Paying for the road public private partnership projects in Pakistan

May 28, 2020 By 0 Comments

We recently completed a multi-case study for a client and thought to share few of our findings in relation to Pakistan’s public-private partnership (PPP) projects in road and infrastructure.

Snapshot – Pakistan’s road infrastructure

As a start, Pakistan has an impressive road infrastructure with total roads of 264,000 Km, motorways of 2,066 Km, national highways of 11,321 Km and expressways of 78 Km. Transport sector’s overall contribution remains 12% of GDP. For its population of 210 million, 76 million live in cities and the population is growing at 2.4% per annum. The urban population is expected to reach 50% by 2050, which would demand more pressure on existing highways and roadways. On average, Pakistanis travel nearly 400 billion passenger Kms per annum and this is expected to rise to 1,000 billion passenger Kms by 2030.

Overall rural connectivity remains low while safety standards also lag behind

About 118 million – which is almost 60% of the country’s population live in poverty. Overall, rural transport access remains low with only 53% of the rural population living within 2 Km of an all-weather access road. This limits economic growth and development in rural areas. Also, efficient transport remains a barrier for 40% of women in Pakistan in accessing social welfare facilities such as health and education. Car and motorcycle ownership levels by women are lower than for men and women also have to rely on family support for travel outside their homes, leading to limited access to economic opportunity, healthcare, and education.

Also, the World Health Organization (WHO) estimated that 25,781 persons were killed in road crashes in Pakistan in 2013 due to many factors, including poor driving skills, limited usage of protective helmets on motorcycles, outdated vehicle standards, poor road design and no routine maintenance. Such standards warrant an immediate need to upgrade Pakistan’s road infrastructure network.

New infrastructure and upgradation require large capital financing

Pakistan requires capital funding to augment its current infrastructure for safe and reliable rural road access network. Expansion of the existing National Highway Authority (NHA) network would be necessary for creating an improved road access grid around the country. Estimates necessitate an addition of 5,000 – 7,000 Km to the NHA network alone during the next decade to continue the pace of growth and development.

Provincial highways and expressways constitute the next important part of the road network in the country. Of the provincial highways, less than 5 percent roads are four-laned, about 22 percent have two lanes and the remaining are single lane. Their maintenance is generally poor. Further, the resources require for upgrading and maintenance are may well be equally daunting and are seem nowhere in sight.

NHA’s financial position remains precarious and budgetary resources inadequate

If NHA is to be given the responsibility of managing and funding Pakistan’s large infrastructure requirement, it needs to have a stable, strong and robust balance sheet. Unfortunately, its balance sheet strength has deteriorated in the last few years with operations and maintenance far outweighing the revenues, which remains meager compared to the size of its operations. A snapshot of NHA’s profit and loss is as follows:

Source: SOE Federal Footprint Report, 2017 (Ministry of Finance) – Amounts in Rs. Million

The revenues show a topline of Rs. 29.2 billion whereas the O&M expenses alone amounts to Rs. 101.7 billion. Adding finance cost for various loan receipts, the net loss comes out a whopping Rs. 133.5 billion. A meager top line also demonstrates that NHA does not recover adequate tolls from its operations and relies on the government funding to finance its losses, which is an unsustainable long-term proposition.

It is also evident that Government’s budgetary resources will be grossly inadequate for meeting the resources requirements for building next round of highways and expressways. Raising public debt is not a viable option with high fiscal deficits of the GOP. Further, raising debt for a non-revenue earning asset can at best only be a short-term exercise and cannot bear the burden of massive outlays required.

User-pays infrastructure development and PPPs remain a long-term viable alternative

All infrastructure services around the world including power, natural resources, telecoms, railways, airports, irrigation rely on user charges. In India, even the rural roads have been funded out of levies paid by farmers. In Pakistan also, the user pay scheme under an ambit of a comprehensive PPP agenda can bring in reforms and more road access development. There are examples available in Pakistan where projects have relied on toll-based systems to meet growing needs of transport infrastructure. Pakistan needs to continue this momentum.

