the lead in setting up driver training centers, where customer

relations trainings are introduced at affordable costs. Alternatively, this task could be placed

under the Trade and Transportation Facilitation Program (TTFP), which has been

instrumental in conducting trainings for freight forwarders in the past.

85. Road industry’s growth is severely hampered by lack of access to formal sector credit.

A World Bank report has outlined concrete steps that can be taken to redress the situation in

this regard: (i) developing a Truck Leasing Concept with banks; (ii) establishing a revolving

National Guarantee Fund to give incentives to decrease interest to banks; and (iii) developing

a fund to buy and scrap old but operational two-axle trucks in order to provide truckers with

down payments for newer vehicles53

. All of these are pertinent. In addition, given the high

incidence of loss to goods in transit, the effective role of the insurance industry by developing

cargo insurance, third party insurance, and collision insurance into an industrial norm needs

to be increased.

86. Finally, one cannot help mention the need for further development of the road

infrastructure. To be fair, the government has been investing heavily in infrastructure

development projects. That problems still exist is simply a function of the astronomical

increase in the pressure on road transport, a trend that is likely to accelerate as per our

forecasted estimates (see section 3.1). While government efforts need to continue, it is

unlikely that current infrastructural problems will be resolved over the short run.

53 World Bank, “Trade Competitiveness”, 2006.


Section 5

Railways

87. Pakistan Railways (PR) is a subordinate department of the Ministry of Railways. It is

governed by the Railway Act of 1890. In 1997, GoP announced its intention to privatize

PR54

. The plan failed to materialize. Subsequently, in 2004, the Pakistan Railways

Corporation (PRC) was created. The rationale was to grant the entity sufficient independence

to operate and allow it to effectively compete with other modes of transport. Such

independence has not been forthcoming in reality.

5.1 The PR network

88. The PR network consists of 7,791 route-km, 7,346 kms of which are of broad gauge

while the remaining 445 kms are of metre gauge55

. There are 625 stations with 1,043 kms of

total double-track sections and 285 kms of electrified sections56

. Since 1982, no new routes

have been constructed. The Main Line connects the five major stations of Karachi, Multan,

Lahore, Rawalpindi, and Peshawar. Based on their role and degree of significance, the

network is ranked into six categorizes of lines.

Table 5.1: Classification of PR lines (2004-05)

Classification Route-kms

Primary A 2,124 km

Primary B 2,622 km

Secondary 1,185 km

Tertiary 1,416 km

Metre Gauge 439 km

Narrow Gauge (abolished) --- Source: Pakistan Railways Year Book 2004-05.

89. The core railway, comprising the main north-south route and the strategic link to

Quetta, comprises one third of the total network. However, it supports 75 percent of the total

trains and over 85 percent of freight traffic57

.

54 Visit Pakistan Railway’s official website for background information, available at <http://www.pakrail.com>. 55 Ministry of Railways, 2005. 56 Ibid. 57 World Bank, “Transport Competitiveness”, 2006.



Table 5.2: Pakistan Railways: Core and Non-Commercial Networks

Percentage of Network Percentage of Trains per day

Route-km Track-km Passenger Freight Total

Core 33 41 73 86 76

Non-commercial 67 59 27 14 24 Source: Pakistan Railways Year Book 2004-05.

90. The network has 520 diesel locomotives, 23 electric locomotives and 14 steam

locomotives58

. The latter are no longer used in daily services. Sixty-eight percent of the total

locomotives are over-age and require overhaul/replacement59

. In 2004-05, there were 21,556

freight wagons, including 10,491 covered wagons, 5,526 open wagons and 5,216 special type

wagons.60

Recently, 130 flat wagons were purchased from China for container transport. The

total number of passenger coaches is 1,865.61

5.2 Share in the market

91. Rail accounts for less than 10 percent of the total passenger traffic in the country.62

The number of railway passenger-kms began to increase due to motorization at the end of the

1970s, only to decline again in the 1990s. Passenger-kms have followed a similar trend since

the 1990s. During the late-1990s, PR’s passenger output was registering low or negative

growths. Since 2000-01, the service has witnessed quite a remarkable turnaround. In the past

five years, average growth in passenger-kms has been over 5.5 percent per annum63

. In 2004-

05, the average transport density was 8,500 passengers per day. On routes where daily

passenger trains are run, the average transport density stood at 10,600 passengers per day.

Table 5.3: Passenger volume revenue and fare

Year No. of passengers (million)

Total Passenger Kms (million)

Average No. of Kms Traveled per Passenger

1950-1955 average 1955-1960 average 1960-1965 average 1965-1970 average 1970-1975 average 1975-1980 average 1980-1985 average 1985-1990 average 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

78.9 102.7 126.3 130.5 134.1 145.7 113.5

82.3 84.9 73.3 59.0 61.7 66.5 73.7

6,778.5 8,064.0 9,533.6

10,025.2 10,792.2 15,112.0 17,402.6 18,483.2 19,963.7 18,158.0 17,082.3 16,385.1 17,555.4 18,904.8

85.9 78.5 75.5 76.9 80.2

103.7 155.3 224.3 235.2 247.7 289.3 265.5 264.1 256.7

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

68.8 64.9 65.0 67.5 68.9 69.0

19,114.4 18,773.8 18,979.8 18,495.3 19,589.7 20,782.9

277.8 289.4 292.0 273.9 284.4 301.1

58 Ministry of Railways, 2005. 59 World Bank, “Pakistan Transport Sector Assistance”, 2002. 60 Six hundred and twenty nine departmental wagons and 328 brake-vans are not included in these figures.

Japan International Cooperation Agency, 2006. 61 Japan International Cooperation Agency, 2006. 62 World Bank, “Pakistan: Transport at a Glance”, The South Asia Energy and Infrastructure Operations Unit,

South Asia Region, January 2005. 63 Ministry of Railways, 2005.



Year No. of passengers (million)

Total Passenger Kms (million)

Average No. of Kms Traveled per Passenger

2002-03 2003-04 2004-05

72.4 75.7 78.1

22,305.6 23,045.1 24,237.7

308.1 304.4 310.0

Source: Pakistan Railways Year Book 2004-05.

92. In the freight business, rail has an even lower and stagnant market share. Out of the

total transport output of approximately 123 billion ton-kms in the country’s transport sector,64

rail accounts for a mere 5 billion ton-kms65

. As a whole, over the last 50 years, PR has lost its

modal share of freight by 73 percent66

. The trend in freight output has been similar to

passenger output. After registering negative growth rates in the late-1990s, the number of

ton-kms has increased in the last five years at an average of more than 8 percent per annum67

.

Yet, current figures reflect a much-lower growth trajectory from the peak years in the 1960s

and 1980s. Even the current meager market share is largely maintained courtesy of legal

regulations mandating certain public entities to utilize PR.68

Moreover, if freight traffic were

to be confined to just the core network (currently it is also carried out on the non-core

network), freight would be decreased by another 24 percent69

.

Table 5.4: Pakistan Railways: Freight Data

Year Tons carried (Thousands)

Ton-kms (Million)

Average Kms Carried by a Ton

1950-1955 average 9,244 4377.9 477.0

1955-1960 average 11703 5479.8 468.2

1960-1965 average 14156 7212.7 514.4

1965-1970 average 14619 7899.9 550.8

1970-1975 average 12715 7906.7 626.3

1975-1980 average 13367 8598.5 665.3 1980-1985 average 11185 7379.1 666.2

1985-1990 average 10960 7942.6 732.2

1990/91 7717 5708.6 742.3

1991/2 7560 5961.6 792.4

1992/3 7769 6180.3 798.8

1993/4 8036 5938.8 741.7

1994/95 7356 5661.0 772.8

1995/96 6854 5077.4 742.3

1996/97 6380 4607.0 727.1

1997/98 5977 4447.3 745.8

1998/99 5448 3969.5 730.6 1999/00 4770 3753.5 759.3

2000/01 5894 4519.5 771.0

2001/02 5866 4572.7 782.6

2002/03 6180 4819.8 779.8

2003/04 5140 4796.3 781.2

2004/05 5410 5013.5 782.1 Source: Pakistan Railways Year Book 2004-05.

64 This figure is for 2004-05. 65 Government of Pakistan, Pakistan Economic Survey 2005-06, 2006. 66 Asian Development Bank, “Technical Assistance for Transport Policy Note”, TAR: 38028, 2004. 67 Government of Pakistan, Pakistan Economic Survey 2005-06, 2006. 68 World Bank, “The Indus Trade”, 2005. 69 World Bank, “Transport Competitiveness”, 2006.



5.2.1 Value added in the rail sub-sector

93. As is clear from the above discussion, passenger traffic constitutes the bulk of PR’s

operations. Yet, it only accounts for 56 percent of total revenue70

. Unit passenger revenue is

significantly less than average per unit freight revenue. Freight charges cannot be slashed

substantially as freight revenue cross-subsidizes passenger fares. Moreover, the revenue

generated by the small core commercial network is used to support the non-commercial

network, which is twice its length71

. Both passengers and freight cover their direct train-

related operating costs and produce a surplus. Core freight transport produces a surplus

towards access and infrastructure costs. Moreover, even freight on the non-core network

nearly covers its long-run direct costs. Other non-core services operate at a loss.

