The performance of the logistics sector provides a stark contrast to the economic recession Pakistan has been mired in. As of December 2018, the logistics sector is valued at $34.2 billion, registering an annual growth rate of 18% between 2017 and 2018 (source: Ministries of Communications and Postal Service). However, experts are quick to point out that the figures present only part of the picture because a large segment of the sector operates in the grey economy with no verifiable records or data.

The fact that Pakistan is one of only a handful of countries that does not have a dedicated Ministry of Transport further adds to the complexity of measuring the sector’s performance and identifying the cost, time and quality inefficiencies in freight management, transportation, warehousing, materials handling, protective packaging, inventory control, order processing, market forecasting and customer service.

It should therefore not be a surprise that on the World Bank’s Logistics Performance Index (LPI) 2018, Pakistan has a ranking of 122 (out of 160 countries), primarily due to poor scores in customs clearance, tracking and tracing and timeliness. For context, other developing economies facing similar industrial, financial and political challenges as Pakistan ranked better on the LPI; Bangladesh (100), India (44) and Nepal (114). The country’s lacklustre performance on the global index has continued despite receiving a 25 to 30% share of the annual Public Sector Development Programme funding.

Interestingly, the major players in the sector interviewed by Aurora were unanimous in pointing out that the poor performance is not because of a lack of market potential. Rather, it is the fragmented and unregulated nature of the sector, combined with a complete absence of a long-term government strategy aimed at developing the logistics value chain as a means to climb out of the economic black hole Pakistan is trapped in.

The value of logistics

It is impossible to overstate the contribution of logistics in boosting economic growth in any country. Globally, it is a $4.3 trillion industry, contributing an average of eight to 10% to the GDP, creating thousands of new jobs and improving export competitiveness substantially. A look at the LPI for the last 10 years provides sufficient evidence; the countries ranked in the top 20 include the 10 strongest economies in the world. At a time when Pakistan is dealing with a deteriorating balance of trade position due to languishing exports, it is a fallacy to believe that investing in traditional export sectors (agriculture, textile and medical equipment to name a few) will be sufficient to turn around the economy.

In 2015, the World Bank estimated that the logistics sector in Pakistan could capitalise on untapped potential worth approximately $30.77 billion. This value would be realised by developing integrated road/rail networks (including air, sea and dry ports), thereby improving connectivity between the rural areas and urban markets as well as among regional trading partners.

As Moin A. Malik, CEO, Agility, points out, “Pakistan’s exports will be competitive only when supply chain inefficiencies in bringing products, raw materials and finished goods to market are eliminated.” In fact, he is of the view that by simply improving the quality and linkages of transportation infrastructure, Pakistan can increase exports by at least 35%. Malik’s view is well-founded. In 2015, the World Bank estimated that the logistics sector in Pakistan could capitalise on untapped potential worth approximately $30.77 billion. This value would be realised by developing integrated road/rail networks (including air, sea and dry ports), thereby improving connectivity between the rural areas and urban markets as well as among regional trading partners. Added to which it would reduce spoilage of perishables and significantly bring down the time and cost of transportation. However, if Pakistan is to realise its logistics potential and turn into a regional trading hub, the top priority will have to be the resolution of the long-standing issues plaguing the transportation sector.

Transportation woes

Despite the fact that railways are considered the most efficient and cost-effective mode of transportation for goods, more than 90% of inland freight in Pakistan takes place across approximately 264,000 kilometres of road networks. In this scenario, the importance of high-quality trucks cannot be emphasised enough and yet, this is one area in which Pakistan’s logistics sector is severely lacking. There are about 500,000 registered trucks operating in Pakistan, of which the majority are obsolete Bedford trucks with rigid suspensions that have limited speeds and are heavy on fuel consumption that make them highly inefficient in terms of time and cost. Aggravating the situation further are undocumented truck owners who do not operate within the regulatory environment and are prone to overloading. This increases the risk of road accidents, spoilage due to long lead times and most importantly, damage to the road, bridge and highway infrastructure which causes annual losses to the tune of two percent of the GDP on average (source: World Bank).

