MENA Logistics. An Assessment of Opportunities and Constraints in the Logistics Industry in Pakistan. Pakistan Logistics Constraints Analysis

Transcription

1 2009 Pakistan Logistics Constraints Analysis 1 MENA Logistics An Assessment of Opportunities and Constraints in the Logistics Industry in Pakistan Idom Consulting 31/7/2009

2 Table of Contents 2 Table of Contents 1. Objective and Methodology Executive Summary The Logistics Sector at a Glance Importance of the Logistics Sector Composition and Characteristics of Pakistan s Transport Market Where in the Value Chain Are Logistical Weaknesses? Road Transport Road Infrastructure Assessment Road Services Assessment Road Transport Recommendations Improve the Operation of the National Trade Corridor (NTC) Improve Regulation of the Transport and Trade Sector Support Incentives for the Renewal of Fleets in the Freight Transport Sector Reshape Current Truck Insurance Schemes Maritime Transport Maritime Infrastructure Assessment Maritime Services Assessment Maritime Transport Recommendations Liberalize the Maritime Transport Industry Quality Assurance Programs Rail Transport Rail Infrastructure and Services Assessment Rail Transport Recommendations Promote PPP Initiatives for the Development of the Rail Network Introduce Modern Management Techniques in Pakistan Railways Freight Division Air Transport Air Infrastructure and Services Assessment... 28

3 Table of Contents Air Transport Recommendations Pun in Practice Vision 2030 Policies Other Logistical Infrastructure Freight Villages Reefer Storage Trading Spaces Logistical Infrastructure Recommendations Development of Public-Private Trans-Freight Stations and Reefer Storage Areas Development of Wholesale Central Markets Cross-Cutting Issues Logistical Education Customs and Inspection Recommendations Develop Logistic Training Modules Develop IT in Logistics Awareness Program: How Useful Is IT In My Supply Chain? Customer-Oriented Approach in Customs Conclusion and Going Forward Annex Acronyms Bibliography List of Interviewees Projects Summary The Logistics of Citrus... 45

4 Table of Contents 4 Tables Index Table 1: Logistics Performance Index (LPI). Source: Doing Business, World Bank Table 2: Road network size (in km) in terms of a country s area (in sq-km). Source: own analysis Table 3: Current projects in road infrastructure. Source: Ministry of Transport Table 4: Current projects in maritime infrastructure. Source: KPT & PSA International Table 5: Pakistan-Germany rail network size comparison. Source: Pakistan Railways, Eurostat and BMI Table 6: Pakistan-Germany rail network usage comparison. Source: Pakistan Railways, Eurostat and BMI Table 7: Current projects in rail infrastructure. Source: Ministry of Railways Table 8: Fruits conservation temperature requirements and maximum life. Source: University of California Figures Index Figure 1: LPI vs. GDP-PPP per capita. Source: Doing Business, World Bank Figure 2: Pakistan s Logistics Performance Index (LPI). Source: Doing Business, World Bank Figure 3: Pakistan s Logistic Sector Size. Source: Pakistan International Freight Forwarders Association estimation Figure 4: Transport mode split in terms of tons-km transported. Source: Business Monitor International + Eurostat Figure 5: Orange exports value chain. Source: own analysis from Doing Business and Trading across Borders data Figure 6: Orange exports lead times. Source: own analysis, Doing Business and Logistics Performance Index Figure 7: Orange exports price structure. Source: local experts + interviews with orange exporters Figure 8: Pakistan National Motorways. Source: National Highway Authority (NHA) Figure 9: Container traffic at Pakistani ports (in 000 TEUs). Source: Drewry Consultants Figure 10: Duration of customs procedures. Source: World Bank

5 Objective and Methodology 5 1. Objective and Methodology IFC (International Finance Corporation), part of the World Bank Group (WBG), commissioned Idom Consulting to conduct an assessment of the logistics sector in Pakistan. The objective of the assessment was to identify priority issues along the logistical value-chain which constrain the competitiveness of the agro and time-sensitive manufacturing sector in Pakistan. The ultimate objective of this assessment is to provide recommendations as to how to remove critical sector constraints and open the sector for investments in order to further its development and ultimately strengthen private sector development in Pakistan. While extensive research on the transport and logistics sectors in the country already exists, this assessment is not intended to be a general revision of the already available sector data and information. Instead, this report seeks to produce findings and recommendations based on original analysis geared towards the stated objective. The assessment was conducted over a six-month period and was guided (but not limited to) the analysis of a case study. Initial desk research showed that in the perishable goods segment, citrus is one of Pakistan s top commodities for both export and the domestic market. A detailed and extensive mapping and analysis of the logistic and value chains of citrus exports to European markets was conducted. The analysis focused on quantifying time and cost factors at each point of the logistics chain. The citrus logistic chain in Pakistan was then compared to that of a benchmark European Union (EU) country. Idom Consulting chose Spain, which is a top exporter of oranges and other time-sensitive commodities and has successfully undergone major developments in its logistics sector in the last 20 years. This was followed by extensive field work that comprised interviews with representatives at all levels of the logistics value chain. The field work and analysis was by no means limited to the citrus sector, and stakeholders in other sectors were consulted to ensure that findings and recommendations were applicable to other time-sensitive sectors. The initial field work and analysis was followed by a high profile focus group in Karachi. The goal of this focus group was to present, discuss and validate initial findings and prioritize them, and close information and data gaps. Participants came from various fields, including exporters of different sizes, retailers, freight forwarders, and shipping companies. These consultations in the field were followed by a questionnaire-based survey to confirm workshop conclusions and bring a more detailed in-depth analysis which produced final findings and recommendations. This report summarizes the main findings and provides recommendations on assistance needs in the logistics sector in order to further develop Pakistan s logistics sector and attract investment.

6 Executive Summary 6 2. Executive Summary Pakistan s logistics is an important economic sector with significant growth and investment potential. It is also a key driver for private sector development, economic growth and overall development. There is a clear relationship between a country s logistics performance, lead times and its export performance. Yet, a detailed analysis of the time-sensitive citrus value chain in Pakistan revealed that there were critical inefficiencies in the country s logistics value chain, resulting in a 45 percent excess in export times (compared to Spain) and higher logistics costs (35-40 percent of retail price compared to 22 percent in Spain), leaving much room for improvements in the sector. This report provides a detailed analysis of the numerous obstacles in Pakistan s logistics processes and provides recommendations for improvements on a sub-sector basis. Pakistan s weak road transportation infrastructure and services were found to be the biggest challenge facing the industry. The main problem facing Pakistan s road infrastructure is the critical situation of the National Trade Corridor (NTC), which faces severe capacity bottlenecks due to poor physical condition, the presence of non-motorized traffic, and the extensive commercial activities located along it. Road services suffer from a lack of trucking industry regulation, which produces numerous downstream problems. The dependence of the Pakistani logistics chain on road services makes it critical for these problems to be corrected to decrease export time and increase product quality, opening up new markets for exports. Inefficiencies in the maritime sector are also affecting Pakistan s logistics performance. Maritime transport accounts for 91 percent of Pakistan s international trade. This fact makes reforming and improving the sector particularly important for Pakistani goods to reach international markets. Current regulation is a key disincentive for potential investors, holding back global logistics operators, shipping companies, and other related services providers from fully developing their service in Pakistan. This ultimately translates into higher costs for importers and exporters. Improving maritime infrastructure and services was identified as an opportunity for critical improvement and high impact, both in terms of facilitating trade and investment and for creating jobs. Rail services in Pakistan are weak and fail to offer an alternative to road transportation, with weak infrastructure and a sector dominated by a public operator. Rail transport is currently only used for the transport of a few non-time sensitive goods. Developing rail infrastructure and services has cost advantages, is more environmentally friendly than road transportation, and will take some of the stress away from the overburdened and underdeveloped trucking industry.

