Highway to success: is the CPEC a winner?

KATHARINE ADENEY

THE China-Pakistan Economic Corridor CPEC is one of the investment corridors for Chinas infrastructure financing through the BRI.1Defined by Chinese Prime Minister Li Keqiang as the flagship project of Chinas ambitious BRI, it has resulted in at least US$ 25 billion in investment. While this is significantly less than the US$ 62 billion that was talked about in 2017, many projects have been funded, including energy infrastructure, roads, a port and airport and fibre optic cables. Nawaz Sharif, the prime minister under whom the programme was formally inaugurated in 2015, described the CPEC as a game changer. Many of the projects defined as CPEC projects were retrospectively added to the CPEC, but others were new. Under Nawazs premiership, energy projects were prioritised, in addition to those located within Punjab, the political base of Nawazs party, the PML-N.2

Khan came to power in 2018. His (and his political party, the Pakistan Tehreek-e-Insafs [PTI]) previous opposition to the CPEC was well known. Their criticisms focused on the way in which the PML-N administration had prioritised projects in the eastern wing of the country (where its political heartland was located) and in charge of corruption in the development of these projects.3After his election, Khan was more positive regarding the CPEC, signalling that he would seek to change its focus to align it with the priorities of the PTI.4However, two months later, his adviser for commerce and investment, Abdul Razak Dawood, questioned the financial terms accorded to Chinese companies and argued that Pakistan should put everything on hold for a year so we can get our act together.5

Dawoods intervention was quickly quashed by the Pakistani army pressuring Khan to publicly retract Dawoods comments. A week later, the army chief re-affirmed Pakistans commitment to the CPEC during his visit to Beijing. Following this, the PTI made more conscious efforts to refocus the CPEC to chime with Khans populist rhetoric, especially with regards to socio-economic development and job creation. However, many Pakistani politicians were unconvinced and charged that the CPECs projects had stalled under Khans tenure, for example, former prime minister Shahid Khaqan Abbasis allegation in February 2022 that no [CPEC] project was completed during the current [Khan] governments tenure.6

This was despite the creation in 2019 of the CPEC Authority (headed by a retired military general) to ensure timely completion of the CPEC projects [and] help ensure coordination among the departments concerned.7The rest of this chapter will assess the accuracy of the charges of a slow down under Khans government.

Although the PTI ostensibly sought to use the CPEC to create jobs and promote socio-economic development, rhetoric did not always match reality. In the 2018-19 Public Sector Development Programmes (PSDP), the PTI removed many of the CPEC projects that had featured in the previous PSDP (including those in the poorest province of Pakistan, Balochistan) to the tune of US$ 125 million.8The initial mantra behind the CPEC (from both China and Pakistan) was that it would serve to develop the economically marginalised areas of both countries.9

Balochistan province is one of the poorest areas in Pakistan. Although the port of Gwadar, situated within the province, was targeted as a high priority project, many of the projects surrounding Gwadar port and airport remain uncompleted. There has been little investment outside Gwadar, which has become securitised. This has led to protests, with locals arguing that they are being displaced from their fishing grounds and that they are not receiving any benefit from the CPEC.10Although an impressive number of Social and Economic Development under CPEC projects were listed on the CPEC website from mid-2021 onwards (in many different parts of Pakistan), little detail on these projects is included.

Other projects, such as the creation of Special Economic Zones (SEZ), have progressed extremely slowly. The development of the SEZ was always envisaged to be part of the CPEC as listed in the Long-Term Plan11published under the PML-Ns government. After his election, Khan sought to turn the creation of the SEZ to his advantage, arguing that they would provide local job and training opportunities.12However, progress has been slow, and often more aspirational than real. The location of the SEZ has been politicised. Decisions over location have been made for political rather than economic reasons, for example, the prioritisation of Rashakai as the SEZ for Khyber Pakhtunkhwa over Hattar, despite the existing economic zone at Rashakai being described as a failure by analysts13and ranked lower in feasibility studies than other locations. Rashakai is in the constituency of the former chief minister of Khyber Pakhtunkhwa, the government of which was led by Khans party, the PTI.14

As Rashakai SEZ was inaugurated in May 2021, reports in January 2022 indicated that steel production would start within three months.15However, in February 2022 reports emerged that Chinese investors were asking for further incentives before investing.16Demands for preferential incentives for Chinese companies have been longstanding.17In an interview in 2020, a western diplomat questioned why Chinese companies would invest in the SEZ, given that all companies, not just the Chinese, are [being] offered preferential rates.

