ISLAMABAD: The Export-Import Bank of China will loan Pakistan $1.7 billion to develop a city-wide train system in the eastern city of Lahore, a senior Pakistani government official said on Wednesday.

The 15-year loan will be disbursed in the next five years, and negotiations with Eximbank are under way to finalise other details, Khawaja Ahmed Hassan, chairman of the Lahore Transport Company (LTC), said.

“The bank agreed to lend us the money with a two-year grace period, and our aim is to get it at six per cent interest,” he told Reuters.

The Punjab government recently agreed to award the 27 km (16.7 mile) train line contract project to the Chinese company China North Industries Corp (Norinco). In 2008, a French company had estimated the cost of the project at $2.4 billion.

The Chinese “were very kind and they brought down the cost of the project to $1.7 billion,” Hassan said.

He said the project was likely to begin by the end of 2011.

Lahore, the capital of Punjab province, Pakistan's most populous and prosperous province, is home to more than five million people.

Officials expect the new transport system, the first of its kind in the country, will substantially decrease road traffic.

“There will be a big change. If we are able to bring here the system which we saw in China, thousands of vehicles (will) eventually go off the road,” Hafiz Nauman, a provincial lawmaker and senior member of the LTC, said.

He said another Chinese company will supply 111 buses to the city in June.

Seen as an “all-weather friend” to Pakistan, China has invested heavily in infrastructure development, particularly in the strategic and mineral-rich southwest, bordering Iran and Afghanistan.

China Three Gorges Corp, China's largest hydropower developer, is ready to invest $15 billion in Pakistan's troubled energy sector, an investment that could add 10,000 megawatts to Pakistan's main grid over the next 10 years, a senior company official told Reuters in an interview on April 7.

China is a main supplier of military and defence hardware to Pakistan, and has helped the country build nuclear power plants.