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Work on CPEC’s Mega ML-1 Project to begin in June


Nov 9, 2021
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Work on CPEC’s Mega ML-1 Project to begin in June​

October 25, 2023

China and Pakistan have signed an addendum to the China-Pakistan Economic Corridor (CPEC) framework agreement, reducing the cost of the Main Line-1 (ML-1) project from $9.85 billion to $6.678 billion. The addendum was signed during the Belt & Road Initiative (BRI) forum and will now title the project “Rationalised Upgradation of ML-1 at 140/120km per hour (Upgradable to 160km per hour).” The project aims to upgrade and modernize railway infrastructure across multiple phases, with construction set to begin by June next year following various administrative steps.

LAHORE: China and Pakistan have signed an addendum to the CPEC’s framework agreement under which the country’s first-ever state-of-the-art mega Main Line-1 (ML-1) project will now be executed with a rationalised cost of $6.678 billion instead of the earlier one of $9.85bn.

The addendum related to the revised ML-1 project was signed by the representatives of the two countries on the sidelines of the recent Belt & Road Initiative (BRI) forum on Oct 17 and 18 which was also attended by the caretaker Prime Minister Anwaarul Haq Kakar.

With the revised cost, the ML-1 project will now be titled “Rationalised Upgradation of Ml-1 at 140/120km per hour (Upgradable to 160km per hour)” instead of the previous one “Upgradation of Ml-1 at 160/120 km per hour” as per approved PC-I, Dawn has learnt.

“It is a matter of great pleasure that the addendum related to the revised ML-1 project and cost has been signed. It happened on the sidelines of the BRI forum held to mark the initiative’s 10 years successful completion,” Zafar Zaman Ranjha, the ML-1 project’s team leader (Pakistan Railways) confirmed while talking to Dawn on Tuesday. “And now, after signing the addendum, there is no issue in the way of executing this project under a revised plan,” Mr Ranjha maintained.

To a question, he said the project consisted of three phases having a total length of 1,726km. Phase-1, 2, 3 and 4 comprise Karachi-Multan, Multan-Lahore, Lahore-Lalamusa and Lalamusa-Peshawar.

The design speed, according to the revised project would be up to 140km per hour which can easily be increased to 160km per hour on the upgraded track once the entire left/right of the track is fenced and some other upgrade work is done completely.

Answering a question, the officer said that since the addendum has been signed, the next steps ahead of the start of the civil work on the project would include hiring a consultant, finalising the amended design by Oct 30, preparing the modified PC-1 and getting it approved by Ecnec, initiating and completing the international bidding process, signing commercial agreements, awarding the contract and releasing funds from Exim Bank (China).

“We are scheduled to start the construction work by June next year,” Mr Ranjha said.

Question is, does it really take 16 years to build the whole ML-1 as reported in some other report ?
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Inflation, debt and ML-1

The writer is a former finance minister.

THE caretaker government is hard at work on all matters economic. Its resuscitation efforts include reviving the Karachi to Peshawar railway line (ML-1), a project to be supplied and financed by China for $6.7 billion that will cut travel time between these two cities to 18 hours.

Assuming a three per cent interest rate, a 2pc insurance cost and a 20-year payback period, annual payments come to $530 million. The question our government must ask: can we afford such an expenditure in foreign currency at this time? Should we not consider a cheaper solution of buying a new signalling system for $150m that will increase average train speed and track capacity by 20pc?

(A digression: our railway ministry, like PIA, is similar to a black hole where any money poured in is lost forever and we never see a return. But that’s not the argument I am developing here).

A mistake our governments have made over the years is to not determine the foreign currency or external viability of projects and policies. So, for instance, we build power plants or bridges with foreign loans, but without examining whether that particular project is feasible only in rupee terms or will also generate (directly or indirectly) enough foreign currency for us to be able to service the debt. Or when we enact a policy of, say, giving a tax exemption to a sector, we don’t consider what effect that policy will have on foreign exchange. Our ignoring the external viability has meant that over the years we have pursued policies and projects that have resulted in external debt and liabilities of $125bn with little to show for in terms of foreign earnings.

For instance, the amnesty given to the real estate sector in 2020 allowed property tycoons to park their tax-evaded billions in real estate and construction. However, the government never undertook an analysis of what would happen to the current account deficit as money diverted to real estate and construction would result in more imports and have a negative impact on exports. It also didn’t consider the effect on tax revenues or the manufacturing sector which exports and pays higher taxes. Wanting to spur growth at any cost, the government took our imports to unsustainable levels by 2021.

Also consider: between 2013 and 2018, as we doubled our electricity production capacity, did we study if those projects were externally viable given that an overwhelming proportion of our electricity is used in homes and little for industrial production? Or did we undertake policies that rendered them viable? In fact, because of a fixed exchange rate policy in those years, our exports declined from 13.8pc of total national output to 8.9pc, our import bill shot up and today we are facing difficulty in paying for those plants.

Similar mistakes were made throughout our history where successive governments failed to consider the long-term implications of policies, and these ill-conceived policies have come back to haunt us. Today, our government is reeling under huge domestic and external debts. Since the passage of the seventh NFC Award, another ill-considered policy, the federal government’s deficits have increased exponentially and this year the net revenue of the federal government, after paying the provinces, will be less than the interest we have to pay on debt. We are therefore borrowing even to pay the interest.

Because of this adverse situation, our governments have to struggle to borrow dollars to service our foreign debt and the State Bank has to create new money, through buying of bank securities, to finance the insatiable debt-servicing appetite of the federal government.

This money creation is of course the main reason we have experienced so much inflation and devaluation. To add to our woes, we are also seeing almost no growth in an economy where more than 2.5m new people join the labour force annually.

The caretaker government is aware of these problems. However, it seems that it is trying to stimulate growth as a way out of these problems. This, I think, is a mistake — a mistake we have often made as a solution to our problems.

The current situation calls not for pursuing rapid growth but to first reduce inflation. The most effective monetary tool the State Bank has to reduce inflation is to increase its policy rate — the rate at which it lends money to banks. An increase in the policy rate forces a decrease in demand for goods and services, thus lowering inflation. Indeed, the high policy rate we have today has largely repressed private sector demand, thus tempering inflation.

But our dilemma is that all new credit today is going to the federal government, whereas private sector credit is actually shrinking. When the State Bank raises interest rates, it raises the federal government’s cost of debt servicing. However, rather than cutting its expenditures or increasing its revenues — it’s not possible to do so in the short run —the government just borrows more, forcing the State Bank to print more money. The resulting increase in money supply causes more inflation.

The economy is in a Catch-22 situation where the State Bank’s contractionary monetary policy is swamped by the federal government’s expansionary fiscal policy, caused by its large budget deficit.

Although there are no easy solutions, the best course for the caretakers in my view is to reduce Public Sector Development Programme and provincial Annual Development Programme spending on an emergency basis to reduce the aggregate federal and provincial deficit. Once the deficit is reduced, monetary policy will start to become more effective and inflation will come under control.

However, until we have consolidated our fiscal situation, we should pursue growth only through investments that result in exports. For now, we shouldn’t pursue investments that seek to sell to domestic consumers.

Therefore, we should defer the ML-1 project for a few years. Right now it would be like buying a corporate jet for the CEO of a deeply indebted, loss-making company. The jet may be convenient for corporate managers, but it’s not a luxury the company can afford. Similarly, we can’t afford the new railway line.

The writer is a former finance minister.

Published in Dawn, November 5th, 2023

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