PAKISTAN
ECONOMIC CORRIDORS PROGRAMME
Business Case
December 2014
GOVERNMENT OF PAKISTAN
MINISTRY OF COMMUNICATIONS
NATIONAL HIGHWAY NETWORK
Khunjrab Pass
Sust
CHINA
Misgar
Karimabad
N-35
Jaglot
Chitral
(1) Proposed Hassandbdal –
Havelian – Expressway (59 km)
Dir
N-45
Timergara
Chakdara
Batkhela
Malakand
Swabi
PESHAWAR
National Highway/Strategic Road
Dara Ademkhel
Kohat
Lachi
Expressway
Motorway (Operational)
Nowshera
N-55
Muzaffarabad
Hatian S-3
Chakothi
S-2
Srinagar
Murree N-75
ISLAMABAD
JAMMU & KASHMIR
(DISPUTED TERRITORY)
Gujar Khan
Sohawa
Jhelum
N-80
Latambar
M-2
Kharian
Sarai Gambila
Motorway (Planned)
Skardu
Naran
Rawalpindi
Bannu
Motorway (Under construction)
Rondu
Chilas
Pattan Jalkhad
Mansehra
M-1 Abbottabad
N-35 Haripur
Peshawar
S-1
Sazin
Dasu
N-90
N-5
Torkham
Gilgit
Kalam N-95
Bahrain
Madyan
Bararkot
Balakot
Drosh
N-5
Gujrat
Wazirabad
National Capital
E-3
Pezu
Daraban
(2) Zhob – Mughal Kot (78 km)
Reabilitation
City/Town
Zhob
Interchange
DI Khan
Ramak
Dhanasar
(3) Qila Saifullah- Loralai-Mekhtar
(128 km) Rehabilitation
Provincial Boundary
Chaman
Muslim
Bagh
Qila
Abdullah
International Boundary
Qila
N-50
Saifullah
Ahmed Wal
Taftan
Yak Much
Lar
N-55
Rajanpur
Bellpat
Nuttal
DM Jamali
Surab
N-25
Basima
N-85
Nag
N-30
IRAN
Panjgur
Kala Shah Kaku
Shahdara
LAHORE
Thokar Niaz Baig
Manga
Bahi Pheru
Pattoki
Renala Khurd
Okara
Sahiwal
Chichawatni
Mianchannu
Shorkot
E-5
Lodhran (4)+(5) Gojira-ShorkotKhanewal Motorway (62+64
Bahawalpur
km)
N-5
Nurpur Nauranga
Ahmedpur East
T. M. Panah
Khan Bela
Zahirpir
Rahimyar Khan
Sadiqabad
Pano Aqil
Rohri
Baberlo
Khairpur
Kambar
Larkana
N-255
Nasirabad
Mehar
Wad
Kamoke
M-2
Sardar Garh
Kashmor
Jaccobabad
Kandhkot
N-55 Shikarpur
Ubauro
Shahdadkot Ratodero
Ghotki
Khuzdar
Shadan Lund
Multan
Muzaffargarh
Jampur
N-65
Kalat
Dalbandin
DG Khan
Rakhni
Sibi
Dadhar
Padag
Nokkundi
Mekhtar
Loralai
QUETTA
Lakpass
Spezand
Sheikh Wasil
Mach
Bahawal Khan
Mastung
Noshki
Gojira
M-4
Retra
Taunsa
N-70
N-25
Kuchlak
River
N-55
Mina Bazar
Khanozai
M-3
Sahianwala
Millat
Faisalabad
Malana
Mughal Kot
Khanewal
Provincial Capital
Gujranwala
Pindi
Bhattian
Yarik
Ranipur
Kotri Kabir
K.N. Shah
N-55
Sehwan
Bela
Turbat
Hoshab
Gwadar
Pasni
Ormara
Gabd
Jiwani
Saeedabad
Hala
Uthal
Liari
KARACHI
Gharo
N-120
Hyderabad
M-9
M-10
Khokhrapar
Mirpurkhas
Petaro
N-25
Nakka Karri
Hub Chowki
ARABIAN SEA
Sakrand
N-55
M-7
N-10
N-10
N-10
Naushero Feroz
Moro
Daulatpur
Qazi Ahmed
Shaheed Benazirabad
Dadu
M-8
Awaran
Kotri
Umarkot
N-5
Gujjo
Thatta
RAMD
N-110
Keti Bunder
Road Asset Management Division
S#
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Route
No
N-5
N-10
N-15
N-25
N-30
N-35
N-40
N-45
N-50
N-55
N-65
N-70
N-75
N-80
N-85
N-90
N-95
N-105
N-110
20
N-120
21
22
23
24
25
N-125
N-155
N-255
N-305
N-455
26
N-655
27
28
29
30
31
32
33
34
35
36
37
38
39
S-1
S-2
S-3
E-3
M-1
M-2
M-3
M-4
M-5
M-7
M-8
M-9
M-10
TOTAL
Road Description
Karachi-Lahore-Peshawar-Torkham
Makran-Coastal; Liari-Ormara-Gwadar-Jiwani
Mansehra-Naran-Jalkhad-Chilas
Karachi-Kalat-Quetta-Chaman
Basima - Khuzdar
Hassanabdal-Thakot-Khunjrab
Lakpass-Dalbandin-Taftan
Nowsehra-Dir-Chitral
Kuchlak-Zhob-D.I.Khan
Kotri-Larkana-D.G.Khan-D.I.Khan-Peshawar
Sukkur-Sibi-Quetta
Multan-D.G.Khan-Loralai-Qila Saifullah
Islamabad-Satra Mile-Lower Topa-Kohala
Tarnol-Fateh Jang-Jand-Khushal Garh-Kohat
Hoshab-Panjgur-Nag-Baseema-Sorab
Khwazakhela - Besham
Chakdara - Kalam
Larkana - Naudero - Lakhi
Gharo - Keti Bunder
Hyderabad - Mirpukhas - Umarkot - Khokhrapar
(Indian Border)
Taxila - Khanpur - Hairpur
Larkana - Moenjo Daro Road up to Airport
Larkana - Nasirabad via Rasheed Wagan
Sakrand - Shaheed Benazirabad
Larkana - Kamber - Shahdadkot
Ratodero - Naudero Road incl. Internal Road of about 2
Km
KKH-Skardu Road (Strategic Road)
Kohala-Muzaffarabad
Muzaffarabad - Chakothi
Kot Sarwar - Hafizabad - Wazirabad
Islamabad-Peshawar Motorway
Lahore-Islamabad Motorway incl. 32 Km Link roads
Pindi Bhattian-Faisalabad Motorway
Faisalabad - Khanewal - Multan
Khanewal - Bahawalpur (Lodhran)
Dadu-Djureji-Hub
Gwadar-Hoshab-Awaran-Khuzdar-Ratodero
Karachi-Hyderabad Motorway (Super Highway)
Karachi Northern Bypass
Length
(kms)
1,819
653
240
813
110
806
610
309
531
1,264
385
447
90
146
487
64
135
61
90
220
44
28
34
35
50
18
167
40
55
100
155
367
53
241
109
270
892
136
57
12,131
Hafeez
Note: This map is indicative – actual details may change.
2
Abbreviations and Acronyms
ADB
AITF
BCR
CAREC
CASA
CDC
CDel
EA
EU
FCAS
GDP
GoP
HMG
IRR
LAR
MFF
MoC
NATO
NPV
NSC
NTC
NTCHIP
OECD
PIDG
PPP
RDel
SARTIP
TA
WBG
Asian Development Bank
Afghanistan Infrastructure Trust Fund
Benefit Cost Ratio
Central Asia Regional Economic Cooperation
Central Asia South Asia (Electricity Transmission)
Commonwealth Development Corporation
Capital Departmental Expenditure Limit (DFID)
Executing Agency
European Union
Fragile and Conflict Affected States
Gross National Product
Government of Pakistan
Her Majesty’s Government
Internal Rate of Return
Land Acquisitions and Resettlement
Multi-tranche Financing Facility (ADB)
Pakistan Ministry of Communication
North Atlantic Treaty Organisation
Net Present Value
National Security Council (HMG)
National Trade Corridor
NTC Highway Investment Programme
Organisation of Economic Cooperation and Development
Private Infrastructure Development Group
Public-Private Partnership
Resource Departmental Expenditure Limit (DFID)
South Asia Regional Trade and Integration Programme
Technical Assistance
World Bank Group
£1 = US$1.667
3
INTERVENTION SUMMARY
1.
Due to its strategic geopolitical location, Pakistan has the potential to play a
significant role in trade between Central and South Asian countries, and
between Central Asia and the rest of the world. Developing efficient economic
corridors1 would help to unlock significant economic potential for Pakistan and
the region.
2.
Infrastructure connecting regions and economic centres is crucial to opening up
opportunities for trade and associated economic development2. Lack of
transport infrastructure, along with energy, is seen as a major constraint to
growth in Central, West and South Asia contributing to the “band of poverty”
across much of the region3. This is of particular concern to Pakistan, which has
been suffering from anaemic growth for the best part of a decade. The
“infrastructure deficit” is estimated, on average, to be costing 3% of GDP4.
3.
A rapidly growing population increases the demand for access to services,
markets and the need to provide economic opportunities for young people.
Fiscal consolidation under Pakistan’s IMF programme means the ability of the
Government of Pakistan to finance this demand is constrained.
4.
DFID funds under this programme will both complement Government of
Pakistan (GoP) efforts to reduce its fiscal commitments and facilitate Asian
Development Bank (ADB) credit lines. The build-up of significant public-private
partnership (PPP) capacity will help attract private sector investments to
support the financing of much needed economic infrastructure. This is critical if
Pakistan is to reach its full growth potential.
5.
Weak economic growth disproportionately impacts the poor. Investing in
economic corridors through transport and related infrastructure will stimulate
economic activity, create jobs, lead to reductions in costs and contribute to
increased living standards. Investing in national trade infrastructure will not only
yield benefits for Pakistan, but also leverage regional gains by linking to
corridors in other countries as part of the Central Asia Regional Economic
Cooperation (CAREC)5 initiative.
6.
Pakistan’s National Trade Corridor Initiative (NTC)6, forms an integral part of
CAREC Corridors 5 and 67,8. It connects the port city of Karachi to Lahore,
Islamabad and Peshawar, as well as linking with India, Afghanistan and Central
Asian countries. The NTC supports about 95% of the country's external trade,
65% of land freight transport, and serves regions that contribute 80–85% of
Pakistan’s GDP9.
1
We define an economic corridor as a recognised transport corridor with regional connectivity that has been developed to
accommodate and facilitate economic activity for the surrounding areas primarily through investment by private sector capital
2 DFID (2013) Connecting people, creating wealth: Infrastructure for economic development and poverty reduction
3 ADB (2011). Binding Constraints to Regional Cooperation and Integration in South Asia
4 This gap is defined as the difference between Pakistan’s development goals and its actual capability to obtain those goals.
World Bank (2014): “Reducing Poverty by Closing South Asia’s Infrastructure Gap”.
5 Established in 2000, CAREC is a partnership of ten countries (Afghanistan, Azerbaijan, People’s Republic of China, Kazakhstan,
Kyrgyz Republic, Mongolia, Pakistan, Tajikistan, Turkmenistan and Uzbekistan) and six multilateral institutions (Asian
Development Bank, European Bank for Reconstruction and Development, International Monetary Fund, Islamic Development
Bank, UNDP and World Bank).
6
See Annex 6
7ADB. 2013. Central Asia Regional Economic Cooperation Transport and Trade Facilitation Strategy 2020. Manila.
8 See Annex 7
9 ADB Board Submission (2007), Proposed Multi-tranche Financing Facility and Technical Assistance Grant, National Trade
Corridor Highway Investment Program (Pakistan)
4
7.
DFID will contribute up to £265 million of grant financing to the ADB’s
infrastructure and economic corridors programme over the next 6 years
(2014/15 – 2019/20). The contribution will comprise two streams:
i. £210m (CDEL) to finance a series of works contracts of a total value of
£635 million (GoP - £63m; ADB - £362m; DFID £210m) for strategic
sections of the national highway network; and
ii. £55m (RDEL) to support an integrated programme of Technical
Assistance (TA) designed to:
 improve highway operation and maintenance arrangements and
ensure strategic alignment between Federal and Provincial economic
infrastructure investments (£15m); and
 promote a series of PPP projects focused on the development and
expansion of economic corridors (£40m). The PPP component will
also release an additional £120 m of the ADB risk guarantees.
8.
The Pakistan Economic Corridors Programme will promote regional trade,
growth and jobs, in line with DFID’s global policy priority to accelerate work on
economic development. DFID funding would, together with the ADB resources
and private sector capital, enable the implementation of a significantly larger
level of infrastructure investment in the Pakistan economy every year, and
close the infrastructure gap more rapidly than would otherwise be possible.
9.
The programme will cover three aspects:
i. Current Need – through financing transport corridor construction and
upgrading.
ii. Regional Inclusivity – leveraging investment in all four of Pakistan’s
provinces, yielding nationwide benefits. Additional technical assistance
and monitoring will assess the impact on affected vulnerable
communities and groups and provide complementary programmes to
empower local communities to fully access benefits.
iii. Sustainability – by helping to develop a commercially viable market
for private investment in economic corridor infrastructure.
10.
DFID’s assistance is aligned with wider HMG and National Security Council
(NSC) objectives for Pakistan (and also Afghanistan). These are articulated in
the British High Commission’s Integrated Delivery Plan:
i. Supporting Pakistan in its regional relationships
ii. Expanding regional trade
iii. Helping Pakistan to create jobs and income
11.
Anticipated Results include:
i. 355 kilometres of roads developed.
ii. Up to 12 Public Private Partnership transactions completed, crowdingin up to £260 million private capital for infrastructure.
iii. Refreshed transport sector policy and planned investment programme
to 2025.
iv. Improvements in National Highway Asset Management and increase
in quality and safety of roads.
5
I. STRATEGIC CASE
Context, need and opportunity to intervene
Context
12.
Historically, trading routes crossed Central and South Asia and interactions
between its people were commonplace. Yet today, complex and contested
politics have resulted in the region being one of the least connected in the
world and amongst the most fragile, politically and economically.
13.
Regional trade is amongst the lowest globally, while the cost of trading across
borders is one of the highest. According to the World Bank, it is cheaper for
South Asian countries to export to anywhere else in the world than to export to
each other10. As a result, the share of intra-regional trade has only marginally
improved from 2.5% to 4.8% between 1995 and 2010, compared to 50% in
East Asia11.
14.
This geographical phenomenon is driven by low road, rail and power
connectivity. For example, South Asia has just 70km of road for every 100sqkm
of land, compared to 100km in East Asia and 340km in the OECD12. The failure
to address these constraints for many years has further exacerbated the