On paper, progress is being made in Allama Iqbal SEZ in Punjab, which was inaugurated in January 2021, as approval was granted for 15 applications by named companies in March 2021.18This was followed by news in December 2021 that a United Arab Emirates energy firm was also investing US$15 million.19However, little information is available about the pace of construction or whether utilities have been connected. We must, therefore, be sceptical about the rates of progress. Without such connectivity, the development of the SEZ will stall. A prime example would be the Bostan SEZ in Balochistan, where work has started slowly because of the lack of utilities provided.20The SEZ in Sindh, Dhabeji, is still embroiled in legal disputes and work has not yet commenced.21

 

Note: The 2018 data was taken on 23 October 2018 and the 2022 data taken on 10 February 2022. The 2018-22 Sindh data are not directly comparable as two new projects were added in Thar and one completed project was removed from the CPECs website.

Source: cpec.gov.pk

 

As a recent Asian Development Bank report on the CPEC noted, [s]tarting with an ambitious plan with multiple SEZs simultaneously often results in failure and waste of resources.22There are capacity problems in Pakistan, such as multiple bureaucratic hurdles for international investors. Back in 2020, an industrialist reported that there should be one place where people can go and submit documents the current system is not built to create ease.23Despite reports of centralisation to provide a one window operation, little has changed in practice.24

 

Notes: The 2018 data was taken on 18 October 2018 and the 2022 data was taken on 3 February 2022. The figures for Punjab are not directly comparable, as the Orange Line Metro was added after 2018. Three road projects were also added to the portfolio for Balochistan after 2018.

Source: cpec.gov.pk

 

The Framework on Industrial Cooperation, signed during Khans visit to Beijing in February 2022, has high aspirations but little detail on how the mechanics of the business-to-business matchmaking mechanism of Pakistani and Chinese enterprises will operate.25Technical and vocational education in Pakistan is not aligned with industry needs.26This is an issue that has not received sufficient attention despite the belated construction of the Technical and Vocational Training Institute in Gwadar. As journalist Hasaan Khawar told me in December 2020 that the Chinese say they cant find high-tech or specialised labour in Pakistan. So, wherever they cant find local labour, they bring in Chinese [workers]. Although the CPEC website has started publishing job figures for the CPEC projects, including a tally of local jobs created, independent verification (and details
of the nature of these jobs) is still required.27

 

 

Figure 1: Pakistans Bilateral Debt to China 2015-2021

Source: (Finance Division 2015-2021).

 

Contrary to the claims of many Pakistani politicians regarding the lack of progress under the PTI, an analysis of the CPECs website reveals that five energy projects were completed under Khans government. These include three projects in Thar, Sindh, the Coal Fired Power Plant Hub in Balochistan and the Matiari to Lahore line transmission project. The first four were well on their way to completion by the time Khan became prime minister, but the last one was not.28Table 1 reveals that the location of the energy projects remains concentrated in Sindh because of the number of projects on the Thar coal fields located in that province.

Apart from energy projects, infrastructure projects particularly roads were a major feature of the CPEC. Under Khans leadership, there was more progress in this area (although many of these projects were started under the PML-N government). As Table 2 demonstrates, additional infra-structure projects were added to the CPEC portfolio by the PTI, particularly in the provinces of Khyber Pakhtunkhwa and Balochistan. As noted above, neither the PML-N nor the PTI governments have been shy of using the CPEC to bolster their political base, and the lack of projects in these two provinces had previously been criticised by the PTI. However, it remains to be seen whether the funds to deliver on these in the pipeline projects will transpire, especially since the removal of the PTI government from power in 2022.