7 Executive Summary 7 There are also cross-cutting obstacles in the sector that will need coordinated efforts by the government and private sector to improve logistics efficiencies. These include: establishing freight villages to serve as logistics hubs, investing in reefer storage facilities to increase the shelf life of perishable goods, and developing trading platforms for smaller and medium size producers to sell their goods. Such initiatives would not only help large players in the sector, but will also help those at the beginning of the supply chain like small farmers and producers. Going forward, further research needs to be done to pinpoint problems and opportunities for the private sector to engage and profit from the logistics industry. This process will need to include in-depth conversations with private sector stakeholders and the government to identify ways the public and private sectors can work together to build a sustainable and efficient logistics industry. Business and investment opportunities and projects will need to be mapped in detail based on areas that are identified as being highest impact. As part of the effort to engage the private sector in investing in logistics opportunities, interested private sector players will need to be identified, profiled, and encouraged to communicate with policy makers. Assisting the private sector in becoming involved in the logistics industry will help policy makers understand which policies need to be changed and will encourage more private sector investment.

8 The Logistics Sector at a Glance 8 3. The Logistics Sector at a Glance 3.1 Importance of the Logistics Sector Logistics is described 1 as the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements. Note that this definition includes inbound, outbound, internal and external movements, as well as the return of materials for environmental purposes. However, other factors such as customs inspection or the level of support from the banking and insurance sectors also have a notable influence on a country s logistics abilities 2. Efficient logistics is a necessary condition for a country s overall development and economic growth. Pakistan can make improvements in most of the areas included in the above definition. In that context, a good way to measure a country s logistics expertise is the Logistic Performance Index (LPI), an indicator compiled by the World Bank. According to this index, Pakistan lags slightly above the regional average and is clearly behind the EU average 3. Pakistan s biggest weaknesses according to the LPI are in the Infrastructure (2.37) and Customs (2.41) categories. Country Overall LPI UAE 3.73 EU 3.67 Israel 3.21 Saudi Arabia 3.02 Oman 2.92 Jordan 2.89 Tunisia 2.76 Pakistan 2.62 MENA 2.42 Morocco 2.38 Egypt 2.37 Lebanon 2.37 Syria 2.09 Algeria 2.06 Table 1: Logistics Performance Index (LPI). Source: Doing Business, World Bank. 1 Source: Council of Logistics Management. 2 A graphic representation of the complexity involved in logistics can be found in the annex of this document. 3 In terms of LPI, one is the lowest possible score, while five is the highest.

9 The Logistics Sector at a Glance 9 This is important because there is a clear relationship between logistics performance, lead times and export performance. World Bank Group studies have shown that a 10 percent reduction in overall lead time results in a 4.3 percent export increase in countries in the Middle East and North Africa. Moreover, there is a clear link between the performance of a country s logistics sector and its overall level of development. The LPI is clearly positively correlated with the country s gross domestic product (GDP) per capita at purchasing power parity. Countries with a high LPI typically have a high GDP-PPP. LPI Slovakia CORRELATION LPI vs. GDP-PPP Germany Spain Singapore Pakistan Morocco Egypt Algeria GDP-PPP per Capita(US$) Figure 1: LPI vs. GDP-PPP per capita. Source: Doing Business, World Bank. Figure 2: Pakistan s Logistics Performance Index (LPI). Source: Doing Business, World Bank.

10 The Logistics Sector at a Glance 10 The logistics sector is not only important for private sector and economic development, but it is equally important in and of itself as an economic sector with significant growth and investment potential. The sector in Pakistan moves a yearly figure estimated to be over USD 500 million. Transport USD 480 million Warehousing USD 10 million Other Services USD 40 million Total Market Size USD 530 million Figure 3: Pakistan s Logistic Sector Size. Source: Pakistan International Freight Forwarders Association estimation. 3.2 Composition and Characteristics of Pakistan s Transport Market Maritime transport accounts for 91 percent of Pakistan s international trade, while road accounts for most of Pakistan s domestic traffic, accounting for roughly 93 percent of the total tons-km transported within the country. While most OECD countries also heavily rely on road transportation, rail services are used in a higher percentage in OECD countries than in Pakistan (16.0 percent in OECD vs. 2.4 percent in Pakistan), as seen in the below graphs. 2.4% 0.2% 5.3% 5.4% 93.1% Road Rail 16.0% River Air Pipeline 73.1% Figure 4: Transport mode split in terms of tons-km transported. Source: Business Monitor International + Eurostat.

11 Spain Pakistan Pakistan Logistics The Logistics Sector at a Glance Where in the Value Chain Are Logistical Weaknesses? While the snapshot of Pakistan s logistics sector provides an overview of the size and composition of the transport sector, and the importance and frequency of the different modes of transportation, it does not look at quality and efficiency. The citrus value chain was analyzed in detail, in order to identify logistical inefficiencies and bottlenecks in a time-sensitive value chain of a perishable product. In order to do this, we mapped the transport of a container of oranges from the harvesting field to its destination market, both domestically and abroad. At each stage of the route, we identified key actors and quantified the involved time and costs (the Pakistani Case ). The same exercise was carried out for a container of oranges in the value chain in Spain (the Spanish Case ). The Pakistani Case was benchmarked against the Spanish Case, comparing the overall structure of the logistical value chain, and the time and costs involved at each stage. Analysis of Orange Export Logistics Chains Highly manual process + Lack of refrigerated storage facilities Production Field Done in trucks, often unrefrigerated (or with the cooling system turned off) Low tech plants with limited cold storage space Processing Plant Highly bureaucratic procedure Customs Inspection Bodies Unsuitable facilities for perishables Origin Port Lack of refrigerated warehouses within or nearby ports The Karachi and Qasim ports account for almost all the container traffic in the country Destination Port (export) Cost Structure Concept Time (non-cumulative) Cost in USD (non-cumulative) Harvesting Field Processing* Documents Preparation Inland Truck Transport to Port Customs Clearance Access to Port Port & Terminal Handling Sea Transport*** 0.5 Days <1 Day 11 Days 6 Days 3 Days <1 Day 4 Days Days 90 $/Ton - 96 $/20-foot container** Time Days <1 Day 4 Days Cost in USD (non-cumulative) 295 $/Ton $/20-foot container** 200 $/20-foot container** Days To Final Destin.: 2-4 Days 500 $/20-foot container** 200 $/20-foot container** $ 1,200-1,500 $/ 20-foot container 1.5 Days 0 Days 2 Days 4-6 Days 150 $/20-foot container** $ $/ 20-foot container Figure 5: Orange exports value chain. Source: own analysis from Doing Business and Trading across Borders data. Due to inefficiencies at several points in the logistics chain, citrus export times in Pakistan were found to be 27 days longer than in Spain. Although 55 percent of this time (15 days) is due to Pakistan s longer distance to the European destination markets, 45 percent (12 days) is due to Pakistan s lower efficiency in the logistics chains. In sum, inefficiencies in Pakistan s logistics value chain are responsible for a 45 percent excess time.

12 The Logistics Sector at a Glance 12 Days Maritime transport to destination (Rotterdam) 55% 45% Port and terminal handling Customs / technical control Inland transport and handling Total Time Difference is of 27 Days 5 0 Pakistan Spain Document preparation Figure 6: Orange exports lead times. Source: own analysis, Doing Business and Logistics Performance Index. These delays and the inefficiencies that cause them also have an impact in terms of logistics costs. In Pakistan, logistics costs represent on average percent of the total retail price, whereas logistics costs account for only 22 percent in Spain. Price per ton (USD) Pakistan Spain Retail Price Importer Price Price at Destination Producer Price Price at Harvesting Field 1 Figure 7: Orange exports price structure. Source: local experts + interviews with orange exporters.

