Struggling ML-1

Published November 14, 2022

Pakistan and China are planning to arrange bidding for $10 billion Mainline-1 — the 1,872km Railway Track along with associated facilities from Karachi to Peshawar — next month (December) and have agreed to have its foreign exchange component of $8.4bn fully financed through Renminbi (RMB) based Chinese loan.

The bidding would be among the leading Chinese companies to be identified and recommended by the Chinese government. During the meeting of Chinese President Xi Jinping and Prime Minister Shehbaz Sharif early this month, both sides agreed to immediately activate their respective teams of technical and financial experts to fast-track progress on the much-delayed project.

The Executive Committee approved the project of the National Economic Council (Ecnec) hours before Prime Minister Sharif’s visit to Beijing at a total cost of $9.85bn subject to the recommendation of cost, technical details by the third party consultant and preferably an equity participation financial model.

The project was part of the original $46bn China-Pakistan Economic Corridor (CPEC) framework but could not take off in more than eight years while most of its sister energy sector portfolio was up and running a few years back. The fresh push comes at a time Beijing has already become the single largest lender to Pakistan with an over $23bn existing debt portfolio.

The project aims to increase passenger train speed from 65 to 160km per hour and freight train from 37 to 120km per hour

On the basis of bidding results, the financial teams of the two countries would then finalise detailed term sheets of the Chinese loan and financing plan to be spread over eight years of project implementation. This will be carried out in a way that the entire loan portfolio is not booked on Islamabad’s accounts and instead is drawn gradually in line with the project requirements.

During these meetings, the two sides broadly agreed that the entire Chinese loan would be in RMB as pressed by Beijing since most of the foreign exchange has to be utilised for machinery and material imports from China.

Pakistan had been insisting on a Chinese loan mix of US dollars and RMB. It had to give in given the project’s criticality, whose funding significance has increased manifold after recent devastating floods damaged a lot of railway infrastructure and is posing risks of a major tragedy. The Chinese loan is expected to be a mix of a Central Chinese Government loan and a sovereign guaranteed loan.

The two sides are aiming to complete negotiations leading to commercial contract signing that would be followed by financial closure by the Chinese contractors with a target to hit groundbreaking latest by end-March 2023. After signing, the project is expected to take about eight years and six months to reach the commercial operations stage, i.e. by September 30, 2031.

To cover these milestones, the two sides have extended the five-year framework (second) agreement signed on May 5, 2017, and expired six months ago. The two governments signed the first framework agreement on April 20, 2015, for a feasibility study for ML-1 upgradation and modernisation.

The project cost was estimated at $9.2bn in February 2020, with a financing share of 10:90 between Pakistan and China. However, this was revised to $6.8bn in August 2020 through cost rationalisation, but the Chinese side remained unconvinced and hence uninterested.

The project costs have been revised again to $9.85bn, including a Chinese financing of $8.4bn (85pc), with the remainder of $1.48bn or 15pc to be financed through local resources. At an exchange rate of Rs200/dollar, the total project cost is Rs1.97 trillion, including a Chinese share of Rs1.675tr and Pakistan’s Rs296bn.

Considered the country’s logistic backbone, the ML-1 starts from Karachi, passes through Kotri/Hyderabad, Rohri, Multan, Lahore, Rawalpindi, and terminates at Peshawar but is now in dilapidated condition at present. Its freight and passenger traffic crawls between 37km per hour and 65km per hour, respectively. The 1,872 km line includes a 55km Taxila-Havelian section and a 91km Lodhran-Khanewal section.

The project also involves the upgradation of existing ML-1, the establishment of a dry port near Havelian Railway station, the upgradation of Railway Academy Lahore and the improvement of facilities and stations in Karachi, Hyderabad and Rohri in Sindh, Multan, Lahore and Rawalpindi in Punjab and Nowshera and Peshawar in Khyber Pakhtunkhwa.

The project aims to increase passenger train speed to up to 160km per hour and that of a freight train to 120km per hour with increased axle load from 22 tonnes to 25 tonnes and to increase the number of freight trains to 171 per day from less than 34.

Under a recent decision of the Executive Committee of the National Economic Council (Ecnec), the ministry of railways would set up a project implementation unit for monitoring and timely implementation. Moreover, a steering committee would be constituted by the minister for railways with representation from all stakeholders to oversee progress.

Meanwhile, the Ministry of Railways will be required to update its Railway Business Plan and Railway Strategic Plan along with a roadmap for the future transformation of existing systems into electric traction systems.

While the project is of utmost importance to Pakistan’s passenger and freight transport, even upon completion, this would remain an island — unable to meet the country’s requirements in isolation.

In the words of the planning commission, “the railway sector in Pakistan does not have the governance framework, institutional framework, management process or regulatory framework to compete in an increasingly challenging 21st century transport market effectively.”

Published in Dawn, The Business and Finance Weekly, November 14th, 2022

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