Highway to success: is the CPEC a winner?
KATHARINE ADENEY
THE
China-Pakistan Economic Corridor CPEC is one of the investment corridors for
China’s
infrastructure financing through the BRI.1 Defined by Chinese Prime Minister Li Keqiang
as the ‘flagship
project’ of China’s 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 Nawaz’s premiership, energy projects were prioritised, in addition
to those located within Punjab, the political base of Nawaz’s party, the
PML-N.2
Khan came to
power in 2018. His (and his political party, the Pakistan Tehreek-e-Insaf’s [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.3 After 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.4 However, 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
Dawood’s intervention was quickly quashed by the Pakistani army
pressuring Khan to publicly retract Dawood’s comments. A week later,
the army chief re-affirmed Pakistan’s commitment to the CPEC during his visit to Beijing.
Following this, the PTI made more conscious efforts to refocus the CPEC to
chime with Khan’s populist rhetoric, especially with regards to
socio-economic development and job creation. However, many Pakistani
politicians were unconvinced and charged that the CPEC’s projects had stalled
under Khan’s tenure, for example, former prime minister Shahid Khaqan
Abbasi’s allegation in
February 2022 that ‘no [CPEC] project was completed… during the current [Khan]
government’s 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’.7 The rest of this chapter will assess the
accuracy of the charges of a slow down under Khan’s 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.8 The 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.10 Although 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 Plan11 published under the PML-N’s 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.12 However, 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 analysts13 and
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 Khan’s 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.15 However,
in February 2022 reports emerged that Chinese investors were asking for further
incentives before investing.16 Demands
for preferential incentives for Chinese companies have been longstanding.17 In 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 2021.18 This was followed by news in December 2021
that a United Arab Emirates energy firm was also investing US$15 million.19 However, 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.20 The 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 CPEC’s
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’.22 There 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’.23 Despite 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 Khan’s 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.25 Technical and vocational education in Pakistan
is not aligned with industry needs.26 This 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 can’t find
high-tech or specialised labour in Pakistan. So, wherever they can’t 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: Pakistan’s 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 CPEC’s website reveals that five energy projects were completed
under Khan’s 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.28 Table 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 Khan’s 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
Khan’s govern-ment
that the scale of Pakistan’s 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 Nawaz’s electoral
platform in 2013), ‘the tariff payments paid by the Pakistani government to the
power generation companies included a high return on equity’.31 ‘Chinese policy banks [also] required developers to purchase
political risk insurance’32 – which had to be reimbursed by the Pakistan government to
developers.
Chart 1: GDP per capita (Constant 2015 US$) 2014-2020
Source: World
Bank (2022).
Khan sought to
restructure the terms and length of time of the IPP repayments during his
period as prime minister.33 In May 2021, the debt
load exceeded the US$ 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”.34 At 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 Pakistan’s GDP would increase once the energy shortages were fixed,
thus increasing Pakistan’s ability to repay its debt.36 However, 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 Pakistan’s economy, in
evidence even before the pandemic hit, has exacerbated ‘the serious issue of
overcapacity and unsustainable capacity payments to power generators’.37 A 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’.39 The Asian Development
Bank has argued that Pakistan needs to focus on producing “higher value
added goods’40 and that, with the exception of rice, Pakistan’s exports are
in sectors of low value.41 As 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 Pakistan’s water scarcity and
further undermine its water security.
Finally,
Pakistan needs to push for more educational and training opportunities. Despite
Khan’s rhetoric, there is little
evidence of new skilled Pakistani jobs being created.42 Pakistan 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 Pakistan’s
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 Xi’s 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 Pakistan’s
Federal System: The Politics of the CPEC’,
Asian Survey 60(3), 2020, pp. 441-65.
9.
Christine R. Guluzian, ‘Making
Inroads: China’s 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 Pakistan’s
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 Pakistan’s Coal-Fired Power Plant
Construction Boom? Understanding the China-Pakistan Economic Corridor’s
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.