Vyom's Musings : The Illusion of CPEC Prosperity - The Debt Trap

[Rasengan]

Even that claim is questionable. As I said earlier, there has been enough discussions on this here on PDF. And the member's name that I've stated, made some very valuable and informed contributions.

As for Thar Lignite, is a Brown Coal of very low thermal coefficient, it remains to be seen how efficacious it is in its use.

You are talking about Mr. Niaz? He does have fantastic knowledge on the subject and is well informed. However, the reality is no proper feasibility study has been conducted across the whole of Pakistan. I did specify in my previous message that this was my opinion on the assumption that Pakistan has enough reserves just to meet its own domestic needs. Whether this option is viable all depends on the incentive and policies the government provides for local companies to extract these resources. The strong lobby in Pakistan is preventing this from occuring. As for the Thar coal project, it seems to be successful because a pilot project of 50 MW was completed.

 

[Vyom]

500 INR me bullet ka tank full
bhai lagta hai kissi moti party ka driver set ker rakhaa hai apne

na bhai paisa toh puchta bhi nahi hoon card pe payment. dard kafi hota hai... bas tank full

First off, thank you for this detailed and meaningful analysis. It is always good to read constructive criticism about such a major project when 99% of the news and analyses declare it THE silver bullet for all our problems. However, I have a few comments of my own here and would like to read your response.



This is not just a road project. Both governments have planned and launched export processing zones along this route. There are some industrial parts (apparel parks, electronics city etc) which are in advanced stages. There is also a dedicated free zone for Chinese companies in Gawadar (land was allocated for it last week).

I agree that the power projects included in the early harvest program are for current demand only. These projects, about 10,600MW in total, are supposed to start providing energy before the next elections in 2018. There are other projects as well in the pipeline. Besides no one said that more projects can't be started once this planned economic boom starts.



Chinese companies do employ a lot of their local resources, as I believe this is Chinese government's official policy to kick start infrastructure projects in developing countries with soft loans and then drive this money back home by employing Chinese companies and Chinese manpower. But remember, Pakistan doesn't have anyother alternatives right now. A power plant company that employs 50% Chinese manpower is better than a power plant which doesn't exist at all! So I believe its a net positive sum for Pakistan. Plus foreign expertise is always welcome.



Actually yes. A few countries have started producing cheaper stuff than China as China moves up the industrial ladder. Take that news of Foxcon opening assembly plants in India for example. Wages are increasing in coastal China and I believe CPEC like projects will serve to protect Chinese investments in low skill industries like textiles etc by moving them to cheaper locations like Pakistan.



Agreed. But CPEC has far more strategic value than purely economic one i.e. bypassing the Straits of Malacca. So I guess that's their rationale.



Pakistan already has currency swap agreement in place with China. These projects are contracted in USD because of our current economic situation I guess. Your views on it?



I think this idea that Gawadar can rival Dubai anytime before 20~30 years is ludicrous. It will take time but of course there is potential. Pakistan has an edge over UAE everywhere (bigger market, bigger human resources) except for the monies right now. And CPEC aims to address this, albeit slowly.



Given our economic and security situation, I guess Pak would have taken anything. Like I mentioned above, its better than nothing. But I do agree that this whole project can be a massive death trap if its not managed properly. Right now, however every thing seems to be going as planned.

Wonderful reply, Thank you.

just keep an eye open for the Chinese, no matter how much friends they are they are very calculative to the last penny. I have been astounded at their exploitation of African resources. Avoid the debt trap, Pakistan's financial maneuvering will be tested, your IMF loans dont make it any easier. Good luck.

 

[Capt.Popeye]

You are talking about Mr. Niaz? He does have fantastic knowledge on the subject and is well informed. However, the reality is no proper feasibility study has been conducted across the whole of Pakistan. I did specify in my previous message that this was my opinion on the assumption that Pakistan has enough reserves just to meet its own domestic needs. Whether this option is viable all depends on the incentive and policies the government provides for local companies to extract these resources. The strong lobby in Pakistan is preventing this from occuring. As for the Thar coal project, it seems to be successful because a pilot project of 50 MW was completed.

Is'nt it mind-boggling that no proper feasibility study has been done on something that is being touted as a reserve of resources ?

Does an 'assumption' qualify to form the basis of some judgements?

About the Thar Lignite based pilot project; can you provide any data on the operating efficiency ratio or the Cost/benefit ratios, among other operating parameters?

It makes no point to talk in the air.

 

[Spectre]

Is'nt it mind-boggling that no proper feasibility study has been done on something that is being touted as a reserve of resources ?

Does an 'assumption' qualify to form the basis of some judgements?

About the Thar Lignite based pilot project; can you provide any data on the operating efficiency ratio or the Cost/benefit ratios, among other operating parameters?

It makes no point to talk in the air.

Most important thing is the GCV (gross calorific value) of coal; India sorely lacks in this dept. prompting imports.