Notwithstanding, both core and non-core networks run a huge deficit if the long-term train

and track depreciation costs are included72

. Table 5.5: Pakistan Railways: Network Costs FY2004 (PKR million)

Core Non-core

Revenue 10,123 2,663

Train costs 7,579 2,970

Direct short-run surplus 2,544 -307

Access costs 1,489 1,265

Network short-run surplus 1,105 -1,572

Train depreciation 2,455 1,281

Track depreciation 1,720 618

Network long-run surplus -3,070 -3,471 Source: World Bank, “Transport Competitiveness”, 2006.

94. PR’s freight fare is calculated on a commercial basis for each commodity, accounting

for volume, weight, form (type of packing), method of loading, and susceptibility to transport

losses. PR’s annual freight per wagon output stands at a dismal 20073

. By and large, freight

rates are at an advantage in comparison to our estimated rates for road transport. Existing

literature points to rail as being especially cost-effective in terms of long-haul containerized

cargo. Notwithstanding, the PR’s share is still minimal because of the propensity on the part

of the clients to pay higher prices for more efficient services to transport containers. The

following table provides the basic rate scales.

Table 5.6: Pakistan Railways’ Basic Rate Scale for Freight Transport

Distance (km) Rate (PKR per ton per km)

1-250 0.37

250-300 0.28

300-500 0.18

501 and above 0.16 Source : Pakistan Railways Rate Lists

5.2.3 Commodities carried

95. Major commodities carried by Pakistan Railways include petroleum and other non-

dangerous hydrocarbon oils (18.1 percent), chemical manures (9.9 percent) and railway

materials and stores (17.4 percent)74

. Perhaps the biggest reason for the steep decline in rail’s

70 Ibid. 71 Ibid. 72 Ibid. 73 World Bank, “Pakistan Transport Sector Assistance”, 2002. 74 Japan International Cooperation Agency.



importance as a freight carrier is the loss of oil transport as a major commodity. Prior to the

construction of the Karachi-Mahmood Kot oil pipeline, rail was the single biggest transporter

of oil, with transport loads averaging 8-9 freight trains per day75

. While the volume has

reduced to one fourth, the railway freight service has never reoriented itself to the loss of oil

business. Likewise, the growth in ATT activity, which provided significant business to PR,

has also slowed down. This is partly due to trade flows being diverted to Iranian facilities due

to cumbersome procedures at Karachi76

but more so because of a shift from rail to road as the

preferred mode of transport of ATT goods. The NLC now gets priority on this front.77

Table 5.7: Commodity Volume Carried

Name of Commodities Freight Carried (Tons)

Ton-Km

Kms

Iron and Steel Division “A” includes angle, axles, sheets, girders etc

8 6306 788

Sugar 72 56634 787

Paddy and Rice 41 32147 784

Cement 51 39977 784

Oil Division “D” includes vacuum refined edible oil

40 31366 784

Gypsum 23 17972 781

Oil Seeds 201 157031 781

Petroleum and other hydrocarbon oils non-dangerous i.e., having flashing point at above 76 Fahrenheit

1111 867812 781

Coal and Coke for the Public 362 282715 781

Chemical manures (Fertilizers) 609 475451 781

Fire wood 64 49651 776

Ballast and Stone 25 19259 770

Machinery, other than electrical 4 2791 698

Other grains and pulses 4 2713 678

Sugarcane 2 1306 653

Timber 1 470 470

Live-stock 1 429 429

Salt 132 36647 278

Miscellaneous 2069 1686558 815

Total 4820 3767235 782

Departmental Commodities

Coal, Coke and Patent fuel for Railways (including H.S.D. and furnace oil)

253 195120 771

Railway Material and Stores 1067 833914 782

Total 1320 1029034 780

Sigma Total 6140 4796269 781 Source: Pakistan Railways cargo documentation

96. The above table presents an interesting picture with regard to PR’s importance in

carrying agricultural produce. The overall share of agricultural commodities in Railway’s

freight is about 50 tons, which comes to less than 1 percent of the total. Livestock’s share in

the total freight traffic is also minimal. Fertilizers however account for 9.9 percent of the total

freight carried. Thus, while rail’s importance for transport of agricultural outputs in minimal,

it does contribute more substantially to agricultural inputs. Rail’s unimportant role in

transporting agricultural produce is not surprising given the service’s inability to handle

75 Key informant interview. 76 Shaheen Rafi Khan, et al. “Quantifying Informal Trade between Pakistan and India”, Research Report,

Sustainable Development Policy Institute, 2006. 77 World Bank, “Transport Competitiveness”, 2006.



perishable items. Railway does not have any specialized containers to carry such goods and

given the frequent delays, clients often prefer road to carry such goods despite the lack of

temperature-controlled road transport. The few perishable items carried by PR are mainly

transported in passenger trains.

5.3 Constraints to growth

97. A discussion on the key factors behind PR’s dismal performance can be couched in

the theoretical debate on the inefficiency of public sector functioning. The bureaucratic

inertia linked with large public sector organizations is pervasive in the case of PR. The

organization’s management culture is non-commercial and thus functional efficiency has

always been a low priority. Like most other mega-organizations in Pakistan’s public sector,

PR suffers from tremendous political interference both in deployment of personnel and in

day-to-day management. Moreover, PR’s senior management has no incentives, or authority

to inculcate corporate governance practices in the entity. An excessively cumbersome

operational set-up and lopsided priorities have led to sub-par outcomes.

98. Lack of a principal focus on commercial viability has meant that PR has primarily

remained a passenger railway services. Internally, the management views PR as a public

service, which seeks to provide subsidized transport to citizens.78

The fact that Pakistan lacks

a fixed operation diagram for freight trains is thus not surprising. Freight trains are operated

in intervals between the running of passenger trains, which are prioritized. The former are

often forced to stop and wait for the passing and exchanging of passenger trains. Moreover,

freight services receive the less reliable locomotives and lose their locomotives if passenger

locomotives fail, an occurrence that takes place three times daily on average79

.

99. Moreover, PR’s infrastructure and rolling stock have become aged and decrepit. The

majority of freight wagons are extremely old and perform poorly. Some wagons are

restrained to operation speeds of less than 55 km/hr.80

Locomotives are also outdated.

Moreover, the snailish pace of freight trains reduces the locomotive utilization ratios

tremendously. A total of 14,570 bridges are utilized as part of the network. The bridges were

built more than a century ago and require rehabilitation81

. In addition, the signaling system is

insufficient for the present operation and safety needs because of a lack of a back-up system.

The lane capacity also remains small despite the double tracks. Train speeds are restricted to

15 km/hr in large station yards. Moreover, a single-track section of 245 km (Khaniwal-

Raiwind) is still on the main corridor causing reduced speeds and frequent delays due to the

need to exchange tracks.

100. Infrastructural problems point to the presence of an ad hoc and unsustainable financial

structure. Indeed, the 1990’s observed no investments in infrastructure except for the

procurement of locomotives. This trend has finally reversed in the recent past with efforts

underway to dualize the entire track. Track strengthening and rehabilitation is also being

undertaken in order to enhance operational speeds and minimize maintenance costs.82

Notwithstanding, the fact that PR is in poor financial health83

and that according to some

informal estimates, 25 new locomotives are needed to capture merely 1 percent additional

market share of freight traffic, costs of reviving rail’s share in the transport sector are

78 This was clear from all discussions during key informant interviews with PR officials. 79 World Bank, “Transport Competitiveness”, 2006. 80 Japan International Cooperation Agency, 2006. 81 Ibid. 82 This is being done as part of the Rehabilitation and Improvement of Tracks (2001-2006) project. 83 The GoP has to pay a substantial amount of annual subsidy simply to keep PR operations afloat. Even the

much reduced subsidy figure for 2005 stood at PKR 3.9 billion. This was less than half of the sanctioned subsidy amount of PKR 9.1 billion.



unserviceable84

. In order to effect meaningful positive change, the revenue and passenger

subsidy structures would have to be overhauled.

101. A direct outcome of these shortcomings and perhaps the most significant constraint

for PR is the inability to provide guarantees in terms of time needed for consignments to

arrive at the destination. While time bound deliveries are always important for production and

retail industries, given the increasing volume and pace of economic activity in the country,

the need for transport services to reorient themselves to the market demand has been further

exacerbated. Unfortunately, given the bureaucratic inertia and cumbersome regulations

inflicting PR, the service has been unable to transform itself to enhance efficiency. The

depleted infrastructure and rolling stock, and the priority accorded to passenger traffic does

not allow for time bound deliveries. Currently, the actual transport time of conventional

wagons from Karachi to Lahore is 60 hours (as compared with 45 hours for road), reflecting

the long running and waiting periods85

. The existing conventional wagons take 2.5 times

longer than locomotives86

. Moreover, delays, especially in freight trains are routine.87

Consequently, despite an effort to ensure timeliness, including a fixed timetable for container

and parcel trains, delays are commonplace.

5.3.1 The governance of PR freight

102. Admittedly road and rail transport are incomparable in some ways given that the road

carriers provide door to door service, which not only reduces labor costs but also the number

of ‘handlings’ per consignments. Under such an inherently compromised position, railway

services around the world often tend to offset the disadvantage by employing an aggressive

marketing strategy and developing attractive cost packages for clients. Unfortunately, neither

is present in the case of PR. Individual officers in PR have no authority to negotiate

concessionary rates to attract business. Rate lists are fixed and have to be applied uniformly

across the board.