problem, negatively impacting on poverty reduction efforts.
Need
15.
In Pakistan economic growth is recognised to be well below the level needed to
cater for a rapidly growing population13. The reasons for this are well
documented14. Poor economic management characterised by large fiscal
deficits and inefficient subsidies; conflict and insecurity; and natural calamities
have been the major factors. The poor are particularly affected through two
main channels: (i) low levels of public and private investment holds back job
creation15; and (ii) lack of fiscal space means shockingly low levels of basic
public services, on which the poor depend.
16.
While macro and fiscal reform is crucial in addressing constraints to growth,
poor connectivity compounds poverty by restricting access to markets and
basic services. While the poor may not be the first users of economic
infrastructure such as national highways, they stand to benefit from the
economic efficiencies and lower prices generated by such investments.
17.
There is strong evidence that economic growth is a key driver of long-term
sustainable reductions in poverty, and that well-designed infrastructure
contributes by enabling connectivity, trade, growth, and job creation. For
example, DFID support in developing regional corridors in East Africa is
10
http://blogs.worldbank.org/endpovertyinsouthasia/downside-proximity
ADB (2011) Binding Constraints to Regional Cooperation and Integration in South Asia
12 Kochhar, Kalpana (2012), WB presentation at Chief Economist Advisory Committee
13 Final Report of the Panel of Economists: Medium Term Development Imperatives and Strategy for Pakistan,
Planning Commission of Pakistan, 2010
14 World Bank (2012) Country Economic Memorandum
15 Foreign direct investment has also fallen 40% per year since the global financial crisis in 2008 (IMF)
11
6
estimated to have reduced transit times and transaction costs by 20% resulting
in a 10% increase in average annual real growth in trade16.
18.
It is also widely accepted that increased trade opportunities can boost private
investment and economic growth. For example, in Central Asia, Linn estimates
that the benefits of effective regional cooperation could lead to a doubling of
regional GDP over 10 years17. However, it is important to acknowledge that
some of these benefits are only realised over a long time-frame, and increased
trade and openness in the short-term is not always beneficial to everyone1819.
Opportunity and Options
19.
The Government of Pakistan’s strategy and key objectives of the proposed
economic corridors programme are to promote regional integration and to
reduce transport costs through improved connectivity and reduced transit
times. These objectives could be achieved in several ways: through
improvements to road and/or rail infrastructure and operating and maintenance
arrangements; through improvements in port infrastructure and port operations;
and through improvements to infrastructure and operating arrangements at
border crossing points.
20.
The rail sector is responsible for less than 10% of national freight and
passenger traffic and these levels continue to decline. Pakistan Railways is
ineffective and mismanaged. With 82,000 employees, there is significant overmanning and the enterprise is haemorrhaging cash, requiring large fiscal
subsidies.
21.
The ADB and the WBG are leading efforts to support GoP to restructure poorly
performing state-owned enterprises like Pakistan Railways and prepare them
for eventual privatisation. DFID is financing TA to support these efforts through
an ongoing ‘Stability and Growth’ programme. Until such time as there is
evidence that fundamental sector reforms are underway and that Pakistan
Railways is allowed to operate as a commercial entity, there is no appetite
within the IFI and donor community to support infrastructure investments in the
sector.
22.
Pakistan has three major sea-ports at Gwadar, Karachi and Muhammad Bin
Qassam. Infrastructure and operations at all locations are either satisfactory or
under improvement. Bottlenecks and blockages are caused by factors other
than infrastructure deficit or operational reasons. The Government of China and
the WBG are the major donors in the sector and there are no significant funding
gaps. For future developments, the application of public resources will need to
be carefully assessed to avoid crowding out private sector investment.
23.
Pakistan ranks 72nd out of 160 countries in terms of overall logistics
performance and 58th in terms of overall customs performance.20 Investment in
16
Infrastructure Thematic Review, Lilly-Ryan Collins and Stephen Young, DFID 17 July 2012.
‘Central Asian Regional Integration and Co-operation: Reality or Mirage’; J.F. Linn, 2012
18 United Nations Conference on Trade and Development: trade, income distribution and poverty in developing
countries: a survey; 2012.
19 In the case of South and Central Asia, where there is potential for trade costs to be drastically reduced, the
benefits for millions of poor consumers of goods and energy are highly likely to outweigh any short-term negative
effects. The benefits in the longer term, both in terms of reduced expenditure for consumers and greater
productivity and returns for firms, will spur growth and create new job opportunities
20 World Bank. Logistics Performance Index Dataset. http://lpi.worldbank.org/ (accessed 29 May 2014).
17
7
physical infrastructure at border crossing points, and improvements to both
customs procedures and to the enabling legal and regulatory framework, would
both benefit regional trade and boost Pakistan’s economy. A single window
system is envisaged as a long term vision for improving cross-border traffic.
The ADB is preparing a Border Services Improvement project for Torkham,
Wagha and Chaman, that is expected to address key bottlenecks on Pakistan’s
strategic border crossings and has allocated $150 million in its pipeline for the
project. The WBG is also providing support to this initiative, some of it funded
from DFID’s Asia Regional Programme.
24.
Roads are the transport sub-sector with the most compelling case for support:
roads are the principal mode of transport, responsible for over 90% of freight
and passenger traffic. In comparison, the railways handle little more than 5% of
traffic and even this is declining. The ports sector is currently well supported by
state, external government and private sector interventions; and future
infrastructure investments may prove an attractive option for private sector
capital. As noted, an extensive programme, supported by Government, a range
of donors and the IFIs, is scheduled for border crossing points. The proposed
intervention will be a critical component in the attempt to better align ongoing
GoP and donor investments both at Federal and Provincial levels to ensure
meaningful economic corridor development and regional integration.
25.
Pakistan’s National Trade Corridor Initiative (NTC), forms an integral part of the
Central Asia Regional Economic Cooperation (CAREC) Corridors. It connects
the port city of Karachi to Lahore, Islamabad and Peshawar, as well as linking
with India, Afghanistan and Central Asian countries. The NTC supports about
95% of the country's external trade, 65% of land freight transport, and serves
regions that contribute 80–85% of Pakistan’s GDP21. The ADB estimates that, if
fully implemented, the NTC initiative should save between US$5 billion and
US$7.5 billion per annum, equivalent to 2.5% of GDP, currently lost because of
inefficient logistics22.
26.
Developing economic corridors, including improving and extending Pakistan’s
road infrastructure, would help to unlock economic gains for Pakistan and the
region by providing a quick route for Afghan, Chinese and Central Asian goods
and natural resources to the sea, and for international business to access these
markets. Through the CAREC process and NATO investments in Central Asia
and Afghanistan, roads have been built or will soon be completed up to the
Afghan-Pakistan border, but not into Pakistan.
27.
Significant capital investment will be required. The GoP has recently prioritised
the construction of five road investments and two bridges23. These roads will
complete essential links between the Afghanistan–Pakistan border and the
border with India and the sea ports of Karachi and Gwadar, and will link China
with the Arabian Sea. These are part of an existing (but not as yet fully funded)
loan agreement between the ADB and the Government. Project preparation
activities are well advanced but without additional resources to cover the
funding shortfall, these investments will be significantly delayed.
21
ADB Board Submission (2007), Proposed Multi-tranche Financing Facility and Technical Assistance Grant,
National Trade Corridor Highway Investment Program (Pakistan)
22 ADB Board Submission (2007) Proposed Multitranche Financing Facility and Technical Assistance Grant
National Trade Corridor Highway Investment Program (Pakistan)
23 (i) Hassanabdal-Havelian (59km); (ii) Qila Saifullah-Loralai-Wagham (128km); (iii) Zhob-Mughal (79km); (iv)
Gojra-Shorkot (62km); (v) Shorkot-Abdul Hakim (20km); (vi) Two bridges to cross River Ravi and Sindhai Channel
(7km)
8
28.
The ADB estimates the construction cost to be $1.047 billion (£635 million).
Grant financing from DFID will help unlock the ADB and GoP funds that have
been committed for these road sections. Analysis by the ADB shows that the
economic benefits of such investments would be considerable24. Improvements
to road infrastructure linked to measures to improve road safety and highway
operation and maintenance arrangements have been shown to provide the best
value for money25.
29.
Pakistan’s ability to leverage private investment to help finance infrastructure
development is limited. While the required legislation is largely in place the
capacity to identify, evaluate, structure and manage complex Public Private
Partnership transactions is weak. As a result, few deals beyond simple
operation and maintenance contracts have been taken to financial closure.
30.
In order to maximise the benefits from transport corridor enhancement and
develop an effective economic corridor, it is essential that private investment
and expertise be leveraged to support ancillary infrastructure such as energy
plants, business parks and access roads. Many of these investments will fall
within the remit of Provincial governments.
31.
DFID technical assistance will therefore help build the capacity of PPP units in
the provincial Planning and Development Departments of Sindh and Punjab, as
well as in the Federal Ministry of Finance, to structure and manage a number of
PPP deals. It is expected that this support will eventually provide opportunities
to leverage returnable capital funds from DFID’s proposed regional facilities or
other international investors.
32.
CDC and DFID’s Private Sector Infrastructure Development Group (PIDG), for
example, have expressed interest in engaging more in Pakistan if they can be
assured that the regulatory risk can be minimised; a robust investment pipeline
exists; and that sufficient capacity exists within government to effectively
develop and manage private financing arrangements. DFID can play a key role
in helping to address these concerns and increase the likelihood of such
investments in future. The ability to leverage significant foreign direct
investment will make further economic corridor and infrastructure development
more sustainable.
33.
While the bulk of DFID funds would contribute towards financing the current
need for better transport infrastructure, resources will also be targeted towards
ensuring that the benefits from such infrastructure flow to local communities.
This will be done through TA that assesses potential impacts on local
communities, especially vulnerable groups, and will recommend measures to
support them – which may include public works and/or ensuring local
communities are given employment opportunities. TA will also be used to
strengthen policy and planning frameworks for economic corridor
enhancement. This will enable improved prioritisation of infrastructure
investments and coordination between relevant government agencies at
Federal and Provincial levels.
24
25
See Cost Benefit Analysis appraisal for details
See Annex 9 for a broader assessment of the transport sector
9
What is the Pakistan government’s response to this need?
34.
Along with energy reform and privatisation, improving infrastructure and
regional trade are priorities for Prime Minister Nawaz Sharif’s government. The
Prime Minister clearly set out his vision for extending motorways and
communication links to Kabul, Central Asia and South Asia in his August 2013
inauguration speech. Regionally, agreement was reached in November 2013 to
extend CAREC Corridor 5 through Pakistan to the sea and to introduce a new