13 The Logistics Sector at a Glance 13 There are opportunities to improve reliability, predictability, lead times, and costs in the Pakistani citrus export chain. These opportunities are at the most critical points of the logistics chain, in areas such as trucking, warehousing, customs, and maritime services. The next chapters will look at the most critical of those inefficiencies, describe the trouble spots in more detail and analyze the underlying cause as well as suggest initiatives to address these.

14 Road Transport Road Transport After mapping the Pakistani logistics industry, the assessment found that while all modes of transportation (road, rail, air, and shipping) exist, Pakistan s freight transport is dominated by road transportation. This is similar to most OECD countries; however rail services play a bigger role in these countries than in Pakistan. Pakistan s weak road transportation infrastructure and services were found to be the biggest challenge facing the industry. The main problem facing Pakistan s road infrastructure is in the critical situation of the National Trade Corridor (NTC), which faces severe capacity bottlenecks due to poor physical condition, the presence of non-motorized traffic, and the extensive commercial activities located along it. Road services suffer from a lack of trucking industry regulation, which produces numerous downstream problems. The dependence of the Pakistani logistics chain on road services makes it even more vital for these problems to be corrected to decrease export time and increase product quality, thereby opening up new markets for Pakistani exports. 4.1 Road Infrastructure Assessment In Pakistan, there are approximately 260,000 km of roads, of which about 60 percent are paved, mainly comprising single and two lane roads. The main artery in the country is the National Trade Corridor (NTC), a 1,760 km long highway that crosses Pakistan from north to south. Its length is less than 1 percent of the total road network of Pakistan, but it serves over 80 percent of the urban population and carries over 60 percent of inter-city traffic. It is managed by the National Highway Authority (NHA). Figure 8: Pakistan National Motorways. Source: National Highway Authority (NHA).

15 Road Transport 15 Pakistan s road system main challenge is to raise its service standards. Transit times currently are three times those in Europe and East Asia. A trip from Lahore to Karachi (1,260 km) takes about 2 days, while one from Peshawar to Karachi (1,700 km) takes 3 days. The presence of non-motorized traffic and even pedestrians reduces traffic capacity. Operating conditions are further exacerbated by extensive commercial activities located along the roads, poor physical condition of the roads, and lack of traffic management in towns. The consequence is in the high travel times that particularly penalize long-distance trips. Another feature of Pakistan s road network is its low density, which leaves several areas underserved. This shows when comparing Pakistan s road density with that of neighboring countries such as Bangladesh, Sri Lanka, India or Afghanistan. In this comparison Pakistan only is in a better position than Afghanistan. Country Network Size Area Ratio Bangladesh 239, , Sri Lanka 97,286 65, India 3,316,452 3,287, Pakistan 259, , Afghanistan 42, , Table 2: Road network size (in km) in terms of a country s area (in sq-km). Source: own analysis. In that context, different roads are currently being upgraded as part of a plan by the country s government to improve the national road infrastructure. Build-Operate-Transfer (BOT) schemes 4 are used for some of these new developments. Project Investment (USD Million) Time Frame Funds Origin Sheikhupura D.G. Khan motorway (405 km) 642 (BOT) n.a. NHA Makran Coastal road (653 km) 420 (BOT) n.a. NHA Gwadar - Ratodero road (885 km) 296 (BOT) 2012 NHA Rawalpindi - Islamabad ring road (80 km) RDA Table 3: Current projects in road infrastructure. Source: Ministry of Transport. 4.2 Road Services Assessment Weak road transportation services were identified as one of the main logistical challenges in Pakistan. Because of bottlenecks like a large informal trucking sector and a lack of refrigerated vehicles, Pakistani perishable goods face a lower price and shelf life, making it more difficult to compete internationally. 4 BOT: this is a form of project financing, in which a private entity receives a concession from the public sector to finance, design, construct and operate a facility according to a concession contract. This allows the project promoter to recover its investment in the project, as well as the subsequent operating and maintenance expenses.

16 Road Transport 16 Not only is trucking the main way for moving goods domestically, but it is also an essential link in the Pakistani export chain for goods shipped by sea and, to a lesser extent, by air. Truck loads account for 206,404 million tons-km of goods per year, about 93 percent of the country s total. For agricultural goods, there is no alternative transport mean for transporting fruits and vegetables out of rural harvesting areas. Despite its importance, the Pakistani road transport is immature as a service sector. One of the issues identified in our study is a lack of qualified service providers. Most providers have a small fleet, reflected in the industry average of below two trucks per owner. This means that most trucks are not owned by a formal company, but are mostly informal businesses owned by individual drivers. Moreover, many trucks are in poor condition, with a vehicle park of a high average age, and few specialized vehicles with reefer devices or refrigerated trucks available to transport perishable goods. Other problems include the lack of standard cargo and load trucking legislation, and limited availability of insurance coverage for cargo. Freight forwarders in Pakistan do not have a widely accepted liability scheme comparable to general practice in the global forwarding business. This occurs despite the considerable changes towards openness that the insurance market in Pakistan has undergone since 1996 (part of a wider reform process of the financial sector by the government). Foreign investors are now allowed to hold up to 51 percent equity share of companies operating in the general insurance sector. However, five major domestically-owned companies still account for 78 percent of that market. One direct consequence of the unreliable service available in the country is high working capital requirements, as higher safety inventories are needed. Producers of certain goods are also forced to invest their resources in non-core activities such as their own truck fleet, which increases shipping-related costs and entry barriers to the sector. Another externality is road damage from overloading, as trucks are loaded to their maximum cubic capacity, irrespective of axle loads or resulting vehicle speeds. In summary, the trucking sector in Pakistan is poorly regulated with about 70 percent of trucks 5 part of the informal sector. This environment provides little appeal to large sophisticated operators and service providers willing to enter the market due to low prices, low margins and generally unfair competition. These problems are mainly caused by the lack of a formal legal and institutional framework for the trucking industry coupled with a lack of enforcement of rules on vehicle inspection, driving license concession, overloading, crew hours, and hazardous cargo handling. The Motor Vehicle Ordinance 1965, incorporating federal and provincial amendments, is an archaic and outdated regulation if compared with best practices 5 Source: local experts estimations.

17 Road Transport 17 from OECD countries. Obtaining a driving license in Pakistan is relatively easy. There are no proper training schools, instructors, equipped vehicles, or testing and licensing facilities. The National Highway Authority (NHA), which was created in 1991, focuses its activity in the planning, development, operation, repair and maintenance of the national highways and other strategic roads. However, the total length of the roads under NHA management only stands at 8,780 km, which accounts for about 3 percent of the entire road network in the country. 4.3 Road Transport Recommendations Given the dependence of Pakistani transportation on road services, implementing reforms and improvements are vital for increasing the competitiveness of Pakistan s products. Having a regulated trucking industry with capacity for transporting perishable goods will increase the quality and shelf life of products, allowing companies and smaller growers to earn a greater profit margin domestically and compete internationally. After our analysis we recommend improving regulation of the transport and trade logistics sector, supporting incentives to renew trucking fleets, and reshaping the current truck insurance schemes. These recommendations support the development of a modern, safe, and efficient logistics road transport sector in Pakistan and aim to create transparent regulation for market entry and service provision. However, above all these, we recommend to improve the operating conditions of the National Trade Corridor (NTC) Improve the Operation of the National Trade Corridor (NTC) The National Trade Corridor (NTC) is a critical artery in Pakistan s road network and should be in an excellent condition both from the infrastructure and the service point of view. The improvement of its operation is the single most pressing issue regarding logistics in Pakistan. Road condition could be improved in many parts of the 1,760-km long highway. A sum of $5 billion has already been budgeted over the next four years to spend on the improvement of the country's highways, including works on the NTC 6. However, as this will most likely not be enough, it is recommended to explore further opportunities in order to embark on an upgrading process as wide as possible. These should include public-private partnership (PPP) arrangements 7. It is also recommended to close the NTC to non-motorized traffic. This would contribute to increase its capacity. Commercial activities along it should be regulated, 6 Source: National Highway Authority. 7 PPP: this describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies.