103. An inherent advantage that an organized rail service may have over road transport is

the absence of handling mishaps. Unfortunately, the incidence of pilferage in PR is reportedly

high. Leakages in loosely packed items like wheat and other edibles are usual. Also, since the

responsibility of packaging is the client’s/agent’s, the loss can almost always be blamed on

poor packaging. Another common occurrence is switching of items like live animals whose

description on the delivery receipt (which is the only document to prove ownership of a

consignment) cannot be tailored beyond a point. Thus, a switch cannot be proven.

104. One positive element of the PR freight business is that the service does provide for an

inbuilt compensation guarantee in case any loss is proven. Compensation issues are handled

through a Complaints Department. However, the efficiency of this department is poor.

Customers often complain of the rigid rules under which compensation is allowed as well as

the indifferent attitude of the staff towards claimants. No formal dispute resolution

mechanism exists in PR.

105. Finally, PR has managed to put itself in an advantageous position with regard to level

of automation. Although the service’s internal accounting and management procedures are

still manual, and highly disorganized, from the domestic commerce point of view, a recent

welcome development has been the introduction of customer tracking services for container

84 This estimate is based on an informal internal PR calculation. It was provided to us during one of the

interviews. 85 Japan International Cooperation Agency, 2006. 86 Ibid. 87 Dedicated freight trains (maal garis) only travel once they have been filled to full capacity, which makes

timeliness a function of demand for use of these trains. Moreover, containers are often queued and nepotism frequently needs to be employed to get containers ahead in the queue.



transport, which helps keep passengers up-to-date with the delivery status of their

consignments.

5.3.2 Lack of a competitive environment

106. The PR is a monopoly. Being the only rail service in the country, no competition is

faced from within the sector. Lack of any compulsion to orient the service with market

realities is thus obvious. Admittedly, in the last decade, PR has made a number of moves to

allow private sector involvement in the business. However, contrary to what most recent

literature suggests, these moves do not amount to an attempt to enhance competition. Instead,

private sector involvement is being sought to outsource a number of unprofitable segments of

the rail freight business. While this may imply competition among various entities in the

private sector that invest in the particular activity, the ownership remains solely with the PR.

Nonetheless, such attempts are still welcome as they carry the potential to transform PR’s

freight services into an efficient industry. The outcome of course depends on the level of

commitment and sincerity from the PR management in implementing the drive towards

private sector involvement. Thus far, the agenda remains narrow and is often kept suitably

vague. The bureaucratic inertia seems to be at play, implying that moves to open up the

management system to ‘outside’ actors are only being pursued hesitantly.

107. The most significant private sector role is currently witnessed in the dedicated parcel

service where luggage vans are sub-contracted to freight forwarders.88

The system was

initiated in 1999. In their capacity as contractors, freight forwarders are free to solicit clients

and fix their own rates. PR only acts as a carrier, with all other tasks including

documentation, loading/unloading and delivery having been outsourced to the contractors.

The system, while increasing the volume of parcels and providing direct short-run surpluses

in terms of revenue, is running at a long-run deficit. The system is not very profitable for the

contractors either. Moreover, bureaucratic ‘red-tape’ continues to induce inefficiencies.

Contractors face a number of bureaucratic hurdles in dealing with the concerned PR

departments. Although the incidence of disputes over claims or mishandling of contractors’

freight are low, contractors are often treated menially and must accept such treatment or use

personal contacts to expedite the payment clearance processes.89

108. Other commendable steps to involve the private sector include an expression of

interest in involving private sector entities to run the freight business. While the scope and

specific nature of such an offer remains unclear, the fact is that PR has realized the urgent

need to use private sector efficiency and expertise to become more competitive. Already,

negotiations are underway with three major private sector investors to outsource an allowance

of one freight train with a carrying capacity of 1440 tons every day.90

In addition, private dry

ports are being developed and private sector involvement is being sought on some existing

dry ports like the one in Lahore.

5.4 Building on the strengths to enhance competitiveness

109. Pakistan’s topography, spatial distribution and demand for transport services present

an ideal opportunity for rail to become a major player in the freight transport industry. PR is

especially suited for long-haul containerized cargo. Given that literature already points to

PR’s competitive advantage in terms of costs in containerized cargo shipments, and that its

88 World Bank, “Transport Competitiveness”, 2006. 89 Interview with PR contractor and official from the accounts department. 90 Information about this development has not been made public yet. We have learnt of such a possibility

through our key informant interviews.



scope for cost reduction is much higher than that of the road sector, PR’s problem seems to

be one of functional efficiency rather than any inherent barriers to being competitive.

110. One positive element of PR transport at present, which unfortunately ends up making

it uncompetitive in the industry is its strict enforcement of overloading limits. The largest

3,000 HP locomotives and new high performance freight wagons with full loading are

allowed a maximum axle load of 22.86 tons.91

Other lines are permitted an axle load of 17.27

tons or less92

. Weigh stations are available which remain functional and barring exceptions,

gross overloading is not permitted. While this provides an advantage to the road sector, where

overloading is commonplace, it also implies that road fares could rise under stricter

enforcement regulations, thus allowing PR to become more cost competitive.

111. The potential for private investment to flow in is facilitated by the presence of

financing facilities. Unlike the road transport sector, where the majority of operators have

low or absent credit lines, private investors interested in rail operations in Pakistan all have

ready access to substantial amount of credit. The real hurdle thus is not the availability or

access to credit, but the lack of commitment from PR and the existing poor state of the rail

sub-sector, which makes mega-investment unattractive, except under excessively

concessionary terms. The latter is virtually impossible given the fear of public scrutiny and

the likely political fall out.

112. While such advantages for the PR exist, in order to realize these, a concerted effort

has to be made to overhaul various aspects of the establishment’s functioning. The foremost

concern is the need to develop the political will to transform PR into a corporate unit in

reality. Until and unless bureaucratic hurdles are eliminated, enhanced efficiency is unlikely

to result. Bureaucratic hurdles in themselves lead to poor governance structures, added costs,

and poor customer service, all of which tend to take business away to other more efficient

alternatives.

113. On a broader level, literature on railway services across the world is unanimous in

highlighting the fact that profitable railways almost inevitably generate bulk of their revenues

from freight traffic. Therefore, all existing recommendations for improving the state of PR

suggest prioritization of the freight traffic.93

While that may be theoretically attractive, the

fact is that PR cannot afford to focus on its own profitability ahead of passenger welfare

unless a political decision to do so is made at the highest level. Political compulsions to

maintain affordable passenger fares are likely to force the scope of PR’s choices to remain

limited to ones falling within the existing paradigm. Notwithstanding, PR could seek to

improve its efficiency within the existing paradigm by involving the private sector even more

aggressively. While a number of arrangements could be envisioned, the most realistic is to

divert freight business to the private sector while retaining the management and operation of

trains within the public sector. This would not only ensure more aggressive marketing among

various contractors, but could also enhance efficiency levels. PR is already cognizant of the

need to move in this direction and has contemplated outsourcing the marketing of its

container service.94

114. The private sector could also be involved in extending rail’s delivery network to allow

for door-to-door service. A contracted out arrangement with road carriers could allow for

consignments transported by rail to be delivered to the customers’ final destination. However,

the increased cost and the higher number of ‘handlings’ would still be an issue.

115. Notwithstanding the above, it is important to note that PR’s ultimate test is its ability

to compete with the road sector. In that regard, even allowing the private sector to act as

91 Japan International Cooperation Agency, 2006. 92 Ibid. 93 World Bank, “Transport Competitiveness”, 2006. 94 Ibid.



‘managers’ of the freight business is unlikely to bear dividends unless the infrastructural

bottlenecks and the issue of redefining priorities are resolved. Indeed, there is substantial

scope for reducing operating costs by replacing traditional operating systems and removing

many of the bureaucratic management hurdles. However, these measures are unlikely to have

a consequential impact unless major investments are made in upgrading locomotives, rolling

stock, motive power, as well as train tracks and signaling. Automatically, this raises the

concern about the substantial financial implications of fulfilling such a need. In this light,

some reports have suggested that PR could allow private ownership of rolling stock or even

trains. Others point to the possibility of joint ventures or partial or complete concessioning of

the freight business. While there is some private sector interest in investment in rolling stock,

or contracting individual freight services (as is already being done), freight concessions are

unlikely to be taken up given the high risk factor involved.95

116. Apart from the options of various degrees of outsourcing, there could be scope for

institutional separation of the passenger and freight business,both having their own

locomotives, rolling stock and staff.96

Moreover, a commercial rail corridor could be

established with relative ease given that main line infrastructure for freight transport already

exists. While a separation of freight and passenger services will allow a dedicated group of

officers to focus on improving freight business, again, until freight is accorded equality with

the passenger service, the attendant benefits of such a division will not be realized. In any

case, such a division is under consideration as part of the National Trade Corridor policy

framework.

117. Upgradation and a reorientation of priorities is urgently needed for rail to be able to

increase speeds of trains, enhance utilization ratios, reduce shipment times, inject reliability

and predictability into its business, and in turn revamp governance structures to allow for

more customer satisfaction. All of these are required to allow rail freight business to regain

some of its lost market share. The challenge is to ensure such improvement without raising

rail fares significantly but without increasing dependence on the GoP.

95 Ibid. 96 Ibid.


Section 6

Aviation

118. The aviation industry is unique in that the pace of transportation offered by it cannot

be matched by any other sub-sector. Therefore, it is not entirely comparable to either rail or

road. Regardless, a number of the issues discussed with regard to the other two sub-sectors

also remain relevant to the aviation industry.