corridor starting at the Chinese border.
35.
The Government’s ambition is to link the national and regional corridors
together under one integrated plan, the NTC. Responsibility for developing a
strategic vision for the development of economic corridors in Pakistan currently
sits with the Ministry of Planning, which has asked the ADB for support to take
this work forward. The GoP is working to increase its revenue collection
substantially, partly to increase its financing of public infrastructure. However,
cutting the fiscal deficit remains its priority in the short run.
What is the international community’s response?
36.
The ADB is the major player in the field of developing transport and trade
infrastructure in Pakistan and the region. Japan is a contributor to this initiative.
While the Americans are supporting construction of some roads near and
connecting to the Afghan border, this is not part of wider economic corridor
development. The Governments of Pakistan and China are discussing
developing connectivity from Gwadar to the Pak-China border.
37.
If approved, DFID’s Economic Corridors programme will form part of a series of
initiatives supported by the international community to improve regional trade
and connectivity, in partnership with GoP:
i.
ii.
iii.
Developing border post infrastructure to improve the flow of goods (ADB
and WB/DFID)
Improve standards and procedures to help facilitate trade (WB and EU)
Improved co-ordination between donors and with GoP, and building
consensus for change (WB and DFID).
Does DFID have a comparative advantage? How does this link to DFID’s global
poverty reduction objectives?
38.
The proposed programme complements existing DFID country and regional
programmes with a focus on trade and economic development. Together, they
aim to reduce the various constraints to growth. Examples include:
i.
26
South Asia Regional Trade and Integration Programme (SARTIP)26 DFID is working with the World Bank and the ADB to promote trade and
investment in the region. The Economic Corridors programme can be
seen as a successful outcome of SARTIP, where funds were used to
prepare the ground and seek opportunities to contribute to regional
connectivity and integration
SARTIP – managed by DFID’s Asia Regional Team
10
ii.
iii.
iv.
v.
vi.
Energy - DFID is supporting the CASA-1000 initiative, through SARTIP,
to match Pakistan’s energy needs with surplus electricity generated in
Central Asia
Afghanistan Infrastructure Trust Fund (AITF) - a DFID supported trust
fund managed by the ADB that pools donor funding to finance
infrastructure investments and related sector reform in Afghanistan
Stability and Growth – a recently approved programme to support
GoP’s macroeconomic and fiscal reforms under the IMF framework
Enterprise and Asset Growth – a range of private sector development
initiatives focused on creating efficient markets to mobilise financial
services for the poor and small enterprise; skills development and
capacity building for small enterprise; and investment climate reforms.
Regional Infrastructure Facility (under development) – supporting the
development of regional economic corridors in Central/South Asia.
39.
DFID has encouraged and supported challenging macroeconomic and fiscal
reforms in Pakistan through the current IMF programme. DFID’s work in
Pakistan and the region also maintains a strong pro-poor focus through health,
education, private sector and cash/asset transfer programmes.
40.
The programme makes a significant contribution to operationalising DFID
Pakistan’s economic development shift and scaling up support to private sector
development. While DFID is a new player in the transport sector in Pakistan, it
is well-placed to help – a similar project is being implemented in Afghanistan
with the ADB (see AITF above).
41.
DFID has extremely good relations with the Government of Pakistan, ties that
we can use to encourage sound prioritisation, ensure delivery and manage
risks. DFID has also established a good working relationship with the ADB, incountry and regionally, which has a strong reputation for its infrastructure and
regional trade work. Grant funds help lever ADB loans and private finance, and
thus help influence GoP’s own investments towards areas of higher economic
return.
How will the intervention a) do no harm or b) address the underlying causes of
conflict and fragility?
42.
Research commissioned by DFID27 provides emerging evidence that the way in
which infrastructure, health, water, sanitation and other services are delivered
in fragile and conflict-affected states has an impact on their ability to contribute
to wider peace-building/state-building efforts and at least ‘do no harm’ to these
processes. This is in addition to the primary function of promoting human
development outcomes and making progress towards the MDGs.
43.
Provision of infrastructure has potential to exacerbate as well as reduce conflict
and fragility. Whether infrastructure provision makes a positive or negative
contribution and to what extent, depends upon many factors such as sector,
scale, timing, degree of community involvement, time horizon, ownership, stage
of project cycle and stakeholder characteristics. DFID will ensure (and
commission work where required) that appropriate and effective policies and
safeguards are in place to address conflict and fragility issues associated with
its investments.
27 Infrastructure
Thematic Review, Lilly-Ryan Collins and Stephen Young, DFID 17 July 2012.
11
Strategic Fit
44.
The proposed intervention is fully consistent with the Secretary of State’s vision
to scale-up DFID’s work on economic development. A focus on promoting
prosperity and stability in Pakistan, and supporting Pakistan to play a
constructive role in the region including expanding regional trade, particularly
with Afghanistan and India, are set out in the UK government’s National
Security Council (NSC) objectives for Pakistan, and in DFID’s Country
Operational Plan. Helping to improve economic connectivity between
Afghanistan and Pakistan would also provide a powerful demonstration effect
and help build confidence in the potential of regional integration.
45.
The UK government, through DFID, FCO and others, has built substantial
working relationships with the International Financial Institutions (IFIs) and
country governments. This includes working with the ADB in Afghanistan, as
well as working with the World Bank and others in supporting GoP’s Economic
Reform Programme. DFID is also uniquely able to leverage UK and
international expertise, for example through CDC and PIDG. This can help
promote private sector investment opportunities and sustainability in the longer
term.
Impact and Outcomes
46.
The expected outcome of the programme is ‘Improved, safer and efficient
regional connectivity through development of economic corridors leading to
enhanced trade and private investment’.
47.
DFID funding, together with the ADB and Government resources, will enable
the implementation of a significantly larger level of infrastructure investment in
Pakistan. As a complement to the ADB resources, DFID funding would allow
the infrastructure gaps to be closed more rapidly and produce a marginal
stream of economic and social benefits when compared to the counterfactual (a
scenario characterised by high transportation and communication costs). This
could occur in two ways:
i.
In the short-term, DFID co-financing of infrastructure projects can be a
key and stable source of external funding for high quality public
infrastructure investments with a direct impact on economic growth and
therefore poverty reduction. This will be targeted at roads that link poorer
regions of Pakistan, like Baluchistan, into the major road networks, while
creating economic corridors which promote increased trade with
neighbouring countries.
ii.
In the medium term, DFID TA will support federal and provincial
authorities to finalise institutional, regulatory and financial mechanisms
for Public Private Partnerships (PPP). This will be complemented with
high quality transaction advisory services and capacity building to identify
evaluate and prepare a robust pipeline of potential PPP transactions.
Sustainability
48.
The upgrading, extension and efficient operation and maintenance of national
highway infrastructure are integral components of the Government’s strategy
12
for the transport sector28. The ADB country assistance plan provides for
extended support to the transport sector in Pakistan; co-financing with DFID will
facilitate programme implementation.
49.
In the broader sense, the investment will support GoP’s own efforts to increase
growth-enhancing investment with sustainability being achieved through higher
GoP revenue collection. A vibrant PPP sector would open access to resource
mobilisation for public infrastructure development and create a sustainable
source of financing with further positive impacts on growth, jobs and poverty
reduction.
Feasibility
50.
As described earlier, transport and regional connectivity is a high priority for the
Pakistan Government. DFID has actively championed reducing the constraints
to growth and associated reforms by supporting the IMF programme and other
initiatives; it is recognised by GoP as a trusted partner.
51.
The main challenge to regional co-operation is that increases in regional trade,
and the associated gains, depend on regional and bilateral relations improving
or, at least, being maintained. PM Sharif has continued to champion regional
trade, which is encouraging for prospects of increased regional co-operation.
52.
However, the programme recognises the associated risks. The focus of the
programme at the output level is country-specific. This ensures that regardless
of regional conditions, there are substantial benefits to be gained through
creating an enabling environment for growth in Pakistan by supporting
domestic economic activity. By retaining the regional scope at the outcome
level, the programme will also benefit from the opportunities arising from
improvements in regional relations as the investments will be well placed to
support regional trade.
What institutions do we think matter most for Pakistan’s development? How will this
intervention – and the way we plan to implement it - influence these institutions?
53.
In the context of the Economic Corridors programme, the main institutions are
the Planning Ministry, Ministry of Communications (MoC) and the National
Highway Authority (NHA). TA will target MoC and NHA through specific
interventions to improve planning and prioritisation to help to deliver GoP’s
Vision 2025.
54.
Major national roads are controlled by the federal government whereas
provincial governments are responsible for inter-city roads, intra-city
communication networks, mass transit systems, bridges and other local
infrastructure. The PPP component plans to work with the PPP units of the
federal government and two of the largest provinces of Pakistan, Punjab and
Sindh, to develop a functioning PPP market29.
Is it appropriate to committee funding beyond the UK Spending Review period?
28
PAKISTAN 2025 A Vision for Building a Better Future
Other provinces are not excluded from support. However, they will also require a PPP programme with the
ADB to benefit which is currently not anticipated.
29
13
55.
Physical infrastructure by its nature requires a significant commitment period to
provide the financial assurances to enable delivery. Similarly the commitment
to build up capacity to prepare and effectively delivery PPP funded
infrastructure requires a multi-year investment before this leads to sound and
sustainable delivery capacity.
56.
In the event of UK elections, it is recognised that priorities may change. The
disbursements made within the current Spending Review to support road
infrastructure will have still ensured a faster delivery of key road connectivity
that would otherwise been the case. A decision to end funding in the next
Spending Review will inevitably mean slower delivery and not all roads will
actually be built unless new funding sources are found. However it will not lead
to wasted funds for the UK (or ADB and GoP) – just lower investment and
therefore lower benefits to Pakistan and the communities benefiting from the
road infrastructure. The majority of the PPP-related funding fall outside the
current Spending Review, and therefore an ending of funding will have little
technical impact.
57.
Not extending funding beyond the current Spending Review period will naturally
not be welcomed by the GoP and ADB. However relations with the GoP are
excellent. The UK political cycle is well understood and there is full recognition
that a new government may have different political priorities, as is the case in
Pakistan’s own political cycles. Similarly ADB, in consultation with GoP, will
have capacity to adjust plans, and have the capacity to re-prioritise their own
