The government has asked to slow down work on the ML-I funding deal

Islamabad:

The Economic Affairs Directorate (EAD) has advised the government to move slowly in finalizing a financing deal for nearly $6 billion Chinese loan for the China-Pakistan Economic Corridor (CPEC) Mainline-I (ML-I) project to avoid complications in the implementation of the mega scheme.

The advice came amid serious objections raised by the Planning Commission’s vice-chairman against the committee’s bypassing of the downward revision of the project’s cost, according to sources familiar with the developments. These issues were raised during a meeting held to review the status of the ML-I project a few days ago.

Pakistan and China agreed to revise down the cost of the ML-I project to $6.67 billion, a reduction of $3.2 billion, or a third, through reduced scope and design aimed at making it commercially viable. However, all these changes were made without the approval of the relevant forums.

Pakistan expects 85% of the project’s cost, or about $5.8 billion, in a Chinese loan. Beijing wants to finalize the financing deal first and then start the bidding process. However, the sources said EAD officials objected to finalizing the funding terms before completing other requirements.

Instead, they asked the government to first arrange for bidding to award the contract to a Chinese company, then sign a commercial agreement, and then finalize the financing agreement.

A few years ago, Pakistan finalized the financing terms of a strategic project even before the trade agreement and EAD was now facing problems from the audit department, they added. Railway ministry officials informed the Planning Commission that during a recent visit of a Chinese delegation, the Chinese sought more clarity on the financing of ML-I and also sought clarity on tax exemptions.

Pakistan has assured China that all concessions and exemptions available to other CPEC projects will be extended to ML-I as well. However, Beijing raised the issue of a new withholding tax, they added. However, EAD officials advised the government to show some patience and let other details of the contract be finalised.

Railway ministry officials were of the view that China wanted Pakistan to continue negotiations on the loan while completing other formalities.

China is reluctant to begin the bidding process until financing terms are finalized, officials said. Beijing wants to build these policy decisions into the bidding documents.

Reading: Promise to expedite Gwadar, ML-1 projects praised

Pakistan and China had started financing negotiations in November 2020 for the larger CPEC project. Pakistan asked for a loan for a period of 25 years with a 10-year grace period and an interest rate of 1%. It also proposed debt equal to 90% of the project’s cost and asked for financing in both US currency and Chinese renminbi (RMB).

Instead, China proposed borrowing in RMB, a debt ratio of 85% and a repayment period of 15 to 20 years.

Pakistan is ready to accept the loan in RMB because of the sharp depreciation of the US currency and the reduction of dependence on the dollar. However, EAD officials told the Planning Commission that it will go ahead formally only when there is a commercial agreement for the ML-I, the sources said.

Sources said EAD had also sought a viable business plan from Pakistan Railways before applying for the Chinese loan. Senior EAD officials were of the view that the financial condition of the autonomous bodies was quite poor and that they did not have sufficient resources to finance their debt.

There were also divergent views on the terms of funding. EAD officials were of the view that Pakistan should convince the Chinese to give a concessional loan in line with the strategic nature of the project as outlined in the framework agreement.

Sources said the deputy chairman of the Planning Commission had objected to the committee being ignored in the scope and cost reduction process. Changes to the design, scope and cost have been made without prior consultation with the Planning Commission, he said during a recent meeting.

Published in The Express Tribune, December 6^u2023.

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