6.1 Aviation Network and Administration

119. Pakistan has 36 operational airports, of which 6 are international, 19 are domestic and

11 are feeder.97

Not all airports are open to civilian (passenger or cargo) use. Airport control

falls in four categories: (i) airports used only by the Air Force, (ii) airports administered by

the Air Force but used by both the Air Force and Civil Aviation, (iii) airports administered by

the Civil Aviation Authority (CAA) but used by both the Air Force and civil aviation, and

(iv) airports used by civil aviation only.

120. Overall, aviation constitutes a miniscule share of the transport sector. In 2004-05, 6.94

million passengers traveled domestically by air out of which 0.08 million were transit

passengers.98

A total of 1.76 billion passenger-kms were flown. In addition, a mere 116,202

tons of cargo and 10,412 tons of mail were hauled.99

A total of 36.94 million ton-kms were

performed.100

These low volumes are despite the steady increase in air cargo traffic over the

years, save a minor decline during the 1990s.

Table 6.1: Domestic Air Traffic of Passengers and Freight of Pakistan International

Airlines101

Year Passenger-kilometers (million)

Freight Ton-kilometers102

(million)

1994-95 2312.36 35.45

1995-96 2006.40 35.19

1996-97 2031.54 35.07

1997-98 2056.67 34.95

1998-99 1916.20 33.23

Continued…

97 World Bank, “Pakistan Transport Sector: Overview”,

<http://web.worldbank.org/WEBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT> 98 Federal Bureau of Statistics, “Statistical Year Book”, 2006. 99 Civil Aviation Authority, Government of Pakistan. Civil Aviation Statistics of Pakistan 1972-2005 ( Karachi:

MIS Branch, Civil Aviation Authority Headquarters, 2006). 100 Ibid. 101 This table only depicts information about the Pakistan International Airlines (PIA). However, given PIA’s

virtual monopoly over the sector, these are fairly representative of the aviation industry. 102 We include both freight and mail volumes in these figures



Year Passenger-kilometers (million)

Freight Ton-kilometers102

(million)

1999-00 1936.53 31.07

2000-01 1960.36 33.22

2001-02 1554.98 34.50

2002-03 1651.54 38.33

2003-04 1769.31 36.94 Source: Federal Bureau of Statistics, Statistical Yearbook 2005.

121. The principal utility of aviation is to carry consignments that must reach their

destination in a quick, time-bound manner. Perishable items are thus often transported

through the aviation sector, although international shipment of perishable items is more

significant than domestic transport. Aviation is also a major carrier of courier mail.103

122. Pakistan domestic legislation on aviation is ‘opaque, confused and complex’104

. An

amended version of the Carriage by Air Act 1934 governs domestic air carriage. The present

legislation is embodied in two SRO notifications (SRO 295(k) 62 and SRO 1033 (K) 67),

both of which are not accessible to the public105

. A draft of a new legislation- the National

Aviation Policy 2006- has been prepared. It introduces modern air carriage concepts and

seeks to eliminate the key bottlenecks created by the previous legislations. It proposes to

bring domestic legislation in line with international best practices.

6.2 Freight and passenger handling

123. The aviation industry’s passenger and freight administration is conducted in two distinct

loops. The CAA’s regulatory framework applies directly to the various air operators, but only

indirectly affects the end clients. The second loop constitutes the direct interaction between the

operators and the clients. While the first loop is bureaucratic, the latter has proven to be rather

efficient.

124. The CAA has traditionally been dominated by the Air Force. Retired Air Force officers

often fill key posts in the Authority. Therefore, officials who are not trained in the field of civil

aviation often end up running the affairs of the Authority. A common misconception is that Air

Force officers are suited to CAA postings given their background in defense aviation. In reality,

the two fields are quite distinct and ought to be managed in diametrically opposed ways. Consider

that defense aviation’s ultimate objective is to eliminate its competitors, while civil aviation must

encourage competition and ensure that all stakeholders are duly accommodated in order to

maximize benefits for the end client. Another anomaly lies in the fact that CAA falls under the

Ministry of Defense (MOD), and not the Ministry of Communications, which would be the

natural parent establishment for an aviation service. Given the virtual absence of expertise of

MOD on civil aviation, the Ministry has been unable to play any constructive role in helping the

progress of the aviation sub-sector. Under the proposed National Aviation Policy (2006), the

Ministry of Communications has already suggested making the CAA independent of the MOD.

125. In light of the above, it is hardly surprising that much of the problems faced by the

aviation sector with regard to transportation lie in the interaction between the CAA and aviation

operators, be they passenger or cargo services. On paper, a partial Open Skies Policy applies106

and entry barriers to joining the Pakistani industry are minimal. However, bureaucratic

103 In 2004-05, 4,070 million tons passed all airports in the country. 104 Jamil and Jamil, 2003. 105 Ibid. 106 The policy is based on allowing access to Pakistani skies but on a reciprocal basis wherever possible. Visit

Civil Aviation Authority’s official website for details on the policy, available at <http://caapakistan.com>.



procedures and highly discretionary powers vested in officials at key decision-making posts in the

CAA and MOD have deterred operators from making the industry truly competitive. Moreover,

the licensing fee for operators to enter the Pakistani market is exorbitantly high and thus keeps

small to medium scale investors away. Admittedly, such an entry barrier is a result of a deliberate

reversal of the policy of the 1990s where low capital requirements allowed a number of sub-par

airlines to become operational. While this is understandable, such a restrictive policy should be

compensated by facilitating any investors willing to enter the market under the currently

stipulated conditions. More importantly, a level playing field must be provided to all operators.

Currently, PIAC, a public sector entity, remains a near monopoly. Despite the operation of

private airlines like Air Blue, and previously others like Hajvery and Bhoja, the GoP’s subsidies

and other concessions to PIAC have never allowed fair competition. PIAC has been a loss

making public sector entity, but like the PR it has been kept afloat through regular GoP

assistance.107

Moreover, given the government ownership, PIA can often get away without

fulfilling various financial requirements, thus putting other operators at a disadvantage. PIA

currently owes a substantial sum of money to CAA in arrears against parking and landing

charges.108

In the final outcome, the aviation industry comprises of a small number of operators,

none of them remotely competitive with PIAC.

126. Notwithstanding the above, the second, and arguably more important aspect of the

aviation industry in terms of our discussion- interaction with passenger and cargo clients- is

conducted rather efficiently. Air passenger and cargo transport is a transaction between the

operators and clients. There negligible contact of the public sector regulator (CAA) with the end

clients. Clients either deal with private services (e.g. mail), or in the case of cargo with operators

or their contractors, who are again private sector entities. Given that carriers apart from PIAC are

not public sector entities, most of them have managed to inculcate corporate governance practices

in their functioning. Even PIA’s customer service has improved tremendously in the recent past.

One major advantage of the airline industry is that the entire sub-sector is automated on a global

scale and thus is naturally better able to maintain records, provide real time information, and track

both freight and passenger status. Notwithstanding, some recent research undertakings still

contend that the times involved in completion of various business processes at the airports are

unduly long109

.

127. By and large, domestic flight delays, especially on main arteries are not excessive.

Majority of the freight is carried on passenger aircraft, except a limited number of cargo flights

utilizing Shaheen Cargo services or aircraft belonging to various courier services. Any cargo

orders are basically negotiated directly with the operators whose fares are deregulated, yet highly

competitive.

128. The only operational concern in the aviation industry is with regard to handling of

consignments at the airport, largely stemming from the lack of modern cargo scanning equipment

capable of detecting explosives. Given the security concerns in Pakistan, any cargo that is not

scanned or physically checked is required to be detained at the airport for a 24-hour ‘cooling

period’, thus undermining the very objective of speedy delivery110

. However, this concern is

specific to items, which could be damaged by a thorough physical examination. Another capacity

constraint is a lack of suitable lockers with strong rooms at Karachi, Lahore and Peshawar

airports for keeping gems and jewelry and other valuable items, which are usually not transferred

107 Like PR, GoP has to bail out PIA from time to time in order to allow it to stay afloat. In the past three years,

GoP has paid PKR 5.18 billion directly out of the federal budget (explicit liabilities). 108 The exact amount of arrears is not easily obtainable, but we were told during one interview that the arrears

run into ‘hundred of millions’ rupees. 109 S.I.A Zaidi and J. Mansoor, “Study on Creation/Improvement of Cargo Handling Facilities at Airports in

Pakistan”, Ministry of Commerce, Government of Pakistan, 2006. 110 Ibid.



through rail or road. The need for such lockers is mandated under international civil aviation

regulations.111

129. All aviation operators are mandated by law to have comprehensive insurance. Courier

mail is usually insured by the courier service. The incidence of losses/pilferage is extremely low.

Moreover, while no dispute resolution mechanism exists, a clearly defined compensation package

is detailed, which is often easy to claim.112

130. Perhaps the biggest disadvantage of the aviation sector is its high costs as compared with

the other sub-sectors. While most of these costs are unavoidable, given the naturally high

operating and fuel costs of the aviation industry, the industry’s regulatory framework does play a

role in exacerbating them. Pakistan has one of the highest landing and parking charges in the

world (see tables 32 and 33). Operators have to pay a specific amount on a per ton basis for every

outbound aircraft at any airport in the country.113

Taxes on passenger fares are also extremely

high, and climbing. Having said that, admittedly, even a revamping of the regulatory structure

would not impact costs significantly enough to bring them at par with other competing sub-

sectors. In essence, this implies that while the aviation industry is unmatched in terms of speed

and thus ought to be the preferred mode of transport for certain specific items, where time can be

compromised, clients would inevitably prefer road or rail. In other words, since high costs are an

unavoidable aspect inherent in the nature of the industry itself, the scenario is unlikely to change.

