PPP Experience - Pakistan

Roads Sector
PPP Experience of Pakistan

Table of Contents
2. Roads.......................................................................................................................................2
2.1. Institutional Framework........................................................................................................3
2.1.1. Ministry of Communication...........................................................................................3
2.1.2. National Trade Corridor Management Unit (NTCMU)................................................4
2.1.3. National Highway Authority.........................................................................................5
2.1.3. NHA PPP Cell...............................................................................................................5
2.1.4. National Transport Research Center..............................................................................6
2.2. Policy Framework.................................................................................................................6
2.2.1. PPP policy by NHA.......................................................................................................6
2.2.2 Midterm term Development Framework (MTDF).........................................................7
2.2.3 Pakistan Transport Plan by NTRC.................................................................................7
2.3. Initial Response to PPP Implementation..............................................................................8
2.4. Suggestions for improved methodology on PPP implementation......................................10
2.4.1 Cordon off the Project Company (Special Purpose Vehicle) from Bureaucracy.........10
2.4.2 Assignment of Toll Receivables...................................................................................10
2.4.3 Lengthy Approval Process............................................................................................10
2.4.4 Mandatory PPP option Analysis...................................................................................10

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PPP Experience of Pakistan

2. ROADS
An efficient transport system is a pre-requisite for Pakistan to become globally competitive. The
growth in capacity must be achieved while increasing service levels and decreasing costs.
Internationally, prices of transport services have fallen due to increased productivity, increased
competition between suppliers and pressure from users who face growing global competition in
their own markets. There would be need for a higher level of investment in transport with
enhanced private sector participation in the provision of transport infrastructure and services.

Currently, the total length of the roads net work is more than 260,000 km out of which 60% is
paved (high type roads) while rest is unpaved (low type roads). National Highway Authority
(NHA) maintained national highways and motorways accounts for approximately 12,000 km
which is 4.6% of the total roads network but carries 80% of the commercial traffic of Pakistan.

Fiscal Year High Type Low Type # Total

Length % Length % Length %
Change Change Change
1996-97 126,117 6.5 103,478 3.6 229,595 5.2
1997-98 133,462 5.8 107,423 3.8 240,885 4.9
1998-99 137,352 2.9 110,132 2.5 247,484 2.7
1999-00 138,200 0.6 110,140 0 248,340 0.3
2000-01 144,652 4.7 105,320 -4.4 249,972 0.7
2001-02 148,877 2.9 102,784 -2.4 251,661 0.7
2002-03 153,255 2.9 98,943 -3.7 252,168 0.2
2003-04 158,543 3.5 97,527 -1.4 256,070 1.5
2004-05 162,841 2.7 95,373 -2.2 258,214 0.8
2005-06 167,530 2.9 91,491 -4.1 259,021 0.3
2006-07 172,827 3.2 86,370 -2.8 259,197 1.1
2007-08 175,000 0.8 84,038 -5.5 259,038 -1.3
2008-09 176,060 1.3 83,140 -2.7 260,200 0
2009-10 179,290 1.2 80,328 -3.4 259,618 0
Source: Economic Survey pf Pakistan 2009-2010

The road sector has pre dominantly been one of the main recipient of the PSDP funds. From
PSDP 2010-2011, Rs 44.6 billion (16%) from the total PSDP of Rs 280 billion has been
allocated to NHA, which is 64% of the total allocation for the transport & communication sector.
It is estimated that the ¾ of the national highways and motorways are in poor condition. The
road density in Pakistan is 0.32 km/square-km compared
Description No. Km
to more than 3 km/sq-km in Japan and 1 km/sq-km in
National Highways 20 9280
India. The poor quality of roads network is causing Rs Motorways 7 1930
202 billion tons/km on annual basis. The total inland Expressways 3 384
traffic by road and rail transport is currently estimated at Strategic Roads 3 262
239 billion passenger-km of passenger traffic and 153 Total 33 11856
billion ton-km of freight traffic. Road transport accounts Source: National Highway Authority (NHA)
for 91 per cent of passenger traffic and 96 per cent of
freight traffic.

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PPP Experience of Pakistan

Currently, roads carry 129,249 million ton-km of freight and 131,408 million passenger-
km/years of passengers which is projected to be 278,591 1 million ton-km and 471,792 million
passenger-km/years, respectively by 2030. The current pace of development in national
highways and motorways will not be enough to handle these volumes.