The motivation of doing PPPs in road infrastructure remains simple. Given the resource constraints, there seems no other option but to commercialize highway projects and raise private capital and market borrowings, which are then sustained by levying user charges. If highways can be developed through self-sustaining approach, the development and capital inflows can grow manifold without too much reliance on scarce budgetary resources. If better services are provided at reasonable and affordable user charges, there will be general acceptability for such an approach.

Examples of PPP projects in Pakistan

A brief snapshot of some of the PPP projects undertaken in Pakistan are summarized as under.

Swat Expressway Lahore-Islamabad Motorway Hyderabad Mirpurkhas (Sindh PPP) Jhirk Mullah Katiyar (Sindh PPP) KTDC  (Sindh PPP)
Project Summary Construction of 81 Km long, high speed, fenced, 4-lane expressway linking M1 directly with Swat Overlay and modernization on 357 km long existing 6-lane motorway Construction of 60 km long road with 8 bridges and 62 culverts Construction of 17 km long road including bridge over River Indus Construction of 50 km long two-lane dual road and rehabilitation of existing highway
Construction Period 2 Years 2 Years 2 Years 2 Years 2 Years
Concessioner Frontier Works Organization (FWO) Frontier Works Organization (FWO) Deokjae Construction Company Al-Jasr Pakistan Pvt. Ltd. Frontier Works Organization (FWO)
Concession Type BOT BOT BOT BOT BOT
Concession Period 25 Years 25 Years 30 Years 25 Years 25 Years
Initial Project Cost PKR 35 Billion PKR 46 Billion PKR 5.8 Billion PKR 4.5 Billion PKR 9.9 Billion
Financing Structure 58:42 (Debt:Equity) 70:30 (Debt:Equity) 70:30 (Debt:Equity) 75:25 (Debt:Equity) 70:30 (Debt:Equity)
Project Details Under this project, the Government has provided upfront subsidy as well as operational subsidy to support debt obligations – Private Sector to assume demand risk The Sponsor issued corporate guarantee in favor of Lenders The Project was supported by bridge financing and minimum revenue guarantee by GoS. Private Sector to assume demand risk The Project was undertaken on an annuity basis The Project was undertaken on an annuity basis

Governments have moved away from annuity-based PPP model.

Under PPP road projects, governments and policy makers have moved away from traditional annuity approach of infrastructure financing. Instead the focus has shifted to a more comprehensive long-term PPP concession involving construction, tolling and O&M all combined into one contract.

Annuity schemes were preferred by the construction companies since they did not involve taking traffic / demand risk while getting assured of semi-annual annuity payments from the government. The typical logic was that an annuity led model limited to construction only would provide a more competitive bid for the construction component, thereby giving more value to the government. The government can later outsource other components individually under separate contracts, if they so wish to do so. For road projects, this only meant limited private sector participation, typically limited to construction component only.

In Pakistan, NHA projects have been constructed with a similar rationale that the government would levy a toll / user charge once the construction is completed. This implied a series of tolling contracts subsequent to the construction component which never materialized. Often, the government found it difficult to run separate procurements for each subsequent component whereas the lack of strong technical, financial and legal capability also inhibited long-term road infrastructure development in the PPP mode. A better deal is a single DBFOT (design, build, finance, operations and transfer) allowing a single concession to do all this in a far more efficient and cost-effective manner.

A single PPP concession can provide a much-needed impetus

A much-needed impetus in providing financing to large road projects can be provided by a single PPP concession. When applied in India, UK and USA, the response of the user community has been positive and has accelerated economic growth by providing better and cheaper transportation.

We believe that in Pakistan also, the only way to support a larger program of road development is to rely upon user charges. In order to keep these charges at affordable levels, upgradation of highways and related capital costs should be phased out over time so that self-sustaining projects are undertaken with minimal support from the government exchequer. By commercializing road development and making it financially sustainable, it is possible to expand the investment program multi-fold. As China and several other countries have shown, toll-based road projects remain the key to better infrastructure and economic growth. That would be a win-win for all stakeholders and users.