This also explains the negligible freight market share of the aviation industry.

Table 6.2: Aircraft Landing Charges at Various Airports in Pakistan ( PKR per ton)

Year Non-international flights

Weight of Aircraft (Tons)

Not exceeding 1 Ton

Exceeding 1 Ton But not 20 Tons

Exceeding 20 Tons

1990 15.00

* 12.00 ** 10.00

* 62.00 ** 52.00

1998

15.00

* 12.00 ** 10.00

* 62.00 ** 52.00

2002

1.50

* 1.20 ** 1.00

* 6.20 ** 5.20

2003

15.00

* 12.00 ** 10.00

* 62.00 ** 52.00

Source: Civil Aviation Statistics of Pakistan 1972-2005 Note: * Using International Airports ** Using Domestic Airports

Table 6.3: Aircraft Housing Charges at Various Airports in Pakistan (PKR per ton)

Date of Effectiveness

Location Domestic flights

Weight of Aircraft

Not exceeding 1 Ton Exceeding 1 Ton But not 20 Tons

Exceeding 20 Tons

1990 Karachi Islamabad

Lahore All others

10.00 10.00 10.00 9.00

10.00 10.00 10.00 9.00

36.00 36.00 36.00 27.00

1998 Karachi 9.00 9.00 27.00

2002

Karachi Islamabad

Lahore

1.00 1.00 1.00

1.00 1.00 1.00

3.60 3.60 3.60

111 Ibid. 112 Key informant interview. 113 Ibid.



Date of Effectiveness

Location Domestic flights

Weight of Aircraft

Not exceeding 1 Ton Exceeding 1 Ton But not 20 Tons

Exceeding 20 Tons

All others 0.90 0.90 2.70

2003

Karachi Islamabad

Lahore All others

10.00 10.00 10.00 9.00

10.00 10.00 10.00 9.00

36.00 36.00 36.00 27.00

Source: Civil Aviation Statistics of Pakistan 1972-2005.

131. As far as passengers are concerned, aviation is again the preferred mode of travel for

time-constrained passengers, especially those traveling relatively longer distances. High costs

remain a factor, but here time savings far outweigh the additional costs for those who are able

to afford it. As economic activity in the country increases, and wealth levels rise, more and

more people are likely to prefer air to other modes of travel. However, the future volume is

dependent on a number of factors, most importantly the trend in airline tariffs, which in turn

is a function of a combination of operating costs, fuel being the most significant.

6.3 The way forward

132. Most of the aviation industry’s shortcomings stem from a highly bureaucratic and

discretionary regulatory authority, which has discouraged the industry from developing

into a truly competitive one. There is a need to allow civil aviation experts to take up key

decision-making positions in CAA, and to depute experts in MOD (presuming that

strategic concerns will not allow aviation to be brought under any other ministry in

reality) to deal with civil aviation in the country. Such a development may allow better

use of the existing liberal policy to allow new passenger and cargo operators to enter the

market. The need is to implement this policy in practice by facilitating investors

interested in the sector. One important concern in this regard is PIAC’s near monopoly,

which ought to be eliminated by creating a level playing field. Pakistan’s aviation sector

could gain tremendously by making use of modern air cargo services.114

The government

must realize its stake in terms of increased revenues were the number of aviation sector

operators and clients to increase. CAA could provide incentives to existing operators to

market aggressively, especially to attract more freight business in the commodities where

the aviation industry has an inherent advantage. Some of the gains from increased freight

volumes however, ought to be compromised by lowering the tax rates for the industry.

133. On another note, the tendency in Pakistan to build mega-airports in major cities

must be reviewed. Currently, a new airport is being built in Islamabad. While such

infrastructure development projects are key, the costs involved and the return on

investment needs to be studied extremely carefully before committing to such initiatives.

Perhaps more emphasis should be laid on equipping existing airports with modern

equipment for scanning and other services. Efficiency gains are sure to turn out to be

more important than modern buildings over the long run.

114 Raven, J. 2003. “Trade Facilitation and Competitiveness for Pakistan”. <www.nttfc.org/proceed03/proc03-

raven.htm>.


Section 7

Ports 7.1 Port administration, makeup and network

134. Port management is usually left out of the discussion when strictly dealing with the

transport sector. It is normally considered under the purview of trade and transport facilitation. In

reality however, it is impossible to reflect upon the transport sector’s impact on commerce

without dealing with the entry (for imports) and exit points (for exports) for the country’s external

trade. Efficiency of trade flows and that of the transport sector are complementary. For instance,

an extremely efficient port clearance process for imports is inconsequential if sufficient transport

facilities for onward shipment are unavailable. Similarly, much of the efficiency gains of inland

transport will be compromised if port management is inefficient and causes delays. In this light,

we shed some light on the state of management at Pakistani ports.

135. Pakistan’s 1,100 km long coastline opens to the Arabian Sea.115

Karachi Port and Port

Qasim are the two major international ports. Other ports are relatively insignificant.116

Both are

located in the coastal city of Karachi. Containerized cargo is dealt with in four container

terminals. The Ministry of Ports and Shipping administers ports and shipping in Pakistan. The

entire ports sub-sector consists of autonomous bodies under the control of the Director General of

Ports and Shipping. Management at major ports is heavily influenced by Naval presence. Naval

officers are often posted to manage the ports. Similar to the aviation industry, this suggests that

port managers are people who might be well acquainted with naval issues but not with the

international competitive environment confronting commercial ports.

136. Port Qasim is operating as a landlord port, primarily serving the steel, petroleum, and

chemical industries.117

Karachi Port Trust (KPT) is also making progress towards converting

itself into a landlord port. The total cargo volume handled by the two ports in 2003-04 was 43.26

million tons.118

At the Karachi port, the total port traffic increased from 20.5 million tons in 1991-

1992 to 27.5 million tons in 2003-04119

. Imports were worth 21.6 million, accounting for 78.5%

of total traffic120

. The total port traffic at Port Qasim rapidly increased from 7.2 million tons in

1991-92 to 15.6 million tons in 2003-04, representing an annual growth rate of 6.7%. In 2003-04,

imports accounted for 11.7 million tons, thus constituting 74.7% of total traffic121

. In 2003-04,

115 Japan International Cooperation Agency, 2006. 116 Minor ports include Jiwani, Gwadar, Pasni, Kalmar, Ormara, Sonmiani, Nargar Parkar and Keti Bunder. 117 Visit the official website of Port Qasim, available at < http://www.portqasim.org.pk/projects.htm>. 118 Japan International Cooperation Agency, 2006. 119 Federal Bureau of Statistics, Statistical Bulletin, 2006.

120 Ibid. 121 Ibid.



1.2 million 20 ft. containers passed through the two ports. Nearly, 1.0 million twenty feet

equivalent units (TEUs) (80.9%) of these were full container movements122

.

Table 7.1: Cargo handled at Karachi Port and Port Qasim (Thousand tons)

Year Karachi port Port Qasim Total

1994-95 23205 9199 32404

1995-96 23580 9648 33228

1996-97 23475 10585 34060

1997-98 22685 13250 35935

1998-99 24055 11743 35798

1999-00 23426 12764 36190

2000-01 25952 12110 38062

2001-02 26692 13226 39918

2002-03 25387 15816 41203

2003-04 27596 15669 43265 Source: Federal Bureau of Statistics, Pakistan Statistical Yearbook 2005.

7.2 Costs

137. Both the KPT as well as Port Qasim Authority (PQA) run on excessive profits. PQA, for

example, accumulated a net financial surplus amounting to PKR 1.08 billion at the end of FY

2003-04.123

Contrary to common logic, high port surpluses are a negative factor in terms of their

impact on state of commerce in a country. This is because a high surplus (especially operating

surplus) in most cases would suggest high port costs, which are eventually born by the traders.124

Indeed, this is the case with Pakistan’s main ports.

138. Port entry costs on average are 5-9 times higher than other countries in the region. For

instance, vessel call charges in Pakistan are USD 30,000, in Jebel Ali in Dubai they are USD

6,700125

. Total container handling charges at Karachi port’s specialized terminals are also

substantial (see table 7.2).126

Part of this is a result of the shipping lines imposing several

additional charges including, in some cases, a shipping surcharge Also, a ‘terminal handling

charge’ is effectively charged twice, levied first by the shipping line and then duplicated at the

container terminals.127

Table 7.2: Port Tariffs at KPT and Port Qasim128

Unit KPT

Revised in Sept. 2004 PQA

Revised in May 2005

Pilotage USD/GRT 0.15 0.13

Haulage and Towage Mooring fee Berthage Fee

USD/tug/act USD/ GRT USD/ GRT

485 0.05 0.08

485 0.04 0.08

For first 24 hours Past 24 hours

Port dues USD/ GRT 0.40 0.32

Wharfage Import Export Import Export

Break Bulk PKR/ton 70.00 35.00 44.00 31.00

122 Japan International Cooperation Agency, 2006. 123 World Bank, “Trade Competitiveness”, 2006. 124 Ibid. 125 World Bank, “Pakistan Transport Sector: Overview”,

<http://web.worldbank.org/WEBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT> 126 Bulk cargo handling charges are low but this makes up a minority of the total consignments passing through the

two ports. Two thirds of total dry cargo (in tonnage terms) passing through Karachi is containerized. 127 A number of berths on both ports are now privatized and their charges deregulated. Therefore, the actual costs

depend on the agent company used for a particular consignment. 128 Since a number of port services are privatized, rates wary between private firms. Rates listed here are combined

from various sources.