Qasim Awan, Director, TCS Holdings, makes it abundantly clear that sub-quality fleets and the absence of a comprehensive regulatory framework for the trucking industry are the reasons why Pakistan’s exports are not competitive and have contributed to our poor ranking on the LPI. In addition to quality, trucking fleets in Pakistan do not comply with international standards, thereby automatically disqualifying local logistics companies from participating in and benefitting from regional road freight trade, greatly limiting their profitability. A 2016 National Highway Authority (NHA) report stated that international regulations overseeing long-haul traffic specify that articulated trucks (trailers) should constitute at least 50% of the truck fleet; in Pakistan, articulated trucks comprise only 12% of the total fleet. The underlying reason, according to Malik, is the unavailability of financing options to upgrade commercial fleets as this requires massive investment, which most small and medium transport operators cannot afford.

Relying on rail

It would be myopic to focus exclusively on road infrastructure to improve logistics performance. Experts believe that a far more feasible option is to develop the often ignored rail network as the primary means of inland freight. There is sufficient evidence available to lend credibility to this perspective. According to a World Bank study, a single freight train is equivalent to 100 trucks. Not only that, since logistics is an extremely price sensitive sector, it makes even more sense for public and private sector investment to be allocated for rail development. This is because a gallon of fuel can transport a ton of goods over a distance of 250 miles using rail compared to only 90 miles by road. Added value also comes from fuel efficiency and the faster routes to market rail offers and that is why internationally, almost 50% of all cargo is hauled by railways.

Yet, due to the lack of quality container and non-container freight trains in Pakistan, rail’s share is a mere five percent. The good news is that there are encouraging developments. In December 2018, Pakistan Railways launched the country’s first ever dedicated freight train on the Karachi to Lahore route with 75 containers as part of a public-private partnership. In 2019, there are plans to develop new rail tracks and improve the quality of existing ones connecting Karachi to all major cities. One area that deserves attention is the provision of cold store containers in freight trains as this will minimise wastage of farm produce and other perishables that Pakistan is currently unable to export. Shahab Ahmed, Executive Director, Seagold, is of the view that removing bottlenecks from road and rail logistics is more essential now than ever before, and with good reason. “As CPEC continues to gain momentum, Pakistan will not be able to take advantage of the economic potential it offers in the absence of a high-functioning and internationally-competitive logistics sector.”

The CPEC opportunity

Since its signing on April 20, 2015, all stakeholders have looked upon CPEC as the springboard that will propel Pakistan towards sustained economic growth and finally enable the country to take advantage of its strategic regional location and emerge as a trading hub. The importance of an integrated and efficient logistics and transportation sector for CPEC to reach its potential can be gauged by the fact that $6.1 billion will be invested towards transforming the existing road infrastructure, while $3.69 billion will go to railways. In line with the high investment priority given to land routes, plans are underway to construct new (and upgrade existing) roads in compliance with international standards to improve freight capacity. This is important because trade experts believe that as CPEC projects mature, at least 100,000 additional trucks will be needed to transport construction material as well as increased volumes of export-import trade goods; during the last five years, Pakistan-China trade has maintained an annual growth rate of 18.8% and this figure is expected to increase. These improvements are expected to reduce travel time by 50% and transportation costs by 10%, which in turn will make Pakistan’s logistics sector more efficient and exports more competitive while driving the profitability and growth of the sector to new heights.

In addition to road infrastructure, an integral part of CPEC is the development of the new port at Gwadar. At present, the bulk (approximately 90%) of Pakistan’s international trade is routed through the Karachi Port Trust (KPT) and Port Qasim. With the development of Gwadar, there is an opportunity to increase the volume of marine cargo while reducing delays due to congestion at the two overburdened ports in Karachi. Furthermore, the government and the business community expect demand for warehousing to increase manifold because several Special Economic Zones (SEZs) will be established along the corridor. Currently, the contribution of warehousing to the logistics sector is minimal, largely because this crucial sub-sector has been ignored by policy makers and logistics companies. In Malik’s view, most players in logistics shy away from investing in developing warehousing capabilities due to the massive upfront cost this entails and the maintenance expenses involved in the long term as well as the limited profitability of the sector.

As CPEC projects mature, at least 100,000 additional trucks will be needed to transport construction material as well as increased volumes of export-import trade goods; during the last five years, Pakistan-China trade has maintained an annual growth rate of 18.8% and this figure is expected to increase. These improvements are expected to reduce travel time by 50% and transportation costs by 10%.

