Approval of ML-1 project deferred

Planning ministry says sponsors need to provide fresh analyses

ISLAMABAD: The Central Development Working Party (CDWP) on Wednesday deferred once again, the approval of $9.2 billion Mainline (ML-I) project under the China-Pakistan Economic Corridor (CPEC) due to a host of unresolved issues.

The mega railway line project is the only project declared strategically important by China and Pakistan. However, the World Bank linked success of the project to bringing governance reforms in the railways and warned that the project’s debt servicing was not sustainable.

The CDWP had a threadbare discussion on the project in its meeting on Wednesday and the “forum underlined the space for improvement in the proposal and deferred the project till next meeting”, the planning ministry said in a statement.

The ministry raised serious objections over financial and technical working of the project. “The results of the financial and economic analysis provided in the PC-I, based on total cash flow are misleading,” according to the planning ministry.

It added that the sponsors needed to provide fresh analyses and all the required details of incremental economic and financial costs and benefits to carry out the analyses and rationally determine the financial and economic viability of the project.

It was for the third time that the project’s PC-I had come before the CDWP for approval. Previously, the entire project was considered in the CDWP in 2016. The PC-I for Phase-I was placed on the agenda of the CDWP meeting in May 2018. The CDWP had then decided to address all the outstanding issues first.

The planning ministry saw no possibility of freight generation by the CPEC Special Economic Zones (SEZs) in the near future as all SEZs in Pakistan were at the planning stage and also the Kashgar Economic Zone in Western China had not been developed.

“The instant project is only envisaged to seek Chinese loan, using CPEC framework to upgrade the existing railway infrastructure on ML-I,” the ministry said.

Recently, the Deputy Chairman of the Planning Commission had asked the World Bank to provide the third-party review of the ML-I project. The Bank said in its analysis that the Project would not succeed without governance reforms in the railway.

It also stressed that the implementation of the Pakistan Railways Strategic Plan (PRSP) was a pre-requisite to the success of this project as well as the improvement in the quality and financial sustainability of the railway sector in general in Pakistan. “The costs estimates are adequate, however, the contingency allowance at 4% seems very low at this stage of project development and accordingly the estimated cost should be regarded as a minimum,” the Bank cautioned about reality of $9.2 billion proposed project.

There was also a view that the rolling stock should be separated from the main project to save capital cost. The World Bank said that financial rate of return to Pakistan Railways was generally negative, and it could only improve if there were real fare and freight increases such as those assumed in the Business Plan.

“If these are assumed, however, demand will decrease, and the economic case will reduce for the project,” the Bank said but it cautioned that the assumed Business Plan fare structure would increase the project savings to 50% of the 2035 debt service, but the proposed fare structure should be very carefully planned to be successful.

The Bank also raised questions about the debt sustainability of the project. “In the low demand case, the debt service is 80% of projected revenue. The high demand case has a better result, but the project savings only cover 20% of the 2025 debt service of the project,” it said.

The CDWP referred the Diamer Basha Dam land acquisition project at a cost of Rs164 billion to the Executive Committee of the National Economic Council (Ecnec), which is 173% higher than the original cost approved in 2008.

The CDWP meeting, chaired by Deputy Chairman Planning Commission Mohammad Jehanzeb Khan and attended by Planning Secretary Zafar Hasan as well as senior officials from relevant federal governments departments, approved three projects worth Rs1.04 billion.

In the meeting, the first project was presented by the Maritime Affairs Ministry. The meeting approved the ‘Establishment of Business Park at Korangi Fisheries Harbour” worth Rs784 million.