Dry Bulk Cargo Wheat Coal Crude, diesel, kerosene oil, Fuel Edible oil Molasses Tractor, tracked vehicle, etc Motor vehicle Tyre, tyre scrap, accessories Food grain, fertilizer etc Food grain, flour and seed Fertilizer, rock phosphates ecl. Cow dung

PKR/ton PKR/ton PKR/ton

PKR/1000litre PKR/1000kg PKR/1000kg PKR/CBM PKR/CBM PKR/ton PKR/ton PKR/ton PKR/ton

54.00 21.00 44.00 30.00 35.00 18.00

256.00 316.00 316.00 25.00

40.00 21.00 40.00 30.00 35.00 18.00 126.00 158.00 158.00 25.00

34.00 25.00 31.00 11.00

218.00 275.00 275.00 21.00 21.00 14.00

34.00 25.00 31.00 15.00 68.00 83.00

275.00 17.00 17.00 14.00

Container

LCL Container (s) PKR/ton x 2

Size 20 ft PKR

70.00 35.00 620.00 620.00

FCL Container (s) PKR/ft

Size 40 ft PKR

90.00 35.00 1240.00 1240.00

Empty container (s) PKR/ft

Over size 40 ft PKR/ft

40.00 40.00 34.00 34.00

Destuffing charges PKR 20 ft container

40 ft container

500.00 1000.00

Demurrage PKR/Ton First 15 days (after free period)

Next 25 days (after free period)

Thereafter till clearance (after free period)

28.00 50.00 70.00 Source: Japan International Cooperation Agency, 2006.

139. The high costs are despite the fact that there is significant private sector involvement at

the ports. At KPT, operations are completely deregulated at the berths. Clients could potentially

deal directly with private service providers for final delivery without having to personally interact

with the port authorities. At KPT for example, a number of private companies have leased berths

and function as ‘quick cargo movers’, something that KPT had failed to do in the past.

Privatization has meant increased efficiency in terms of port handling. Competition is enhanced

by the fact that there are no rent controls applied to these private companies, and apart from

container charges, which are more or less fixed, each company has its own rate structure, which

can vary substantially.129

By and large, however, costs still compare unfavorably with other

regional ports.

7.3 Port Clearance times

140. Private sector involvement has ensured that the ship-shore handling speeds at Karachi are

in line with those at efficient international ports for all categories of cargo—containers, bulk

cargoes and general cargo. Containers are handled at over 25 moves per crane per berth hour,

bulk cargoes are handled at approximately 3,000-9,000 tons per ship day (depending on the

commodity handled), and general cargo’s turnover rate is 2,500 tons per ship day.130

At Port

Qasim, handling speeds for containers are around 22-24 moves per crane per berth hour; and

handling speeds for non-container cargoes are also in line with standards at efficient ports

elsewhere131

.

129 Much of this discussion draws upon key informant interviews. 130 World Bank, “Transport Competitiveness”, 2006. 131 Ibid.



141. One exception to the above is the KPT controlled berth (not outsourced). Items handled at

the KPT berth include loose cargo. The most important commodities handled include general

cargo, fertilizer, rice, phosphate, coal, steel and scrap, among others.132

At the KPT berth,

handling speeds are much slower than the berths managed by private companies. Moreover,

consignments are handled rather carelessly. A major factor often overlooked in handling of loose

cargo is the significant environmental impact caused by careless handling of items such as coal.

A simple visit to the KPT vicinity for example exposes one to the blackened ‘coal dumps’,

highlighting the environmental hazards associated with coal handling at KPT.

142. Further improvement in ship-shore turnaround times, port traffic, and productivity is

possible if some existing infrastructural bottlenecks are removed. Port Qasim does not yet have

specialized dry bulk handling facilities. There is also a restriction on night navigation at Port

Qasim due to lack of adequate navigation facilities. Currently, only vessels of 202 meters overall

length (LOA) can be accommodated during the night on a request basis. Moreover, the ports’

limited draught (9-12) keeps the latest and most efficient ships from calling.133

Underutilization

of capacity is another concern that is most evident in the case of KPT. Two berths at the Karachi

port were not used for cargo handling throughout 2003-04, despite the limited available space

within the existing port area134

. This adds to the mooring time of the dry bulk carriers.

7.3.1 Customs clearance:

143. Despite the efficient ship-shore handling, overall container dwell times in ports stand at

11 days on average. These times are four times those in developed countries, and three times the

average in East Asia135

. The major factor behind excessive times is the tardy customs clearance

process, which suffers from tremendous operational bottlenecks. A recent World Bank report has

estimated customs clearance times as being 4-5 days, when the entire process can actually be

completed within one day136

. Therefore, much of the gains from speedy ship-shore handling are

lost.

144. The customs procedures remain bureaucratic despite some level of automation. Although

the examination procedure is extremely thorough, the entire rationale is undermined given the

high incidence of informal payments- commonly called ‘speed payments’, which are used to

hasten the clearance process. A previous landmark study on Indo-Pak trade confirms our finding.

It reported that the single biggest complaint from traders they interviewed was with regards to

customs procedures.137

An overwhelming majority of formal traders in the study interviewed

complained that bribes were demanded to expedite formal consignments. Were a bribe not paid,

customs officials retaliated by slowing down the clearing process.138

Notwithstanding, there is an

interesting dynamic to the practice of rent seeking. The arrangement only assists in expediting the

clearance of legal consignments for the most part. Often, under declared or illegal consignments

are stopped and dealt with strictly, a fact one would not necessarily relate to cases where corrupt

practices are rampant.

145. Though, in our interviews, we were repeatedly told of the customs official facilitating

agents, this seemed to be directly correlated with the personal understanding and rent payments

between the agent and the customs officers rather than professional efficiency of the department.

Indeed, rent-seeking practices are not limited to customs officials. Clearance/forwarding agents

132 KPT customs documentation. 133 World Bank, “The Indus Trade”, 2005. 134 Japan International Cooperation Agency, 2006. 135 World Bank, “Pakistan Transport Sector: Overview”,

<http://web.worldbank.org/WEBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT> 136 Clearance times in some of the most efficient ports like Singapore are 1.25 hours. 137 Shaheen Rafi Khan, et al., 2006. 138 Ibid.



used by clients to fulfill customs formalities on their behalf often collude with customs officials.

Since clearance agents must be licensed and their level of efficiency is largely a function of

personal contacts, the market entry barriers are high. This implies that agents can overcharge and

in turn cut deals with customs officials for personal gains.139

146. Notwithstanding, significant efforts have been made to eliminate corruption from customs

procedures. The scope of the efforts suggests sincerity on the part of the authorities.

Unfortunately however, much of the efforts have not produced desired objectives, courtesy of the

weak governance environment that underpins the entire management structure. The most

significant move has been to introduce automated customs clearance procedures both in a quest to

reduce clearance times as well as remove human influence. Much of the documentation

requirements have been made uniform and have been brought in line with international protocols.

Where the automated system has worked as envisioned, consignment clearance times have come

down astronomically.140

However, the system is only functional in part at the moment and multi-

layered human interaction with various custom tiers still remains.141

Our discussions have

revealed that the computerized systems are fraught with technical glitches. Commonly cited

complaints include frequent breakdowns of the system, slow responses to the online GD

application, a highly cumbersome process to remove any entry errors into the computer software,

and the like.142

There is an urgent need to pay attention to the lingering technical glitches.

Moreover, attention must also be paid to capacity building of the clearance agents/forwarders and

even customs officials who are not adept at using automated systems. Ideally, the system ought

be expanded to dry ports up country. The ultimate goal ought to be to move clearance procedures

away from the ports/borders.

Box 5: Major constraints at land borders

Development of seamless gateways is becoming more difficult since the border remains the point at which governments can most easily collect taxes and duties, enforce trade treaties, certify that goods meet specific health, safety, and environmental standards, and interdict trade in contraband

143.

Difficulties at the land borders are aggravated by requirements for back-to-back exchanges of cargo, narrow and congested access roads, agencies with overlapping jurisdictions and enforcement activities, poor communication/coordination with functionaries on the other side of the border, lack of financial and testing facilities at the border, and insufficient infrastructure for inspection and protection of cargo

144. None of the upcountry dry ports or borders have automated clearance procedures. All

experience high corruption levels.

