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Most of foreign investment came to Pakistan through CPEC

ISLAMABAD: Interior Minister Ahsan Iqbal said on Friday that most of the foreign investment came to Pakistan through the China-Pakistan Economic Corridor (CPEC).

Talking to a delegation of students in Islamabad on Friday, Interior minister said connectivity through this mega project would enhance trade opportunities for Pakistan with 70 per cent of the international maritime trade via Pakistan’s two big ports of Karachi and the new Chinese built port of Gwadar, Radio Pakistan reported.

Minister said Pakistan will soon become the choice destination for foreign investment.

The Minister said that an international journal has recently included Pakistan in five rising economies of the world.

He said despite attempts to impede the economic growth, the PML-N government still succeeded in achieving highest growth of last ten years.

He said the Stock Exchange index also reached all-time high to historic 53000 points during the incumbent ruling and the trend needed to be maintained with further political stability in the country.

He said with projects of Energy and infrastructure new vistas of development will open.

“The World Bank (WB) has lauded Pakistan for improved economic condition”, he added provided political stability should prevail in the country for improved economy.

Source: Business Recorder, 20th Oct 2015.

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CPEC: The initiative for economic prosperity ,opportunities and Institutions

The China –Pakistan Economic Corridor is an economic cooperation between the world’s two steadier friends. This economic corridor is considered to be the game changer for both of the countries for their economy as well as political stability which will impetus to strengthen the institutions of Pakistan and China. Initially, this project was incepted worth $46.5 billion and later it was valued to $51.5 billion. A mammoth of the projects of highways , transport and energy are being built under the aegis of CPEC. Aside from the controversies over this astounding corridor, the CPEC  is basically a shared venture of development between the two friend countries and it hopes to move the Pakistan’s and as well China’s growth equally to the heights of wondrous.After its completion, the CPEC will prove a geopolitical game-changer for the reason that it will bestow China with an alternative way to South China Sea and Strait of Malacca to reduce the cost of shipping of oil, gas and goods for china.In a day , China spends approximately $18 million on its imports of 6.2 million barrels of oil as shipment cost from the destined region-the Middle East, accounting for 80% of its oil needs rooting through the Malacca Street covering the distance of 9,912 miles. But through the Gwadar Port build under the umbrella of CPEC, the mentioned cost will be significantly reduced to one-third of the current level of cost .because the distance through Kashgar -Gwadar  is 3,626 miles. The reduction in 6,000 miles will save almost $6 million every day and $2billion per annum.Likewise Pakistan is going to be benefited from the CPEC from its projects of transport and energy .The 21 agreements on energy including gas, coal and solar energy  the 14  projects will  provide up to 10,400 megawatts of energy by March 2018. These projects would provide up to 16,400 MW of energy altogether, which can reduce much game of energy demand and supply of the country. The current energy demand –supply gap is 15000 MW .The energy production through CPEC will cause once again the Pakistan’s production industry to flourish and uplift the economy towards its booming path. Besides the energy sector CPEC seems to be  employment creator and will pave the way for business and skill enhancement for labors in Pakistan.The jobs that will be of two types, the direct jobs, like a construction worker making the road, to secondary or side jobs, like a restaurant owner on the road, this will have a direct impact on Pakistan’s economy and politics. One must understand that making an investment of $51.5 billion is not a free gift, but an effective buying of power.

