Misunderstood ML-1 rail project – Opinion | So Good News

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 speed up progress on the badly delayed ML-1 rail track project.

On his return from China, it increasingly seems that the most ambitious project under CPEC (China Pakistan Economic Corridor) has gained momentum.

Although it seems unrealistic, Pakistan and China plan to arrange bids as early as next month for a $10 billion 1,872 km ML-1 rail track project, including all allied facilities, from Karachi to Peshawar. Both sides are reported to have agreed that the US$8 billion foreign exchange component will be fully financed through Renminbi (RMB)-based Chinese loans. The project is part of the initial framework for the $46 billion China Pakistan Economic Corridor (CPEC), but could not take off for eight years.

Bidding will take place among three leading Chinese companies, which will be identified and recommended by the Chinese government. ML-1 is perhaps the largest infrastructure project conceived by the public sector authorities in terms of cost, technology and debt sustainability.

There are some important ground realities that need to be considered:

1. Riddled with incompetence, nepotism, mismanagement and mismanagement, Pakistan Railways (PR) has been a loss-making enterprise for decades. Many stalwarts in many governments vowed to restructure public relations with the aim of turning it into a profit-making entity. But no government has managed to reverse PR.

2. PR does not have the necessary internal expertise to conceive, implement, maintain and lead the project. Third-party control is inevitable at all stages of the project life cycle.

3. China stands out as the single largest lender to Pakistan with an existing debt portfolio of over $23 billion.

The Executive Committee of the National Economic Council (Ecnec), prior to the Prime Minister’s departure to China, approved the project at a total cost of $9.85 billion subject to the recommendation of costs, technical details from a third-party consultant and preferably an equity participation financial model.

Based on the above realities, the ML-1 project may turn out to be a nightmare for the country if it is not transparent, realistic and professionally evaluated by independent professionals in the field. The country is still suffering from the “chaos” caused by the random influx of IPPs (Independent Power Producers) over the last three decades. The resulting circular debt cripples the economy.

For the ML-1 project, bidding will be among three Chinese bidders recommended by the Chinese government. Under this limitation, the independent consultant, who must be appointed under competitive bidding process supervised by Pakistan, should be from an independent third party with a mandate for bid preparation and evaluation, financial-technical and managerial project management until handover. It is unlikely that an independent third-party consultant will be contracted by China.

The key issue with PR, apart from lack of expertise, is the business model. In the early years of the country, PR was profitable when it was run by competent and professional managers. The business model was largely based on lucrative oil and freight transport operations and break-even or some subsidized public transport segment. Driven by vested interests, this model was obliterated over the years. At the moment, the revenue generation of public relations is mostly out of public transport, while the losses are subsidized by the government.

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

Furthermore, in the absence of a viable business plan, backed by sovereign guarantees to cover project risk and return on equity, an equity participation as envisioned 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 the economy and service to the public. A project like ML-1 is desirable and important. But before you casually step into this make-or-break project, the mess in our house needs to be cleared and a new order put in place. This will have political consequences and the alienation of vested interests. Both of these factors are challenging for the political leadership. ML-1 is a test case for the government to set the house in order and get it off the ground in the public and nation’s interest based on a viable business plan.

Copyright Business Recorder, 2022