One of the major international concerns surrounding the CPEC was the levels of debt Pakistan would incur. Very few of the projects have been funded through grants most have been funded through the independent power producer (IPP) financial mode (discussed below) and the Chinese government loans at or near commercial rates.29

It was under Khans govern-ment that the scale of Pakistans bilateral debt to China became evident, as shown in Figure 1. Bilateral debt levels to China almost tripled from US$ 5,210 million in 2015 to US$ 14,180 million in 2021. Bilateral debt to China currently stands at almost 18 per cent of total Pakistani debt (and 36 per cent of bilateral debt levels). This does not include loans from Chinese banks. In February 2022, the International Monetary Fund included the US$ 4 billion given by China to stabilise the foreign exchange reserves part of the external public debt, bringing the levels of external public debt to US$ 18.4 billion.30

In addition to the bilateral loans, large repayments are due to the IPPs, a feature of the early part of the CPEC project. Chinese IPPs were able to demand higher rates of return for their investments, which were guaranteed by the Pakistan govern-ment. This was to ensure that the energy projects that characterised the early stages of the CPEC were delivered in a timely manner. Drawn by domestic priorities, notably the promise to fix the energy crisis (a mainstay of Nawazs electoral platform in 2013), the tariff payments paid by the Pakistani government to the power generation companies included a high return on equity.31Chinese policy banks [also] required developers to purchase political risk insurance32 which had to be reimbursed by the Pakistan government to developers.

 

 

 

 

 

 

Chart 1: GDP per capita (Constant 2015 US$) 2014-2020

Source: World Bank (2022).

 

Khan sought to restructure the terms and length of time of the IPP repayments during his period as prime minister.33In May 2021, the debt load exceeded the US$ 19 billion in total invested in the plants despite the fact that many of the plants are not actually producing power due to overcapacity and the failure of Pakistani power authorities to develop the national grid and related delivery systems to fully meet grassroots demand.34At the 10th Joint Cooperation Committee in 2021, Beijing refused again to renegotiate the terms of the power sector contracts.35

Although the CPEC is too big to fail, the way forward is unclear. In the early stages of the CPEC, when concerns were raised over the number and amount of loans, it was argued that Pakistans GDP would increase once the energy shortages were fixed, thus increasing Pakistans ability to repay its debt.36However, Chart 1 clearly demonstrates this has not happened. Even before the onset of COVID-19, and with the increased energy generation, the GDP per capita was reducing in Pakistan. Energy generation is no magic bullet.

Many of the problems facing the CPEC are long-standing and a legacy of the previous PML-N regime although it was under the PTI that the dangers of the debt trap surfaced. Despite his previous (and current) commitment to the CPEC, new Prime Minister Shahbaz Sharif faces an uphill struggle. The shrinkage of Pakistans economy, in evidence even before the pandemic hit, has exacerbated the serious issue of overcapacity and unsustainable capacity payments to power generators.37A few weeks before the dismissal of Khan, China had to agree to roll over US$ 4.2billion of debt.38

To make the most of the investments under the CPEC and to increase the GDP and its capacity to repay the investments, Pakistan needs to focus on what it wants to achieve from the SEZ. Till date, there have been no special incentives for specific industries that would benefit Pakistan.39The Asian Development Bank has argued that Pakistan needs to focus on producing higher value added goods40and that, with the exception of rice, Pakistans exports are in sectors of low value.41As the CPEC moves towards agricultural cooperation, Pakistan needs to ensure that the technology transfers from China are affordable by focusing on high value goods that can be exported to China, for example, mangoes. Pakistan also needs to ensure that new agricultural projects do not add to Pakistans water scarcity and further undermine its water security.

