M4: A new capital highway?

IFR Asia - Asian Development Bank 2016
4 min read

The next stretch of Pakistan’s M4 highway is set to be the first project to be financed jointly by the Asian Development Bank and the Asian Infrastructure Investment Bank.

The ADB and the newly established AIIB have identified the M4 project as their first co-financing initiative and are set to sign final documentation in a matter of months, according to people close to the project.

The AIIB listed the M4 as the first “business opportunity” on its website on April 11, referring interested parties to an ADB invitation to tender with a May 23 deadline.

The timetable means the M4 will be one of the first Asian infrastructure projects to win the support of the AIIB, which officially opened for business in January 2016 and is aiming to approve its first loans by the end of the second quarter.

A co-financing arrangement, where the ADB takes the lead and will administer the financing on behalf of the other lenders, will allow the AIIB to begin lending before the bank has finished recruiting investment specialists. Effectively it means using the ADB’s existing due diligence and project selection criteria instead of its own.

It also suggests that the China-sponsored institution will adhere to the same lending standards as the established multilateral development banks, easing fears that the new institution will channel capital to lower-quality projects – although ADB insiders caution against reading too much into the decision.

The AIIB’s own safeguards, in fact, have already delayed bidding by six weeks. The bank has agreed on a universal procurement policy, while the ADB’s tender for the M4 section had allowed bids from only its eligible member countries. As a result, the deadline has been extended from April 11 to May 23.

The M4 motorway in Punjab, Prime Minister Nawaz Sharif’s home state, forms part of a network of major roads connecting Northern Pakistan – and its northern neighbours – to warm-water ports at Karachi and Gwadar in the South. The ADB has already financed two of the four sections of the 233-kilometre highway, while the Islamic Development Bank has led a third. The final stretch covers 64 kilometres from Shorkot to Khanewal.

Pakistan’s finance ministry reported a conversation with ADB country director Werner Leipach in December, where the ADB staffer said the bank would seek AIIB assistance for the Shorkot-Khanewal section, near the China Pakistan Economic Corridor.

No dollar amount was available, but the ADB’s most recent M4 section – just two kilometres shorter at 62km – came with a US$178m ADB loan, US$92m grant from the UK’s Department for International Development and US$46m of counterpart support from the Pakistan government. That financing closed in October 2015.

“Road transport dominates Pakistan’s transport system, but much of the national highway network was built before the 1950s and consists of poor-quality two-lane roads which struggle to cope with current high levels of traffic, including heavily-laden freight trucks,” Zheng Wu, transport specialist in ADB’s Central and West Asia Department, said of the October M4 financing.

“The project supports the government’s goals of decongesting highways and improving the north-south corridor to reduce the time and cost of moving people and goods, which is a major constraint to raising competitiveness, and attracting private sector investment needed to generate sustainable jobs for a fast growing population.”

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M4: A new capital highway?