To bridge this gap an amount of 830 2 billion will be required to be invested in national highways
and motorways, which is more than three times the total PSDP for 2010-11.
Year Network(Km) PSDP (Rs.
Province Km %age
in millions)
Punjab 2659 22 1991 6564 5,152
Sindh 1975 17
1994 6564 6,000
NWFP 1651 14
2001 8690 10,900
Baluchistan 4629 39
2005 9518 20,000
NAs/AK 942 8
2006 10849 31,000
Total 11856 100
8-Jul 11485 29,000
Source: National Highway Authority (NHA) 9-Aug 11856 36,500

Source: National Highway Authority (NHA) / PSDP

The gap can only be filled with private sector participation which is also the corner stone of the
transport strategy in the Mid Term Development Frame work 2005-10, Pakistan Transport Plan
by NTRC and NHA’s PPP policy. Table 3: Road Targets 2010

The MTDF (2005-2010) conceived an Description Improvements Construction

(Km) (km)
ambitious plan of constructing and National Highways 6,500 2,500
improving 21,100 KM of roads (federal, Provincial Highways 1975 4,000
provincial and strategic) with a total Special Area Roads 1651 500
investment of Rs 248 billion with Rs 31 Total 14,100 7,000
billion private sector participation. Source: MTDF 2005-10
However, by the end of the current MTDF
2005-10 the overall success in attracting the private sector investment was not encouraging.
NHA was able to meet half of the target set in the MTDF 2005 -10 at the close of the program.

2.1. INSTITUTIONAL FRAMEWORK

Ministry of Communication is the highest regulating body of the transportation sector. It has
three departments namely, National Highway Authority, National Transport Research Center and
Motorway Police. The ministry works in close liaison with the planning commission where a
special unit has been set up for the National Trade Corridor Improvement Plan (NTCIP) project.
In line with the MTDF, NHA has established a special PPP unit for [add the mandate of the unit].
Institutional framework work is briefly discussed in the coming sections.

2.1.1. MINISTRY OF COMMUNICATION

1
NTRC Transport plan: chapter 4 page 18 Table 4.3.9.
2
Pakistan Transport Plan – NTRC, chapter 7 p: 31

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PPP Experience of Pakistan

Ministry of Communications (MoC) has a history of restructuring, after its establishment

in 1947. Initially, Pakistan Railways (from 1974 onwards) and Posts & Shipping (from
inception) were part of the MoC. In 2002 Pakistan Railway was made a separate ministry
and in 2003, ports & shipping was assigned as a separate ministry. Functionally MoC is
headed by a Federal Secretary. It has been organized into 2 wings (namely)
Administration Wing headed by Joint Secretary-I and Roads & Road Transport Wing
headed by Joint Secretary-II.

As per the rule of the business3, MoC has been allocated the following responsibilities: -

1) National Planning, research and international aspects of road and road

transport

2) National highways and strategic roads; National Highway Council and

Authority; Administration of Central Road Fund and Fund for Roads of
National Importance.

3) Mechanically propelled vehicles; Transport Advisory Council; Urban

Road Transport Corporation.

4) Enemy Property.

5) National Highways and Motorway Police.

There are a number of autonomous as well as attached / subordinate departments under

the Ministry. There is a dedicated Planning and evaluation cell in MOC which
coordinates with all the departments of the ministry. MoC exercises administrative
control over the following Departments / Organizations:

 National Transport Research Centre.

 National Highway & Motorway Police
 National Highway Authority
 Construction Machinery Training Institute

From PPP perspective NTRC and NHA are relevant and hence discussed in the coming
sections.
2.1.2. NATIONAL TRADE CORRIDOR MANAGEMENT UNIT (NTCMU)
National Trade Corridor improvement plan (NTCIP) plan initiative is anticipated to
reduce cost of doing business by reducing trade related transport and freight cost. This
would be achieved by systematic policy & procedural interventions, long term
investments by promoting private sector financing through PPP and sustainable
institutional reforms. In August 2005 National Trade Corridor management unit was
established in the planning commission and headed by a Prime Minister’s task force