funds rather than all investment streams having to be closed because of a
DFID decision.
14
II. APPRAISAL CASE
Options
58.
As the strategic case sets out, lack of connectivity is a key constraint to growth
in the region. Regional connectivity could be improved through investments in
road, rail or ports. Investment in rail was rejected primarily due to the current
state of Pakistan Railways (PR) described earlier. With substantial overmanning and haemorrhaging cash, it requires large fiscal subsidies. Rail today
accounts for less than 10% of freight traffic. Until there is political will to
undertake fundamental sector reforms and allow PR to operate as a
commercial entity, railway infrastructure investment would achieve little.
Pakistan’s three sea ports are either operating satisfactorily or are already
under improvement. While there are bottlenecks and blockages, these are not
due to an infrastructure deficit but to other constraints.
59.
Only one option was identified to address regional connectivity shortfalls. This
is a national approach that will allow regionally linked economic corridors to be
developed across Pakistan through a combination of:
i.
ii.
iii.
60.
Capital investments in highway infrastructure
Technical assistance to improve the planning, design, operation and
maintenance of highway assets and
Technical and financial support to the establishment of federal and
provincial contractual mechanisms designed to attract private investment
in public infrastructure.
Other delivery options are covered in the Commercial case.
Cost Benefit Analysis
Upgrading of Identified Priority Roads
61.
The highway investments that have been proposed for joint ADB-DFID
financing have been prioritised by the GoP. They will complete essential links
between the Afghanistan–Pakistan border, the border with India and the sea
ports of Karachi and Gwadar, and link China with the Arabian Sea. They are
part of an existing (but not fully funded) loan agreement between the ADB and
the Government. Project preparation activities are well advanced.
62.
Table 1 lists the four proposed road sections (six packages) and presents
results of the economic appraisals undertaken by the ADB for three of the
roads. An updated traffic study is underway for the fourth road, the M4. Once
the study is completed (June 2015), the ADB will appraise the M4 project’s
economic viability as measured by: (i) benefit to cost ratio (BCR), (ii) economic
internal rate of return (EIRR), and (iii) net present value (NPV). We expect
EIRR’s to be in the same range (or higher) as the other road sections. Should
this not be the case, DFID reserves the right to reconsider its support for the
M4 investment and/or seek re-approval with DFID senior management.
63.
The ADB guidelines require use of a 12% discount rate. Projects with EIRRs
below this are generally not financed - unless they can demonstrate substantial
non-monetized benefits. The ADB’s approach to economic analysis is
considered to be in line with international best practice and consistent with
DFID’s own approach. Where available, the ADB economic appraisal utilises
15
software such as HDM-IV30 which has been developed to enable governments,
road agencies and donors to prioritise road investment and maintenance
expenditure based on relevant economic criteria.
Table 1:
Funding
Proposed Road Sections, Distances, Costs, Economics and
Description
(Est. Start Date - End Date)
KM
Total
Cost
US$m
EIRR
NPV,
$m
GoP
($ m)
ADB
($ m)
DFID
($ m)
Hassanabdal – Havelian
E-35, 4 lane, new build, KP/Punjab
(Nov 2014- Dec 2017)
59
388
15.2%
76.2
39
221
128
Qila Saifullah – Loralai - Wagham
N-70, 2 lane, rehabilitation, Balochistan
(Apr 2015 - Sep 2017)
128
120
24%
99
12
68
40
Zhob-Mughal Kot
N-50, 2 lane, rehabilitation, Baluchistan
(Apr 2015 - Sep 2017)
79
114
15%
32
11
65
38
M4 Gojra - Shorkot, Punjab,
(Oct 2015 - Mar 2019)
62
300
TBD
TBD
30
171
99
M4 Shorkot - Abdul Hakim
(Oct 2015 - Mar 2019)
20
100
TBD
TBD
10
57
33
M4 two bridges to cross River Ravi and
Sindhnai Channel, 4-lane, Punjab,
(Oct 2015 - Mar 2019)
7
25
TBD
TBD
3
14
8
355km
$1047
$105
$597
$346
£635m
£63m
£362m
£210m
Programme totals
64.
Two principal types of benefit are included in the calculations for the proposed
projects:
 savings in Vehicle Operating Costs (VOC) from improved traffic
conditions and higher levels of service; and
 savings in travel time costs resulting from increases in vehicle speed due
to higher speed limits, improved alignment, increased level of service and
increased overtaking opportunities.
65.
One important benefit has been excluded from the analysis for lack of data savings in accident costs resulting from road upgrading. For the case of
upgrades from 2 to 4 lane roads in particular, this means the estimated
economic returns can be considered conservative.
66.
Unit rates for VOCs per km by IRI31 have been provided by the National
Highways Authority based on calibrated HDM-IV model outputs. For both the
without and with project scenarios VOCs are linked to IRI values, so the poorer
the road surface the higher the cost of operating a vehicle on it. Economic
appraisal is undertaken in constant prices. In line with ADB guidance, market
distortions such as fuel subsidies and indirect taxes are removed.
30
Highway, Development and Management (HDM-IV) is the software most widely used for road investment and
maintenance appraisal by road agencies and donors.
31 International Roughness Index, a standard international measure of road condition.
16
67.
The value of time savings per passenger is based on either: (i) IMF / Pakistan
Bureau of Statistics (PBOS) estimates of GDP per person employed, adjusted
to hourly values using national data on average working hours; or (ii) where
available, PBOS estimates of average wages. The value of non-working time is
taken as 30% of the value of working time. The value of time is hypothesised to
increase over time in line with changes in real GDP per capita. A shadow wage
rate factor of 0.75, in line with ADB guidance, is applied to the value of work
time to convert it from financial to economic prices.
68.
Average vehicle occupancy is derived from NHA estimates of 2 persons per
car / light vehicle, 30 occupants for large buses and 1.5 for trucks. 25% of all
occupants, including crew, of cars, light vehicles and buses are assumed to be
in business time.
69.
For existing traffic VOC and time savings are multiplied by without project traffic
volumes (based on traffic counts). The ‘rule of a half’32 is applied to all
additional trips generated by the project.
70.
In addition to initial investment costs, incremental changes in annual operation
and maintenance costs are included in the analysis. The streams of costs and
benefits derived from each project are discounted over a 20-year appraisal
period (excluding investment period) to estimate the BCR, EIRR and NPV.
71.
Sensitivity tests and calculations of switching values were carried out to
determine the effect on NPV / EIRR of variations in key parameters. The results
of sensitivity tests vary by project and are shown in attached economic
analyses.
CBA Results
72.
Table 1 shows that the first three roads have positive base case NPVs at the
ADB’s discount rate for Pakistan of 12%33, with EIRRs ranging from 15% 24%. Sensitivity analysis indicates the results are robust to changes in key
parameters. An EIRR of 15.6% was calculated for the M4 sections in 2007, but
this requires updating. Approval of ADB (and DFID) funding for the M4 is
dependent upon a positive NPV at a 12% discount rate.
Road Maintenance
73.
The government established a dedicated road maintenance fund in 2003 that is
financed by toll revenue from the motorways and national highways, federal
grants, and other road revenues. This has provided the NHA with a stable
source of funding for road maintenance — free from political influence. This has
enabled the NHA to plan and use scarce resources effectively.
74.
Maintenance spending increased steadily compared with spending on road
construction, except for FY2009 when the national economy shrank because of
the global financial crisis. However, road maintenance fund revenues fall short
of the unconstrained requirement. The solution may be to build more toll-based
motorways and transform existing national highways into toll-based ones after
upgrading them.
32
A standard assumption in CBA of transport projects that the demand function is linear in the relevant region of
generalised costs. Net benefits to travellers are estimated as the generalised consumer surplus from the change
in generalised costs on all travel movements.
33 DFID Pakistan normally uses a 10% discount rate.
17
Technical Assistance
75.
1
2
3
4
5
6
7
Technical assistance provided to improve the strategic planning of economic
corridor infrastructure and strengthen the transport policy regime will help
ensure that expected benefits of highway related investments are realised and
sustained. For example, improved axle load management and asset
management will help to better maintain pavement quality. More effective
tolling policies and capacity building of PPP units will help to finance and
leverage private sector expertise to operate and maintain assets. Together with
enhanced road safety initiatives, these will all help to deliver better VfM for
DFID’s investments.
Brief description of TA component
Road Safety Initiatives
Transport Sector Policy and Economic Corridor planning
Axle load control and asset management
Equipment
Equitable tolling policy
Social impact assessment and mitigation
Monitoring and Evaluation
TOTAL ALLOCATION
Allocation £ million
5.0
2.0
2.0
1.0
1.0
1.0
3.0
15.0
Public private partnerships
76.
The 12 individual transactions that are expected to be developed over the
course of the programme have yet to be identified. An accurate estimate of the
cost and benefits of the proposed PPP investments is therefore not possible at
this stage. As potential transactions are identified during the project preparation
phase economic viability assessments will be conducted to determine the BCR,
EIRR and NPV.
77.
The assessment will also consider how the investments will support national
economic corridor development (including impact on local growth and poverty
reduction) as well as the amount of private finance that can be leveraged; the
impact on savings and contingent liabilities for the Government; and what (if
any) amount of viability gap financing may be required to take the deal to
financial closure.
78.
Once a package of preferred transactions has been identified and project
preparation work completed, additional approval will be sought from DFID
senior management (Director Level) to proceed with implementation and
develop the transactions further until financial closure (see management case).
79.
It can be assumed, however, that because of the need for PPP projects to have
a high and very secure level of revenue generation potential (to make them
attractive to investors) that the EIRRs of projects pursued through a PPP
modality will tend to compare well with other infrastructure projects for which
there is less concern with financial feasibility.
80.
In general, PPPs are a globally accepted and well used procurement modality
for leveraging private capital, bringing cost and time efficiencies and for availing
private sector expertise to manage risks and efficiently deliver public goods and
services. For example, the UK National Audit Office found 73% of construction
projects undertaken through traditional procurement suffered cost overruns (as
18
against 22% in PPPs), and 70% suffered delays (against 24% in PPPs).34 In an
analysis of Australian projects undertaken since 2000, PPP projects had a
1.1% net cost overrun, in comparison with 15% for traditional procurement.35
81.
In Pakistan one of the biggest problems suffered by current public procurement
practices are the consistent cost overruns and delays. Addressing this will be a
major driver for improving value-for-money. Also the cost of funding critical
infrastructure development needs vastly exceeds existing and projected fiscal
resources. Private resource mobilisation through PPPs can help fill the gap.
82.
Federal and Provincial governments recognise that the establishment of
enabling legal environments is not sufficient to catalyse large-scale private
investment into PPPs; that a PPP modality should be selected only when a
project is bankable and provides value-for-money (when compared with
conventional infrastructure procurement); and that PPP modalities are more
appropriate where projects can be shown to generate revenues.
83.
They also acknowledge that they have weak capacity to select appropriate
projects as PPPs, i.e. those which offer the best value-for-money, to conduct
pre-feasibility and feasibility studies, to structure PPP transactions, to prepare
