CPEC: Current State and Future Outlook

Faisal Ahmad

During past five years China and Pakistan have explored new avenues –energy and infrastructure projects–under the framework of China-Pakistan Economic Corridor (CPEC). Scores of energy and infrastructure projects have been completed and operationalised. Few others are in the process of completion. Meanwhile, bilateral cooperation is underway for commercial operations at Gwadar port and infrastructure development in the Gwadar city. To oversee this multifaceted cooperation, both governments regularly take stock of the CPEC framework through Joint Cooperation Committee (JCC). As the bilateral cooperation under CPEC framework completes its fifth year, this piece looks at how bilateral economic relationship has been affected by the change of government in Pakistan after July 2018 elections. It explores how CPEC will evolve in next few years and what are the expectations from both sides in the next phase.

Since coming into power Pakistan Tehrik-i-Insaf (PTI) government has influenced the course of CPEC cooperation. PTI government started by undertaking a comprehensive review of the CPEC framework, as it, during its days in Opposition,remained critical of number of mega-projects and the excessive focus on infrastructure building. This set the stage for different set of expectations from CPEC in Pakistan in the short-to-medium term. PTI had argued that it will seek renegotiation of existing CPEC related contracts and their terms and conditions. This was articulated by an Advisor to the Prime Minister, Mr. Abdul Razzaq Dawood in an interview with Financial Times.[1] He argued for re-evaluation of the projects and proposed slowing them down. The tone and tenor of the interview reflectedthe manner in which the new government was engaging with China on CPEC. Its timing was also odd, as that interview was published at a time when Chinese Foreign Minister Wang Yi was visiting Islamabad.

As the PTI government undertook the review of CPEC projects it missed an important point: CPEC is a component of China’s larger Belt and Road Initiative (BRI). PTI wanted China to realign its goals for CPEC according to the agenda of PTI government. Beijing, however, was looking at much broader picture where BRI encompassed cooperation with more than 60 countries in four continents. This naturally meanta difference of the lens from which China and PTI government viewed the project. This was on display during Prime Minister Imran Khan’s visit to China in early November. Pakistan pushed for expanding cooperation in new areas such as socio-economic development, agriculture and poverty alleviation. But, still the Chinese leadership promised to adapt to Pakistan’s new agenda.

Recently, both countries agreed to focus on “industrial, socio-economic and agriculture cooperation” during 2019. This has emerged from of the 8th JCC meeting held in December, 2018, where Pakistan sought further financial assistance, and Beijing called for more facilitation, enhanced security and a reliable repayment system. Islamabad, beset by a financial crisis, is seeking various forms of financial support such as grants, investments, concessional loans and joint ventures to shore up its depleting foreign reserves and boost local economy. Beijing, on the other hand, is pushing for putting in place a mechanism that can allow Pakistan to fulfill its financial obligations to Chinese companies, particularly, in the energy sector. Moreover, in the wake of attack on Chinese consulate, Beijing China has emphasized on accelerating the process of forming and deploying Special Security Division-South to meet the emerging security challenges. In this backdrop, following section will review the current state of bilateral cooperation in key sectors of CPEC and its likely evolution in short-to-medium term.

Energy:

During the first phase of CPEC, focus remained on addressing Pakistan’s energy crisis. Pakistan invited Chinese companies to invest in power sector and establish power plants, mostly coal based. As part of Early-Harvest Projects (EHP) three coal-based power plants, each of 1320 MWs, were constructed and operationalized in Sahiwal[2] and Port-Qasim[3] with investment from Chinese companies. Alongside coal-fired power plants,another (around) 600MWs of electricity is being generated from solar and wind power plants established in South Punjab and Sindh.  Collectivity, these projects have added 3240MWs of electricity to Pakistan’s national gird over past five years. Government of Pakistan provided sovereign guarantees and committed to paying tariffs to Chinese companies against the electricity purchased from them. As Pakistan entered into a balance of payment crisis in 2018, the payments to the Chinese companies were delayed. In one instance, Pakistan owes around $119 million to a Chinese company for operating the coal power plant in Sahiwal.[4] Given Pakistan’s financial difficulties, Chinese authorities have been emphasizing on establishing a mechanism that would allow Pakistan to clear outstanding payments of Chinese companies without hindrance.

Pakistan is faced with issues of line losses and inefficient recovery of bills from consumers. Deep structural reforms in power sector are required to meet financial obligations. Pakistan is seeking technical support from China to reduce line losses and move to net-metering for recovery of electricity cost.

Meanwhile, Pakistan is also interested in moving away from imported coal as a major source of its energy mix. Pakistan intends to move towards domestic sources of energy, particularly, hydropower as the main source.

