PTI govt approves CPEC’s $7.2b strategic project

ML-1 project includes dualization, upgrading of 1,872 km railway track from Peshawar to Karachi

ISLAMABAD: Pakistan Railways’ Mainline-I Project – the lone strategic project of the China Pakistan Economic Corridor (CPEC) – cleared its first hurdle on Saturday when the government approved it at a cost of $7.2 billion, setting the stage for negotiations with China and International Monetary Fund (IMF).

In the fourth bid, the Central Development Working Party (CDWP) has recommended US$7.2 billion Mainline-I (ML-1) project to the Executive Committee of National Economic Council (Ecnec) for further approval, announced the Ministry of Planning.

A part of the Ministry of Planning, the CDWP is responsible for the scrutiny and approval of the development projects. The prime minister has authorized the CDWP to approve development schemes costing up to Rs. 10,000 million.

Beyond this cost, the CDWP recommends the projects to the Ecnec for consideration and approval.

In total, the CDWP approved 13 projects worth Rs36.2 billion and recommended five projects worth Rs1.3 trillion to Ecnec for its consideration.

Pakistan gives high priority to the ML-1 project due to its strategic importance and the CDWP’s clearance will also pave the way for its inauguration by Chinese president’s upcoming visit to Pakistan.

The ML-I project includes dualization and upgrading of 1,872 km railway track from Peshawar to Karachi and its big milestone for second phase of CPEC, tweeted Lt Gen (retd) Asim Saleem Bajwa, chairman of the CPEC Authority. He is also special assistant to prime minister on information.

The Pakistan Railways had proposed construction of the project at a cost of $9.2 billion. But the transport and communication wing of the Ministry of Planning did a commendable job by reducing the cost by $2 billion without disturbing the construction cost.

The transport wing of the planning ministry excluded overheads and contingency costs from the project scope as projects being completed on engineering procurement and construction basis are not entitled to receive contingency charges. This helped making major savings.

The transport wing also calculated the project cost at current rupee-dollar parity, which cut the cost for components that the Chinese contractors would procure from Pakistan like labour and other materials.

As per the approved construction plan, the federal government has to allocate Rs78.1 billion in the next year’s Public Sector Development Programme (PSDP) including Rs7.8 billion local share. However, the proposed PSDP document shows only Rs6 billion allocation.

The government needs to jack up its allocation for the project, if it wants to timely complete the scheme. The Peshawar-Hyderabad track and Karachi-Hyderabad track has been excluded and is planned to be built with the help of private sector, which also helped lowering the cost.

The CDWP has cleared all the aspects of the project except the financing arrangements that will be finalized between Pakistan and China after project’s final endorsement by Ecnec.

As per standard methodology approved for CPEC projects, the negotiations for financing arrangements from Chinese financial institutions start only after the project has been approved by the government of Pakistan and commercial contract is signed between employer and contractor.

For ML-I, negotiations for finalizing the terms of loan were already under way between Financing Committee formed by Pakistan and its counterpart formed by China.

Its impact on the national debt will be evaluated by the Economic Affairs Division.

The decision whether the loan will be a central loan or sovereign guarantee loan (Railways), will also be taken by the Financing Committee. In both cases, Pakistan will have to provide sovereign guarantees.

Pakistan will also have to seek relaxations from the IMF, as under the existing IMF deal it does not have space to provide sovereign guarantees to the tune of Rs1.2 trillion.

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.

It was for the fourth 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 and then the CDWP again deferred its approval on April 14 of this year.

Once completed, the speed of passenger trains will increase from 65/110 km/h to 160 km/h. The speed of the freight trains will also increase to 120km/h from 80 kilometer per hour.

The package-1 of the ML-I will be completed between January 2021 to December 2024 and will cover construction of 527 kilometer long track between Peshawar, Rawalpindi and Lahore.

Package 2 will be completed from January 2022 to December 2026 and will upgrade 521km long track from Lahore to Hyderabad. Package 3 will upgrade 740km track of Rawalpindi-Peshawar and Hyderabad-Multan.

The Planning Ministry had observed that there seemed no possibility of freight generation by the CPEC Special Economic Zones (SEZs) in the near future as all SEZs in Pakistan are at planning stage and also the Kashgar Economic Zone in Western China has not been developed.

The Planning Ministry had also sought clarification whether it is permissible under the set rules and procedures to conduct limited bidding between Chinese companies/consortia as stated in Article-IV of the Framework Agreement between China and Pakistan.

“The provision of the framework agreement between two governments hall prevail over PPRA [Public Procurement Regulatory Authority] Rules. Therefore, in the presence of Framework Agreement, limited bidding (among Chinese Contractors) is permissible,” said railways ministry.

According to the ML-I Framework Agreement, the project will be executed in EPC mode.

The Planning Ministry had objected that “results of financial and economic analysis provided in the PC-I, based on Total Cash Flow were misleading”.

It had asked to provide fresh analyses under ‘with’ and without project conditions and provide 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.

Ministry of Railways was of the view that “the Chinese consultants have been advised to prepare the financial analysis in according to the recommendation made by the Planning Commission regarding WACC [weighted average cost of capital] which is a time intensive exercised and may further prolong due to travel restriction because of current pandemic”.

“The economic analyses show that, over an evaluation period of 2025-2060, the project has a small positive economic rate of return in the range 2.5 to 4.1 percent per annum, tariffs are held constant.

“If tariffs are increased as in the Business Plan, the economic rate of return reduces to-0.9 to 0.7 per cent per annum. However, the financial rate of return to railways is generally negative, and only improves if there are real fare and freight increases such as were assumed in the Business Plan.

“If these are assumed, however, demand will decrease, and the economic case will reduce”, said the Planning Ministry.