CPEC and railways

Various news items have recently reported that the long awaited work on upgrading Pakistan Railways’ Mainline 1 (ML-1) is about to start. What does this mean for railways? How can Pakistan benefit from proposed upgrade? What are going to be the associated costs and financing obligations? And how can Pakistan meet them?

Upgrading ML-1 is an early harvest project of CPEC, for which the National Railway Administration of China and the Ministry of Railways Pakistan have jointly conducted a feasibility study.
CPEC’s official website quotes the project cost of $8.176 billion for rehabilitation and up-gradation of the Karachi-Lahore Peshawar (ML-1) Railway Track, with a length of 1,872kms. The first phase of $3.2 billion covers up-gradation of four segments.

The upgrade will bring the long-needed attention to railway transportation, which has deteriorated significantly over the past few decades. The Pakistan Railways carried over 70% of the national freight load in the 1970s, which now stands at a meagre 4%. Reportedly, the Pakistan Railways expects that this would grow to 20% after completion of this project with freight traffic increasing from five to 25 million tonnes per annum by 2025. The passenger traffic is also expected to increase by 45% (from 55 to 80 million passengers per annum).

These estimates seem realistic. India currently has 25% of its freight load carried by railways. Moreover, long-haul trucks carrying containers currently take about seven days for a return-trip from Peshawar to Karachi and back. Upgrading ML-1 would reduce it to three days or less. Similarly the current passenger train travel time of 16-24 hours between Lahore and Karachi is expected to reduce to 10 hours or thereabouts.

However, in order to take benefit of these opportunities, the railways will have to invest in the rolling stock — locomotives and wagons — besides upgrading the track. The Pakistan Railways currently has 95 locomotives in use for freight operations, including the 55 newly purchased engines. Based on five times growth target, it will need about 380 more locomotives and approximately 15,000 wagons (40 wagons per locomotive). The recent purchase of locomotives in Pakistan was done at roughly $4 million apiece, whereas a wagon may cost $200,000. This means a need of $4.5 billion additional investment, taking the total required investment for the project to $12.7 billion.

What does this mean in terms of revenue potential? A five-fold growth would mean Rs200 billion in revenues. This is pretty much in line with expert estimates that a freight locomotive with full load can make a revenue of about $20,000 a day in Pakistan, which can lead to about $2.5-3 billion every year (with 475 locomotives after accounting for down time) and taking into account increased passenger revenues. Presently, the Pakistan Railways is making an operational loss but let’s also hope that this surge of revenues would be accompanied by a turnaround and the organisation would reach 15%-20% profit margins. This would then lead to Rs40-50 billion of net profit ($375-600 million) as the maximum limit on potential annual profits. Is this enough to pay back the loans?

Let’s look at the financing side. The infrastructure cost of $8.2 billion is expected to be financed through government-to-government concessional loan. Let’s assume a 2% rate with the loan repayment period of 15 years. This would mean an annual payment of $638 million. The additional $4.5 billion financing for rolling stock is not likely to be on concessional terms. If we assume a 4% rate with 15 years repayment, this would require another $404 million payment every year. This means that the project will create an annual obligation of about $1+ billion for the next 15 years, which far exceeds the revenue potential even in most optimistic scenarios and ignoring the foreign exchange liabilities.

How should the government resolve this issue? Firstly, there is a need to look at project costs and see how these can be minimised. The present project cost implies up-gradation cost of about $4.36 million per km of double track. According to the Compass International’s Railroad Engineering & Construction Cost Benchmarks (2017), higher-side estimated cost per km for constructing a high speed double track on existing railroad stone bed along with centralised traffic control system should be under $1.9 million. However, looking at other project costs around the world, it becomes clear that these costs can greatly vary and can go as high as multiple times this estimate. Nevertheless, there is a need to assess what is driving such high costs in Pakistan and how can they be minimised.

Furthermore, there are a number of other untapped revenue sources that can be capitalised on. For instance, the Pakistan Railways has a vast pool of commercially valuable real estate available, which can be used under public-private partnership mode. The railway stations can be turned into profitable commercial entities. Last but not the least, the Pakistan Railways must go towards institutional and financial reforms to turn around the entity and make it profitable, before it begins to plan for more ambitious revenue targets.

Published in The Express Tribune, March 6^th, 2018.

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