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PROGRAM INFORMATION DOCUMENT (PID)

CONCEPT STAGE

Report No.: AB2562

Operation Name / First National Transport Corridor Improvement Development Policy Loan
Region / SOUTH ASIA
Sector / Roads and Highways (30%); Ports (30%); Railways (30%), Civil Aviation (10%)
Project ID / P101683
Borrower(s) / Government of Pakistan
Implementing Agency / Planning Commission; Central Revenue Board; Ministry of Railways; Ministry of Communications/National Highways Authority; Ministry of Ports & Shipping; Ministry of Defense.
Planning Commission
Address
Islamabad
Tel :
Fax :
Email :
Date PID Prepared / September 21, 2006
Estimated Date of Appraisal Authorization / December 19, 2006
Estimated Date of Board Approval / March 22, 2007

Key Development Issues and Rationale for Bank Involvement

Poor performance of the trade and transport logistics sector significantly reduces the competitiveness of the actual and potential export industries and ultimately hurts the country's overall economic growth. The transport system in Pakistan generates high economic losses from a mismatch between supply and demand for transport services and supporting infrastructure. It is estimated that the inadequate and inefficient transport system is imposing a cost to the economy of about 4 to 6 percent of the GDP, constraining economic growth, reducing export competitiveness and hindering social development. An efficient transport system is a pre-requisite for Pakistan to become globally competitive.

The government with Bank support has developed a strategic approach for the transport sector, focusing first on the National Trade corridor linking Pakistan’s major ports in the South with its major cities and trade corridors to the North. The objective is to promote an integrated approach to planning, investing and managing the National Trade Corridor transport logistics system. The Government of Pakistan and the World Bank agreed on a financing program, which includes a programmatic Development Policy Loan (DPL), specific sub-project investment lending and a technical assistance loan. The Bank and GOP agree that a multi-sector policy-oriented DPL to support implementation of reforms acting as triggers for specific sub-project investment lending would be most effective. The technical assistance loan will help to prepare and monitor reforms and provide the additional analytical underpinning. Investment lending will ensure that the transport infrastructure provides the capacity and the level of service expected to satisfy the increasing demand. The Bank has provided and will continue to provide analytical support to develop the framework to guide sub-sector policies (for highways, railways, ports and trade facilitation), including pricing, regulation and enforcement, medium term budgetary frameworks, restructuring and progressive commercialization of public entities and strengthening of institutions (National Highway Authority, Pakistan Railways, etc.).

Recent Economic Development

Fiscal Year 06 ended in June 2006 with generally good economic outcomes. GDP growth was a robust 6.6 percent, exports grew by 14 percent, and average inflation decelerated from 9.3 percent in FY05 to 7.9 percent in FY06. Growth in recent years has been broad-based with all key sectors of the economy making a significant contribution. Foreign investors' interest in Pakistani assets remained strong, with the sale of KESC and the partial sale and transfer of management control of PTCL in FY06.

Transport Sector Overview

Prospects for continued rapid growth over the next 3 years are good, provided that political and macroeconomic stability are maintained, that structural reforms and investments to reduce the cost of doing business continue, and that domestic savings and public and private investment increase. On the macroeconomic stability front, the key challenge is to arrest the widening of the current account deficit. Imports have been growing rapidly, and the current account deficit has risen to $5 billion in FY06 (3.9 percent of GDP) up from $1.5 billion in FY05 (1.4 percent of GDP). The main reason for this has been strong import demand, fueled partly by healthy economic growth and higher oil prices, but also by loose monetary policy pursued and a rupee appreciating in real terms over the past few years. The Government and the central bank plan to take additional steps on the monetary, exchange rate and fiscal fronts to reduce demand pressures and curb the current account deficit.

Transport Sector Overview

Although the transport sector is functional, its efficiency is relatively low with long waiting and traveling times, high costs and low reliability. These factors constrain Pakistan's ability to integrate into global supply chains which require just-in-time delivery. The main weaknesses of the present transport system can be summarized as follows:

·  High port costs, resulting in higher charges to users than might be considered desirable in terms of overall economic policy, increasing openness to the world economy and stimulating trade and allowing Pakistan to capture a share of the regional and global market share.