18 Road Transport 18 allowing only services to the driver and the vehicle. These should be offered in clearly designated areas in the vicinity of, but outside, the road itself. These actions should result in a notable increase in the average transit speeds on the NTC, significantly reducing the current trip times of 48 hours from Lahore to Karachi (1,260 km) or 72 hours from Peshawar to Karachi (1,700 km) Improve Regulation of the Transport and Trade Sector With the NHA exclusively focused on a marginal part of the network, there still exists the need for an entity taking care of road transportation with a much broader approach. It is therefore recommended to introduce an independent agency assuming the management of maintenance, contracting and construction of the whole road network, as well as the regulation of interurban road freight and passenger transport. Possible benchmarks are the Spanish General Directorate for Traffic (DGT), the Finnish National Road Administration (Finnra), or the Dutch Road Authority. These are autonomous agencies under the supervision of the relevant ministry (typically transport or interior). In general, road transportation regulation agencies have the following divisions: Traffic Management and Mobility Division: o Interurban traffic management and control: radars, vehicle checks, etc. o Information provision to road users about interurban traffic o Education of traffic agents regarding the management of traffic flows Road Security Education Division: o Driver education on road safety o Traffic safety advertising campaigns o Supervision of driving schools o Definition of drivers license tests o Training and certification test providers and evaluators o Oversight of centers performing medical checks on drivers seeking license renewal Normative Arrangement Division: o Oversees the organization that issues fines for traffic violations o Analysis and resolution of traffic violation appeals IT Department: o Creation, development, maintenance, operation, and custody of the registries and databases of vehicles, drivers and traffic rules infringers, driving educators, driver education centers, etc.

19 Road Transport 19 o Management of organization activities statistics o Providing IT support to the rest of the authority National Observatory of Road Security: o Investigation of all aspects related to road security o Analysis of road security data and statistics o Promotion of new road security policies Support Incentives for the Renewal of Fleets in the Freight Transport Sector In order to improve the quality of the trucking fleets, the average age of the trucks needs to be decreased. One way to do this is to introduce a truck modernization incentive program that creates financial incentives and support for truck owners to trade in their trucks for newer models. Fleet renewal will not only increase the quality of the transport of goods, but also help reduce accidents, health problems, and environmental contamination. Mexico and the USA have successfully implemented similar programs that Pakistan could use as a model. Mexico ran a payments program between 2003 and 2007 to replace old inefficient freight vehicles; a similar program is currently being discussed in California. This program would subsidize the purchase of model or newer trucks that can meet US-emission requirements. The goal of the program, in line with the California Clean Air Act, would be to reduce truck-generated pollution. Spain also had a program to remove older cars in the mid-90s that was very successful. The program was run in two phases: Plan Renove I: Between April and October 1994 the program provided 600 to anyone retiring a vehicle over 10 years old in order to purchase a new car. 170,000 older cars were retired during this time, which represented 14 percent of cars that were older than 10 years. Plan Renove II: Between March and June 1995 the program provided 500 to anyone retiring a vehicle over seven years old in order to purchase a new car, helping retire 140,000 cars Reshape Current Truck Insurance Schemes Freight forwarders in Pakistan do not have a widely accepted liability scheme comparable to general practice in the global forwarding business. In that context, it is recommended that the forwarders association PIFFA agrees on an overall liability and insurance scheme for their members. This should be arranged by international standards, so that the liability and coverage becomes part of the image and profile of the forwarders being PIFFA members.

20 Maritime Transport Maritime Transport Maritime transport accounts for 91 percent of Pakistan s international trade. This fact makes reforming and improving the sector particularly important for Pakistani goods to reach international markets. Our case study of the transport of a container of oranges further highlighted the problems facing the industry, which then allowed us to recommend solutions based on other countries experiences. The regulation in place in Pakistan is a key disincentive for potential investors, holding back global logistics operators, shipping companies, and other related services providers from fully developing their service. This ultimately translates into higher costs for importers and exporters, since higher port and terminal handling costs are transferred into final transport fees. Reforming the maritime infrastructure and services was identified as an opportunity for high improvement and high impact, both in terms of facilitating trade and investment and for creating jobs. This need is particularly pressing in relation to maritime services. All in all, the problems facing both parts of the maritime logistics industry and recommendations for improvement are outlined below. 5.1 Maritime Infrastructure Assessment The main ports in Pakistan are Karachi, Qasim and Gwadar. In 2006, million tons of cargo 8 was transported through them. Container throughput has grown at an average annual rate of 15.2 percent since 2000, reaching 1.8 million TEUs at the two container ports in use in In recent years Karachi has lost ground to Qasim, diminishing from a 79 percent share in 2000 to a 65 percent share in Karachi Port Qasim Figure 9: Container traffic at Pakistani ports (in 000 TEUs). Source: Drewry Consultants. 8 Source: Federal Bureau of Statistics. 9 Source: Drewry Consultants.

21 Maritime Transport 21 The port of Karachi is Pakistan's largest and busiest seaport, handling about 60 percent of the nation's cargo. It has two container terminals, one of which operated by Hutchison. A third one, focused on transshipment, is set to open in The port is managed by the Karachi Port Trust (KPT), a board of trustees comprising a chairman and 10 trustees, 5 of which appointed by the private sector. Port Qasim is Pakistan's second busiest port, handling about 40 percent of the nation's cargo. It is located in an old channel of the Indus river, 35 km east of Karachi. The approach to the port is through a long 45 km navigation channel. One of its major advantages is its proximity to different national transport facilities. It is 15 km away from a national highway, directly linked to the railway network through six tracks and 22 km away from the international airport. The port of Gwadar is a new development located at the entrance of the Persian Gulf on the Arabian Sea and about 460 km west of Karachi, in the Balochistan region. It became operational in It is a deep-sea water port, being constructed in two phases with heavy investment from China. The government of Pakistan has projected this port as the first link in the development of an energy and trade corridor to China and Central Asian republics, by providing them with short access route to the markets in the Middle East and Europe. Port infrastructure in Pakistan is overall in good shape. Of course, there are aspects that could be improved, such as the connection of the Karachi Port with other transport means or the custom and storage facilities 10. In any case, several upgrades affecting the country s commercial ports are already underway. Project Investment (USD Million) Time Frame Funds Origin 3 rd Container Terminal at the Karachi Port Karachi Port Trust (KPT) Gwadar Port 2 nd Phase: container, oil and bulk grain terminals, plus Ro-Ro berth Development of multipurpose cargo handling terminals each at 3-4 existing berths Gwadar Port Authority & PSA International Karachi Port Trust (KPT) Table 4: Current projects in maritime infrastructure. Source: KPT & PSA International. 5.2 Maritime Services Assessment Maritime services in Pakistan are away from OECD standards in terms of service level and availability. Integration with international regulation is a necessary step. Privatization in the maritime services sector 10 These will be analyzed at a later point in their own specific sections.