Finally, Pakistan needs to push for more educational and training opportunities. Despite Khans rhetoric, there is little evidence of new skilled Pakistani jobs being created.42Pakistan should also look further to develop incentives for Chinese companies to invest, particularly those that are tied to local employment quotas or training provisions.43

Footnotes :

1. This paper partly builds on research co-authored with Filippo Boni, and assesses how the CPEC progressed under the premiership of Imran Khan, whether there is any evidence of the CPEC delivering on its promises, and where we should look in the future, following the return of the Pakistan Muslim League (N) [PML-N] to power. Filippo Boni and Katharine Adeney, The Impact of the China-Pakistan Economic Corridor on Pakistans Federal System: The Politics of the CPEC, Asian Survey 60(3), 2020, pp. 441-65.

2. Ibid.

3. Eastern Route for CPEC May Foster Enmity Between Provinces, Warns Imran, The Express Tribune, 30 September 2015. https://tribune.com.pk/story/965041/eastern-route-for-cpec-may-foster-enmity-between-provinces-warns-imran.

4. Andrew Small, Returning to the Shadows: China, Pakistan, and the Fate of CPEC, The German Marshall Fund of the United States and the Centre for Asian Law, 2020. https://www.gmfus.org/news/returning-shadows-china-pakistan-and-fate-cpec.

5. Jamil Anderlini, Henny Sender and Farhan Bokhari, Pakistan Rethinks its Role in Xis Belt and Road, The Financial Times, 10 September 2018. https://www.ft.com/content/d4a3e7f8-b282-11e8-99ca-68cf89602132.

6. Mohammad Hussain Khan, CPEC Stalled Under PTI Govt, Says Shahid Khaqan Abbasi, Dawn, 7 February 2022. https://www.dawn.com/news/1673733/cpec-stalled-under-pti-govt-says-shahid-khaqan-abbasi.

7. Aamir Yasin, Asim Bajwa Made Chairman of Newly Created CPEC Authority, Dawn, 27 November 2019. https://www.dawn.com/news/1519047.

8. Filippo Boni and Katharine Adeney, The Impact of the China-Pakistan Economic Corridor on Pakistans Federal System: The Politics of the CPEC, Asian Survey 60(3), 2020, pp. 441-65.

9. Christine R. Guluzian, Making Inroads: Chinas New Silk Road Initiative, Cato Journal 37(1), 2017 pp. 135-47. https://www.cato.org/sites/cato.org/files/serials/files/cato-journal/2017/2/cj-v37n1-10.pdf.

10. Katharine Adeney and Filippo Boni, How China and Pakistan Negotiate, in Evan A. Feigenbaum (ed.), China Local/Global. Carnegie Endowment for International Peace, Washington DC, 2021, pp. 1-34; and Farhan Bokhari and Benjamin Parkin, Pakistan Seeks to Calm Protesters at Chinese Belt and Road Port Project, Financial Times, 18 December 2021. https://www.ft.com/content/0bd3988d-96d6-47a2-8006-1810cd90c151.

11. Long Term Plan for China-Pakistan Economic Corridor (2017-2030), Government of Pakistan, Ministry of Planning, Development and Reform, 2017. https://www.pc.gov.pk/uploads/cpec/LTP.pdf.

12. Ibid.

13. Ejaz Hussain and Muhammad Furqan Rao, China-Pakistan Economic Cooperation: The Case of Special Economic Zones (SEZs), Fudan Journal of the Humanities and Social Sciences 13(4), 2020, pp. 453-72. https://link.springer.com/article/10.1007/s40647-020-00292-5.

14. Katharine Adeney and Filippo Boni, How China and Pakistan Negotiate, op. cit., pp. 1-34.

15. Eastern Route for CPEC May Foster Enmity Between Provinces, Warns Imran, op. cit.

16. Business Recorder, Chinese Investors Want More Incentives in Rashakai SEZ Project, Aaj News, February 2022. https://www.aaj.tv/news/30278339.

17. Filippo Boni and Katharine Adeney, The Impact of the China-Pakistan Economic Corridor on Pakistans Federal System: The Politics of the CPEC, 2020, op. cit., pp. 441-65.