·  Long dwell times for inbound containers due to low port productivity and undue delays at customs (100 percent of containers are examined physically). The result is congested terminals and the need to construct additional facilities which could be avoided by taking actions which reduce dwell times and congestion.

·  Relatively shallow draft in ports, which will increasingly limit direct shipping connections as the size of container vessels on direct services increase. Calls from smaller vessels providing feeder services would result in higher shipping costs compared to other ports in the region which have a higher depth.

·  Poor highway conditions and weak highway management, which prevent the main road infrastructure to provide the required levels of service. 44 percent of the road on the National Trade Corridor is in fair or poor condition. Available capacity is limited by pedestrians, non-motorized transport, and grossly overloaded, small obsolete, slow moving trucks. As a result, road services are generally slow (around 25 km/h) and unreliable. Exporters and importers have developed special costly arrangements for high value freight operating under time constraints.

·  High truck overloading, which leads to road damage, high accident rates, slow speeds and congestion. Fatalities/100 million vehicle kilometers are 10 – 20 times higher in Pakistan than in Europe, North America or Australia. As a result, while the trucking industry in Pakistan has low direct costs, its external costs are high.

·  Insignificant levels of rail freight traffic which do not reflect the intrinsic potential of rail. The rail system has been largely abandoned by the private sector. The rail could increase its share of the freight market in view of its competitiveness on long distances (about 800 km) as demonstrated in other parts of the world.

·  Pakistan Railways is unprofitable and financially unsustainable. It is unable to service its debt and has been often unable to fully fund its operating costs and pension payments. To continue to operate, Pakistan Railways has received significant subsidies from the Government (US$133 million in 2004 and US$65 million in 2005). The 2005 financial statements show an improvement of the operating account with a slight profit of about US$ 4.6 million, before depreciation and interests. This profit is generated by non-railway activities however. Excluding these activities, the deficit on the operating account would have been US$41.7 million and the need for subsidies of about US$106.6 million. The reported deficits are distorted by the low levels of depreciation used in the accounts of Pakistan Railways. The deficit would increase by about US$60 million if international standards were adopted.

·  Incomplete implementation of the customs reform agenda. The simplification, modernization and harmonization of procedures and documents are at the heart of the trade facilitation agenda with customs clearance being the main focus. Significant progress has been made already with the average customs clearance time reduced from seven to less than one day comparable with international standards. Full implementation of the new system will allow clearance procedures to be moved away from the border while, at the same time, reducing opportunities for informal payments and providing incentives for importers and exporters to obey existing regulations.

·  Weak, fragmented and relatively under-developed freight forwarding/logistics sector is. It has yet to transform to provide the breadth of services and levels of vertical integration, which are increasingly found elsewhere and are necessary for the export-oriented manufacturing sectors, particularly in textile and clothing.

Word Bank Support for National Trade Corridor Program

Rationale for Policy-based Lending. Many of the issues facing the transport sector are policy related and institutional in nature and are difficult to address through investment operations. Reforms and investments joined together in investment operations have often conflicting timetables. Consequently, investment loans on their own have had limited success in achieving positive results. A policy-focused operation is a more appropriate instrument to achieve the reform objectives. Separate investments operations leaving reforms in policy-focused operations have proved to be more efficiently executed.

Link to Pakistan's Poverty Reduction Strategy Paper (PRSP). The PRSP adopted by the Government in December 2003 identified substantially improved transport infrastructure and reduced trade-logistics bottlenecks as requirements to achieve the objective of economic growth while maintaining macroeconomic stability. Indeed, exports and particularly the manufacturing sector, which have been major contributors to economic growth, require improved efficiency of transport and trade logistics to increase their global competitiveness. Reducing the share of transport and logistics in the cost of imports will contribute as well to this objective by reducing the cost of inputs in the export production costs.