22 Maritime Transport 22 has not followed the pace of the one in ports. Several state-owned firms in the shipping, ship-building and repair sector exist. These do not appear to be real candidates for privatization at the moment. The state-owned Pakistan National Shipping Corporation (PNSC) is the country s largest shipping company. It was established with the assistance of the Pakistan Navy in 1963 and nationalized by the government in Its major shareholder is the Ministry of Communications. PNSC is mainly focused on liquids, which account for 85 percent of its total shipments. This is in part the result of a successful negotiation with three of Pakistan s major oil refineries to undertake crude oil shipments in According to BMI s assessment, the refineries decision was to some extent influenced by the Pakistani government. Although the government plans to induct the private sector into direct shipping, it has also stated that it wants to promote and protect PNSC Maritime Transport Recommendations While maritime transportation accounts for most of Pakistan s international trade, inefficiencies and opportunities for improvement in the sector exist. By analyzing the industry and using our case study as proof of the delays in the transportation chain, we recommend that Pakistan liberalize the maritime transport industry in order to attract the top maritime services providers at a global level, and create port quality assurance programs based in international best practices. Implementing these recommendations will increase Pakistani exports by making them more competitive with other regional goods Liberalize the Maritime Transport Industry Since maritime transportation is international in character, there is an inherent need for harmonization and standardization of regulation across countries. To have legislation in line with that of the leading countries in the sector, should help to attract the top maritime services providers at a global level. It is therefore recommended that Pakistan adapts its regulation on maritime transport to the standards set by OECD countries. In the case of liner shipping 13, the basic regulatory framework among OECD countries consists of The Code of Liberalization of Current Invisible Operations and The Common Shipping Principles. The private sector already plays a noteworthy role in port infrastructure in Pakistan. A similar liberalization process of the maritime transport industry would entail a number of benefits for the country, including: Liberalization policies would enhance competition within the sector, resulting in efficiency gains. 11 Source: Business Monitor International (BMI). 12 Source: Drewry Shipping Consultants-IFC. 13 Liner shipping is regular shipping with set schedules in different harbors published in advance. The capital-intensive character of liner shipping, particularly container shipping, has led to a substantial degree of concentration.

23 Maritime Transport 23 Increased competition would force providers to improve the quality of their service. Users of maritime transport services would have a wider choice of options at competitive rates. Liberalization should ensure greater transparency and thus create an investment favorable environment in the sector Quality Assurance Programs In order to create good practices that help raise the overall service level at Pakistani ports, it is recommended that ports introduce their own quality assurance program. This should be done by monitoring a series of key performance indicators (KPI) through a balanced scorecard. The KPIs should cover various fields, including: Port operational performance: Dwell time, transit times, loading and unloading rates, and availability of daytime or 24/7 port services. Availability of services to the ship: Bunkers, waste treatment, provisions, water, power, pilotage, towage, and mooring. Availability of services to the goods: Reefer container service, customs hangar, bounded warehouse, consolidation/de-consolidation, containers depot, and agriculture and sanitary area. Quality of maritime services: Frequency, transit time, availability of door-to-door service, capacity, punctuality, cost, and clarity on costs. Compliance with security, safety and environment regulation: Observance of the SOLAS and SAFEMED IMO conventions, ISPS code, and FAL standards. Degree of intermodal and logistic integration: o Access to land transport including rail and road. o Connection with logistics platforms. IT expertise: Tracking and tracing processes and IT. The purpose of tracking these KPIs is twofold. It will help identify the areas that lag behind international best practices and help the sector work towards overcoming these deficiencies. In addition, this data should contribute to the implementation of quality assurance programs in ports, as done in several OECD countries. Self-managed programs typically have penalty measures for poor port handling performance and have proven to reduce errors and delays. The quality assurance program of the Barcelona Port Authority 14 (APB) includes the following customer service guarantees: 14 Source: Barcelona Port Authority (APB).

24 Maritime Transport 24 Safe handling: In the case of damaged or absence of goods, a minimum amount of 150 and a maximum amount of 450 per container is paid. Coordinated physical inspection: If a maximum set time for inspection is exceeded, a penalty ranging from 150 (less than 24 hours delay) to 450 (over 48 hours delay) applies. Information: If no answer is provided to questions regarding container traffic procedures within four working hours, a penalty of 30 is applied. This is also applicable if wrong information is provided. Transit: The APB guarantees that customs procedures for containerized goods on transit take place within the same day that transit documents are admitted. The penalty for not fulfilling this policy is of 450. In the long run, a performance monitoring process (balanced scorecard) combined with a quality assurance program (service guarantees) should allow Pakistani ports to improve their performance, gradually raise the standard of their services, and ultimately become more competitive.

25 Rail Transport Rail Transport Rail has become a key transport mode for freight in OECD countries and could be used to transport a higher share of heavy non-perishable goods. Weak rail services in Pakistan fail to offer an alternative to road transportation, with weak infrastructure and a sector dominated by a public operator. Developing rail infrastructure and services has cost advantages, is more environmentally friendly than road transportation, and will take some of the stress away from the overburdened and underdeveloped trucking industry. 6.1 Rail Infrastructure and Services Assessment Pakistan s rail network is operated by the state-owned Pakistan Railways (PR) under the supervision of the Ministry of Railways. It comprises 8,163 km, of which broad gauge tracks account for 7,718 km and narrow gauge tracks for the remaining 445 km. It only has international active links with India. However, plans exist to also establish a further connection with China and other neighboring countries. Concept Pakistan Germany Network size (km) 8,163 41,315 Country area (sq-km) 881, ,021 Table 5: Pakistan-Germany rail network size comparison. Source: Pakistan Railways, Eurostat and BMI. Pakistan Railways freight business unit operates over 200 freight stations, but railways use for freight transport in Pakistan is limited in volume. This transport mean is only used for a few specific goods such as wheat, coal, fertilizer, cement and sugar; it is hardly used for the transport of perishable goods. Largely neglected for decades, inefficiencies in the railways service include: Rates are based in market trends in road transport, which is the main competitor to rail transport. The dominance of road transport up to now has been evident. PR has continued to operate the entire network by cross-subsidizing profitable and non-profitable freight routes, even though the rationale for many lines had effectively disappeared. PR has continued to offer the traditional pattern of supply-driven services. PR has failed to downsize staff substantially and streamline operations. The consequence is that Pakistan Railways has lost a considerable share of its private freight traffic. Most importers and exporters are not satisfied with the railway services, and so urgent consignments are usually transported by truck. The result is that rail freight is now largely confined to segments where rail is protected by regulation or to usage by public sector entities. This implies that no efficient alternative transport mean to the congested National Trade Corridor (NTC) exist, missing an opportunity to reduce the number of trucks on the roads and the problems that these cause.

26 Rail Transport 26 Concept Pakistan Germany Tons per year (million) Avg. trip distance (km) Tons-km (million) per year 5, ,914 Usage in land transport 2.4% 21.9% Table 6: Pakistan-Germany rail network usage comparison. Source: Pakistan Railways, Eurostat and BMI. The underlying reason for the current situation is the total lack of competition within the sector. In a context in which there are no alternative providers in the market offering competitive rail services, no modern management techniques have been introduced in the public railways operator up to now. All in all, a number of upgrading works in different areas of the rail network are currently underway. Project Development of double track from Peshawar to Lodhran (884 km) Development of double track from Lahore to Faisalabad (141 km) Extension of VIIF & UIIF communication over c. 1,000 km Investment (USD Million) Time Frame Funds Origin Pakistan Government Pakistan Government Pakistan Railways Table 7: Current projects in rail infrastructure. Source: Ministry of Railways. 6.2 Rail Transport Recommendations Rail transport in Pakistan has a high opportunity for improvement. Despite its poor track record, rail has commercial potential and could play a valuable transport role in the country. The main benefit of investing in rail transport is to reduce road traffic, and if the necessary reforms are taken, provide a fast and cheaper way of moving goods domestically. Pakistan Railways needs to take major steps to improve the freight services quality. Challenges faced today include improving delivery times, reliability and tracking information. In that context, we recommend promoting public-private partnerships to upgrade the railway network and introducing management techniques in the railway s freight division as important initial steps towards the development of a modern rail transport Promote PPP Initiatives for the Development of the Rail Network With a number of areas still underserved, the rail network in Pakistan can significantly be enlarged. Publicprivate partnerships (PPP) can help to increase the pace at which this is upgraded. Besides, the implementation of double tracks in different parts of the network would allow notably increasing

27 Rail Transport 27 frequencies and reducing trip times. PPP arrangements should also contribute to bring the latest know-how and technology into the sector Introduce Modern Management Techniques in Pakistan Railways Freight Division The legal framework currently in place that supports Pakistan Railways monopoly and undermines competition should be revamped. A pilot program was run in the country for operating passenger trains under a private sector scheme through lease, but that same experiment was not done for freight trains. Ideally, the long-term goal of reforms would be to open up the sector to private competition in order to allow a specialized, competitive, rail freight operator to enter the market. However, this initiative does not seem very much aligned with current governmental policies, and so it is not much likely to actually be implemented either in the short or the mid-term. It is therefore recommended to focus sector development efforts on improving Pakistan Railways freight transport services by modernizing freight transport management and operations within the operator. We recommend establishing a department in Pakistan Railways dedicated to freight transport and building its capacity as a necessary first step. Besides, other additional actions should include: Eradicate cross-subsidizing practices between profitable and non-profitable freight routes. Eliminate the lines for which its commercial justification has effectively disappeared. Listen to the demands of its present and potential customers, moving away from the long established pattern in the company of supply-driven services.

