Pakistan Competitiveness and Logistics Challenges Presented by Moin Malik, Chief Executive 22 November 2011.

Pakistan Competitiveness and Logistics Challenges

Presented by Moin Malik, Chief Executive

22 November 2011

Geographic Overview

― Pakistan is located at a strategic and important location at the cross-roads of South Asia, the Middle East and Central Asia.

― It has 1,046 km coastline along the Arabian Sea and Gulf of Oman in the South.

― Pakistan has great potential for trade with landlocked Central Asian States, Afghanistan for the Afghan Transit Trade and to the west and north into China, via the Karakoram highway.

― There is a common border of 1600 kilometer between Pakistan & India.

— A study by Peterson Institute for International Economics (PIIE) gravity model, shows the potential of formal trade between India and Pakistan is roughly 20 times greater than recorded trade.

Logistics & transport impediments in South Asia

― In recent years, Pakistan's growth of imports has far outpaced growth of exports, resulting in a large and growing trade deficit.

― Refusal to allow overland routes to third countries is a major impediment to regional trade.

― Long cargo dwell times, limited implementation of transit agreements, and high transit costs are just some of the trade constraints that hinder movement of goods.

― Customs and border procedures are not oriented to facilitate trade where as in sufficient infrastructure add on to the problems.

― High costs and dwell times have contributed to unauthorized cross border trade.

― Pakistan lacks solid trade relationship with its large and economically dynamic neighbors.

Pakistan can become Asia’s trade, energy and transport corridor

Source: World Bank – LPI 2010

Pakistan's Logistics performance indicators

Indicator Description

Pakistan rank (out of 155)

Over all LPI Over all Logistics performance scores 110

Customs Efficiency of clearance process 134

Infrastructure Quality of trade and transport related infrastructure 120

Logistics Competence Competence of quality of logistics 120

Timeliness Timeliness of shipments in reaching destinations 110

Tracking & Tracing Ability to track and trace consignments 93

International Shipments Ease of arranging competitively priced shipments 66

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Top Ten Logistics Hub

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Least Attractive Logistics Hubs

Emerging markets Logistics index

Logistics infrastructure in Pakistan

Sea Ports ― Port traffic in Pakistan grows at 8 percent annually in recent years.

― Two major ports, Port Karachi and Port Qasim, handle 95 percent of all international trade.

― Port Gawadar, operated by Singapore Port Authority, is aiming to develop into a central energy port in the region. If fully operational the port will be in competition with the other ports in the region like Chabahar port in Iran, as well as Dubai in the United Arab Emirates.

― The local road infrastructure is insufficient and depleted. The need is to construct major new motorways and highways linking ports to main urban and industrial centers.

Airports― There are 36 operational airports. Karachi is Pakistan's main

airport but significant levels of both domestic and international cargo are also handled at Islamabad and Lahore.

― Pakistan International Airlines (PIA), the major public sector airline, is facing the competition from a few private airlines.

― Poor infrastructure, lack of proper storage, racking & temperature-controlled facilities are lacking even at the major Airports.

Trucking ― Road transport is the backbone of Pakistan’s transport system, accounting

for 96 percent of freight movement.

― Currently there is a fleet of over 0.2 million trucks plying on the roads.

― The technology of over 96% fleet consists of rigid suspension of old & obsolete Bedford trucks out of which about 67% are 2 & 3 axle rigid trucks, 8% articulated and 25% multi-axles trucks.

― The illegal modification of trucks, low freight rates due to unhealthy competition and prevalence of ineffective vehicle examination system in the country, encourages overloading which damages the roads and cause accidents.

― According to an estimate, 70% of the 2, 3 axle trucks are overloaded while 40% of 4, axle trucks are overloaded.

― Roads deterioration and damages due to overloading are imposing huge infrastructure maintenance cost, slow travel times and high fuel costs.

Railways― Railways are the cheapest mode of transportation and plays a vital

role in passenger and freight transportation for a country.

― At present Pakistan railways is ineffective, trains, tracks and machinery are outdated or faulty- the losses have reached billions of rupees.

― A number of services of Pakistan Railways have been cancelled because of mismanagement and shortage of locomotives, fuel and financing.