147. The incidence of demurrage at the ports is reportedly not so high, a welcome change from

what was reported in a number of previous studies.145

Much of the demurrage is believed to be a

consequence of a genuine documentary or declaratory problem with the consignment, or

uncleared arrears, rather than an intentional delay by the customs authorities. Port Qasim has

instituted a demurrage waiver clause, which can be provided if relevant officers deem that the

delay was not caused due to any fault of the client. Low incidence of demurrage is also partly a

result of the liberal ‘free storage periods’ at the ports. Table 7.3: Free storage periods at KPT and Port Qasim

139 We were told during our interviews that such occurrences are fairly common. 140 The fastest clearance times witnessed during a recent survey was three hours. World Bank, “Transport

Competitiveness”, 2006. 141 For example, the goods declaration form is now filed online. 142 Key informant interviews. 143 World Bank, “South Asia Regional Integration and Growth” . 144 Ibid. 145 During a study on Indo-Pak informal trade that the author was part of, almost all interviews revealed that

demurrage was a major hurdle in trade as the excessive amount reduced the profit margins substantially. In a few cases, high demurrage costs were even cited as one of the reasons for low formal trade volume. Khan et al., 2006.



No. of free days

KPT (from the arrival date of cargo) Port Qasim (from the date of KRODM-IGM)

8 calendar days 8 calendar days

DG cargo 4 calendar days

All sort of motor vehicles 3 calendar days Source: Ministry of Ports and Shipping, Government of Pakistan.

148. While there is tremendous inefficiency in the entire process, clients often tend to shy

away from challenging such practices. A major reason for such an attitude is that while a

substantial amount of money is siphoned away informally in absolute terms, relative to the

consignment value, the informally expended resources for port clearance are extremely small.

Below, the broad estimates of disaggregated informal costs incurred during port clearance are

listed. Table 7.4: Estimates of informal costs associated with custom clearance PKR

Cost per container (Imports) Cost per container (Exports)

Custom examiner report 300 Examination officer 300

Bribe to Appraiser 200 Appraiser 200

Bribe to Principal appraiser 300 Principal Appraiser 300

Miscellaneous informal charges

2000 per container Miscellaneous informal charges

2000

Clearance agents (overcharge)

0-18,000

Total 2,800-20,800 Total 2,800 Source: Khan et al., 2006.

7.4 Potential avenues for improvement

149. The main need with regard to port management is to instill a more commercial approach

in management and operations decisions. The ports have made progress in modernizing internal

procedures, at least at the ship-shore handling level. Now there is a need to work towards creating

robust down-stream linkages to integrate the entire commerce supply chain. Currently, while

freight forwarders handle all incoming consignments, there are very few that provide integrated

services.

150. There is a significant cushion for reduction of port related costs. Cost reduction could be

achieved not only by reducing tariffs, but also by enhancing efficiency of port handling. Potential

gains in this regard could come from improving the utilization ratios of the berths, especially at

KPT. Infrastructure improvements could also enhance cost efficiency. There is a need to provide

specialized dry bulk handling facilities, removing the limited draught capacity, and providing

night navigation facilities at Port Qasim, among others.

151. The most important concern in the short-run is to remove the glitches in the automation of

the customs procedures and to extend the system to upcountry dry ports. Eventually, one could

envision clearance processes being taken away from the ports to the clients’ end destinations.

Moreover, there is also a need to introduce an Electronic Data Interchange system. Currently, the

automated portion of services at both ports covers only management of vessels but does not cover

other management tasks such as operation at conventional and container terminals146

. With

regard to statistics, the present system covers only vessel statistics but these are not compiled

periodically or systematically. This is another aspect that needs attention.

146 Japan International Cooperation Agency, 2006


Section 8

Major Government Initiatives

152. The government remains cognizant of the multifaceted problems confronting the

transport sector. The irony is that majority of macro level initiatives undertaken by the

government often end up remaining mere visions. The lack of on ground impact is clear from

the fact that as many as 80 percent of our survey respondents said they were not aware of any

major public sector initiatives to improve the functioning of the transport sector.

153. In this section, we do not go into details of the specific projects being undertaken by

the government. Instead, we point to various management related developments, which

theoretically carry the potential of impacting the transport sector favorably in the medium

term. The point being made is that there is no dearth of government attention on the transport

sector. However, contrasting much of the discussion in the preceding sections with the

positive outlook of the facts presented below clearly underscores the vision (policy)-

implementation disconnect afflicting the Pakistan’s transport sector. Literature is silent on

ways to redress this problem, except suggesting ‘broad’ possibilities such as the need to

institute political will and commitment.

154. Notwithstanding the fact that no updated policy has been implemented in the sector as

a whole, GoP has undertaken many attempts to articulate a comprehensive transport policy

that encompasses all sub-sectors. Under a transport sector development initiative (TSDI)

sponsored by the World Bank, major stakeholder consultations were undertaken. The

findings of the TSDI were shared with Ministry of Commerce (MOC) to help in formulating

a national transport policy. The TSDI recommendations included (i) development of an

enabling policy framework that incorporates the perspectives of the three key

stakeholders―the government both as service provider and regulator, the private sector, and

users, (ii) establishment of a national transport policy board, (iii) creation of a unified

Ministry of Transport that encompasses all sub-sectors, (iv) policy reforms and incentives to

encourage the private sector, (v) development of human resources in the sector; and (vi)

enforcement of existing legislation on safety standards, environment, etc. The National

Transport Research Center (NTRC) under MoC was assigned the responsibility to use the

TSDI findings in developing a comprehensive transport policy. However, given the lack of

capacity, NTRC was unable to develop a draft policy document acceptable to GoP147

.

155. A significant new initiative being undertaken by GoP is the National Trade Corridor.

The strategic framework for the National Trade Corridor Implementation Program has been

developed with the aim of reducing the cost of doing business by bringing the trade and

transport logistics chain in the country up to international standards148

. The National Trade

and Transport Facilitation Committee (NTTFC) has been established to serve as a platform of

interaction between the public and private sectors on trade logistics issues. The institutional

147 Asian Development Bank, “Transport Policy Note”, 2004. 148 Government of Pakistan, Annual Plan 2006-07 , 2006.



setup, structure and source of funding for the NTTFC are weak and the Committee needs

further strengthening149

. Already, the Committee appears to have made progress with regard

to developing and improving the goods declaration form and transport clearance

documents150

. In addition, a minimum standard of professional qualifications and standard

training conditions for freight forwarders has been developed. Also, the acts for the carriage

of goods by road and air have been reviewed. However, as mentioned in the text, much still

remains to be done to remove the confusion in domestic legislation.

156. The policy framework for the National Trade Corridor incorporates several key

reforms in the railway sector as well. It has been broadly endorsed by the Prime Minister.

Reforms relevant to trade facilitation include preparing a Business Plan and Marketing

Strategy, changing the present departmental structure and governance, and separating core

and non-core, and passenger and freight services.

157. Other measures undertaken by GoP in the recent past include the approval of a revised

National Aviation Policy, implementation of the World Bank funded TTFP, and

implementation of the national Khushal Pakistan program, which sought to improve rural

transport access at the district level151

. The TTFP’s primary objective was to develop a

public/private sector collaborative institutional framework to develop and support the first

phase of the country’s medium-term trade and transport facilitation program. The latter

intended to modernize the traditional procedures, including information flows, documentation

and related legislation152

. TTFP successfully achieved some of its targets such as introducing

a new uniform Goods Declaration, which can serve as the basis for a single administrative

document, introduction of new professional standards and a training program for freight

forwarders, and initiation of a process to formulate new transport legislation for carriage of

goods by air, sea and road. However, TTFP “did not achieve all of its objectives because it

tried to do too much, too quickly, and with inadequate resources”153

.

158. In addition, a National Highway Safety Ordinance has been enacted. The purpose of

the Ordinance is to present the legal foundation for developing the Highway and Motorway

Police Force154

. The Ordinance includes revised legal axle road limits for commercial

vehicles and presents the legal framework for axle load enforcement155

. The NHA is also in

the process of developing a National Highway Development Plan, which concentrates on

strengthening existing assets and providing linkages from the main road system to isolated

areas and sub-regional border crossings156

. GoP has articulated a clear development priority

for highways and has commenced a multi-year PKR 35 billion National Highway

Improvement Program157

. Moreover, a road fund account has been established which will be

utilized to allocate significant financing for the road network conservation.

159. A National Transport Master Plan Study was recently completed. The study provides

a comprehensive overview of the transport sector and outlines the way forward. The first

phase of the study was supposed completed by March 2006 and focused on the collection of

transport statistics. There are also two public research and analytical organizations that work

on the transport sector in Pakistan and periodically give assistance to public: the NTRC and

the National Institute of Transport (NIT). However, both lack objectivity and need to liaison

with the private sector on a regular basis in order to provide valuable inputs to policy makers.

149 World Bank, “Transport Competitiveness”, 2006. 150 Asian Development Bank, “Multitranche Financing Facility”, 2005. 151 World Bank, “Highways Rehabilitation Project”, 2003. 152 World Bank, “Trade and Transport Facilitation Project”, 2001. 153 Raven, 2001. 154 World Bank, “Pakistan Transport Sector: Overview”,

<http://web.worldbank.org/WEBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT>. 155 Asian Development Bank, “Multitranche Financing Facility”, 2005. 156 Ibid. 157 World Bank, “Highways Rehabilitation Project”, 2003.



160. In 2005, the GoP adopted the Medium Term Development Framework (MTDF),

which aims to raise expenditures on infrastructure, (including transport) to approximately 4

percent of GDP by 2009-10158

. Several factors formed the basis for the increase in funding.

They include optimal employment of the present capacity with priority on restoring and

upgrading transport infrastructure, careful and cost-efficient investments in economically

feasible new roads, development/improvement of the road network to assist trade growth,

development of innovative funding mechanisms and improvement of private sector

participation, precedence to road maintenance and safety, effective control of overloading on

roads, and improvement of capacity of road sub-sector agencies159

.