3
Schedule II of rules of the business 1973

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PPP Experience of Pakistan

overseen by Deputy Chairman Planning Commission headed by eight sectoral committee

each headed by a secretary.
NTC plan to develop the north south and east west trade links with Central Asian Estate,
India, Afghanistan and China. The plan encompasses all sub sectors of transportation
(roads, railways, ports and airways).
In the first phase Rs 31 billion of private sector investment in national highways and
motorways is projected for the period 2005-2010.
2.1.3. NATIONAL HIGHWAY AUTHORITY
To federalize five national highways, in 1978 Government of Pakistan (GoP) decided to
federalize five important highways in the country and created National Highway Board
for monitoring the development and maintenance of these federalized roads and named
them "National Highways". Later on in 1991 The National Highway Authority (NHA)
was created and given more strategic and role in planning, development, operation, repair
and maintenance of National Highways.
A National Highway Council is the supreme policy making body of NHA headed by the
Minister of Communications. An Executive Board is responsible for the overall
operations and functioning of NHA. Operationally NHA has four operational wings and
NHA-PPP Unit comes under the Planning Wing.
2.1.3. NHA PPP CELL
NHA through the NHA ACT 1991 is empowered to develop project under private
participation and currently, it estimated that the GoP can finance only 50% of its plans for
the roads development and the remaining half is projected to come from the private sector
investment. NHA is approaching this task by dedicating a special NHA PPP cell to
develop facilitate and monitor projects under PPP modality.

In pursuance to this, NHA has established a Private Sector Cell for providing one-
window operation for PPP projects. NHA-PPP cell took various initiatives including: -

1. Development of PPP Policy and Legal Framework.

2. Development of SOPs for handling PPP projects at all stages.
3. Standardization of documents, i.e. Pre-qualification criterion,
Request for Proposals including Evaluation Criteria and
Concession Agreement.
4. Identification of number of projects to be executed under PPP
basis.

The technical and financial support from Asian Development Bank together with the
NHA’s own proactive PPP strategy has translated in to enhanced capacity to accelerate
the national PPP initiative in the development of highways and motorways across the
country. This fact is evident by the fact that currently, the NHA enlisted the following
projects in its current Five Year Plan that will be financed on a BOT/PPP basis. The total
value of these projects is estimated at US$820 million, contributing 25% of the Five Year
Plan:

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PPP Experience of Pakistan

# Project (Km) Project Value

2.1.4. NATIONAL TRANSPORT RESEARCH CENTER

National Transport Research Centre (NTRC) was established in June 1974 in the
Planning and Development Division, as one of its Technical Sections, to provide much
needed research and development (R&D) support for planning and appraisal of transport
sector projects/plans in a coordinated and cost effective manner. NTRC was transferred
as such to the Communications Division in November 1992. It is effectively functioning
as an R&D Wing of the Ministry of Communications.
NTRC is primarily a research body in the field of Transport Planning, Road Engineering
and Road Safety. The most recent achievement can be tracked in 2007, when NTRC has
formulated a plan called Pakistan Transport Plan Study (PTPS) 4 for the transport sector
termed as policy. It was not adopted formally by MoC and remained a futile exercise.

2.2. POLICY FRAMEWORK

The transport sector doesn’t have a formal policy frame work at the federal level, local
government or provincial levels which is a major impediment in itself.
At the institutional level NHA PPP Cell has formulated a PPP policy in May 2007. In addition
to this, some other visible initiatives have been a five year plan for the transport sector by NTRC
in association with JICA, and a over whelming emphasis on PPP in the transport sector in the
MTDF (2005-2010).

However, there is supportive legal frame5 work which offers more investor confidence as
compared to a policy, but a well framed policy gives the investor the confidence of the extent to
which the government is willing and its readiness to solicit projects under PPP modality. The
NHA-PPP policy offers the same and addresses the tactical and operational issues in developing
a project under PPP modality, including, toll policy, operational and road maintenance policy,
financial and contractual arrangement, security package, investment incentive for the private
sector and the bidding process.
2.2.1. PPP POLICY BY NHA

4
The plan is posted on the NTRC web site as a National Transport Policy (draft final report, May 2007)
5
The legal frame includes the National Highway Authority Act 1991, Punjab Highway Authorities Act 1989, North-
West Frontier Highway Authority Ordinance 2001.

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PPP Experience of Pakistan

The NHA policy was formulated in May 2007. The salient features of the policy are as
follows: -
1. Transparency, openness and fairness is the foundation stone
2. Provision of unsolicited projects only if the party can demonstrate over
ridding advantages (new technologies, opening up disadvantaged areas
etc.)
3. A standard two stage bidding process
4. General lease period of 25 years
5. Right to collect the toll is given to the Concessionaires at locations they
consider appropriate (subject to approval of NHA)
6. Facilitation/resolution by NHA in case of disputes in tolling
arrangements at the interface between two Concession Areas
7. GoP/NHA support/ subsidy via Viability Gap Fund and/or PSDP
8. Minimum exemptions from tolls
9. Appropriate toll regimes of the Competing routes, especially roads of a
similar standard
Under the current policy NHA has XX projects in the tune of XX billion in the
implementation stage (work in progress, signed concession after achieved financial close)
2.2.2 MIDTERM TERM DEVELOPMENT FRAMEWORK (MTDF)
The Medium Term Development Framework (MTDF) published in May, 2005 declares
an ambitious goal for Pakistan to be a developed, industrial, just and prosperous country
within 25 years, by attaining 7-8 per cent annual economic growth. To support such rapid
growth, MTDF envisages a total investment of about Rs.8.0 trillion during the five years
of 2005/06 – 2009/10. The amount corresponds to 1.3 times of GDP in 2004/05. Out of
Rs.8 trillion, the fixed investment is Rs.7.3 trillion, of which 65% is expected to come
from the private sector and 35% from the public sector.