28 Air Transport Air Transport Air cargo services in Pakistan are limited and fail to complement other transport means. While a few niche markets rely on air transport, there are few options to choose from. Developing this industry and encouraging more operators to enter the market would open up more markets for perishable goods, and cut down on transport times to places like Europe. 7.1 Air Infrastructure and Services Assessment There are 139 airports in Pakistan, including international ones at Karachi, Lahore, Islamabad, Peshawar, Quetta and Sialkot. Air cargo is still infrequently used in Pakistan, although important in certain circumstances, such in those occasions where the planned transport mode would result in late delivery and penalties. PIA is the major national airline. It is 57.7 percent state-owned, 26.3 percent owned by state-run institutions and 16.0 percent owned by private individuals. It provides passenger air travel and freight services to destinations in Europe, the USA, Canada and Libya. The Pakistani government has recently agreed to provide $150 million to support the renewal of its fleet 15. Air transport options are rather reduced. Palletized direct routes to Europe are only available from Pakistan International Airlines (PIA) and British Airways. Transit opportunities are available via the Emirates and Turkey. Another limitation comes from the fact that the dwelling time at the airport is two to three times longer than the actual time of transport 16. Such a delay has a negative impact on the supply line, damaging customer satisfaction, increasing the capital costs during transportation and making it difficult to cope with demand for frequent on-time deliveries requested by overseas importers. Besides, an study of the air freight rates for general cargo 17 showed that India, Pakistan s major competitor in this field, offers air freight rates out of Pakistan that are on average 30 percent lower. There is a freight subsidy of 25 percent offered to Pakistan exporters, but even with it the rates ex India are lower. Air freight rate level is normally linked to capacity available, so it can be concluded that air freight rates out of Pakistan reflect the existing capacity limitations. In addition, and in connection to the subsidies issue, Pakistan exporters complain about the extremely long reimbursement time of air freight subsidies (i.e. some exporters claim that it takes 3-6 months to be reimbursed). 15 Source: Business Monitor International (BMI). 16 Source: Logistics Consulting Group. 17 Source: Logistics Consulting Group.

29 Air Transport Air Transport Recommendations Pun in Practice Vision 2030 Policies The government of Pakistan is well aware of the need to develop and improve the cargo infrastructure at the country s leading airports in order to meet the delivery requirements of a modern global supply chain, as envisioned on the Vision 2030 paper. There, the actions suggested to be taken in the field include: Unilateral open sky policy. Demand-based infrastructure development. Regionally competitive user charges and fuel prices. Bifurcation of regulatory, commercial and operating functions. Liberalization of air service agreements. Encouragement of private sector airlines to operate on international routes. Not many further recommendations could be proposed. If only these steps already identified by the country s authorities were put in practice, the improvement in the air freight scenario would be notable.

30 Other Logistical Infrastructure Other Logistical Infrastructure Overall, the logistics sector in Pakistan needs a number of national improvements that will facilitate the flow of goods, increase product quality, and open new markets for Pakistani goods. The proposed initiatives will not only help the sector nationally, but will also help those at the beginning of the supply chain like small farmers and producers. The main hindrances to the sector that will need coordinated efforts by the government and private sector to improve include: establishing freight villages to serve as logistics hubs, invest in reefer storage facilities to increase the shelf life of perishable goods, and develop public trading platforms for smaller and medium size producers to sell their goods, cutting out intermediaries that add little value to the products. All these recommendations are intended to strengthen the logistics industry in Pakistan and help make the country s products more competitive by adding value while reducing logistics costs. 8.1 Freight Villages Freight villages are logistics concentration points, developed at strategic locations, which provide various logistics-related activities such as warehousing, packing, re-packing, break-bulk centre, and truck parking. In Europe, freight villages are typically a private sector business, developed by large scale operators that host complimentary services and related operators. Freight villages are often PPPs, where an area is defined as a freight village by the public sector usually at the intersection of major multimode routes, and then private sector operators develop the facilities. Freight villages can vary in size, from few hectares to thousands of hectares, depending on their functions. No such facilities exist in Pakistan. In fact, not even a downgraded version of such facilities with limited features exists. As a result, the surroundings of the larger cities are congested with on the rise disorganized parking and waiting areas. With an ever growing truck fleet, the situation is more worrying than ever before. Long stretches of roads leading into cities or circumvallation roads around them have de facto been turned into truck queuing and waiting areas. In parallel, unlicensed workshops, service facilities and spare parts outlets have emerged in such areas. This combines with a widespread lack of metropolitan regulations (or enforcement when these exist) on specific timings for trucks to load, unload and circulate inside metropolitan areas, contributing to traffic jams and pollution.

31 Other Logistical Infrastructure Reefer Storage There is a lack of reefer storage facilities in Pakistan. These facilities require strategic location choice and a set of complementary services to be operationally viable, and so are generally located within larger logistic centers such as freight villages. The lack of reefer storage facilities at key locations for exports is particularly critical for companies dealing with agricultural perishable goods. Well-stored perishables have a longer shelf life, are better preserved, and are of higher quality. As a result, they sell at higher prices. Fruit Range (ºC) Maximum Apricot 0-5 Up to 1 month Strawberry 0-5 Up to 1 month Pineapple 8-12 Up to 1 month Oranges 8-12 Up to 3 months Banana Up to 3 months Mango Up to 3 months Kiwi 0-5 Up to 6 months Table 8: Fruits conservation temperature requirements and maximum life. Source: University of California. 8.3 Trading Spaces Logistics chains of perishables in Pakistan are characterized by an abundance of intermediaries that add little value to the supply chain. Because there are few public trading spaces that smaller farmers can sell their goods to, intermediaries typically retain a share of the profits. Farmers thus make less profit than they otherwise could, as most of them are unable to sell to wholesalers without going through an intermediary. If farmers were able to capture a larger portion of the profit, they would have more money to invest in new equipment and be able to adapt to international harvesting quality standards. This could open up new markets for Pakistani goods, benefiting not only the individual farmers, but the economy as a whole as well. 8.4 Logistical Infrastructure Recommendations Development of Public-Private Trans-Freight Stations and Reefer Storage Areas The development of public-private freight villages, logistic platforms and reefer storage areas at key locations throughout the country such as ports, airports or the main connection nodes, should contribute to raise Pakistan s logistics infrastructure overall level. As an initial step, we recommend the development of a network

32 Other Logistical Infrastructure 32 of simple logistic platforms that we might prefer to refer to as trans-freight stations (TFS). These should at least offer the following services: Waiting area: Acting as waiting points for trucks until these are allowed to enter the city in specified hours of day/night to unload cargo. Cargo breakdown: For larger trucks, TFS would be a point of load breakdown. Smaller vehicles would then carry the load to multiple destinations within the metropolitan city limits. Services to the truck: TFS would be a single-point solution for truck operators by hosting there all facilities and services they might need. As on how to proceed, it is recommended to use the following approach: Identify key locations: The identification of strategic sites for such facilities is an action that should be done in cooperation with the leading export companies operating in Pakistan. Foster development: The creation of agreements between regional authorities and the private sector to develop logistics facilities at the identified locations will contribute to their implementation. Finance development: Identify and define financing options for the construction of these facilities through grants or soft credits Development of Wholesale Central Markets In order to eliminate intermediaries that add little value, it is recommended to promote the development of regional wholesale central markets. The Spanish MERCAs model 18 has proved very successful and is regarded as a good practice. It is recommended to consider this model as a possible benchmark. Such a move is expected to generate the following positive effects: Price structure: Prices will be set more clearly, as the market will be more transparent. Product quality: It will be improved through better storage in shared common facilities. Inspection: It will make quality procedures and checks easier to be enforced. Accessibility: It will make easier for small producers to access large retailers. 18 The MERCAs network is formed by 23 units across Spain. About 3,650 companies work through it, from which about 2,200 are wholesalers that are part of the different food markets, while the rest are companies dedicated to complementary activities such as distribution, logistic or customer services. In absolute terms, MERCAs annual sales of fruits and vegetables add up to 4.1 million tons; fishing products to 0.5 million tons; and meat products to 175,000 tons. Source: Merca Zaragoza.