The immense opportunity that CPEC presents, not only for the logistics sector but for the economy overall, is undeniable. The question is whether Pakistan is prepared to capitalise on this untapped potential. As far as the logistics experts interviewed for the story are concerned, the answer is an emphatic no. To start with, the absence of a unified Ministry of Transport responsible for formulating and implementing a National Transport Policy is the biggest roadblock. At the moment, the logistics sector is overseen by seven to eight separate federal ministries making it next to impossible to have comprehensive regulations for the development and integration of the sector. Foreign and transit trade issues are the purview of the Ministry of Commerce; shipping services are under the Ministry of Ports and Shipping; airports and aviation are supervised by the Ministry of Defence; rail and road infrastructure and freight are overseen by the Ministries of Communications and Railways; and customs and cargo clearance matters are controlled by the Ministries of Finance and Interior. This is one of the reasons why a regulation as basic yet essential as a Trucking Modernisation Plan and a National Transport Policy approved in 2007 are yet to be implemented and why Pakistan has still not ratified and adopted international standards and conventions for the transportation of goods and products. If CPEC is to catalyse Pakistan’s economy, there are many areas in need of improvement. Upgrading trade terminals, simplifying customs procedures, reducing processing times and modernising the trucking sector to make it compatible with international standards is a good start.

Looking ahead

To sum up, economic experts are unanimous in their view that Pakistan’s sustained economic recovery and growth hinges on a robust, integrated, efficient and competitive logistics sector. However, a look at the sector’s performance indicators reveals a dismal picture. From prolonged dwell times of containers at ports, excessive airfreight charges, absence of integrated cold stores at airports and railway stations to obsolete, overloaded trucks, Pakistan’s logistics industry is in need of a massive overhaul.

First, it is imperative for the government to see logistics as a cross-cutting policy concern, crossing the administrative boundaries of transportation, commerce, infrastructure, industry, finance and the environment. The creation of a Ministry of Transport is an important first step in this as it will help to gradually bring the undocumented part of the sector into the formal economy by offering incentives such as affordable financing options to upgrade fleets, build warehouses and train resources. Malik is of the view that if the government succeeds in documenting the grey economy, this will provide an immediate boost to industry profitability and tax revenues for the government. Furthermore, the process of implementing the long overdue National Transport Policy, which focuses on streamlining and modernising each sub-sector of logistics, will be accelerated, enabling Pakistan to reap the benefits of CPEC as well as increased volumes of regional trade with Central Asian countries.

Last-mile deliveries

The growth in Pakistan’s e-commerce market (valued at Rs 99.3 billion in FY18 by the State Bank of Pakistan and registering a year-on-year growth of 92% from FY17) has had a trickledown effect on the courier logistics sector. Although the courier sub-sector (operating in the B2C market) constitutes a small part of the total logistics industry (worth Rs 350 million), Awan identified it as a crucial growth driver. With the e-commerce market expected to hit the one billion dollar mark this year, traditional B2B logistics companies, such as Agility as well as a host of start-ups, have started looking at the booming parcel delivery category as a lucrative business opportunity.

In the courier business, the most expensive and time-consuming component is the delivery of parcels to customers, dubbed “last-mile delivery.” According to Awan, “with Pakistanis increasingly turning to e-commerce to fulfil their shopping needs, cost-effective and timely deliveries are no longer a nice-to-have; they have become a key customer expectation.”

TCS, which controls 64% of the courier business in Pakistan, along with other courier operators, will have to navigate through a maze of challenges if they want to increase volumes and profits through last-mile deliveries. Unlike B2B logistics in which tons of cargo are shipped, doorstep deliveries involve multiple stops and low drop sizes. This is why courier companies need to invest in both large and medium-sized fleets, as well as warehouses where parcels are brought in, sorted and routed for delivery – and this contributes to cost pressures.

Awan explains that as far as courier deliveries are concerned, the extent to which increased expenses can be passed on to the customer is limited and the only way to maintain profitability through delivery is to achieve scale and volume.

Further complicating the delivery landscape has been the entry of digital platforms such as Careem and Bykea that have started offering parcel delivery services. The advantages that a crowd-sourcing model has over the conventional business model of a courier company are low start-up costs, asset-light operations and improved customer experience as they can connect directly with local, non-professional couriers who use their own transportation to make deliveries, giving customers the freedom to make on-demand and scheduled deliveries at a time and place of their choosing. The benefit to retailers and businesses in using these digital services is delivery in a matter of hours, ensuring customer satisfaction.