Given these developments, it is most likely that coal-based power plants would not remain the mainstay of CPEC power projects. Pakistan has already requested China to scrap the 1320 MWs Rahimyar Khan coal power plant. Secondly, given Pakistan’s difficulty in fulfilling commercial obligations Chinese companies are also expected to slow-down the pace of development work in case of ongoing projects. Moreover, operational power plants too are not likely to be run on full capacity. Addressing these issues require continuous consultations, both formal and informal, at the level of joint-working group focusing on energy issues.

Gwadar:

Development of Gwadar port and city is an important component of the CPEC framework. At present a masterplan of Gwadar as a smart port city is being finalized. A draft has been prepared and submitted to Islamabad for approval.[5] Following approval of the master plan by Pakistan’s political leadership, development works will commence. Gwadar city requires a dedicated power plant, an international airport, hospital, vocational training facilities, and necessary road infrastructure to make the port commercially operational. Islamabad seeks to make Gwadar port a transshipment hub alongside a petroleum city. Pakistan has signed a Memorandum of Understanding with Saudi Arabia, during Crown Prince Mohammad bin Salman’s visit to Islamabad in February,for establishing an oil refinery in Gwadar possibly along with a petro-chemical complex.

During the past year Pakistan and China had agreed to commence work on a coal power plant and an international airport in Gwadar. Unfortunately, no development work has been started on the ground. At the 8th JCC meeting, both sides reaffirmed their commitment to initiate work on airport, hospital and vocational training institutes within three months to gain support and trust of local people. China has pushed Pakistan to provide tax breaks and tariffs concessions to companies that will begin manufacturing operations in Gwadar. Beijing believes such concessions will enable Pakistan to attract investment in Gwadar city.

China Overseas Ports Holding Company (COPHC) is leading the development of Gwadar Free Zone, which is meant to become the industrial hub of Gwadar. In 2018, first phase of construction of Gwadar Free Zone was completed, with building of a business center, trade exhibition hall, cold storage and a warehouse. In January, 2018, Gwadar Free Zone was inaugurated and first International Expo was also held. COPHC claims that nearly 30 companies have made investments in the Free Zone totaling an amount of nearly US $474 million.

Undoubtedly, the future of CPEC centric cooperation is linked with development of Gwadar port and city. History is evident that port cities take decades to develop. The pace of development in Gwadar is, however, too slow. The development work on Gwadar port and city will remain slowas long as both sides do not finalize the Gwadar Smart City Master Plan.

Infrastructure:

As a corridor, infrastructure development is at the heart of CPEC initiative. At its core, infrastructure development is meant to promote connectivity, within Pakistan and overland with China. At present, upgradation of Karakorum Highway (KKH) Phase-II from Havelian to Thakot, Sukkur-Multan section of Karachi-Lahore Motorway, and Lahore Orange Line are under construction as part of CPEC road infrastructure projects. Chinese government has provided concessional loans of around US$ 5.8billion at an interest rate of around 2% p.a. for these projects. KKH project will improve connectivity with China, while Karachi-Lahore motorway will enhance intra-Pakistan connectivity and boost commerce

On the rail side, up gradation of Pakistan Railways Main Line-I from Karachi to Peshawar has been declared a strategic project of CPEC. Given its strategic significance, Beijing is keen to finalize modalities and begin work on the ground. Islamabad, however, has reservations over the financial model and its high cost to the tune of US $8.2 billion. PTI government is undertaking comprehensive review of the project as it is seeking to follow ‘build-operate-transfer’ model. China has, however, shown willingness to provide up to 85 percent of the project financing. Feasibility studies have been completed. Work on preparing a preliminary design of ML-1 is underway. Despite the current stalemate, it is likely that ML-I project will be undertaken in accordance with the Framework Agreement inked in May, 2017, whereby both countries will share project cost on 85%-15% percent basis.

Meanwhile, information highway project of laying optical fibre cable (OFC) from Rawalpindi to Khunjareb has been completed and operationalized. It included 820km of cable laying and related construction at the cost of US$44 million.

Socio-Economic Development:

The most significant adjustment into the CPEC framework has been the inclusion of socio-economic development projects. PTI government, and in particular PM Imran Khan has been emphasizing on emulating Chinese socio-economic development model of reducing chronic poverty. In this regard, a joint working group on agriculture and socio-economic development has been formed.[6] Both sides have identified areas of ‘agriculture, education, medical treatment, poverty alleviation, water supply and vocational training’ as the focus of socio-economic development centric cooperation.