Total investment in the transport sector is planned to be over Rs.573 billion, of which
Rs.304 billion is to be by public investment out of which and the remaining was planned
to come through private sector participation. Out of this NHA envisaged Rs.91 billion to
be financed by BOT/PPP for its highways and motorway projects. MTDF has the
following policy for the transport sector:

1. Optimal utilization of the existing capacity with emphasis on

rehabilitation and upgrading
2. Selective and cost efficient investment in economically viable new
roads, including expansion of the rural network
3. Development/improvement of road network to facilitate transport and
trade with Iran, Afghanistan, Central Asian States and India
4. Development of innovative financing mechanisms and enhancement of
private sector participation
5. Priority to roads maintenance and safety
6. Effective control of overloading on the roads
7. Enhancement of capacity of the road sector agencies

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PPP Experience of Pakistan

2.2.3 PAKISTAN TRANSPORT PLAN BY NTRC

The transport plan was initiated in 2004. A joint effort by a team form JICA and NTRC.
The plan is proposed for the period 2004-2010 estimating a total investment of Rs 808
billion by 2010. The private sector participation is the corner stone of the plan and churn
out a plan of 2,140 km of nine motorways with a cost of USD 2,892 million. However,
the plan lacks the internal institutional coordination especially with NHA. Nonetheless,
the plan was in line with the MTDF (2005-10) policy for roads and readiness of the
government to develop the road sector with the private sector participation.

2.3. INITIAL RESPONSE TO PPP IMPLEMENTATION

Pakistan’s early experience from PPP program in roads is similar to the general trend in the
South Asian experience with minimal activity in PPP in the early 1990’s gradually picked up in
the mid 1990’s and peaked in the late 2008 and gradually mellowed down to a modest levels and
the trend still continues (Table: 1).
Roads - Investment commitments private participation in South Asia
6

5
2008 -USD BIllion

0
19 0

19 3
19 4

19 8
20 9

20 1
20 2

20 5
20 6
19 1
19 2

19 5
19 6
19 7

20 0

20 3
20 4

20 7
08
9
9
9
9
9
9
9
9
9
9
0
0
0
0
0
0
0
0
19

Source: World Bank and PPIAF, PPI Project Database.

The roads sector has undergone numerous development phases in PPP initiatives but this sector
still has a less developed PPP program than for ports & power generation. Numerous attempts
were made to attract private sector investments into highways and motorways, without much
success.

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PPP Experience of Pakistan

NHA attempted to attract private capital for the construction of (367 km) of M-2: Islamabad-
Lahore motorway on a BOT basis. A concession
agreement was executed with Daewoo as the
sponsor/contractor but the motorway was completed by
traditional public financing through a direct loan of US$667
million from Daewoo by the GOP’s guarantee. Many years
after completion of the M-2, NHA still owes Daewoo
outstanding loan amount.
Construction of M-3: Pindi Bhattian – Faisalabad
Motorway (53 km) was also initiated on a BOT formula
but the BOT contract was terminated for technical reasons.
The motorway was completed by the original contractor,
again through a traditional public finance.

The M-9: Karachi and Hyderabad Motorway concession agreement was signed with M/s SCC
(Pvt) Limited in September 2006. The M-9 is a four lane divided highway between Karachi and
Hyderabad. It is the primary road linking Karachi Port and Port Qasim to the rest of the country.
The concession was to upgrade the road to a “motorway” standard.
The project was terminated by the Government in July 2007 as a
result of “political” pressure.

Sindh government has successfully implemented the Lahore -

Faisalabad Motorway project in under BOT basis. The project was
successfully completed by LAFCO which is a wholly owned by
FWO.

The NHA signed a contract with FWO to operate and maintain the M-2 motorway between
Islamabad and Lahore in 1997. An operation and maintenance contract is a common type of PPP;
however, this project is not considered a traditional PPP because FWO is not a privately-owned
company.