Link to World Bank Country Assistance Strategy (CAS). The proposed NTCIP’s objectives are consistent with the CAS for FY’06-09 adopted on April 4, 2006, which reflects the high priority assigned to sustaining growth and improving competitiveness. The CAS estimates that modernization of the National Trade Corridor alone will require investment of about US$ 1 billion per year over the next 5 to 6 years. In addition, the repair of critical road links, destroyed or damaged in the October 2005 earthquake, is an urgent priority. There is strong demand for increased lending in the transport sector during the coming CAS period. The CAS proposes follow-on investment lending for highways and trade facilitation is expected along the National Trade Corridor with an increasing emphasis on private sector participation in operation and management. In railways, the CAS envisages a combination of development policy lending and investment projects should the government commit to a medium term reform program to corporatize and commercialize Pakistan Railways. In the port sector the CAS proposes Bank support for the move towards landlord ports and professional management, combined with a modern institutional and legal framework for port operations that would open the way for investment lending to upgrade port infrastructure.

Collaboration with other Development Partners: NTCIP as medium-term transport master plan for the country provides the basis for donor engagement in the sector and is supported by the donor community:

§  The Asian Development Bank (ADB) will be a strong partner for the implementation of NTCIP. The financing plan for the highway component of NTCIP envisages that ADB's contribution will amount to US$1.1 billion, about 30 percent of the total cost of the component. ADB is also presently funding: (a) the Port Management Unit in the Ministry of Ports and Shipping, (b) technical assistance to prepare a framework for Public Private Partnership (PPP) in infrastructure, and (c) technical assistance to prepare a trucking strategy which will become integral part of the overall strategy for NTCIP.

§  The Japanese Bank for International Cooperation (JBIC) is expected to cofinance with ADB one section of the highway component of NTCIP. The exact contribution for each donor has not been defined yet.

Proposed Objective(s)

The development objectives of the National Trade Corridor Improvement Program (NTCIP) are to reduce the cost of trade and transport logistics and bring services' quality to international standards in order to reduce the cost of doing business in Pakistan and ultimately enhance export competitiveness and accelerate industrialization. The GOP will achieve these objectives through a comprehensive multi-sector reform program aimed at streamlining procedures and improving services and physical infrastructure. The scope of the current program includes: railways, the road transport industry, ports, trade facilitation and air transport. At the end of the reform program, the following outcomes are expected:

·  Reduced share of domestic transport and cost of non-factor services in the total value of commodities;

·  Overall reduction of transport and transit costs and times for goods using the National Trade Corridor;

·  Increased rail share of long distance freight traffic;

·  Reduction in the operating deficit of railways, with objectively determined and targeted subsidies;

·  Better corridor user satisfaction;

·  Improved safety and reliability of transport operations; and

·  Improved procurement practices and enhanced accountability of the entities involved in NTCIP.

Preliminary Description

Proposed Reforms. The key policy areas supported under the programmatic DPL include policies that would: (a) lead to modern and streamlined trade and transport logistics practices; (b) reduce the costs for port users and enhance port management accountability; (c) create a commercial and accountable environment in Pakistan Railways and increase private sector participation in operation of rail services ; (d) modernize the trucking industry and reduce the cost of externalities for the country; (e) sustain delivery of an efficient, safe and reliable National Highways system; and (f) promote and ensure safe, secure, economical and efficient civil aviation operations and boost air trade.

Environment Aspects

NTCIP is a mix of development policy lending as well as specific sub-sector investment loans. It is proposed to undertake a strategic environmental assessment (SEA) that will (a) evaluate the effects of policies for environment and natural resources; (b) assess the capacity of the transport sector institutions to manage environmental issues in the sector and their relationships with the country's Environmental Protection Agency; (c) provide a framework and guidelines for dealing with environmental issues in the sector and during preparation of investment projects as part of the NTC program; (d) identify hot spots and sensitive receptors that could be impacted by the NTC program. If policies in the first DPL have a significant negative impact on environment, they would be subject to a full environmental impact assessment.

Tentative Financing

Source: / ($m.)
BORROWER/RECIPIENT / 0
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT / 300
Total / 300

Contact Points

Contact : Jean-Noel Guillossou Amer Zafar Durrani

Title : Senior Transport Economist, co-TTL Senior Highway Engineer, co-TTL

Tel : (202) 473-4943 (92-51) 2279641-6 (Ext.: 211)

Fax : (202) 522-2427 (92-51) 2279648

Email :