best-practice requests for proposals, to negotiate wisely with private investors
and lenders, and to manage construction and operation of PPP projects.
84.
This often leads to a situation where those projects which are actually suitable
for procuring through a PPP modality (i.e. because of the high potential
return/revenue generation capacity) are instead funded completely from public
funds and through traditional procurement. Meanwhile, those that do not
demonstrate high returns are identified for procurement under a PPP modality,
where they are unlikely to progress to execution.
85.
Table 2 provides an indication of the EIRRs that are expected for two ADB
supported projects (see below) that are currently being financed through a PPP
modality. It is expected that PPP projects supported with DFID funds will build
on this experience and deliver returns within the same range. Based on these
figures, it is conservatively estimated that the PPP component would be able to
crowd-in up to £260m in private investment and accrue a total public savings of
up to £130m through the 12 PPP transactions.
Table 2:
PPP
Project
(HMDC)36
Ex-ante EIRR %
Total estimated construction
cost
Private capital leveraged for
construction
200%38
6,500m
PRs
US$65m)
PRs
3,950m
US$39m)
Sindh
1
(approx.
(approx.
PPP
Project
(KTDC)37
157%
PRs
10,000m
US$100m)
PRs
8,600m
US$86m)
Sindh
2
(approx.
(approx.
34
Source: Seibert, 2006; European Investment Bank. In 2009, the UK National Audit Office had found that 65% of
UK PPP construction projects were completed on budget, compared to 54% of public construction projects
delivered to the contracted price (source: UK National Audit Office; “Performance of PFI Construction).
35 Allen Consulting Group, “Performance of PPPs and Traditional Procurement in Australia,” Report to
Infrastructure Partnerships Australia, 2007.
36 HMDC: Hyderabad Mirpurkhas Dual Carriageway Source: E&Y report and Sindh PPP Unit.
37 KTDC: Karachi-Thatta Dual Carriageway. Project in final negotiations with the Frontier Works Organization.
38 Property prices increased by 5 to 10 times, while the travel time has been reduced to 1/3.
19
86.
The PPP interventions will also introduce financial due diligence, economic
appraisal and VfM frameworks, and stringent project selection criteria so that
only those projects that satisfy minimum bankability, leveraging and VfM saving
standards will be considered in the PPP project pipelines supported by the
programme.
87.
The benefits of PPP modalities in terms of crowding-in private capital and
producing public savings can be significant. It also allows infrastructure
investments and associated benefits to be realised earlier than would be
possible through traditional wholly government funded procurement.
88.
Demonstration Effects. It is difficult to estimate the beneficial demonstration
effects that DFID assistance will have on procurement governance and public
finance options in future. Evidence from the Hyderabad Mirpurkhas Dual
Carriageway project in Sindh shows that during the early stages commercial
banks were reluctant to finance the project. Due to a history of delayed
payments by Government, there were doubts about the provincial
Government’s ability to fulfil its obligations in a timely manner, e.g. with regard
to the minimum revenue guarantee. The poor quality of some of the prefeasibility work for previous project concepts also raised concerns. These
factors established an initial aversion to risk that had to be overcome.
89.
Following the successful completion of the Hyderabad Mirpurkhas Dual
Carriageway and the efficient operation of the private concessionaire,
stakeholders now report increased confidence in the PPP modality and in the
Sindh Governments’ ability to manage such investments. As a result, the
concept of user service charges is gradually gaining acceptability, not just for
toll roads but also in other public services like urban transport.
90.
Simultaneously, the use of independent engineers and external auditors was
introduced for the contractual payments, which has enhanced transparency
further. Completed PPP projects have therefore set higher standards for
projects undertaken under traditional procurement.
Theory of Change
91.
The strategic case sets out a clear rationale for investing in major infrastructure
programmes and promoting fiscally responsible private-public partnership
arrangements to accelerate economic development. The strength of evidence
that the outcome will be achieved is medium to strong. The full Theory of
Change is described in Annex 1 and summarised in the diagram below. The
assumptions incorporated in the theory of change are also listed in Annex 1.
When applicable, cross-references to the empirical estimates can be found in
related literature.
92.
The Theory of Change is built around two strands, each leading to the same
overarching Goal of “increased regional economic integration, trade and
growth”:
i.
ii.
Upgrade and extension of national trade corridors complemented by
sector policy development and planning
Mobilisation of private sector capital to support economic corridor
development
20
93.
In the proposed programme, the first stream of Inputs totalling £635 million
provided by the Government of Pakistan (£63 m), the Asian Development Bank
(£362 m) and DFID (£210 m) will finance a series of Works contracts designed
to remove bottlenecks in strategic sections of the national highway network.
94.
A second stream of Inputs totalling £176 m provided by the ADB (£121 m) and
DFID (£55 m) will support an integrated programme of TA designed to improve
highway operating and maintenance arrangements, to reduce road traffic
accident rates, to empower local communities to secure maximum benefits
from the interventions and to promote a series of PPP projects.
95.
The ability of PPP’s to leverage private sector finance will help narrow the fiscal
gap in public expenditure commitments. The logic supporting this approach is
also a need to provide a complimentary and sustainable mechanism for future
investments in economic corridors. The development of a vibrant PPP market
along the economic corridors should also serve as a strong demonstration for
other sectors including local energy supply, agriculture and manufacturing.
96.
These two strands will reduce the infrastructure and institutional bottlenecks
that are currently restraining regional connectivity and economic growth.
Evidence
97.
Infrastructure connecting regions and economic centres is crucial to opening up
opportunities for trade and associated economic development39. A significant
body of literature shows a positive association between infrastructure
development and economic growth, especially in countries facing clear
infrastructure-related constraints. A different way to articulate this
generallyaccepted linkage is to emphasise that no country has ever reached an
advanced stage of development without having invested in good and relevant
infrastructure40.
98.
Recent IMF research41 demonstrates that debt financed infrastructure ‘can pay
for itself’. The effect of public investment on GDP is also well documented for
Pakistan42. A State Bank of Pakistan report estimates that a 10% increase in
nominal government investment for two successive years results in an increase
of nominal and real GDP growth by 1.48% and 1.37%, respectively, in the
following year (and 0.69% and 0.65%, respectively, after two years). In
addition, the ADB’s independent Evaluation Department found solid evidence
of positive returns when reviewing previous ADB investment in similar roads
and PPP investments43.
39
DFID (2013) Connecting people, creating wealth: Infrastructure for economic development and poverty
reduction
40 DFID (2013) Infrastructure Thematic Review
41 ‘Does investing in infrastructure really pay off? In our study, which uses a combination of empirical analysis and
model simulations, we find that increased public infrastructure investment can have powerful effects on the
macro economy. It raises output in the short term by boosting demand and in the long term by raising the
economy’s productive capacity.’ “The Time Is Right for an Infrastructure Push”, IMF Survey Magazine: IMF
Research, September 30, 2014.
42 M. Hanif et al. 2010. A Small-Size Macroeconometric Model for Pakistan Economy. State Bank of Pakistan:
Karachi (SBP Working Paper Series No. 34). p. 13.
43 Pakistan: National Highway Development Sector Investment Program–Project 1 (ADB, May 2014)
21
Inputs
Outputs
Intermediate outcomes
Assumption: systems are put in
place to ensure that
infrastructure is maintained,
developed, operated and
sustained
1.
Investment
in
2.
economic
3.
infrastructure
4. stocks
(Where
5.
are below
the
6. level
optimum
7.the
given
8. potential
country’s
level9.of economic
activity)
10.
Assumption:
11. is
investment
12. to support
designed
13. growth
economic
14.than
(rather
15. motivated
politically
16.
for example)
Better
infrastructure
services
Transport, energy
and ICT services
become more
accessible and /
or lower price and
/ or more reliable /
better quality.
Assumption:
political commitment
to implement and
retain measures to
improve road safety,
axle load control
and equitable tolling
arrangements
Outcomes
Impact
Assumption: the presence of sustained enabling environment factors
crucial to growth; security, good governance and climate.
Reduced production
and transaction
costs, including
transport costs:
infrastructure services
are a key input to all
production and
transactions. When
they become more
easily available,
reliable and less
costly, this reduces
production costs.
Increases poor people’s access to factor
and product markets
Increased agricultural and industrial
productivity: inputs to production become
less costly, the cost of transporting good to
market reduces, and greater reliability of
services increases efficiency.
Economic
growth
Increased private investment: affordable,
reliable infrastructure is an important
element of the enabling environment for
business.
Increased trade: because the time and
costs incurred by traders transporting
goods between countries is reduced.
Poor people are better able to
access jobs and services
Inclusive
growth
Assumption: progressive improvement in
bi-lateral and regional cooperation
Adapted from: OECD (2006) Promoting Pro-Poor Growth: Infrastructure. Paris: OECD
22
Appraisal/ Safeguards
99.
Due Diligence of the ADB is being carried out to:
i. Confirm that the ADB safeguards are in line with DFID requirements.
ii. These safeguards have been fully applied during project preparation.
iii. That the ADB has adequate resources to monitor and manage the
programme particularly with respect to social and conflict sectors.
Institutional capacity to deliver the intervention
100. The ADB, through its 2008-17 transport sector Multi Tranche Finance Facility
(MFF), has assisted the Government of Pakistan to develop the capacity of the
National Highway Authority to prepare and implement highway improvement
programmes. Fully resourced Project Implementation Units (PIU) have been
established within the NHA to undertake or manage the process of prefeasibility, feasibility, design, appraisal and project preparation. These
processes are considered to be fully responsive to standard ADB safeguards
and include social impact assessments and climate and environment
assessments. Complete documentation produced to date has been made
available for reference44. The ADB has ensured that the staff complement,
capacity and performance of the NHA and PIUs is adequate. This assessment
was endorsed based on the meetings and interaction with GoP counterparts.
101. The ADB has demonstrated through performance that it has the necessary
technical and administrative staff at post to manage existing road programmes.
For the PPP component, the ADB has committed to hire a full time National
Officer to manage the provision of TA to the provincial governments. The ADB
will hire additional staff to support delivery and monitor impact. A more in-depth
review will be undertaken as part of the due diligence exercise.
Gender Act
102. This intervention will benefit women and girls in two ways:
44
I.
Poverty disproportionately affects women and girls. The growth, jobs and
poverty reducing impact of the investments will mean at least half of all
individuals lifted above the poverty line will be women and girls.
II.
Through earmarking of TA to support local community development,
DFID funds will build capacity within the ADB and more broadly to ensure
road and other infrastructure investments promote community based
growth. This will have a direct impact on poorer communities, including
women and girls – at a minimum through reduced transport costs and
providing them with easier access to markets, which reduce prices of
basic consumer goods and increase income-generating opportunities.
This will also benefit women indirectly by better delivery of services, and
