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June 2, 2020

CDWP approves $9.248 bn for ML-1 project tomorrow

ISLAMABAD: The government is mulling over different options to fix governance issues of cash-bleeding Pakistan Railways (PR) while approving modernisation of rail mainline project with an estimated cost of $9.248 billion under the China Pakistan Economic Corridor (CPEC).

As the third party evaluator, the World Bank (WB) had raised issue of governance and debt servicing for making the project successful. After deferment of the project a couple of times, the government has once again placed it on the agenda of an important meeting for getting approval tomorrow (Wednesday).

The Central Development Working Party (CDWP) is scheduled to meet on June 3, 2020 just ahead of the Annual Plan Coordination Committee (APCC) because the government wants to make ML-1 as part of the next fiscal year’s Public Sector Development Program (PSDP) for 2020-21.

The government is considering options to hand over Operation & Maintenance (O&M) of Pakistan Railways under this project to a Chinese firm for a certain period so that it could be run on professional lines.

“This project will not be successful without the reform of the railway sector in Pakistan. The implementation of the Pakistan Railways Strategic Plan (PRSP) is a pre-requisite to the success of this Project as well as the improvement of the quality and financial sustainability of the railway sector in general in Pakistan,” the WB in its assessment stated.

According to the WB, the project generates significant savings in rolling stock capital. However, the financial rate of return to PR 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.

Debt service: In 2030 in the low demand case, the debt service is 80 per cent of projected revenue. The high demand case has a better result, but the project savings only cover 20 percent of the 2025 debt service.

The assumed Business Plan fare structure increases the project savings to 50 percent of the 2035 debt service, but the proposed fare structure should be very carefully planned to be successful.

If the Lahore-Peshawar section is deferred, the debt service reduces by 24% and with the assumed new tariff structure, the improved surplus would cover the debt service by about 2040.

Implementation plan: The basis of the proposed construction phasing on a section-of-line basis, whether because of the funding arrangements, resource availability, sections conditions or construction disruption to the existing lines, is unclear from the documentation.

An alternative approach could have been to perform all the bridgeworks first while resources were available and economically deployed, followed by all sub-grade and all track works, then signaling, with some practical overlap capacity.

Another option could consider rapid upgrading using a light-handed approach on line sections that are in good condition. Electrification would probably be an attractive follow-up project, at least for the southern portion of the corridor.

The option of outsourcing O&M of Pakistan Railways came under discussion in the last CDWP meeting held in April 2020 in which the approval of this project was deferred.

The proposal under consideration is handing over the O&M of Pakistan Railways to a foreign Chinese contractor having expertise to run any railway on professional basis for five years.

The arrangement should be devised in such a way where the foreign Chinese firm should run 80 percent Pakistan Railways and 20 percent by our local administration.

Such mechanism should decrease the O&M operation by foreign firm 20 percent each year while the role of local management should increase every year, so subsequently 100% O&M should be handed over to the local management in five years period.

“After making huge investment of $9.2 billion, the management of Pakistan Railways cannot be kept at the mercy of existing workforce,” said the top official.

The World Bank (WB) as third party evaluator analyzed this project and informed the government that the project was designed to meet Pakistani conditions and reflected good current practices, including its safety designs. However, significant new human capacity and skills in operating and maintaining the upgraded system will be required.

About the cost, the WB states that the cost estimates are adequate. However, the contingency allowance (4 per cent) seems very low at this stage of project development and, accordingly, the estimated cost should be regarded as a minimum.