Looking at the impact on the economy on the CPEC corridor, it is clear that Pakistan will mostly be a transit point for this CPEC project. This project would be saving thousands of kilometers of transit between China and other countries. The increasing interest of US, Russia and other countries itself shows the worth and value of CPEC. Many of the big business firms and portfolio owners have been in negotiations to invest in the China –Pakistan Economic Corridor. This project has a direct impact on the country’s portfolio investment. Previously, due to severe security threats, the outside country firms were not interested in having business ties with Pakistani government and firms, but this project has changed the mindset of international firms about the security conditions of the country. Engagement of International business firms with the local firms and with the government will promote track 2 diplomacy. This will ultimately strengthen the bilateral economic, political and cultural relations with the connected states through CPEC. It is the inevitable fact that the economic cooperation and financial investments have never been free. CPEC, undoubtedly, is a loan rather than the perfect investment. Pakistan has to repay two percent interest rate annually to the lenders of the loan. Historically Pakistan’s economy mostly relies on the foreign aids and loans but there is a technical difference between the loan taken from China and from other countries AS China invests directly in the projects under the armpit of CPEC to reduce the probability of corruption and free-riding by the stakeholders of our country. CPEC is much-hoped by the people for their prosperity and country’s economic boom.Pakistan is standing o n the beach of economic revival. The leadership is required to steer seriously the country through the path of development. It is the responsibility of the officials to ensure that worker’s rights are protected, environmental and social externalities accounted for and the affected parties duly compensated for damages. First and foremost, the government should priorities investment in its own people and empower them through access to education, employment and equal opportunities to become active participants in the economy. Vocational training and Chinese language training will equip people with the basic skills required to establish businesses, participate in infrastructure development projects and use the CPEC to their own advantage and worth. An overarching policy framework is urgently required to manage the progress of CPEC and ensure that the benefits of the CPEC trickle down to the masses and uplift the entire country as opposed to enriching a select few. Consequently, an economic revival could reduce socio-economic inequities among ordinary citizens, create a more level playing field for all the provinces. It is high time for the policy –makers of our country to keep managing CPEC projects with their wit and words to ensure the desired success of the CPEC for poverty reduction and an increase in the trade and diplomatic relations with another world. Institutions of our country are at the point of convergence to perform accordingly to make the CPEC successful.The Business houses in Pakistan need to enter into joint ventures with Chinese and other foreign entrepreneurs not after the roads are constructed, but long before that. Businesses compete for opportunities to succeed ahead of the opportunity becomes too obvious. In this competition, they need to win supply contracts for the construction material and the technical assistance they can offer for the initiation of work on CPEC projects. The concerned institutions – the Board of Investment (BoI), Federal Board of Revenue (FBR), ministries of commerce and industries, Planning Commission and Ministry of Finance should get themselves coordinated to put efforts for the purpose of institutional thew to make future Pakistan a very sustainable both by its economy and by its institutions by availing this great and heightened opportunity of CPEC.

Source: Pakistan Observer.

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CPEC fears and my response

Humble Reply to Shahjahan Chaudhary on his piece regarding CPEC Fears.

Game Changer

1. 91% of the income from Gwadar Port goes to the Chinese and 9% to Pakistan.

Reply: First of all, the contract was signed with the Port of Singapore Authority in 2007. The same contract was transferred to the Chinese. Secondly, can you kindly point out what’s wrong with this model especially when all the liabilities and investments lie at their end? We don’t up with any loans on Pakistan’s balance sheet.

Let me remind you, in past 7 decades, not only our government has failed to develop the port but also ignored the importance of its geostrategic location; and currently, our country doesn’t have the resources to develop it even if they want to for next 3 decades or so. Every Pakistani still gets to use the port and enjoy the benefits from its development. The port is a window to the economic activity it will generate in the country through becoming a safe transit route for China.

2. Chinese companies get preferential treatment and tax exemptions (making it impossible for local companies to compete and opens the Pakistani market for a commercial invasion)

Reply: The statement is completely misleading. Only CPEC projects get tax exemptions, mainly in the power sector, because we are in dire need to mitigate the losses due to the energy crisis in Pakistan. Moreover, tax exemption also drives down the cost of building these strategic projects, which results in lower tariffs and repayments.

(Impossible is a strong word. Construction companies in Pakistan are working at their full capacity, turning down projects due to output issues. Commercial Invasion? I think mentioning special economic zones would be more relevant since the argument of building infrastructure has no correlation with the commercial viability of businesses.)

3. Money for the road network comes from Pakistan (so we’re paying for the roads China will use to export stuff to us and the world)

Ans: Let me break the statement into 2 parts:

1) The Road; 2) The Money

1) The Road: The roads built under CPEC will be the property of National Highway Authority and will generate revenue through the toll tax. Moreover, as a Pakistani, will you want strategic roads in the country to be the property of a foreign country?

2) The Money: These projects are being built on Engineering-Procurement-Construction+Finance (EPC+F) Model. Finance comes from China and our government takes it as a concessionary loan. Same as ADB model. But the difference is that Chinese companies are mandated to complete these grand projects within 24-36 months. There needs to be open bidding for these projects, but then again, it will push the timeline of the CPEC to 30 years instead of 15 years.

