Islamabad November 12, 2021: Federal Minister for Economic Affairs Mr. Omar Ayub Khan chaired a high-level meeting to discuss agenda of the upcoming meeting of Pakistan-Russia Inter-Government Commission on Trade, Economic, Scientific & Technical Cooperation. The 7th Meeting of Pak-Russia IGC will be held in Yekaterinburg, Russia on 24 – 26 November, 2021. Mr. Omar Ayub Khan, Federal Minister for Economic Affairs, Pakistan and Mr. Nikolay Shulginov, Minister for Energy of the Russian Federation are the co-chairs of Inter-Government Commission.
The meeting was attended by the representatives of Ministry of Foreign Affairs, Ministry of Commerce, Ministry of Energy, Ministry of Information Technology & Telecommunication, Ministry of National Food Security & Research and other relevant departments. The Chair reviewed progress on the decisions of the 6th IGC Meeting which was held in Islamabad in December 2019. The Minister for Economic Affairs emphasized on enhancing bilateral relations with Russian Federation as both countries have huge potential for mutual cooperation in various fields. The participants deliberated on the various proposals for cooperation with Russia including Trade, Customs, Energy, Industry, Agriculture, Education, Science & Technology, Transport and Information & Communication Technology.
The Minister expressed that the role of private sector is significant for enhancing bilateral relations, especially trade and investment. The Minister hoped that Pakistan and Russia would have very constructive and positive dialogue for enhancing bilateral relationships during the upcoming IGC meeting. The Minister directed to identify the priorities and prepare comprehensive proposals including scope, action plan, output and outcomes along with timelines. The Minister expressed that regional integration is fundamental for enhancing socioeconomic relations in the region. Regional connectivity can lead to substantial economic gains with Central Asia, Russia & China, he added. Earlier, Minister for Economic Affairs also chaired two meetings on WB-funded projects i.e. Higher Education Development for Pakistan and Khyber Pass Economic Corridor (KPEC).
The objective of Higher Education Development Project for Pakistan is to support research excellence in strategic sectors of the economy, improve teaching and learning and strengthen governance, in the higher education sector. Dr. Shaista Sohail, Executive Director, Higher Education Commission brief the Minister on progress of the project. The Minister also reviewed the progress on Khyber Pass Economic Corridor (KPEC) Project and directed the National Highway Authority and the Government of Khyber Pakhtunkhwa to expedite its designing and contract award on fast track basis.
What is KPEC?
The Khyber Pass Economic Corridor (KPEC) connects Pakistan and Afghanistan with Central Asia through the Khyber Pass. This route has been integral to trade in South and Central Asia for hundreds of years. It is part of Corridors 5 and 6 of the Central Asia Regional Economic Cooperation (CAREC) routes, which will provide the shortest link between Pakistan, Afghanistan, Tajikistan, Uzbekistan and the Arabian Sea.
KPEC part of ongoing and planned road investments from Dushanbe to Karachi by the countries along the corridor. The project will build a 48-kilometer 4-lane expressway between Peshawar and Torkham by June 2024. It will also generate local economic opportunities and create up to 100,000 new jobs for Pakistanis in Khyber district. The project was designed by the National Highway Authority (NHA) and the Government of Khyber Pakhtunkhwa (KP).
Why is a new expressway needed?
The existing road between Peshawar and Torkham carries about 9,110 vehicles per day. Trucks move very slowly due to congestion and steep grades. The existing road is not adequate and cannot be expanded on the current alignment at reasonable cost due to engineering constraints and expensive resettlement and land acquisition. It is expected that 6,651 vehicles per day will divert from the existing road to the new expressway. This traffic projection does not depend on any further upgrade to the roads on the Afghan side of the Corridor between Torkham and Kabul. With increased trade, traffic volume is projected to increase to 30,000 vehicles per day. With the Torkham border now open 24/7, the traffic volume could further increase. The new Peshawar-Torkham expressway will support the projected traffic volume.
How much does KPEC cost?