33 Other Logistical Infrastructure 33 Logistical education: Markets can be used as education centers; hence these will help to improve logistical know-how of users.

34 Cross-Cutting Issues Cross-Cutting Issues On a sector by sector basis there seems to be growing interest and awareness about the importance of logistics and the role it can play in increasing exports and thereby GDP. However, as the industry grows, there need to be certain national initiatives to ensure that the logistics industry is both sustainable and efficient. Namely, these national initiatives should focus on developing standard educational training to create a knowledge base of expertise for the sector, and reforming customs procedures. 9.1 Logistical Education Over the last few years, logistics has evolved into a wide-ranging subject that covers all aspects related to supply chain management (SCM). This has increased the need for a continuing education targeted to provide specific answers to the latest developments on the field. In Pakistan, the situation is especially critical. Logistics and SCM know-how is not common even in issues often labeled as essential elsewhere. This limited logistical expertise is perceived by both users and providers of logistics services as one of the most critical issues affecting business operations in the country. Examples of where the lack of logistics expertise is more pressing include: Cold chain: There is little respect for cold chain procedures for goods that need to be transported under a controlled atmosphere (temperature and humidity). This occurs due to inappropriate infrastructure, but even in the few cases that this is available, operational malpractices occur. Control mechanisms: Few Pakistani enterprises can provide the merchandising and quality control, supply line control and logistics cost control required to qualify as a partner for international clients. Quality management: There is a general lack of understanding and support of total quality and zero errors concepts. Most individuals do not understand how important their role is in securing that their function is fulfilled. IT Culture: EDI and other IT solutions are not commonly used in the private sector, except by the larger corporations. The IT system is mainly being used for s. The lack of IT utilization hampers communication with buyers, suppliers and public bodies (customs). It brings longer lead times, poorer planning, inferior customer service, and higher cost margins than desirable. It results in lower cost control and so lower profits.

35 Cross-Cutting Issues Customs and Inspection In Pakistan, goods are inspected in largely unsuitable facilities. This is the case even at the main logistic nodes such as the country s main export ports. Perishable goods are mostly inspected in non-reefer facilities. As a result, the cold chain is interrupted even if inspections are performed quickly, which is generally not the case. The break in the cold chain reduces shelf life and quality of Pakistani products to be shipped abroad. In addition, customs officials tend to act more like an auditor than as a facilitator. Delays on imports often arise in connection with valuation of goods, with customs not accepting the shippers invoice as to reflect true value. Besides, inspections are not risk-based, with a notably high percentage of goods being inspected. Inspection rules are unclear, leaving room for and being subject to the discretion of inspectors. Interference from other departments is also another usual source of delay. Containers are sometimes retained for examination and clearance by the Anti-Narcotics Force (ANF) or other departments involved in control over drugs illegal imports. Overall, bureaucracy in customs is high. The extent of paperwork in GD (now on computer) is still large, as 63 fields and numerous background details have to be fulfilled. Lead times could be cut if the GD-PRAL system was further aligned, so that many signatures were avoided and took place electronically instead. Server capacity also needs to be improved, as it is currently delaying the processes and creating longer lead times. Dwell time is also not yet satisfactory. Processing time with an on-line system should make it possible to clear as much as 90 percent of the consignments within 3 days. Such a time frame would be in line with international best practice standards. However, the Pakistan Customs Computerized System (PACCS) is so far only implemented at Karachi International Container Terminal (KICT), still generating too much red tape Pakistan Spain Customs clearance Document preparation Figure 10: Duration of customs procedures. Source: World Bank. As a result of all of the above, lead times and deliveries are often unpredictable. This means that a higher inventory level is needed for both importers and exporters. The higher percentage of goods inspected implies

36 Cross-Cutting Issues 36 higher direct costs in the value chain, for example, the cost of moving and positioning the container for customs inspection. 9.3 Recommendations Develop Logistic Training Modules With an emerging logistics industry, the private sector will want to have a sufficient local pool of qualified people to recruit from. Given that there is a critical lack of local logistics expertise in Pakistan, it is recommended to focus efforts on building local know-how throughout the logistics chain. IFC s Business Edge advisory product might be a good fit to address training needs in the sector. Business Edge covers 19 a range of practical management training products and services. Flexible in its application, it can be adapted to the requirements of specific industries. However, building up knowledge in the logistics sector should be a continuing process with a strategic vision to support the development of the sector and should involve all relevant stakeholders. Logistics training should be geared towards two long-term goals, as recommended by the OECD 20 : Build up qualified workforce: Workers skills have to accommodate the technology available, for example, being able to properly operate a reefer facility. The industry needs to promote training within the sector, as well as help promote relevant skills for jobs in the sector. In addition to training programs, workers skills can be improved through education and certification, resulting in increased rewards to the more skilled certified workers. Respond to new developments in the field: Technology is rapidly changing, and so skilled people are needed to plan, develop and operate the most advanced automated systems. Therefore, continuous training and personnel development in logistics are critical for responding to advanced technology and global business trends Develop IT in Logistics Awareness Program: How Useful Is IT In My Supply Chain? There clearly is an under-utilization of IT systems in logistics operations in Pakistan. Order processing times tend to hamper overall lead times across sectors, and have a negative effect on the distribution lead time due 19 Source: Overview of IFC Advisory Programs document. 20 Source: Transport Logistics: shared solutions to common challenges document.

37 Cross-Cutting Issues 37 to the low level of integration of the parties involved in-between. IT can enhance the efficiency of supply chain management significantly, in particular that of logistics operations, and ultimately increase competitiveness. It is recommended to assess IT training needs in the sector and develop an IT training module customized to logistics operations. The initiative should focus on: IT business diagnostic services in order to provide companies with an insight into their business' strengths, weaknesses, opportunities and threats, and the changes that can be made. Advisory services to introduce IT products in the workplace such as EDI, Internet application, html, invoicing, and order processing. Assisting IT acquisition and usage. Specific actions for the usage of e-platforms across the supply chain, particularly at ports and storage areas, in order to increase traceability and streamlining of tools like radio-frequency, bar codes, and data bases Customer-Oriented Approach in Customs Customs officers are perceived by the private sector as difficult to deal with, unknowledgeable about modern customs inspection procedures, and lacking customer-service orientation. One way to counteract these problems is through targeted training and capacity building on risk management techniques and efficient customer-service. The purpose is to create an efficient business process coupled with a customer-friendly, service-oriented, work culture. The initiative should focus in three areas: Introduce risk management techniques: Customs should use risk management techniques to optimize resources and reduce costs to more effectively set priorities and efficiently allocate the necessary resources for maintaining a proper balance between controls and facilitating legitimate trade. Customs should create risk profiles of traders, allowing traders with a good reputation to go through fewer inspections, and integrate physical inspections into a single system with referrals to other relevant border control agencies. This approach acknowledges that customs will never catch every fraud, but provides the best cost-benefit balance. Risk management also helps limit corruption by automating part of the process and decreasing the number of discretionary inspections. Simplify procedures and spread IT usage: Electronic solutions, now mainly limited to Karachi, should be extended across the country and complemented with required training and investment support. A major effort has to be made to have PACCS available in other cities in Pakistan, at least at the bigger

38 Cross-Cutting Issues 38 customs stations, thus making it accessible for a bigger part of the import-export industry. Facilitation measures should be put in place with the aim to reduce the quantity of information to be provided directly by trade, as well as to reduce red tape. As a first step, it is recommended to further simplify the E-filing of pro-forma invoice, LC and insurance through GD-PRAL. Potential savings are promising. One day less in customs for all imports would have been equivalent to annual financials cost savings for goods in transit of around USD 5 million 21. Build capacity: Improving the efficiency of customs and technical control agencies requires modern inspection facilities, including reefer rooms and inspection posts. 21 Calculation based on 2005 imports.

