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Stimulating investment in logistics

September 10, 2012


PAKISTAN is said to be moving quietly, though rather slowly, towards transforming state enterprises by removing institutional, technical and ideological snags, paving the way for private sector participation to address infrastructure deficit.

The Infrastructure Project Development Facility (IPDF) claims to have completed its homework that includes procedural frameworks, feasibility studies, financial evaluation systems etc, to forge ahead in the targeted direction in an organised fashion. It has also facilitated the closing of a few deals and predicted bright future for public private partnership and improved service delivery by restructured state enterprises.

“Pakistan requires to invest Rs1.5 trillion ($15 billion) annually to sustain and expand physical infrastructure, a cornerstone for conducive business environment. The cash-strapped government is clearly in no position to handle the situation on its own. The government has therefore created the IPDF to attract private capital in infrastructure sector”, an expert told Dawn citing World Bank and the Planning Commission studies.

The IPDF was launched in 2006 under the umbrella of the ministry of finance as part of the ‘Medium-Term Development Framework’ to promote public private-partnership. The initiative has been carried forward by the present government though the pace of progress is not impressive. The IPDF website is not updated since the last activity was reported in 2008.

Anwar Adil, the IPDF CEO, accepted negligence in updating the website but insisted that an efficient team of young, trained professionals is doing valuable innovative work necessary to set the ball rolling. “Yes, our work so far is hidden from the public eye. May be, we did not need so much public attention at this stage.

“We are working on a number of projects. We can provide you with details if you give us time. Some projects I can mention from the top of my head would include the recently concluded National Highway Authority (NHA)deal with a Malaysian company”. Adil Anwar, told Dawn over telephone from Islamabad.

“The NHA has signed a build-operate-transfer (BOT) contract with Binapuri Holdings, a Malaysian company, for the construction of Karachi-Hyderabad Motorway (M-9). Under this project, the existing 4-lane Super Highway will be upgraded in to 6-lane Motorway over three years.

“There is another project of hostel facility for Comsat. However, I am excited over the Pakistan Railway initiative called ‘track access project’ to run private freight and passenger trains. Instead of leasing out tracks, Pakistan Railways is working on a proposal to cut a deal with the private sector to operate their own rolling stocks driven by private engines”, Anwar Adil told Dawn over telephone from Islamabad.

“We looked at six products for shipment through designated freight trains. These include oil, fertiliser, general cargo, containerised goods, cargo for Afghanistan, coal and cement. The laid down procedures were followed in a transparent manner.

Initially 15 bids were received that included Chinese, Korean and a Middle Eastern company.

“After due diligence three companies were selected. These include a Dubai-based company that has entered the process in collaboration with a company of Service Industries of Pakistan, NLC and Pakistan International Container Terminal.

“I know for a fact that Chinese and Koreans are waiting on the sidelines to deal with the final winner of the contract”.

An insider in the economic team of the government said foreigners were kept out because of earlier cabinet decision to let foreigners buy stakes in major infrastructure enterprises only if they collaborate with a local partner before entering the bidding process. The decision was inspired by the fear of hostile takeover of vital services by foreign companies with political agenda.

An ex-member of the IPDF governing board termed such inhibitions baseless. “These huge entities feed coffers. If you are aware of perk and privileges of managers in loss-making state entities you would understand instantly the reason for the resistance to any move towards restructuring”, he said.

The private sector partly blames inefficient and insufficient physical infrastructure for its woes. “Beside the deficient power sector, the depleting standard of logistic facilities has aggravated challenges for business community”, commented a Karachi-based tycoon with a major interest in commodity trade.

“The cement sector is under serious stress. Capacity utilisation of the industry slumped to 68.29 per cent during July-August, the lowest in ten years. The local demand did not pick up at the expected rate because of economic slowdown, and logistic bottlenecks did not allow the sector to cover the local shortfall by responding to demand from across the border in India”, a source in the industry said.

He was asked: Why did the private sector not consider investing in road and rail transport to resolve the issue on the long-term basis? “Because we were not allowed to”, pat came the reply. A representative of a cement company told tales of rigidities in the relevant government authorities.

The story was confirmed by other sources in Islamabad since the Chairman Pakistan Railways was not available. “Yes, they did try but failed to get the support they needed from the government”, a source in the ministry of industry confided.

“I can give you details later but we did make an effort to manage problems of logistics. But the number of trucks designated for cement transportation to India were fewer than what we needed. Besides, because of the bulky nature of the product, train transport was more economical. So, we approached Pakistan Railways for lease of rail tracks. The proposal was shot down as we were told the segment generated business for Pakistan Railways”, a representative of All Pakistan Cement Association said.

Pakistan’ social and political stability, in the ultimate analysis, rests on economic progress. To that end, the economy needs to grow by at least five per cent per annum. Without a pickup in investment, this is not achievable. As new investment also depends on the quality of available infrastructure facilities, investment in infrastructure projects merit a high priority.

The cash-strapped government can clearly not manage the kind of investment that is needed. Besides the dismal performance of major state enterprises (PIA, Pakistan Railways, Pakistan Steel Mills, etc.) lend strength to the view that the private sector must be on the driving seat to turn around state entities and make them commercially viable efficient service providers.

Many countries like China, Argentina, Brazil, UK, Chile and India have succeeded in promoting public private partnership with institutional development, standardised contract procedures and appropriate risk- sharing mechanisms.

However, a cross-country analysis reveals that models differ widely across countries and sectors. Overall, many developing countries have developed their power projects, roads, telecom, ports and airports through partnership models that suited their national and business cultures.