I would be pretty interested in knowing the quantum of reserves along with quality - Don't think Pakistan would have too much to spare as it would need it for their thermal plants.

 

[coffee_cup]

...
I need to know about the Chinese investment model, and your Economy. and I am good with numbers. not self pleasuring but an observation free to let go... I am not keeping you on gunpoint to understand, try economics lessons in college nearby.

Sure you are. Therefore you should use this knowledge to anaylsis Indias grave problems such as towering poverty levels, highest number of suicides committed by farmers anywhere in the world, increasingly extremist society where mass murderers are being elected PMs and most of the hindu extremists, despite committing terrible terrorist act, getting away with slaps on their wrists.

Yeah, you should concentrate on insurgencies running in more than 20 states of India and analyse the solutions.


Funny thing, the thread about Pakistan being opened by dulusional Indians majority of the posters on the thread are also indians... suddenly showing their "expertise" about our country,

Oh man these Indians,

Leave Pakistani alone. This obsession with Pakistan is taking your country no where!

 

[sathya]

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.

@GURU DUTT @Bang Galore @SpArK @Srinivas @Chanakya's_Chant

That's one big business analysis

Bro you are a born businessman!

 

[Capt.Popeye]

Most important thing is the GCV (gross calorific value) of coal; India sorely lacks in this dept. prompting imports.

I would be pretty interested in knowing the quantum of reserves along with quality - Don't think Pakistan would have too much to spare as it would need it for their thermal plants.

I was speaking specifically about Lignite which is what Thar Coal is.

India is a different matter, there is both Steaming Coal and Lignite in India. Most of the Coal is Steaming Coal which can be used in Thermal Power Plants, however it has an high Ash Content, which is more of a management issue. India imports Coking Coal which is used mainly in the Metallurgy Industry and much less so for Power Plants.

India has substantial Lignite too, in the Neyveli Area on the TN/AP border. This Brown Coal with far less GCV. it needs to be processed before it can be used. The PPs which run on this are much lower in efficiency and higher in operating costs.

 

[Spectre]

I was speaking specifically about Lignite which is what Thar Coal is.

India is a different matter, there is both Steaming Coal and Lignite in India. Most of the Coal is Steaming Coal which can be used in Thermal Power Plants, however it has an high Ash Content, which is more of a management issue. India imports Coking Coal which is used mainly in the Metallurgy Industry and much less so for Power Plants.

India has substantial Lignite too, in the Neyveli Area on the TN/AP border. This Brown Coal with far less GCV. it needs to be processed before it can be used. The PPs which run on this are much lower in efficiency and higher in operating costs.

I agree, Lignite coal is essentially the lower grade and produces huge stress on equipment in addition to environmental concerns. The coal needed is thermal coal or steam coal which is a grade between Bituminous and Anthracite.

India is the third largest producer of steam coal but ash content is high which is not desirable so India lately has shown a huge increase in import of coal for power plants, refer acquisition of coal mines in Indonesia by Tata Power for UMPP and interest of Adani and Essar in Australia. In addition the PSUs are too looking at acquisitions.

Coal Facts | WCA | World Coal Association

India infact ironically is the third largest coal importer too with increasingly higher share going towards Power Plants. Total coal imports are projected at 200 million tonnes.

India's coal imports to jump 19 percent to 200 million tonnes in 2014/15| Reuters

 

[RazorMC]

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.

@GURU DUTT @Bang Galore @SpArK @Srinivas @Chanakya's_Chant

Not sure if you're an alt (no offense) but the post was refreshingly well-written with valid arguments.
Thanks given btw.

 

[Capt.Popeye]

I agree, Lignite coal is essentially the lower grade and produces huge stress on equipment in addition to environmental concerns. The coal needed is thermal coal or steam coal which is a grade between Bituminous and Anthracite.

India is the third largest producer of steam coal but ash content is high which is not desirable so India lately has shown a huge increase in import of coal for power plants, refer acquisition of coal mines in Indonesia by Tata Power for UMPP and interest of Adani and Essar in Australia. In addition the PSUs are too looking at acquisitions.

Coal Facts | WCA | World Coal Association

India infact ironically is the third largest coal importer too with increasingly higher share going towards Power Plants. Total coal imports are projected at 200 million tonnes.

India's coal imports to jump 19 percent to 200 million tonnes in 2014/15| Reuters

That is precisely what I said in the earlier post. The problem is more related to fly-ash related issues and less to GCV issues.

 

[Spectre]

That is precisely what I said in the earlier post. The problem is more related to fly-ash related issues and less to GCV issues.

Sorry Sir, but that is incorrect. Low GCV of Indian coal is an issue too though they can be used in our power plants (case of beggars not being choosers) but efficiency per pound is very less. If you apply international benchmarks - Indian coal is characterised by low GCV and High Fly ash. Higher the GCV better the output of thermal plants. in most simplistic terms that is why high GCV is desired and is of high cost.