158 World Bank, “Pakistan Transport Sector: Overview”,

<http://web.worldbank.org/WEBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT>. 159 Planning Commission, Government of Pakistan, Medium Term Development Framework 2005-2010, 2005.


Section 9

Conclusion

161. Given that the ultimate objective of this study is to inform policy makers of the role

played by the transport sector in domestic commerce, one underlying fact needs to be

understood. While the road, rail and aviation industries are competitors, maximum gains will

be realized not by altering the market share of one sub-sector vis-à-vis the other, but by

ensuring that each sub-sector attains the primary market share in commodities it is most

efficient at transporting. Arguably, an overall competitive environment among the three

services would potentially lower costs and enhance efficiency of the entire sector. However,

each service by its very nature has an inherent advantage in performing certain functions.

Ideally, policy makers ought to focus on devising incentives for each service to capitalize on

its respective comparative advantage. For instance, rail is most cost effective in transporting

containerized cargo over long distances. Aviation is most suited to dealing with perishable

items and courier mail. It also has an unmatchable advantage in carrying time-constrained

passengers. Road transport’s advantage lies in the minimum number of handlings, door-to-

door delivery, and the ability to carry loose/bulk cargo. At present, the utility of such

segregation among services is not realized, and given the dismal state of the rail and aviation

sectors, it remains academic. The foremost task should be to remove the inefficiencies within

the three sub-sectors.

162. The discussion in the preceding sections points to three major factors that determine

the degree of efficiency in each sub-sector. Perhaps the biggest constraint afflicting the rail

and aviation sectors is the perverse governance protocols. Both industries are influenced by

bureaucratic functioning and remain politicized in terms of appointments of officials. The

impact is reflected in the performance of both industries. According to a World Bank report,

“Rail carries such a small proportion of freight that, objectively, closure would hardly matter

to the national economy. Rail ……….is not an economic necessity”160

. There is little hope

for a turn around in the service under current bureaucratic governance procedures. The first

step for PR is to gather the political will to overhaul the very approach of the service. Only

then can measures such as involving the private sector, improving infrastructure, and the like

result in efficiency gains.

163. Like rail, there is considerable room for improvements in the aviation sector’s

governance protocol. While client dealing is fairly efficient, the sub-sector is managed by a

highly bureaucratic, and often unprofessionally managed body, the CAA. There is an urgent

need to inject the spirit of competitiveness into CAA official ranks, with the hope that it will

allow a more competitive environment to follow in the whole sector. Unless civilian aviation

experts are allowed to take charge of the functioning of the sub-sector, much needed

measures such as lowering market entry barriers and removing PIA’s privileged position are

unlikely to materialize.

160 World Bank, “Transport Competitiveness”, 2006.



164. The second major determinant of performance is the degree of competition in the sub-

sector. The present situation in the road and the port sub-sectors contrasts sharply with that of

rail and air. While the latter two remain monopolized, the road industry is completely de-

regulated and maintains minimal entry barriers. Despite being highly disorganized and

providing unstandardized services, the industry has managed to attract bulk of the transport

traffic. The gains from private sector competition are obvious from the remarkable turn

around in the performance of the ports, especially the outsourced berths at KPT. Granted, the

quest for competition has to be approached realistically, ensuring that basic citizen needs

(cheap modes of transport) are not compromised. Regardless, state monopolies in no way

provide a viable alternate to a competitive environment.

165. Finally, the transport sector is no exception to the all-pervasive problem of the policy-

implementation disconnect across Pakistan. First, the presence of up-to-date and dynamic

legislation is a necessity. The transport sector suffers from highly dated legislations, which

have little meaning under the present scenario. While new policies/rules are being

contemplated for virtually all sub-sectors, implementation of such legislations continues to be

delayed resulting in persistent efficiency losses in the sector. Despite a number of exemplary

macro level initiatives by the government, hardly anything has materialized in concrete terms.

Moreover, transport legislations such as those for the road industry fail to influence

functioning due to lax implementation.

166. The interplay of the three factors: bureaucratic governance, degree of competition and

implementation performance end up determining the output of the transport sub-sectors. The

divergent scenarios with regard to these factors in each sub-sector have led to equally

disparate performance outcomes. The road sector has grown phenomenally. Its competitive

environment has been complemented by aggressive road infrastructure development.

Notwithstanding, significant challenges remain in transforming the road sector into an

organized industry. Currently, the sub-sector is organized along traditional lines. Moreover,

there are tremendous bottlenecks in terms of regulatory frameworks, lack of access to credit,

zoning restrictions, and other governance concerns. In the final outcome, the functioning of

the sector remains inefficient, implying significant potential for additional time and cost

savings.

167. Until recently, PR did not respond to the competition from the road sector. It

continued to operate the entire network although the rationale for several lines no longer

exists, persistently attempted to cross-subsidize passengers for freight and the non-core

network from the core network, offered the traditional pattern of supply-driven services, and

failed to induce cost efficiencies into its operations161

. Significant measures such as

improving delivery times, reliability, information tracking, among others are still required to

improve the quality of freight services. The current situation on these counts is dismal. The

inefficient rail operations are forcing a larger than usual percentage of low-value commodity

freight onto trucks. Rail freight is now primarily confined to areas where rail is protected by

regulation162

. While some contend that this should prompt authorities to focus solely on the

road sector, the fact is that outright supremacy for road has negative spin-off effects on the

economy. The exceptionally high share of road transport in movement of commercial freight

costs the economy PKR 60-90 billion annually in extra fuel usage and subsidies on diesel.

Moreover, an extra PKR 30 billion per year is spent on additional road user costs163

.

168. The aviation sector is unique in that its speed of delivery cannot be matched by any

other sector. However, the downside of its operations is the significantly higher costs as

compared with road and rail. While some of these cost are artificial, induced as a result of the

161 Ibid. 162 Ibid. 163 World Bank, “The Indus Trade”, 2005.



high license fees for operators, and high landing and housing charges for aircraft, reduction in

these will still not allow the industry to become price competitive. The optimal utility of the

sector with regard to domestic commerce could be realized by gearing it to specialize in

transporting perishable items, courier mail, and high-end passengers.


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Annex 2

Notional illustration of computation of weights for output index164

Step 1: Calculation of price/passenger-km

N Routes Fare/Passenger

(PKR)

Passenger/Trip Trip/Year Revenue/Year (3 x4 x 5)

(PKR)

Passenger/Year Km/Route Km/Year (5 x 8)

Total passenger-

kms (7 x 9)

1 2 3 4 5 6 7 8 9 10

1 Rawalpindi To Peshawar 80 42 1095 3679200 45990 167 182865 8409961350

2 Rawalpindi To Peshawar 70 35 1095 2682750 38325 167 182865 7008301125

3 Karachi To Rawalpindi 1000 40 365 14600000 14600 1567 571955 8350543000



6 Karachi To Muzafarabad 1000 35 365 12775000 12775 1709 623785 7698853375

7 Peshawar To Lahore 250 42 730 7665000 30660 436 318280 9758464800

8 Peshawar To Lahore 250 40 730 7300000 29200 436 318280 9293776000

9 Quetta To Karachi 500 35 365 6387500 12775 715 260975 3333955625

10 Quetta To Karachi 500 35 365 6387500 12775 715 260975 3333955625

11 Rawalpindi To Lahore 200 36 1095 7884000 39420 275 301125 11870347500

12 Rawalpindi To Lahore 170 36 1095 6701400 39420 275 301125 11870347500

n Rawalpinid To Lahore 290 42 730 8891400 30660 275 200750 6154995000

yy

y

uKP

RP

where,

Pu = Price per passenger kilometer for the road passenger service

Ry = Revenue per year for each respondent included in our sample data

Py = Total passengers per year based on our sample data

Ky = Total kilometers traveled in a year based on our sample data

Step 2: Calculating operating revenue of road passenger services at the national scale

Rrdp = Ordp x Pu

where,

Rrdp = National level revenue for road passenger services

Ordp = National output for road passenger services

Step 3: Calculating relative weights

In order to generate relative weights, national operating revenue for road freight services is calculated using an

identical methodology. National revenues for rail passenger and freight services are available in published data.

Say,

Rrdf = National revenue for road freight service

Rrlp = National revenue for rail passenger service

Rrlf = National revenue for rail freight service

Wrdp = relative weight for road passenger service

Wrdf = relative weight for road freight service

Wrlp= relative weight for rail passenger service

Wrlf = relative weight for rail freight service

X= Rrdp + Rrdf + Rrlp + Rrlf

164 Weights for value added and price indices have been computed similarly, but using different proxies (see

section 3.2 and 3.3).



Relative weights for each service equal:

X

RW

rdp

rdp

X

RW

rdf

rdf

X

RW

rlp

rlp

X

RW

rlf

rlf

Existing data sets used to compute output index

1. Output of the road sub-sector (passenger-kms and ton-kms) Pakistan Economic Survey 2005-06

2. Output of the rail sub-sector (passenger-kms and ton-kms) Pakistan Railways Year Book 2004-05; Pakistan Statistical Year Book 2005

3. Operating revenue of the rail sub sector Pakistan Railways Year Book 2004-05

Note: All other required information was generated from the primary survey data

Economy & Finance

The State of Domestic Commerce in Pakistan Study 7 - An Overview of the Transport Sector