Over the past year, many Pakistani, Indian, Chinese and Western experts have given their perspectives on the China-Pakistan Economic Corridor. It is a game changer for some and a strategic concern for others.

I have tried to analyze CPEC by removing all jingoistic and over the top claims from both sides of the border. I will try to minimize repetition, instead take a slightly different perspective and use an Indian example to put my point through. I have also tried to use Pakistani media and government sources to avoid appearing biased.

Positives:

CPEC is a significant investment into a country which urgently needs foreign investments in Energy (Due to consistent power cuts) & infrastructure development. Already China accounts almost half of the total FDI of $1.2 billion for the year 2015–16 and this is bound to increase. Foreign Investment is a far better way to develop the economy than depending on IMF loans.

All details of projects have already been mentioned below. For the Chinese, this new route through gives them overland access to the Persian Gulf through an allied country. Not only will it reduce costs but also act as a security bulwark for oil supplies to the Red Dragon of future conflicts. For Pakistan, this is a major win as it badly needs to develop its infrastructure. The project plan seems to be ambitious and good for Pakistan’s overall economic development. With increasing security concerns being raised by western nations and its neighbors, this surely comes as a boon.in-case

Negatives :

This is how the CPEC looks like as per the Planning commission of Pakistan

Eastern Route – There is a lot of internal political opposition as most of the projects seem to be concentrated in the Punjab province. I think eventually there will be some consensus on this. But, there will be delays. Most of the expansion work is actually happening on Karachi port rather than Gwadar.

The Western Road Way through Balochistan – The western route goes through the treacherous terrains of Balochistan. Apart from the issue of terrorism, the road connecting it to Gwadar has already been converted into single lane rather than the earlier planned six-lane highway.

Over Dependence on China – As per the Prime minister’s office, FDI in Pakistan has been declining over the last decade. China is expected to replace all other investors single-handedly. This combined with reports of Chinese companies planning to bring their own labor has caused some unease among Pakistani economists and planners.

The Energy Projects:

Most of the power projects under CPEC are going to be coal based power plants(investments worth $5.8 billion) which includes a1320 MW power plant in the Thar-I phase project. There is going to be another 1320 MW power plant under Port Qasim Power Project in Sindh . Also, CPEC includes $2.5 billion of investments in liquid natural gas pipeline from Gwadar to Nawabshah. The Quaid-e-Azam Solar Park is up and running, with expansion plans to 1000MW. This is the only solar power project and it has started generating power. Apart from this 100MW of energy is expected to be generated through wind energy.

This is expected to reduce the 5hrs power shortfall that Pakistani cities are facing today.

However, there is very little detail available on the specifics of these projects. Primarily, these were signed as bilateral agreements between Pakistan & China. The bidding process will be limited to Chinese Companies. This is also the first time that Pakistan is going to intake so much foreign capital in a short duration. The projects are funded through loans from China’s Exim Bank.

I tried to find out if India had any similar experiences with sudden large-scale foreign investments in Energy projects. And I came up with the (in-) famous Dabhol Power plant.

Case – Dabhol Power Plant (India):

It was the year 1992 when India had recently come out of a Balance of Payment crisis and was opening its economy through Structured Adjustment Plan under the guidance of IMF. Pakistan today is in a similar situation…only it has become much worse after multiple bailouts.

Dabhol is a place near Mumbai. The now infamously defunct Enron, GE and Bechtel (All US based companies) wanted to invest in India and decided to construct a power plant. The plant was to be Naptha & LNG based. From the beginning, the project was mired in controversy due to lack of transparency in the power purchase agreement. There were many allegations of corruption too. In 2000, when the plant started, the State electricity board ended up paying a per-unit rate of Rs. 4.67 when it was charging Rs.1.89 per unit to its customer. That’s a loss of Rs. 2.78/unit of electricity sold…for a 2000 MW plant, which was one of the largest power plants in the country at that time.

Over time Enron collapsed and the plant continued to be in shambles, still producing electricity and accumulating debt. The investment was not backed by any sovereign guarantees, but state-owned power companies had to take over. To this day, the plant is operating at a loss and accumulated thousand of crores in debt. The Indian government is still planning to revive the plant.

This case should have been the baseline for Pakistani Economic planners. Most of the power plants are going to coal based. The issue is not just environmental, it’s also economic. Although Pakistan has untapped coal reserves in the Thar desert, it might still have to import coal – Adding to the debt cycle. On the other hand, China is planning to reduce its dependence on coal to control pollution in its cities.

And more importantly, there is a lack of transparency in the power purchase agreement. Pakistan seems to have given sovereign guarantees on Chinese investments. So, even when the plants fail or produce unaffordable electricity, Pakistani Government will be ultimately responsible to pay the expected profits to Chinese companies through a contractual obligation. Until Pakistan is sure that they can make the plants profitable, this is an extremely dicey move.

Somehow, this issue has not received much attention in Pakistan (and even in India or the world) and the discussion has been dominated by issues in Balochistan, Pakistani opposition parties & Indian opposition. For China, this is a crucial part of One Belt One Road (OBOR) initiative. There is no doubt that Chinese companies are more than capable of executing big-ticket infrastructure projects overseas. Already, there has been concerns on the financial viability of some such projects – like the Srilankan Hambantota Port which has led to protests in the island. Hoping that this scenario is given due importance before Pakistan is unable to go back on its commitments.

Ravi Singh

Author: Ravi Singh

I am an MBA grad working as a Consultant in an IT firm. You will always find me with a book or a Kindle in my hand during my spare time. Topics of interest: Tech news, Foreign Policy & Economics. Wannabe Entrepreneur!!