Cost and contingencies estimate: KPEC’s construction cost and contingencies estimates are based on international practice for this type of four lane expressway. The cost estimate per kilometer without contingencies is equivalent to $6.7 million. This cost is lower than the international average of $8-10 million per kilometer for expressways in similar mountainous and hilly terrains. The preliminary designs include 22 bridges/flyovers, 139 drainage/culvert structures, and 2 major interchanges. International practice is to allocate enough financing for estimated costs and contingencies to provide confidence to bidders. This will bring reputable contractors to work in this logistically and security challenging but important area. The international average physical contingency is 10 percent and a similar contingency level is usually used to cover price escalation during construction period. For KPEC, a 7 percent price contingency and a 12.5 percent physical contingency have been used.
Competitive bidding determines actual costs: KPEC will use a Design-Build approach. This means that while cost estimates were based on preliminary designs, bidders will develop their own detailed designs and price the work accordingly. Therefore, the best time to review costs will be after the contracts for the main civil works have been awarded. This is in line with international best practice.
Effects of exchange rate fluctuation: KPEC is already delayed by nearly two years. In that time there has been devaluation of the exchange rate, but the reduction in the US$ equivalent of costs due to this devaluation is negated by substantial inflation in nearly all local and foreign inputs. Inflation will likely continue to be added to the base cost estimate between now and the time bids are launched. Sticking to the US$ equivalent estimate of 2017 is the best practice to account for exchange rate variation of the local currency and the inflation in the country. This approach, commonly used in World Bank-financed projects, has been quite reliable to manage both currency depreciation and inflation. An example is the Karachi Port Improvement Project.
Low-cost financing source: KPEC is financed with a $460.6 million IDA concessional credit from the World Bank and $22.15 million from the government. The World Bank’s concessional financing has a maturity of 30 years and an interest rate of 1.25 percent after a 5-year grace period. This financing cost is lower than the government’s own cost of funds. The commitment charge is currently zero. This means that any cost savings realized through competitive bidding can be repurposed or cancelled at no cost to the government. Two thirds of the funds come from a special window that supports regional connectivity, and therefore cannot be utilized for other projects of national nature. This is in addition to the regular allocation of concessional IDA funds to Pakistan.
What are the benefit of the Peshawar-Torkham Expressway?
The expressway’s major benefit is the time and vehicle operating costs (fuel, tires, maintenance) savings associated with traffic flows, which is estimated to amount to PKR 35.5 billion in present value terms. Semi-trailers will be able to make the trip in about an hour compared to two hours now using less fuel and lower wear and tear. The Economic Internal Rate of Return (EIRR) of the expressway is 12.5 percent, corresponding to a benefit to cost ratio of 2.2 excluding benefits from fiber optic cables and improved road safety. The project remains viable at 9.5 percent EIRR even with a cost increase by 20 percent and a reduction of benefits by 20 percent.
How do local communities benefits?
KPEC has a $72 million component to support businesses and people along the road corridor in Khyber district. Communities will benefit from secondary roads connecting them to the expressway, commercial infrastructure, and the revitalization of industrial estates in the area. The project will develop urban centers and industrial estates for marble, packaging, transport and freight sectors. KPEC will support small and medium enterprises and will create an estimated 60,000-100,000 new jobs, including for women.
What is the status of the full Dushanbe to Karachi route?
The Peshawar Torkham expressway in Corridor 5 is Pakistan’s commitment under CAREC for improved regional connectivity. It was endorsed by the Joint Economic Commission between Afghanistan and Pakistan in Ministerial Meetings on February 22-24, 2014 and again on November 23, 2015. On March 19, 2018, the Government of Afghanistan reaffirmed its commitment to developing an economic corridor from Karachi to Kabul and to undertaking the feasibility study for the alternate dual carriageway from Kabul to Torkham to connect with KPEC. A quadrilateral meeting of Pakistan, Afghanistan, Tajikistan, and Uzbekistan is being held on the sidelines of the World Bank Group Annual Meetings in mid- October to further discuss regional trade opportunities among the four countries. Financing for construction and upgrade the other sections between Dushanbe and Peshawar has also been secured.