18. Establishment of Industrial City in Faisalabad Begins, Dawn, 6 March 2021. https://www.dawn.com/news/1610952.

19. APP, UAE Firm to Invest $15mln, The News, 17 December 2021. https://www.thenews.com.pk/print/917426-uae-firm-to-invest-15mln.

20. First Cluster of Bostan Special Economic Zone Opened: Daud Bazai, Balochistan Express, 28 August 2021. https://bexpress.com.pk/2021/08/first-cluster-of-bostan-special-economic-zone-opened-daud-bazai/.

21. Irfan Syed Raza, Dhabeji Industrial Zone Project Hits Snags, Dawn, 29 November 2021. https://www.dawn.com/news/1660813/dhabeji-industrial-zone-project-hits-snags.

22. Economic Corridor Development in Pakistan: Concept, Framework, and Case Studies, Asian Development Bank, February 2022. https://www.adb.org/publications/economic-corridor-development-pakistan.

23. Saira Abdul Waheed and Muhammad Naeem Khan, Drivers and Barriers for Successful Special Economic Zones (SEZs): Case of SEZs Under China Pakistan Economic Corridor, Sustainability 12(11), 2020, p. 4675. https://www.mdpi.com/2071-1050/12/11/4675.

24. Syed Ali Zia Jaffery, Special Economic Zones and the China-Pakistan Economic Corridor: Opportunities and Challenges for Pakistan, Centre for Security, Strategy and Policy Research, University of Lahore, 30 August 2021. https://csspr.uol.edu.pk/sezs/.

25. Business Recorder, Chinese Investors Want More Incentives in Rashakai SEZ Project, Aaj TV, 11 February 2022. https://www.aaj.tv/news/30278339.

26. Economic Corridor Development in Pakistan: Concept, Framework, and Case Studies, op. cit.

27. The data is suspect in other ways, for example, http://cpec.gov.pk/project-details/36 lists the total number of jobs created at 120, with the number of local jobs created as 240 (with thanks to Dr Eram Ashraf for bringing this to my attention).

28. Khalid Hasnain, Major Work on 886 km Matiari-Lahore Transmission Line Completed, Dawn, 30 October 2020. https://www.dawn.com/news/1587725.

29. Kazim Alam, Most Loans Under CPEC at Commercial Rates: Report, Dawn, 30 September 2021. https://www.dawn.com/news/1649227.

30. Shahbaz Rana, Foreign Public Debt to Jump to $103b by End of Next Fiscal, The Express Tribune, 6 February 2022. https://tribune.com.pk/story/2342247/foreign-debt-to-jump-to-103b-by-end-of-next-fiscal.

31. Rishikesh Ram Bhandary and Kelly Sims Gallagher, What Drives Pakistans Coal-Fired Power Plant Construction Boom? Understanding the China-Pakistan Economic Corridors Energy Portfolio, World Development Perspectives, Volume 25, March 2022.

32. Ibid, p. 4.

33. Khaleeq Kiani, Pakistan Urges China to Soften Terms for Power Deals, Dawn, 15 April 2020. https://www.dawn.com/news/1549299.

34. Khaleeq Kiani, Pakistan, China Agree Not to Alter Tariff on Power Deals, op. cit.

35. Ibid.

36. Husain, Ishrat, Financing Burden of CPEC, Dawn, 21 June 2017. https://www.dawn.com/news/1313992.

37. Nicholas Simon, Shelving of Huge BRI Coal Plant Highlights Overcapacity Risk in Pakistan and Bangladesh, China Dialogue, 1 May 2020. https://chinadialogue.net/en/energy/11988-shelving-of-huge-bri-coal-plant-highlights-overcapacity-risk-in-pakistan-and-bangladesh/.

38. Shahbaz Rana, Govt Gets Financial Relief as China Rolls Over $4.2b Debt, 2022, op. cit.

39. Katharine Adeney and Filippo Boni, How China and Pakistan Negotiate, op. cit., pp. 1-34.

40. Economic Corridor Development in Pakistan: Concept, Framework, and Case Studies, op. cit.

41. Ibid., p. 42.

42. Ibid., p. 43.

43. Ibid., p. 23.