Recent development has been the construction of the Lakpass

Tunnel under a concession agreement signed between signed
between NHA and M/s IBEX Construction (Pvt.) Limited in
2006. The project achieved financial closure in April 2007.
The concessionaire is wholly owned by Frontier Works
Organization (FWO), a Pakistani entity. FWO is owned by the
Government—it was created by the Pakistani army as a
special organization to build and maintain roads. It is now a
large construction agency. This means the Lakpass Tunnel is not a traditional PPP, but is
structured as a concession. The tunnel connects the city of Quetta with Iran, through the N-40
motorway. The Lakpass Tunnel project consists of a 180 meter tunnel and four and a half
kilometer road. Its total cost was RS 921.78 million.

The Shahdara Flyover concession has been competitively awarded to a Malaysian company
(M/s Ascent Capital International Limited). Shahdara is a very congested area on N-5 near

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Lahore. The Shahdara Flyover Project is a six lane divided limited access tolled elevated
expressway. It is 5.2 kilometers long and links the town of Shahdara with the city of Lahore. The
project has been delayed as expressway may interfere with the proposed Lahore Rapid Mass
Transit System. The details of the project are being discussed with the Government of the
Punjab.

More recently, Karachi – Mirpurkhas Motorway has achieved its financial close and the work
has been started. A Korean company has been awarded the project and this can be regarded as a
pure PPP project under Design Finance Build Operate and Transfer (DFBOT) modality.

2.4. SUGGESTIONS FOR IMPROVED METHODOLOGY ON PPP

IMPLEMENTATION
There are impediments in the road sector for PPP, but, interestingly these have not prevented the
award and financial close of the projects where a public sector entity (FWO) were the sponsors
and is the reason why these impediments were over looked and the projects were materialized.
FWO, (an institution backed and managed by Pakistan Army) can influence the bureaucratic
decision making and thus were able to muscle their way out of the possible glitches in the project
progress.
A public sector entity like FWO is an attractive proposition for the lenders, because of their sheer
size and the influence in keeping the political pressure away from affecting the project and on the
other hand facilitate in coordinating with the governmental agencies.
For a private project company, it doesn’t have this luxury and needs to securitize the project to
arrange for the project finance. NHA Act doesn’t allow the assignment of receivables, or security
over roads. Like in the power sector where plant itself is the largest security for the private
lenders, NHA doesn’t allow creation of security on the prime assets, which are roads. In addition
NHA thinks that giving guarantees against alternate competitive routes during the concession
period is restraint on its planning and development obligations.
2.4.1 CORDON OFF THE PROJECT COMPANY (SPECIAL PURPOSE VEHICLE)
For greater investor confidence and success of the PPP, the sponsors and the project
management needs to be kept away from the bureaucracy and political influence as far as
possible. This can be achieved by providing in the concession agreements that inter and
intra governmental coordination (Federal-Provincial), approvals, NOC’s etc will be the
responsibility of the implementing agency. This objective can also be achieved by
incorporating a special purpose vehicle (SPV) with minimum representation of the
Government functionaries, who have a history in the development of this project and can
associate themselves with the success of the project and also help the project
management removing the Government specific administrative and operational bottle
necks.
2.4.2 ASSIGNMENT OF TOLL RECEIVABLES
The current NHA Act 6does not allow the assignment of the toll receivables in favor of
the project company. The private project Company can collect the tolls and deposit in an
6
Section 10(2) (vii) NHA Act

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account whose title remains with NHA. The private lenders can take security of the
account but is limited to the actual receipts in the account, meaning the receivables
(future receipts) cannot be assigned as a security.
For a project company to arrange project finance the assignment of toll receivables
becomes the single largest security that it can offer to the lender. Since the project title
remains with NHA, the private project company cannot assign future receipts
(receivables) as security.
NHA Act should provide that the title to securitized future assets should remain with the
project company.
2.4.3 LENGTHY APPROVAL PROCESS
Currently, all projects above RS 100 million are approved by National Highway Council
and then by CDWP/ECNEC. These approvals are also required even if the project is
under BOT, where no financial commitments are required from the GoP. This elongates
the approval process of the project.
NHA should be given more authority under the NHA Act and all BOT/PPP projects
should be closed with no or minimal approvals outside NHA.
2.4.4 MANDATORY PPP OPTION ANALYSIS
In line with the international best practices a PPP option should be mandatory for each
public service project, before public funds are sought for the implementation.
Unfortunately, PPP is usually not the preferred option for public service delivery.
The NHA Act should be amended to provide for PPP as the preferred option for any
development project.

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