Making CPEC work - II
The China Pakistan Economic Corridor (CPEC) is a collection of infrastructure projects for Pakistan (current size US$45 billion, expected size US$62 billion). The Gwadar Port is planned to be a central hub in the connectivity scheme. Starting in November 2016, Chinese cargo transported overland is being shipped to Africa and West Asia.
Then there are transport projects for US$11 billion, connecting Gwadar Port to Kashgar with connections to Central Asia and to Chinese ports in the East. The Eastern Alignment involves upgrading the existing 1152 km highway between Karachi and Lahore and linking with an upgraded Karakorum Highway (KKH) which enters China at the Khunjerab Pass, while the Western Alignment connects Gwadar with D.I. Khan, Hasan Abdal and KKH.
The Energy Infrastructure includes US$33 billion worth of electricity plants and transmission lines. Electricity generation is based mainly on fossil fuels, but also hydro, solar and wind energy. Early harvest projects included 4000MW while another 6000MW were added in 2018-19. There are to be Ten Special Economic Zones in different parts of the country, out of which three have been identified for setting up in Faisalabad, Hattar and Dhabeji in the first round. The SEZs provide tax holidays and concessions of various sorts to attract Chinese investors.
Dr. Abdul Hafeez Shaikh says that China's objectives for the Belt and Road Initiaive (BRI) and CPEC are (1) to extend Chinese surplus capacity and influence to Asia and parts of Europe. (2) to develop Western China, integrate it economically with Mainland China, and complement Western Development Plan for Xinjiang, Tibet and Qinghai. (3) create an alternative to the current shipping route via the Malacca Straits and the South China Sea.
60% of China’s oil comes from the Middle East, mostly from this route to the Eastern ports of Tianjin and Shanghai. The current distance on this route is about 11,000km.From Gwadar to Kashgar it is 3,000 km, from there to Tianjin another 4000 km, thus the combined distance is considerably less than the current route, bringing down shipping costs, and hedging against the risks of a single route.
Making CPEC work will involve costs. These costs will be incurred on land, equipment, interest and employees. How to ensure that the benefits are not meager but mega? If the projects are costly, their execution inefficient, their capacity under-utilized, their links to the rest of the economy minimal, and they generate political discord within the society, the net benefits can be meager or even negative.
Once the projects are operational, they must be managed as per international standards. Clearly, the Pakistan Railways – as it is run now – cannot be entrusted with this formidable task. The same people who have presided over the failure of our past economic zones cannot be counted on to manage the new zones differently. Our way of resource allocation and implementation of our Annual Development Plans do not auger well for CPEC projects.
Going from meager to mega benefits, the infrastructure created must be utilised to the fullest, and that means leveraging these facilities to open new markets (in Central Asia, Africa, Europe), and inviting new players, starting with China and aiming for China-Plus.
For mega benefits, we must enhance exports and get other investors to join. If CPEC is not leveraged to forge new alliances, partnerships and business relations (more FDI, exports, jobs), then mega benefits will not be realised.
There is considerable debate and legitimate concern on Equitable Distribution of Benefits from CPEC. With CPEC generating additional incomes, some questions relevant for welfare economics, national cohesion, and for a broader ownership of CPEC as a whole, arise. How will these additional incomes be distributed across regions and income classes? Where will the money on new infrastructure go? Who will get the new jobs? Who will make the profits? In short: Who will really benefit?
Take for example the thousands of trucks expected to transport goods: Who will produce these trucks? How will business be allocated? Who will own the trucks? How will the money from the truck owners flow to the rest of the economy? What if all the truckers belong to a single region? or two institutions? or three families? or four Chief Ministers?
The longer-term success of CPEC will require employment, profits, business deals and government revenue. According to Dr. Shaikh the most touted period of high income growth in Pakistan in the 1960s was accompanied by income disparities with grave consequences both for the government and the country.
The loans taken for CPEC projects will have to be repaid; principal and interest. The interest rate charged by China varies by the type of project. For some loans specific to Gwadar Port and city, the rate is zero. For many infrastructure loans, the rate is between 1.4 and 2.4 %. For power projects on more commercial terms the rates are 5 to 6 %. Assuming that US$100 billion have to be returned as principal and interest over the next 20 years, an allocation of about US$4 to 5 billion per year would be required. These borrowings will add to the external debt of Pakistan and potentially weigh heavily on the macro economy.
An isolated Pakistan economy with chronic underperformance of exports will not attract FDI. Thus it is critical that the project design, procurement and execution are first rate and combined with prudent government debt management to allow repayment of these loans.
Dr. Shaikh agrees that not everyone is thrilled with CPEC. A little more than a year ago the newly appointed Head of The Institute of Business Administration (IBA) called it a "figment of imagination". Some countries would like to subvert CPEC for their national, regional or global aspirations. Domestic opponents are motivated by politics, ideology, grievances or money. Some citizens have fair concerns on the cost of loans, on equitable sharing of benefits or excessive reliance on a single country.
Pakistan is a country of jalsas and dharnas, of opinions freely expressed in papers and on TV. There is room for misunderstanding to be created between China and Pakistan. Chinese concerns are related to security. High quality dialogue and consultation, awareness of local constrains and opponent’s tactics, and pre-emptive steps and safeguards are required for preservation and enhancement of the harmonious Sino-Pak relationship.
In spite of China’s phenomenal performance, says Dr. Shaikh, our proximity to it and the enormous goodwill and the obvious desire of the Chinese leadership, we have not fully benefitted from the rise of China. We should not just be looking for capital from China but also learning from its experience, and those of the other achievers.
There are 13 countries that have experienced growth rates of over seven per cent for 25 years in the post-War period. What lessons can we draw from these success stories?
Five common features – points of resemblance – stand out. These countries have fully exploited the world economy; maintained macroeconomic stability; mustered high rates of savings and investment; let markets allocate resources; and had committed and capable governments.
CPEC benefits can be exaggerated by the partisans and dismissed by the skeptics. Will CPEC be a transaction or a platform for transformation, Dr Abdul Hafeez Shaikh asks. The choice will be ours, and ours alone.
(This is the second and concluding part of extracts taken from Dr. Abdul Hafeez Shaikh's talk at a panel discussion over dinner at the Schatzalp Restaurant on Tuesday Jan 21, 2020 at Davos. The writer is a defense and security analyst).