― The need is to emphasizes private sector participation in an attempt to increase responsiveness, efficiency and competitiveness of the railways sector.

Challenges

1. Government policies

― Inconsistent Government policies – No Progress on the great initiative of NTCIP.

2. Rising cost of fuel & electricity

— Electricity & fuel cost are the major components of logistics operating cost which is continuously rising.

3. Financing facilities

― High interest rates vs. Profit returns and high risk on credit in this vulnerable market is a challenge for this highly capital intensive product.

― Unavailability of financial arrangement from government in terms of soft loans or tax relaxation to boost this industry.

4. Inefficient transport sector

― Although the transport sector is functional, its inefficiencies with long waiting and traveling times, high costs, and low reliability are dragging the country’s economic growth.

― The poor performance of the sector is estimated to cost the economy 4-6 percent of GDP each year.

Challenges :

5. Human Resource

― Limited local technical expertise , capacity building required in terms of trained Human Resources

6. Disintegrated transport function

― Disintegrated Transport and Logistics Functions – NHA, Post Office, Communications and Ports and Shipping.

7. Legislation

— Pakistan’s regulations are not in line of the International Best Practices; we are still following Carriage of Goods by Sea, Road and Air Act of 1925 and Bill of Lading law of 1865.

8. Regulatory Mechanism

― Logistics industry in Pakistan lacks regulatory mechanism leading to mushroom growth.

9. Unorganized Trucking Sector

— Unorganized Trucking Sector eating 2% of our GDP.

— Inefficient trucking system not only increases our POL consumption but also affects our Road Infrastructure.

Challenges :

10. Limited local infrastructure

― Lack of required infrastructure for an efficient supply chain system

11. Lack of cold storage facilities

— Around 30% - 35% of our perishable products gets wasted based on the inefficiency of the cold chain.

— Poor infrastructure, lack of temperature-controlled storage facilities and processing centers at Airports, Seaports and closer to production base

12. Technical knowledge

— Lack of Awareness of the Incoterms and International Best Practices with no optimization and benefits of Importing on FOB or Ex-works basis.

Opportunities

1. Geographic Location

― Pakistan’s geographical location can make it a strong Hub for the flow through traffic between Asia and Europe.

― Our strategic project of GAWADAR Port can make us an obvious choice / market as logistics Hub to cater for transit trade to and from Afghanistan, CIS and Western China.

2. Attractive consumer market

― With the rising population and consumer market of over 180M people, Pakistan is an attractive retail market in terms of potential growth for temperature controlled cargo mainly F&V, poultry products, fast food chain, consumer products (ice creams, dairy, edibles,) & pharmaceuticals.

3. Logistics infrastructure

― Presently, underserved logistics infrastructure is a key opportunity for the industry players. Declaring and providing required infrastructure for Pakistan’s Port to be a transshipment Hub offering Air /Sea or Sea /Air facilities can bring a lot of savings for our exports & imports.

Opportunities

4. Increasing awareness for 3PLs

― Growing market and awareness of the outsources supply chain services – business to concentrate on their core products / functions

5. Trucking sector

― Trucking sector has great potential for modernization of trucking industry

6. Agro based economy

― Strong Agriculture base has high export market potential for Gulf / Middle East, particularly for Fruits, Dairy and Live Stock

Recommendations

― Government should encourage investor friendly financing arrangements & policies enabling more organized players to enter into this market.

― NTCIP should be implemented completely with the approx. expected saving of USD 500M per annum – 1.34% of the value of Imports and Exports and 0.45% of GDP.

― Integrated multi-model networks and enhanced Ports facilities will lead to a unified and integrated network where goods can move efficiently, thus reducing the cost of transportation.

― Trained manpower to manage specialized tasks. Need is to build the capacity of the industry’s work force. PIFFA has established certified training courses on freight forwarding - however this needs to be further enhanced.

― Necessary legislations to meet the requirement of Global Trade and improvement on LPIs.

― Government and Trade bodies should accept Freight Forwarding as a proper industry and should optimize on their capabilities.

― Unified Ministry of Transport and Logistics should be established integrating all function including Air, Sea, Road Transportation, Ports and Shipping and trade facilitation.

Thank you