improved access to better quality health care facilities and higher
education.
Quest Document numbers 4724413; 4724421; 4724427; 4724402.
23
Analysis of the climate change and environmental risks and opportunities
103. Based on the ADB assessments referred to in para 97, Risks and Impacts are
Category B and Opportunities Category B45. An independent climate and
environmental assessment (CEA) report will be commissioned to review this
assessment.
104. Potential negative impacts include increased soil erosion and changes in
surface water flows, as well as and noise and dust contamination during
construction activities. Impacts of climate change relate mainly to increasing
risks of heavy flooding. Overall, negative impacts are deemed to be moderate
and manageable through an adaptive approach to the design and siting of
infrastructure.
105. There are also moderate opportunities to achieve some positive impacts,
including enhancing community resilience to climate change. These include the
potential for more rapid response to climatic disasters using improved roads;
reduced air pollution from congested traffic; and regional cooperation on
transport regulations and vehicle standards. The TA support for Vision 2025
will provide an opportunity to capture these benefits.
Categorisation of Options
Option
Climate change Climate
& environment change
&
risks & impacts* environment
opportunities*
Proposed programme
B
B
A = High potential risk / opportunity
B = Medium/ manageable risk / opportunity
C = No / low potential impact / opportunity
D = Core contribution to a Multilateral Organisation
106. The proposed programme provides an opportunity for DFID to influence issues
related to environmental management from concept, through design to
implementation, operation and maintenance. It also offers some potential
benefits in terms of increased community resilience in the face of climate
change.
107. Environmental management of the programme will rely on the environmental
regulations and procedures of the Government of Pakistan and the ADB. The
CEA Report will include a description and assessment of ADB’s environmental
safeguarding procedures. Building identified areas for improvement (and
corresponding success criteria) into the governance agreement with ADB and
into quarterly reviews of the programme should help to ensure that
environmental safeguarding activities are adequately addressed. A funding
“break clause” subject to a mid-term review will be used to verify that the
required safeguarding procedures, as set out in the CEA Report, are carried
out fully and to a high standard.
45
Annex 9 Section: Review of selected safeguard measures for proposed road sections to be co-financed by DFID
24
Assessment of social impact, and political & conflict risks and opportunities
108. The proposed option would aim to capture the social development benefits
linked with infrastructure investments. Infrastructure is crucial to economic and
social development across Pakistan by promoting pro-poor growth, raising
labour productivity, lowering production costs, creating jobs and establishing
links to regional and cross-border markets. While the ADB’s sector
programmes undertake poverty and social due diligence, DFID’s partnership
and expertise will help to influence and devise response strategies, apply
policies and procedures and monitor implementation. This will ensure that the
ADB’s approach to poverty reduction and inclusive growth is appropriately
robust and in line with DFID requirements.
109. Through the procedures set down in the governance arrangements, DFID will
engage with the ADB to ensure that safeguards are monitored and maintained.
The ADB project appraisal requirements are also considered to include
adequate conflict risk assessments.
110. Transport interventions can deliver improved social welfare outcomes.
However, they also carry associated risks46. Transport infrastructure directly
impacts on poverty reduction through job creation for unskilled labour during
construction of road projects. The provincial and district transport network also
links farmers with markets, enabling them to get their perishable and
commercial agricultural products to market at lower cost and quicker. Indirectly,
roads also increase communities’ access to social services, and can improve
women and girls’ access to health and education services.
111. Road construction, however, carries the risk of involuntary resettlement and
eviction of indigenous peoples and migrants who may have fled from insecurity
in their places of origin. To address this, individual project preparation activities
will draw on the Land Acquisition and Resettlement (LAR) policy of the ADB
(2011), which provides a legal and operational framework for involuntary
resettlement.
112. The National Highway Authority will also undertake increased community
consultation to ensure implementation of LAR does not lead to conflict at the
local level. Delays have been caused by disputes arising from the application of
national regulations to determine the value of compensation payments for land
acquisition and resettlement. The ADB has worked successfully with GoP to
enhance compensation given to ensure a fairer deal for those displaced;
however this will require an appropriate legal framework to institutionalise the
approach and is a risk the ADB will continue to manage carefully. Progress on
this will be monitored by DFID, and part of the mid-term review47.
113. Other potential risks include increasing levels of road accidents and
transmission of HIV/AIDS. The integral programme of technical assistance
focussed on road safety has been designed to address the first issue on a
federal roads basis. The terms of reference for each project preparation activity
will include a requirement to ensure that measures are taken to assess the risk
and to mitigate the second.
46
47
Social dimensions of transport- a resource for social impact appraisals. DFID publication undated
Annex 9 Section: Review of selected safeguard measures for proposed road sections to be co-financed by DFID
25
114. Part of DFID’s TA funds will be allocated to strengthen capacity to ensure
socio-economic returns of vulnerable groups (especially women) are protected
and enhanced, in particular:
i.
ii.
iii.
iv.
v.
Ensuring arrangements for preventing and, if they arise, addressing
grievances are in place and made to work.
Following due process to avoid bias to certain groups.
Tackling perceptions that some neighbouring countries are behind local
problems.
Aiming to contribute to employment generation.
Transparency over decisions about projects, financing and contracts and
who benefits.
Value for Money Statement
How will DFID ensure Value for Money from the investment?
115. DFID financial support will be invested through the ADB, which has the
potential to provide good Value for Money (VFM) when compared to DFID’s
own direct experience of infrastructure project implementation in the region48.
Three key elements have been identified during the project cycle to monitor
VFM:
i.
ii.
iii.
Upstream technical assistance
Procurement of capital works
Arrangements for Operations and Maintenance
116. Specific measures for determining VFM will also be used to review expected
efficiency gains for road/freight traffic along the NTC. These may include for the
sections of roads considered: reduction in travel time by between half to onethird; reduction in transport cost for freight by between half to one-third;
reduction in the deficit on road maintenance from 40% to 0%; and reduction in
the road fatality rate by up to 30%. Until specific PPP transactions (and
associated VFM measures) have been identified, the amount of private finance
leveraged will be used as the key VFM measure for the PPP component.
117. The ADB’s transport strategy throughout the last decade was rated satisfactory
by the recent Country Assistance Performance Evaluation (ADB 2013). The
ADB programmes have mirrored the Pakistan government’s strategic priority to
support economic growth, rural development, and poverty reduction through
improved access to basic services and employment opportunities.
118. Procurement of capital works will be done through the ADB systems which
have been assessed by the Due Diligence exercise as meeting DFID criteria.
The Construction Sector Transparency Initiative (CoST) will be engaged if
possible to partner DFID, ADB and GoP in this programme. This is further
discussed in the Management Case below and will be elaborated in the
delivery plan.
48
In Pakistan and in Helmand province, Afghanistan
26
How will value for money be monitored during implementation?
119. A quarterly monitoring system will assess progress with log frame indicators
and, crucially, will be specifically designed to assess whether the ADB and the
programme are having the desired impact on the communities involved.
Disbursements will only follow successful attainment of the criteria set down in
the log frame and project implementation plan.
120. Value for money for the TA component will be ensured by identifying from the
outset those projects that are necessary for the successful implementation of
the programme and the impact that they will have on poor communities. Up to
£3m of the TA funds can be retained by DFID to conduct an independent
evaluation of the programme. TA procurement will be done through the ADB
or DFID standard procurement procedures and will be subject to periodic
review to ensure clear progress and agreed future priorities.
121. To secure long-term value and benefit from infrastructure capital investment, it
is also important to secure adequate funding to finance asset management.
This primarily requires the establishment of revenue streams which, through a
Road Fund, can support viable operation and maintenance enterprises. A TA
programme is being designed to help the National Highway Authority to deliver
its mandate more effectively and become a self-sustaining institution.
Why is this the best intervention to deliver the results?
122. In partnering with ADB, DFID funds will buy into the ADB’s capacity and track
record to deliver. Infrastructure and financial sector-related investments are a
core part of the ADB’s portfolio in Pakistan. DFID funds will a) complement the
ADB and GoP resources, b) help unblock GoP resources which are often a
cause for delayed implementation, and c) provide TA and shared risk to ensure
higher socio-economic impact as well as an improved investment climate for
PPP.
How do you know this programme represents better value for money than
alternatives?
123. This option provides the combination of:
o Additional resources and capacity from the ADB
o Credibility with GoP, at Federal and Provincial level
o Ability to provide technical oversight on infrastructure and infrastructure
related PPP investments, while the private sector is contracted by the
ADB to primarily focus on delivery.
o Ability to additionally support regulatory capacity as well as monitor and
strengthen socio-economic impact.
27
III. COMMERCIAL CASE
Delivery Options
124. As detailed in the Financial Case, this programme includes £210m for capital
investments in highway infrastructure and £40m TA for the development of
public private partnership arrangements to support additional infrastructure
financing. A further £15m TA support is provided to improve transport sector
policy and planning; road safety and axle load control; asset management and
equipment; social impact assessment and monitoring and evaluation. The
delivery options for DFID’s main investment (highway infrastructure and PPP)
of £250m include:
 Option 1- Financial Aid: A bilateral approach in which the Government
directly appoints consultants, suppliers and works contractors to prepare
and implement the programme, with DFID meeting a proportion of the
costs by funding channelled through the Ministry of Finance.
 Option 2 - International procurement through open competition: DFID
directly contracts consortia of consultants, suppliers and works
contractors for direct project implementation. The consortia would be
selected following competition in line with the EU Directives.
 Option 3 - Co-financing with other partners: DFID co-finances existing
programmes of other donor partners, relying on available opportunities to
build momentum and utilise their expertise to oversee the delivery of the
programme in close collaboration with Government of Pakistan. The main
delivery partner in Pakistan in this case is the ADB.
125. The first option is likely to present an unacceptable level of fiduciary risk and
has to be discounted on the basis of high transaction cost and lack of key skills
for effective delivery. The second and third options have been utilised by
previous programmes in Pakistan. The pros and cons of all 3 options are
detailed in the table below:
Delivery Options
1.
Financial aid to
government
Pros
Cons