India Coal has GCV in ranges of 3900 Talchar of Orissa to 4300 of Raniganj compared to GCV of around 6500 of Australian coal and 7500 of American coal (Illinois). Conclusion taken from below study.

http://nopr.niscair.res.in/bitstream/123456789/17587/1/JSIR 63(2) 156-162.pdf

Gross calorific value to define coal pricing | Business Standard News

 

[Echo_419]

Petrol 74 PKR hai

I dont remeber exactly because mein tou 2 din bad 1000 ka dalwata hun

Same mein 3-4 din badh 1000 ka dalvata hu

 

[Bouncer]

Wonderful reply, Thank you.

just keep an eye open for the Chinese, no matter how much friends they are they are very calculative to the last penny. I have been astounded at their exploitation of African resources. Avoid the debt trap, Pakistan's financial maneuvering will be tested, your IMF loans dont make it any easier. Good luck.

Thank you. I absolutely believe that the success of this project hinges on how it is managed. The Chinese are very smart with their money, but I believe that fortunately for Pakistan, we engaged them at a very good time because of a number of reasons;

1. President Xi's political legacy depends on this new Silk Road project. He and his team are very much invested in this broad project (spanning Central Asia as well). This is a good thing for us.
2. Chinese government is loaded with cash to spend. They are trying to move more towards domestic consumption and a part of this strategy involves offloading this extra cash to keep Chinese companies busy and their manpower employed instead of rioting on the streets.

I believe that these two factors are played an important part in the birth of this project.

You mentioned Africa earlier as well. I have worked in Africa (Southern, Eastern regions) for a few years and I have seen and heard the first hand accounts of this exploitation there. Pakistan is different in a lot of ways. First off, we have democracy and accountability. Though both of these are in nascent stages but the situation is still much much different from countries such Angola. Our media, think tanks and opposition politicians etc have been scrutinizing these projects very closely. Secondly, Pakistan's local industry is much stronger than African countries in general and can absorb these projects. Finally, we are not offering much natural resources in return; we are offering services.

Edit: If you are interested about China's ever growing interest in Africa and its consequences, I suggest this book by French Howard. Its called something like "China's second continent"

 

[Spectre]

Thank you. I absolutely believe that the success of this project hinges on how it is managed. The Chinese are very smart with their money, but I believe that fortunately for Pakistan, we engaged them at a very good time because of a number of reasons;

1. President Xi's political legacy depends on this new Silk Road project. He and his team are very much invested in this broad project (spanning Central Asia as well). This is a good thing for us.
2. Chinese government is loaded with cash to spend. They are trying to move more towards domestic consumption and a part of this strategy involves offloading this extra cash to keep Chinese companies busy and their manpower employed instead of rioting on the streets.

I believe that these two factors are played an important part in the birth of this project.

You mentioned Africa earlier as well. I have worked in Africa (Southern, Eastern regions) for a few years and I have seen and heard the first hand accounts of this exploitation there. Pakistan is different in a lot of ways. First off, we have democracy and accountability. Though both of these are in nascent stages but the situation is still much much different from countries such Angola. Our media, think tanks and opposition politicians etc have been scrutinizing these projects very closely. Secondly, Pakistan's local industry is much stronger than African countries in general and can absorb these projects. Finally, we are not offering much natural resources in return; we are offering services.

The need of the hour for Pakistan if it wants to avoid the debt trap is:

1. Increase Tax base by 30 -40% and revenue collection by 10%- 20% by granting clemency to tax absconders for a limited period with a penalty to be paid.

2. Wrap up actively operations and sterlize effected areas of security threats. Subsequent to that a massive reduction in Defense Spending in the range of 20 - 30% p.a. Possible only in case of peace treaty with India.

3. Lower the cost of finance Conversion of high cost loans from China to lower/zero cost loans from Europe and Japan.

4. Re-negotiate terms of investment with China to reduce the assured guaranteed return to 13% p.a or 8% plus a figure bench-marked to your G.D.P growth that way you make China partner in your growth.

5. Trade Barriers to goods from China and promotion of their domestic industries via trade sops, lower barriers to credit, better connectivity and power supply. Low tax rates for Industry.

6. Tax- Holidays for all export based service industries like IT, Finance, BPO , Legal and Medical Transcription.

This is required urgently - within a period of 2-3 years otherwise my friend it would be too late. Every country in the region is competitor of Pakistan for pie of Global trade. Pakistan has to decide if it wants to continue to be an aids sinkhole or the next China.

Pardon me for my harsh words.

Regards

 

[Shoaib Rathore]

wow an indian more concerned about Pakistan than its own country. thats Amusing!
yes its a economic corridor as it will be used for economic activity
it Will create lots of direct n indirect jobs
we all know why china will be using gawadar
so u advising china to use south china sea route but u just said that is vulnerable
china investing in dollars n will get return also in dollars