Misconceived ML-1 railway project

During a meeting between Chinese President Xi Jinping and Prime Minister Shehbaz Sharif early this month, both sides are reported to have agreed to immediately activate their respective teams of technical and financial experts to fast-track progress on the much-delayed ML-1 railway track project.

Upon his return from China, it increasingly appears that the most ambitious project under CPEC (China Pakistan Economic Corridor) has picked up pace.

Though it appears unrealistic, Pakistan and China are planning to arrange bidding as early as next month for a $10 billion 1,872km ML-1 railway track project, including all allied facilities, from Karachi to Peshawar. Both sides are reported to have agreed that its foreign exchange component of $8 billion shall be fully financed through Renminbi (RMB)-based Chinese loan. The project is part of the original $ 46 billion China Pakistan Economic Corridor (CPEC) framework but could not take off in eight years.

The bidding is going to take place among three leading Chinese companies, which will be identified and recommended by the Chinese government. ML-1 is perhaps the biggest infrastructure project perceived by the government in the public sector in respect of cost, technology and debt sustainability.

There are some key ground realities which need due consideration:

1. Pakistan Railways (PR), which is riddled with incompetence, nepotism, malpractices and misgovernance, is a loss-making enterprise for decades. Many stalwarts in many governments vowed to restructure PR with a view to turning it into a profit-making entity. But no government has been able to turn around PR.

2. PR does not have the required in-house competence to conceive, implement, maintain and manage the project. Third-party control is inevitable at all stages of the project’s life cycle.

3. China distinguishes itself as the single largest lender to Pakistan with an over $ 23 billion existing debt portfolio.

Executive Committee of the National Economic Council (Ecnec), before departure of the PM to China, approved the project at a total cost of $ 9.85 billion subject to the recommendation of cost, technical details by a third-party consultant and preferably an equity participation financial model.

Based on the above realities, ML-1 project may turn out to be a nightmare for the country if not transparently, realistically and professionally evaluated by the independent professionals in the field. The country is still suffering from the ‘havoc’ caused by random influx of IPPs (independent power producers) over the last three decades. The resulting circular debt is crippling the economy.

For ML-1 project, competitive bidding will be among three Chinese bidders recommended by the Chinese government. Under this restraint, the independent consultant, which must be appointed under competitive bidding process supervised by Pakistan, should be from an independent third-party with a mandate of bid preparation and evaluation, fiscal-technical and managerial project management till handover. It is unlikely that a third-party independent consultant would be agreed upon by China.

The key issue of PR, apart from lack of competence, is its business model. In the early years of the country, PR was profitable as it was run by competent and professional managers. Its business model was largely based on lucrative oil and goods transportation business and break-even or somewhat subsidized public transport segment. Driven by vested interests, this model, over the years, got wiped out. Currently, the revenue generation of PR is largely out of public transportation while the losses subsidised by the government.

In the absence of a viable business model, which could sustain a loan of around $ 10 billion, ML-1 project is unlikely to work in public interest and may lead to another debt trap. Moreover, with the IMF (International Monetary Fund) insisting upon Pakistan to get its existing loans rescheduled from China, it is unlikely that global lender will allow Islamabad a new debt burden of $ 10 billion.

Further, in the absence of a viable business plan, supported by sovereign guarantees for coverage of project risk and return on equity, an equity participation as envisaged by the government from the private sector or public / private partnership is unlikely to motivate a private investor.

The railway, for any developed country, is the prime mover of its economy and service to its public. A project like ML-1 is desirable and essential. But, before randomly getting into this make-or-break project, the mess in our house has to be cleared and a new order put in place. This will have political consequences and alienation of vested interests. Both of these factors are challenging for the political leaderships. ML-1 is a test case for the government to put its house in order and get it on ground in public and nation’s interest based on a viable business plan.

Copyright Business Recorder, 2022