39 Conclusion and Going Forward Conclusion and Going Forward This analysis of the Pakistani logistics sector used original research obtained through a case study tracking a crate of oranges from grower to end consumer, research of the sector from government and other resources, and ongoing investment projects. The case study of the path of a crate of oranges in Pakistan was compared to a similar crate in Spain, and was useful in the analysis of this sector because it focused on a perishable good that depends both on a continuous cold chain to maintain quality and speed of transport to increase shelf life. Also, this case study helped the study gain valuable insight into the different obstacles that goods, particularly perishable goods, face in making their way from grower and producer to the final consumer. The study also ascertained the exact amount of days spent for different logistics processes like customs clearance and transport, enabling the analysis to identify where Spain s logistics sector was able to exceed that of Pakistan s. While this report has highlighted the numerous obstacles in logistics processes and detailed recommendations on a sector and national basis, further research needs to be done to pinpoint problems and opportunities for the private sector to engage and profit from the logistics industry. This process will need to include in-depth conversations with private sector stakeholders and the government to identify ways the public and private sectors can work together to build a sustainable and efficient logistics industry. Going forward, business and investment opportunities and projects will need to be mapped in detail based on areas that are identified as being highest impact. As part of the effort to engage the private sector in investing in logistics opportunities, interested private sector players will need to be identified, profiled, and encouraged to communicate with policy makers. Assisting the private sector in becoming involved in the logistics industry will help policy makers understand which policies need to be changed and why in order to encourage more private sector investment. There are numerous examples of other countries with successful logistics industries that can be used as a baseline for best practice logistics policy. Strengthening the logistics sector has numerous benefits. By having an efficient and competitive logistics industry, Pakistan will be able to increase their exports and reach different markets with high quality standards. Having strong and strategic policies in place will attract further investment into the sector, ensuring its sustainability. Further, this sector will open up new opportunities, attract new players into the sector, and help increase the incomes of stakeholders from the largest companies down to the smallest growers.

40 Annex Annex 11.1 Acronyms ANF APB BMI BOT DGT EDI EU FIATA GAP GDP IATA IFC IMO IT KICT KPI KPT LPI MARPOL MENA NHA NTC Anti-Narcotics Force Autoritat Portuària de Barcelona (Barcelona Port Authority) Business Monitor International Build Operate Transfer Dirección General de Tráfico (Spanish Road Authority) Electronic Data Interchange European Union International Federation of Freight Forwarders Association Good Agricultural Practices Gross Domestic Product International Air Transport Association International Finance Corporation International Maritime Organization Information Technology Karachi International Container Terminal Key Performance Indicator Karachi Port Trust Logistics Performance Index International Convention for the Prevention of Pollution from Ships Middle East & North Africa National Highway Authority National Trade Corridor

41 Annex 41 OECD PA PACCS PIA PIFFA PR PPP RDA RDT SAD SCM SME SOLAS SSSR TEU TFS TIR USD VTS WCO WTO Organization for Economic Co-operation and Development Port Authority Pakistan Customs Computerized System (PACCS) Pakistan International Airlines Pakistan International Freight Forwarders Association Pakistan Railways Public-Private Partnership Rawalpindi Development Authority Radio Data Terminal Single Administrative Document Supply Chain Management Small and Medium Enterprises Safety Of Life At Sea Short Sea Shipping Route Twenty-Foot Equivalent Units Trans-Freight Stations Transit International Routier (or International Road Transit) United States Dollar Vessel Traffic Services World Customs Organization World Trade Organization

42 Annex Bibliography Alavi, Hamid (2004). Trade Facilitation: the Role of Modern Technology (presentation). Business Monitor International (2009). Pakistan Freight Transport Report. Business Monitor International (2009). Pakistan Infrastructure Report. Business Monitor International (2009). Pakistan Shipping Report. Consortium, B.-l. (2007). MEDA MoS Project. Devlin & Yee (2005). Trade Logistics in Developing Countries: The Case of Middle East and North Africa. Government of Pakistan (2007). Pakistan in the 21 st Century: Vision Government of Pakistan (2007). Strategic Directions to Achieve Vision Government of Pakistan (2007). Trucking Policy for the Modernization of the Trucking Sector under the National Trade Corridor Improvement Program (presentation). Guindy, S. E. (2007). Safe and High Quality Supply Chains and Networks for the Citrus Industry between Mediterranean Partner Countries and Europe. Hoekman, Bernard (2009). Deeper Integration of Goods, Services, Capital and Labor Market: A Policy Research Agenda for the MENA Region. Logistics Consulting Group (2006). Pakistan: Logistics Cost Study. OECD (2006). Transport Logistics: Shared Solutions to Common Challenges. World Trade Organization (2008). Country Trade Profiles.

43 Annex List of Interviewees Contact Company Phone Ahmed Mansoor Century Paper Sabir Imtiaz Century Paper Brig. S.S.A. Qasim CIL&T Abdul S. Khan Engro Chemicals Marek Minkiewicz Makro M. Amir Janjua Packages Limited Seema Riaz Packages Limited Babar Bidat PIFFA Noman Lutfi Unilever Pakistan Nasar Hayat USAID

44 Annex Projects Summary This is a consolidated list of the different recent and on-going projects mentioned in different tables throughout the report. Project Investment (USD mill.) Time Frame Funds Origin 3rd Container Terminal at the Karachi Port Karachi Port Trust (KPT) Gwadar Port 2nd Phase: container, oil and bulk grain terminals, plus Ro-Ro berth Gwadar Port Authority & PSA International Sheikhupura D.G. Khan motorway (405 km) 642 n.a. NHA Makran Coastal road (653 km) 420 n.a. NHA Gwadar - Ratodero road (885 km) NHA Development of double track from Peshawar Pakistan Government to Lodhran (884 km) Rawalpindi - Islamabad ring road (80 km) RDA Development of multipurpose cargo handling terminals each at 3-4 existing berths Development of double track from Lahore to Faisalabad (141 km) Extension of VIIF & UIIF communication over c. 1,000 km Karachi Port Trust (KPT) Pakistan Government Pakistan Railways

45 Annex The Logistics of Citrus Rail services and infrastructures Road transportation services Road infrastructures Documents & Processes - Customs and Inspection Processing and packaging Truck transport Rail transport Custom-related activities Non-custom inspection services Export and import processes International trade Transport of agricultural products Local /urban transport Industries, processing plants, etc. Capilar distribution Logistics platforms Dry ports Intermodality, Distribution, Logistics activities Ports Maritime services Maritime infrastructure Handling & Storage at Ports Air Services Policies related to logistics, transport and exports. Regulation. Existing plans and government actions. Wholesale distribution Handling & Storage at Intermediate Nodes Country-wide transport Freight consolidation. Country-wide distribution. Logistics operators Airports Money & Risk Banking & Insurance Banking and insurance for the logistics industry