So I have been reading through some literature regarding CPEC and this is what I found how Pakistan is getting itself into a circular debt cycle. which I hope will not turn into a spiral dept trajectory. also interestingly I found Pakistani negotiators missing on obvious points like they did on the FTA with China that resulted in decimation of local Pakistani Manufacturing as it could not compete with prices of Chinese products.
So Here are my observations.
1. It doesn't fit the definition of an Economic corridor. An economic corridor [sic] “connects hubs or nodes of economic activity along a defined geography” (Asian Development Bank). Hence, an empty road through a barren landscape connecting strategically important point A with strategically important point B 3,000 kilometers away does not fit the description. To be truly an economic corridor, the envisaged roads will need to connect demand (markets) with supply (production centers and clusters). The markets as well as production centers can be per-existing ones, or new ones that will spring up as the ‘network effects’ of the economic corridor take root.
The Question is will the proposed China-Pakistan Economic Corridor will truly be an ‘economic’ corridor, or will it be a string of strategically important roads and a bunch of power projects. The Power projects are almost equal to the domestic demand that will be there when its implementation is over. When envisioning the future it is always a thumb rule to have surplus installed capacity. Further there are no domestic Power plant equipment manufactures in Pakistan that make Steam generators and Turbines (500 MW+ capacity). (Would be great if you guys could get some JVs with the Chinese, but alas)
Given the timeline for completion, these power projects could possibly add reasonable generation capacity to the Pakistan national grid by 2017-18, but they would hardly provide any relief in terms of the fast-growing demand for electricity. And there is no silver lining for consumers as far as the cost of the electricity is concerned.
2. It won't create local employment and capacity building. Chinese documents have already stated that the projects would cost more than a similar project in China because of the increased cost of bringing Chinese labour to Pakistan. Means all the wages and machinery deployment costs will flow back to Chinese pockets. The same way they have been doing it in Africa.
3. The corridor's main purpose is to grant Chinese access to the Gulf as an alternative to the vulnerable sea route in the South China sea. Rest is all add on. No worthwhile investment can come in the Balochistan KP stretch. Punjab and Sindh may imagine an export based strategy
but can anyone produce cheaper than China? Further, export led growth is dicey in a world where major economies are in the doldrums [Eurozone, USA and even China is becoming sluggish].
4. The Karakorum Highway Route is Seismically active, snow laden for a little less than 6 months, and is very very very far away from China's consumption centers which lie in the far east. Its way cheaper to import via Ships to those areas, as for its energy requirements, China has gas pipeline links with central Asia, is making a super massive one from Russia. It is not going to be as dependent on gulf oil in the near future.
So if the Chinese have any sense of economics and cost vs risk analysis, they will only keep this route as a fire escape. Highly expensive and risk laden.
Pic 1 China population centers. :
Pic 2 China-Central Asia Oil&Gas Pipelines
5. So how is proposed "investment" planned. it could have been made sweeter by allowing Pakistan to trade in rupees and then arrange fro currency swaps that would help in Pakistan in increasing its Forex and increase trade footprint at the same time. Whereby Pakistan gets to pay in rupees rather than in US dollars or renminbi.
Interestingly it has already been agreed that payments will be in US Dollars.
6. The idea of becoming a 'trading' hub already has a competitor, its Dubai that allows trans shipments to all countries and is already established a business hub. For Gwader to become a competitor it will have to provide services at par with Dubai and better it, from day one. good luck. In view of the economic landscape cities have become prosperous like Singapore and Dubai is their location on sea trading routes which they have cultivated over decades. In view of the Iran Deal, West will get trading access to Central Asia Via Bandar Abbas and other Iranian ports (Chahbahar is not even in question here) by circumventing the instability, and insurgency of Afghanistan which they might go to... at a later date if the dust settle downs there. All possible from Iran.
No country has become prosperous by converting itself into a big toll booth. good luck.
7. China is making investments on which Pakistan has given
sovereign guarantee of 18% return, meaning on investment of Rs 100 Pakistan will pay them back Rs 118 (that's in Compounded interest). In some cases its about 27.2 %.
Example :-
Sinosure is charging a fee of 7pc for debt servicing, which will be added to the capital cost of a project. For instance, the capital cost of a 660MW project at Port Qasim is $767.9m. But it goes up to $956.1m by adding Sinosure’s fee of $63.9m, its financing fee and charges of $21m, and interest during construction of $72.8m; a 27.2pc return on equity is guaranteed. Ironically, interest during construction is allowed at the rate of 33.33pc for the first year; 33.33pc for the second; 13.33pc for the third; and 20pc for the fourth year.
How exactly this helps Pakistan? Beside the projects will be run on turnkey basis by Chinese companies who will employ Chinese manpower to accomplish it. Pakistan on the other hand will have to provide the Chinese security at its own cost. And all this is promised on whether the investments will materialize in the first place.
I think Pakistan is better off running these projects by itself only then it will derive the benefit of the investments. If China can not provide aid money then it should provide loan, let Pakistan execute these projects. Also the interest should not be 18% it should be 5%. Apparently domestic lending rates in Pakistan is Cheaper than that of being given to that to China, If the government gave this incentive to local banks and businesses the benefit would have been much greater.
In the end with 2016 of the repayment of International loans coming up. and with these debts to pay back Pakistan's coffers don't give much of a confidence.