While both sides have committed to broadening the scope of CPEC cooperation, it remains to be seen if Chinese companies will follow the governmental commitment. Pakistan is seeking visits of Chinese experts to explore investment opportunities in agriculture sector and agriculture value chains to promote local economy. Meanwhile, given the central role of agriculture sector in Pakistan’s national economy, ingress by a foreign company will have to be managed carefully for it to be successful.

Special Economic Zones:

At the time of launching CPEC, it was hoped that SEZs will become the engine of Pakistan’s industrial development. Five years later little progress has been madeon the ground. Recently, PM Imran Khan, directed Board of Investment (BOI) to prioritize development of SEZs and make 2019 a year of industrial development under CPEC. In the first phase it is expected that ground breaking of at least three SEZs – Rashaki in Khyber Pakhtunkhwa, Dhabeji in Sindh and M-3 Faisalabad– would take place over the next few months.

Development of SEZs and their success is directly linked to Pakistan’s taxation regime, incentives for investors and ease of doing business in the country. Besides these measures, federal and provincial governments need to provide essential utilities at the SEZ sites. A governance model for SEZs also needs to be prepared at the earliest. At present, federal and provincial governments are at odds over various issues, since many of the subjects have been devolved to provinces. During 2017-18, Chinese experts also evaluated Pakistan’s proposed SEZ sites and have made feasibility studies of 6 SEZs so far. Beijing has suggested to Islamabad, that a distinctive development model for each SEZ be formulated with specific economic rationale keeping in view local conditions at each site and its distinct advantages.

Meanwhile, Chinese side is seeking one-window-operation to coordinate land, essential utilities, taxation, customs, and other legal issues related to development and operationalization of SEZs. Beijing has proposed to Islamabad that Board of Investment (BoI) be designated as the lead Pakistani government department dealing with all aspects and issues related to development and governance of SEZs. Notably, PM Imran Khan has tasked BoI to formulate recommendations for expediting the development of prioritized SEZs. It means that current government is giving priority to SEZs and the relocation of Chinese industry in the next phase of CPEC cooperation.

Present government is looking at SEZs for job creation. Pakistan and China have been making efforts to incentivizing Chinese investor to relocate part of Chinese industry to Pakistan in crucial sectors of textile, petrochemical, iron and steel among others. Pakistan needs in-depth study for prioritizing sectors in which it is seeking Chinese investment, so that it doesn’t happen at the cost of Pakistan’s indigenous industry. Over the medium term, i.e. 3-5 years, SEZs will become the core of CPEC cooperation, and success of CPEC is linked with success of SEZs. In particular, operationalization of Gwadar port is directly linked with operationalization of Gwadar Free Zone. Industry needs to be established in Gwadar. There is no gainsaying the fact that unless goods are manufactured in the Gwadar city, port won’t become a successful commercial venture.

Conclusion:

The bilateral relationship between China and Pakistan is important for both countries. In recent years level of trust has deepened as scope of bilateral cooperation expanded. But, Beijing is currently feeling a little uneasy because of Pakistan’s domestic politics. The unease is not baseless because economic relationship is directly linked with domestic politics. Nonetheless, given the mutual trust and history of cooperation, both sides have so far been able to navigate the difficulties they have encountered so far. There has to be a realization on both sides that they differin their expectations from the CPEC cooperation.

Pakistan is in a financial crunch. It is looking to grants, investments and concessional loans from anywhere and everywhere. Islamabad had made a formal request to Beijing for financial assistance. In the short-to-medium term, economic pressures on Pakistan will constrain expansion of CPEC.

Beijing, meanwhile, is focused on completing the on-going projects. In short-to-medium term, there will be gradual slowdown with both sides reviewing and finalizing plans for next phase. Five in-depth studies in various sectors have been proposed before undertaking future investment cooperation. Finally, by including socio-economic cooperation into the CPEC framework, Beijing has indicated that it is willing to adapt CPEC to the priorities of the government in Islamabad. Such collaboration and communication symbolizes the depth of bilateral relationship and its ability to adjust to new environment.

 

[1]https://www.ft.com/content/d4a3e7f8-b282-11e8-99ca-68cf89602132

[2]Details of Coal-fired power plants at Sahiwal, Karachi can be found here:  http://cpec.gov.pk/project-details/2

[3] Details of Coal-fired power plants at Port Qasim, Karachi can be found here: http://cpec.gov.pk/project-details/1

[4]https://www.nytimes.com/2018/12/19/world/asia/pakistan-china-belt-road-military.html

[5]https://tribune.com.pk/story/1892965/1-gwadar-master-plan-delay-upsets-chinese/

[6]https://www.thenews.com.pk/latest/431190-pak-china-cooperation-in-agriculture-to-be-extended-under-cpec

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