4. Of the original $50b, over $30b was loans to build power plants for which we’ll pay a) interest to Chinese banks b) exorbitant profits to Chinese companies who will build and supply to these plants c) guaranteed profits to the Chinese companies that will operate and own these plants d) backed by sovereign guarantee

Ans: This figure is completely incorrect. All the power projects under CPEC are BOOT (Build-Operate-Own-Transfer) basis which means that investment, loans, and liabilities are all the investor problems. Our problem is to pay for the electricity they produce. No loan has been acquired so far by the government of Pakistan for energy projects.

a) We have nothing to do with the interest rates.

b) Getting a payback for what you invested is a very fair request so don’t know what’s wrong with it?

c) Guaranteed profits because we have PKR 800 billion in circular debt? Why would anyone even want to invest? Would you?

d) Same as above.

5. We’re making commitments to buy electricity at over 8 cents from coal-based plants and India is buying solar electricity at 4 cents (solar price is crashing every year). This will make our manufacturing uncompetitive for the next 15 years or longer.

Ans: We have a flaw in this argument. First, we are comparing apples to oranges. The feed-in tariff for coal power plants is around PKR 8/Kwhr in India as well. Although it’s a lengthy discussion,

Why can’t we opt for Solar? That’s because of the energy mix. India produces 59% of electricity from Coal while Pakistan, prior to CPEC, only 2%. Then, another issue: Solar produces well in the afternoon but doesn’t at night. You need to be over-dependent on reliable energy outputs in order to shift to renewable. I won’t get involved in grid problems but that’s one of the issues as well why Pakistan cannot opt for aggressive solar issues. On the price front, the tariff for solar in Pakistan dropped by more than 60% in past 4 years; in fact, it’s the projects are awarded through open bidding.

Apart from that, cost of producing electricity on generators ranges from PKR 70-90/Kwhr.

6. Meanwhile, the government falsely thinks tax revenue growth is economic growth. Excessive taxation is crushing the local industry and businesses and the government claims a “victory” every time it borrows more money

Ans: That’s a governance and leadership problem, not a CPEC one. If you want to bash the government, you will find me as one of the front-runners.

7. The Chinese are rational profit-minded businessmen…they have zero incentive to think about our future prosperity. Would they rather bolster our economy or own us?

Ans: Too descriptive in nature. But let’s say, we have strategic interests aligned to an extent that they are willing to risk phenomenal amount of money in a country which is not very famous in the international arena. Owning us? I don’t think that would be possible. Bolster our economy? Why not, if it is in great benefit of China?

Shahjahan Chaudhary: So why is the CPEC “game changer” being sold to us with such force? As a state, we are feeling threatened by multiple regional and global forces. The Chinese investment is an insurance policy.

Ans: Isn’t an insurance policy a core agenda from the inception of our existence? We are exhausting 70% budget on the military after the debt is serviced. Why would we not want an insurance policy? Combine that with economic uplift and we land on the term “Game-Changer”

I personally think it’s a game-changer. We are bound by our own fears and fail to realize the scale of what’s coming.

Shahjahan Chaudhary: We’re giving them what they want (profits), in return for what we want (security and survival).

Ans: The problem is that we can’t give them profits. They are betting on us that we can. There is a difference.

Shahjahan Chaudhary:

What’s the problem?

That the “game changer” is a mirage. Let’s be honest about CPEC. It won’t bring us prosperity. It’s a debt trap we’re willing to get into because we’re desperate. Once we see it for what it is, we’ll know what to do: tighten our belts, work hard, train our people and export more.

Ans: I would rather rephrase this: The CPEC is a game-changer, an opportunity for everyone. If we sit at home and expect China to knock at our doors, that won’t happen. What will happen is that the opportunities in Pakistan would become more and more difficult to come by as the markets become more competitive in future. So let’s focus on how to engage with the opportunities emerging from CPEC right now and position ourselves to live the CPEC dream.

Personal Note: I am not happy with the government performance as well but that doesn’t make the CPEC evil in nature. Let’s not run away from our problems and blame China for it. Let’s talk about circular debt, youth platforms, private-public linkages, education, technical training, awareness, research, Gwadar facility centres etc.

Yours truly,

Hamza Orakzai

The writer is the former Head of Operation, Pakistan-China Institute; Australian Awards Fellow 2017 at Australia National University; currently serving as the Chief Executive Officer of Obortunity.

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