Government ownership
Use of government systems


2.
International
Supplier


Potential delivery partners with robust
management and delivery track
record available in market
DFID Pakistan’s ability to control
delivery of the programme


GoP’s track record for selffinanced infrastructure is
not promising;
High
fiduciary
and
corruption risk;
DFID
Pakistan
would
require a significant boost
in specialised technical and
programme management
capacity
to
effectively
manage
and
monitor
delivery and risks.
High transactional cost due
to direct management of
the supplier and contract;
Most
time
consuming
delivery option due to
procurement timelines and
need for detailed project
preparation
and
due
diligence. All likely to lead
to delays to start-up;
28

3.
Existing partners
Most multilaterals and bilateral partners
supporting infrastructure are focusing on
energy. ADB is the only partner heavily
engaged
in
highway infrastructure
development with GoP. The following
points relate to the ADB only.

ADB has an existing programme
(NTCHIP) with GoP which DFID can
contribute
to
and
start
implementation in minimum time.

All delivery mechanisms and systems
are agreed and in place.

ADB is implementing a similar
programme in Afghanistan, hence
has regional experience and ability to
create regional linkages.

DFID has history of contributing to
the ADB programmes and has good
working
relationship
and
understanding of their systems.
Minimum transaction costs for DFID
Pakistan.



Relationship management
between supplier, GoP and
other stakeholders likely to
need high level of proactive
engagement by DFID
ADB’s limited focus on
communities’
perception
and benefits analysis.
ADB lacks dedicated staff
to
manage
DFID’s
contribution
to
the
programme
DFID may need to support
the ADB achieve certain
policy outcomes.
126. A summary of unit costs for projects comparable to Option 2 (DFID Pakistan
steel bridges programme) and Option 3 (a World Bank managed multi-donor
trust fund roads project and an ADB managed road project) is set out in the
table below. The cost comparison indicates better Value for Money is likely
through Option 3 due to the much lower TA/Works ratio.
Intervention
description
DFIDP 66 steel bridges
WB (MDTF) 30 km road
ADB (NTCHIP) 184 km
road
Programme
Total cost
(£m)
15.0
8.3
272.0
Contract
cost
(£m)
12.9
8.0
261.0
Cost
(per
km)
N/A
£0.28m
£1.48m
TA cost
(£m)
TA/Works
ratio
2.1
0.3
11.0
16.3%
3.7%
4.2%
127. A review of the existing and planned portfolios of multi and bi-lateral donors in
Pakistan indicates that only the ADB has a significant presence in large-scale
transport related infrastructure programmes. It is the largest donor and also
has the longest history of engagement in highway construction and
rehabilitation in Pakistan. The World Bank on the other hand has a clear focus
on energy related infrastructure investments49.
128. In view of the above, our preference is Option 3 as there is a clear comparative
advantage demonstrated by donor partners (in particular the ADB) due to their
experience, networks and ongoing work in this area. The ADB will also ensure
appropriate staff in place to manage the funds.
129. Option 3 will also enable DFID to invest in a wider range and larger scale of
projects than it could do alone or through bilateral co-financing; it reduces
49
World Bank no longer has a project portfolio in the Pakistan roads sector; ADB is the principle IFI
29
transaction costs by using the experience, procedures and systems of key
donors to manage delivery, fraud and fiduciary risk; and it minimises project
start-up costs and lead-in times, given the established nature of the overall
programme and related Project Implementation Units.
130. By building on work already underway and capitalising on current networks, the
ADB option will provide opportunities to gain VFM through economies of scale
and streamlining coordination of supply chains and stakeholder management.
131. The ADB has an ongoing Multi-tranche Financing Facility (MFF) agreed with
the GoP since 2008 (which includes the National Corridors Programme
Improvement Programme) to build 1300km of roads by end date of the MFF.
This programme offers the best opportunity for DFID to invest in highways, as
all implementation mechanisms are agreed with the GoP - reducing start-up
costs and time significantly.
132. For the PPP component, the ADB has a significant presence, track record and
ongoing work streams in both Sindh and Punjab provinces. At the Federal level
the ADB helped GoP to establish the Infrastructure Project Development
Facility and intends further support to enhance its capacity.
133. In anticipation of potential DFID co-financing, the ADB is in the process of
seeking approval for a $100 million contribution in early 2015 to expand work in
this area. As set out in the management case, once the ADB approval has
been granted and project preparation work completed, DFID will seek senior
management approval (Director Level) to support the PPP work stream.
134. For DFID to use independent suppliers to support PPPs would increase
transaction costs, complicate coordination and burden the provincial
governments. The ADB, on the other hand, has dedicated resources and
specialist expertise in place and agreements with the Federal and Provincial
governments to lead on this agenda. DFID’s contribution through the ADB will
multiply the benefits for the government and reduce transaction costs for both
the ADB and DFID.
135. The £15m for TA is broken down further in the table below and includes a
mixture of programme delivery TA, programme and policy support and M&E.
1
2
3
4
5
6
7
Brief description of TA component50
Road Safety Initiatives
Transport Sector Policy and Economic Corridor planning
Axle load control and asset management
Equipment
Equitable tolling policy
Social impact assessment and mitigation
Monitoring and Evaluation
TOTAL ALLOCATION
Allocation £ million
5.0
2.0
2.0
1.0
1.0
1.0
3.0
15.0
136. The Programme Delivery Implementation Plan will explore the most effective
way to package and deliver the various types of TA spend. Early Market
Engagement will be used where necessary to gain a clear picture on the best
50
The arrangements for each component will be commissioned through a preliminary design exercise to identify
the scope of work and to develop ToR for the assignment.
30


operating model to support the overall programme and to identify the most
effective TA providers. The main delivery options include:
Combining the programme delivery TA with the construction funds already
allocated to the ADB or
Direct procurement of a provider following competition under the EU Directives
(or using one of DFID’s current Framework Agreements)
137. DFID is currently conducting a due diligence assessment of the ADB Pakistan
to assess their capacity to manage the TA and other components. Subject to
the results of due diligence, DFID will determine the best option to deliver the
TA component.
138. Should the ADB be chosen, DFID will be closely involved in the procurement
process of TA to ensure its independence and effectiveness. DFID
Procurement and Commercial Department (PCD) will be consulted on the best
delivery route during the development of the Programme Delivery
Implementation Plan and before a final decision is made on the delivery route.
139. PCD will also be consulted on the best route for the M&E element which
represents up to £3m of the £15m TA budget. This will be an independent
evaluation and will be contracted through a DFID framework agreement or
following EU competition.
31
IV. FINANCIAL CASE
140. Through the existing National Corridor Highway Improvement Programme the
ADB will invest £362 million and the Government of Pakistan will contribute £63
million over 6 years i.e. 2014-15 to 2019-20 UK financial years. The ADB will
also contribute a further £121 million in support of PPP.
141. DFID is planning to contribute up to £265 million through three programme
components. The expenditure profile of each component against UK financial
year is given in the table below. Details of Highway packages and contribution
of each partner in each package are provided in Annex5. No disbursements are
anticipated in UK FY20/21; however ADB may continue to draw on DFID
resources until the close of the programme (end September 2020).
Component
Highway
Infrastructure
(CDEL51)
Public Private Partnership
(RDEL52)
Technical Assistance (incl.
programme delivery TA,
programme
and
policy
support and M&E) (RDEL)
Total
Value
2014/15
2015/16
2016/17
2017/18
2018/19
2019/20
£ 210 m
10
40
45
45
45
25
£ 40 m
0
6
12
12
10
0
£ 15 m
0
2
3
4
3
3
£ 265 m
10
48
60
61
58
28
Set out how the fixed operational budget will be developed, and what changes would
trigger re-approval
142. DFID will pay a 2% administrative fee to the ADB (included in the programme
cost). This cost will include hiring of at least three dedicated ADB staff to lead
the delivery of the programme, manage highway infrastructure, and TA and the
PPP components. This management cost is fixed at this point of time. In case
of any proposed amendments in the operational budget, this will trigger reapproval of the operational budget from the Head of DFID Pakistan.
Will HMT approval be required? Is the required funding available through current
resource allocation or via a bid from contingency?
143. HM Treasury approval will be required as the programme funding falls outside
the current UK government spending round period. The programme
expenditure includes 79% (£210 m out of £265 m) CDEL. The programme form
parts of of DFID Pakistan’s refreshed Operational Plan and is a high priority for
the UK and Pakistan governments.
Will it be funded through capital/programme/administrative budgets?
144. Of the £265 m allocated, £210 m will be CDEL, (capital) and £55 m will be
RDEL (recurrent).
145. At the mid-term review, DFID will reserve the right to review the grant element
of these funds – including the option of moving from grant to loans, and the use
of returnable capital.
51 CDEL: Capital spend, linked to an asset
52 RDEL: Recurrent spend
32
Is there clarity on control of funds and in particular when ownership of funds passes
from DFID?
146. The ADB is the proposed implementing partner for all components of the
programme. A determination on the implementation approach for the TA will be
finalised after the due diligence of the ADB has been completed. DFID and
ADB will jointly finalise the logframe within the first 3 months of the programme
and will analyse progress against it during Annual Reviews.
147. A Memorandum of Understanding (MoU), will be signed between the ADB and
DFID Pakistan outlining the details of the partnership including accountability.
DFID will disburse funds in pounds sterling on a six monthly basis subject to an
agreed work plan and status of progress. The ADB will furnish expenditure
reports for each tranche before requesting the next tranche. The ADB will
review the financial and expenditure reports of all partners and will share this
information with DFID. Progress will be determined by joint quarterly progress
reviews in which the DFID programme team will participate.
148. The Executing Agency for the highway infrastructure component is the National
Highway Authority, and the Planning and Development Divisions of Provincial
governments of Sindh and Punjab for the PPP component. A range of service
providers is likely to be contracted for the delivery of the TA. DFID reserves the
right to run an open competition to deliver the TA should this offer better value
for money.
149. DFID will commission an independent evaluation by using existing framework
agreements. DFID will develop and agree Terms of Reference with the ADB
within the first six months of programme implementation.
150. The ADB has created robust financial mechanisms and controls with each
partner EA on the basis of the loan agreement between the ADB and GoP. The
ADB’s loan agreement specifies that the GoP will bear and manage any cost
overruns of the programme. The ADB will release funds to Executing Agencies
only on the basis of progress to required standards. The ADB will use its own
procurement procedures to procure technical assistance, if agreed. In addition,
DFID has commissioned a due diligence of the ADB to analyse the ability to
deliver and manage downstream partners, procurement and contract
management and ensure a continuous focus on value for money.
151. Payments by DFID will be made upon request for release of payment from the
ADB. Disbursement schedules will be linked to realistic expenditure profiles for
individual projects, thus mitigating the risk of funding ahead of need. The case
for tranche disbursement will be reviewed quarterly during the joint review
missions of DFID and the ADB. Mission reports will serve as quarterly progress
review reports of the programme. DFID may commission third party validations
to check the physical progress of the projects.
152. All the partners will provide Annual Audit Statements to the ADB within six
months of completion of financial year. The ADB has agreed to share the audit
reports with DFID. The ADB and DFID can commission an independent audit
of any executing agency, if the need arises.
33
V. MANAGEMENT CASE
Who is accountable for the intervention?
153. The ADB is the major implementing partner for the programme and is
accountable for the effective delivery of the intervention. Its performance will
be overseen by the DFID team, led by the Infrastructure Adviser (as lead
adviser) and a programme manager, with relevant oversight.
154. DFID will closely monitor progress of the programme through monthly
management meetings with the ADB and joint quarterly reviews which will
monitor progress of each component and all the executing agencies. DFID will
receive regular information from the ADB’s comprehensive monitoring systems.
In addition, TA will be used to design and implement specific monitoring tools
including third party validations, beneficiary feedback and policy dialogue with
GoP to track, verify and report programme results.
155. DFID will safeguard its investments in the event of slow performance, fraud and
corruption, lack of effective management and any other critical risk, and
reserves the right to terminate any agreement in the case of such events.
These changes will need to be agreed by DFID’s Private Sector and
International Finance Institutions Departments. The ADB will manage all the
programme risks and will inform DFID of any critical risks and mitigation
strategies. Joint quarterly review missions will provide a formal process for
concerns to be raised and managed.
156. The ADB is in the process of seeking Board approval for a £120 million
contribution to expand its work on PPPs at Federal and Provincial levels
(expected in early 2015). Once approval has been given and project
preparation work completed, DFID will seek senior management approval
(Director Level) to support the PPP work stream with DFID grant funds. The
updated PPP proposal will include identification of the 12 proposed
transactions to be co-financed with DFID; a detailed assessment of the
capacity building requirements for the PPP units at the Federal level and in
Sindh and Punjab to ensure that the transactions can be effectively managed;
an updated Value for Money assessment; and recommend amendments to the
log frame to monitor performance and capture benefits.
157. A mid-term review (MTR) will be carried out after two years. Agreed
adjustments to be programme will be completed by the end of year three of the
programme. This MTR will include:

Evidence of effectively managed environmental, socio-economic and conflict
related impacts of investments by ADB and, where relevant, GoP.

Review of the case for DFID grant funds, with potential option of shifting the
CDel element to non-fiscal and returnable capital of elements of the PPP funds.

While these programme funds are not formally classified as financial aid and
are therefore not directly impacted by DFID’s Partnership Principles, DFID
funding for these investments will still take account of GoP progress.
34
Who are the key stakeholders and how will we engage them?
158. The key stakeholders include Government of Pakistan, ADB and DFID. Within
GoP at Federal level, the Economic Affairs Division (responsible for donor
coordination), Planning Commission, Ministry of Finance and National Highway
Authority are primary stakeholders. At provincial level, key stakeholders include
Planning and Development departments, Finance departments and other
sectoral departments.
159. Non-state key stakeholders include communities, road transport associations,
hauliers, road user associations and private sector companies. ADB will be
responsible for managing stakeholder relationships throughout the programme.
DFID will support ADB with policy dialogue and seeking senior level buy-in for
PPP, particularly in provinces. Quarterly and annual reviews will provide key
opportunities for stakeholders’ participation. In addition a bi-annual forum may
be established to engage with these stakeholders, if required.
Risks
What are the high level risks to the success of the programme and how will they be
mitigated?
The programme will have a risk assessment and management plan (RAMP). Under
the terms of the MoU, DFID will have an opportunity to formally review the RAMP
with ADB and GoP on a quarterly basis.
Overarching risks
Insufficient political will, security constraints, These will be mitigated through actions taken during
and environmental issues such as climate the negotiation of, and under the provisions of, the
change and disasters.
MoU and through the established strong
relationships between DFID and the ADB in Pakistan
and ADB Manila, as well as good connections with
GoP.
Programme Management
Inadequate delegation to and capacity in ADB Negotiated MoU will ensure effective delegation to
Pakistan to deliver effectively, plus rigid and the ADB Resident Mission and adequate resources
unresponsive ADB procedures.
in Islamabad to manage the programme. ADB
performance will be monitored closely. DFID will
work through country and regional management as
well as at Director Level to ensure improvements as
required.
PPP TA Related Capacity and Delivery
Risks
i)
ADB and counterpart Governments do i. Grant funded TA offers incentives for
not deploy sufficient capacity.
Government and its staff to develop and retain
ii)
Gestation
periods
for
PPP
capacity in key departments. ADB has
transactions are too long and become
committed to hire a dedicated National Officer
protracted
for managing the component.
iii)
Leveraging of private capital remains ii. Filter mechanism for high demand bankable
an issue due to concerns about poor
projects will be put in place and pipeline will
contract enforcement
include sufficient number of transactions to
diversify
and
mitigate
risk
of
slow
implementation of the overall component
iii. TA will be used to engage multilateral and
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other international infrastructure
guarantee providers (i.e PIDG)
finance
Sector risks
Resistance to reform and new/better ways of The sequential nature of the programme can be
working eg. increased private sector used to make each project approval subject to the
involvement or development of new financing achievement of specific reforms or actions.
instruments.
Project risks
Unsatisfactory road construction.
Social impact
Road construction carries the risk
involuntary resettlement and eviction
indigenous peoples and migrants.
All project details will be available for oversight under
the provisions of the MoU. DFID will maintain the
ability to withhold funds.
of Projects will draw on the ADB’s Land Acquisition and
of Resettlement policy which provides a framework for
resettlement. Projects must also involve increased
community consultation to ensure implementation of
LAR does not lead to conflict at community level.
These safeguard measures will be monitored with
ADB and GoP at quarterly reviews.
Climate change and environmental impact
Increased soil erosion and changes in surface
water flows from road building and noise and
dust contamination during construction
activities. Impacts of climate change relate
mainly to increasing risk of heavy flooding.
Local Capacity
Limited local capacity of GoP Executing
Agency including lack of qualified and
experienced
staff;
weak
management
systems;
fragmented
organisational
structures; and inadequate legal and
regulatory frameworks.
Conflict and Security
In view of the likely location for some of the
roads, a separate appraisal will be
commissioned to provide a comprehensive
assessment of risks and drivers of conflict.
Corruption
High cost of corruption in infrastructure associated with resource leakages, and
maintaining and rehabilitating sub-standard
construction projects.
ADB has a strong comparative advantage in terms of
managing environmental impacts through its policies
and safeguards. These safeguard measures will be
monitored with ADB and GoP at quarterly reviews.
Under the 2008-2017 MFF, ADB has already
identified lessons learned and taken action to build
capacity in the transport sector. DFID’s programme
will provide an opportunity to support and accelerate
this work.
DFID has identified the need for strengthened
conflict analysis to inform project implementation and
will ensure that ADB policies and safeguards
effectively address conflict and fragility.
DFID will monitor closely the application of ADB's
anti-corruption policy.
DFID will engage with the Construction Sector
Transparency Initiative (CoST) to partner with the
ADB and GoP in the programme.
Procurement
Price increases and cost overruns due to New ADB procedures are available to better manage
currency fluctuations, as a value for money currency volatility. ADB will address low capacity in
risk
in
procurement
and
contract PIUs through capacity building programmes.
management. Limited procurement capacity in Competitive tender processes are used to ensure
the Project Implementation Unit resulting in value for money by applying International
delays to procurement activities.
Competitive Bidding procedures.
Macro-economic/IMF programme
For the roads component, this risk would have
Economic reform goes significantly off-track, limited impact aside from risk of reduced efforts to
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and ending of the IMF programme leads to increase tax revenue; DFID funds for this investment
reduced investor confidence
may be reconsidered where this is the case.
DFID will work closely with ADB to ensure the
PPPinvestments and efforts remain credible in the
event of policy setbacks.
Regional
Fluctuating political relationships can have an Programme maintains output focus at the Pakistan
adverse impact on trade flows and broader level, but stands to maximise benefits from
economic cooperation
improvements in regional relations
Interest earned on DFID investments
ADB/ADB Resident Mission earns interest on This will be addressed in MoU. ADB Resident
DFID funds
Mission will inform DFID Pakistan about interest
earned amount on annual basis (audit statements).
The interest earned amount will be used for
programme purposes only.
What are the key fiduciary and fraud risks to UK taxpayer funds?
160. The infrastructure sector is generally associated with resource leakages and
sub-standard quality of work. These are the main fiduciary and fraud risks. ADB
will implement its anti-corruption strategy and DFID will closely monitor its
impact. The ADB will also set up an appropriate grievance redressal system for
communities to make any complaints in this connection and devise an effective
mechanism to deal with such complaints.
What are the reputational risks to DFID?
161. Reputational risks are linked to:

Fiduciary risks (covered above)

Displacement of communities causing significant discontent
What measures are proposed to manage these risks?
162. Community impact will be managed through the ADB (regional?) policy on
moving communities because of infrastructure work, and in line with local laws.
TA will be used to ensure positive impacts for these communities where
possible.
Explain what the team will do to minimise any losses.
163. DFID will closely and regularly monitor the progress of the programme and
assess risks. ADB is responsible for minimising any losses in the programme.
164. Technical and Programme Management capacity within DFID Pakistan is being
increased to accommodate the proposed programme and ensure proactive
delivery and programme monitoring. A full time infrastructure adviser has been
recruited, and programme management capacity has been increased. Private
sector adviser capacity is also being increased. It is anticipate that the
programme will receive DFID oversight that includes: 0.7 Full Time Equivalent
(FTE) of an A2 Infrastructure Adviser as lead adviser; 0.1 FTE Team
Leader/economist; 0.3 FTE Private Sector Development Adviser (lead on PPPelement); 0.2 FTE B1 Programme Manager; 0.6 FTE B2 Project Officer (lead
programme manager).
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165. The ADB will recruit additional staff to ensure enhanced capacity to deliver, and
in the event of clear skills gap, DFID will explore secondment of relevant staff,
to ADB in Islamabad to work more closely with the implementation team.
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