Pakistan Begins to Learn Chinese Development Cost

Despite the official narrative in both Beijing and Islamabad, the China-Pakistan Economic Corridor (CPEC) an ambitious US$51 billion plan to expand and upgrade Pakistan’s infrastructure that is an integral part of Beijing’s “one belt-one road” regional master strategy, is failing to yield the expected results.

With China-Pakistan bi-lateral trade tilting heavily to the former’s side and with Chinese companies failing to implement various CPEC projects due to disagreements, for instance, over tariff rates and with the “corridor” not being wide enough to support the expected trade volume, the illusion of success is fading and with it is also failing the grand notion of real development for Pakistan.

For one thing, this failure owes its existence primarily to the nature of the Chinese involvement, not only in Pakistan but in other target countries, where China develops them only to the extent where its own interests can be effectively protected and enhanced.

China’s partner countries hardly figure as prominent players. On the contrary, acute dependency on China appears to be the defining feature, wherein the “partner” countries are woven into alliances to pave the way for the spread of Chinese hegemony. Their own development remains an illusion.

This is evident from the fact that, as Asia Sentinel reported previously, many of China’s overseas projects in these countries are debt-financed and often fundamentally ill-conceived. The target countries are finding they are sold only illusions of development as the projects completed with Chinese co-operation fail in a majority of the cases to yield the expected results.

That is the case with CPEC. While the corridor has already become operational, the first trade activity has exposed how the project stands on extremely shallow foundations.

The ‘narrow’ corridor

Whereas the first trade activity was hailed in Pakistan as the beginning of a new era in regional development, the corridor – the Karakoram Highway connecting the Xinjiang Uyghur Autonomous Region and Pakistan’s Gilgit-Baltistan region, both sides are starting to realize the project is too narrow to support trade from and to China, requiring an alternative route, which would have to be built over almost-impassable mountains. The Karakoram Highway itself is one of the world’s highest-altitude international arteries.

The fact that this realization has come at a time when the corridor has already kicked off trade speaks volumes about how ill-planned the entire project is.

The Special Committee of Senate on China-Pakistan Economic Corridor in its third interim report has raised concern over inadequate width of the corridor to cater to future traffic volume to be generated by the CPEC.

“With the present width of the KKH the increased traffic will move at a snail’s pace and negotiating frequent bends and turns will require high skills on the part of drivers. On the whole, the driving on KKH will be a highly risky and time-consuming undertaking,” the report said, likely to negatively impact the efficiency and the expected outcomes.

While the committee has recommended the construction of a 90 kilometer-long alternative route, this suggestion has not been taken up by the central government let alone start correcting the project’s deficiencies.

The ‘high’ tariff

The corridor has two parts – the “corridor” itself and investment in energy projects. While the corridor has been found to be too narrow to support the expected volume of trade activity, energy projects have too fallen a prey to financial and other difficulties.

Take for instance the case of the Matiari to Lahore power-transmission line. While the line is vital to the overall CPEC vision because it will carry additional power to be generated under numerous other power-generation projects in Sindh, including Tharparkar and Hub in Karachi, to parts of Punjab, the stalemate between Pakistan and China over tariff rates has cast shadows of doubts over its feasibility.

This US$2.1 billion project, if not built, would render redundant the additional electricity to be generated under other projects and would, ultimately, negatively impact the volume of electricity to be channelized to Punjab and other regions.

This is, however, neither the only nor the first such project waiting to be scrapped. Already a power project at Gaddani has been scrapped because of miscalculated cost. Another large coal-fired power plant to be built in Kallar Kahar, in Punjab, has also been scrapped due to similar reasons.

Given these frequent changes, it is becoming clear that foresight and planning were missing from the launch of one of the biggest series of energy-sector investments ever in this country`s history.

This is one reason why calls for greater transparency are growing in Pakistan as one of the primary reasons for the scrapping of projects is the hidden cost.

In the case of the Matiari-Lahore transmission line, the disagreement is over a Chinese demand for a 30 percent higher tariff rate than Pakistan has allowed.

While an attempt on the part of the government to accommodate Chinese demands would be tantamount to putting an extra burden on consumers, it would also create an outcry in Pakistan where shortage of electricity and high tariffs are already a big problem.

Given the hidden costs involved in such projects, many in Pakistan seem to be asking a pertinent question, which is: If the investment coming under CPEC cannot justify itself on financial grounds, then it is worth considering why should we go down this path rather than walk the hard road of power reforms to promote competitiveness instead?

Uneven development

Whereas many energy projects are seriously deficient, the territorial spread of these projects is yet another problem for the Pakistan government.

Whereas the provinces of Punjab and Sind stand out as two main beneficiaries and while Chinese authorities have repeatedly claimed that the economic corridor is not Punjab-centric and that it would benefit all, the above-quoted report of the Senate committee suggests that the case is otherwise.

The report has noted that whereas US$36 billion has been allocated for electricity generation to overcome load-shedding in the country, not a single dollar of the CPEC was earmarked for any power generation project in Gilgit-Baltistan, the region that connects Pakistan to China through the KKH.

“What this case unambiguously shows is that the particular geography of trade and projects being built in Pakistan by China is primarily catering to Chinese interests. National considerations hardly figure in these mega-projects”, says one economist from a federal university based in Islamabad. “This is likely to reinforce rather than mitigate, as is being widely projected by Pakistan, ethnic and regional disparities.”

Slipping into the dragon’s teeth

Even given the capacity problems, the question of how it will benefit Pakistan overall has also become pertinent, given the extent to which it is tilted towards China. In fact, Beijing’s trade relations with most of the countries in the region that it has wooed into its axis are heavily tilted towards China. This is evident from the many meg-projects it has initiated in Pakistan, Sri Lanka, Indonesia and other states.

Pakistan’s trade deficit with its largest trading partner China widened to US$6.223 billion in the fiscal year of 2015-16. There is no improvement in trade in favor of Pakistan with Beijing despite the CPEC. China’s exports to Pakistan increased to US$10.1 billion in 2014-15 from US$3.5 billion in 2006-07.

Given the ever-widening gap, many analysts have expressed concerns that the rising Chinese influence in Pakistan’s economy could be counterproductive and neutralize whatever benefits the government hopes to reap.

The politico-economic scenario thus developing under CPEC is not only fraught with serious deficiencies but is also earmarking Pakistan as yet another China-dependent state. On the one hand, China has saddled Pakistan with a huge amount of loans, dubbed as investment, and on the other its companies are insisting on fixing high tariffs, rendering many projects either unviable or too costly to yield any meaningful results for Pakistan’s consumers.

Pakistan’s willingness, although still unstated officially, to accommodate Chinese demands would create, as one analyst put it, a separate class of foreign investors in the power sector who enjoys privileged access to the sector’s resources, control the production, the tariff and, ultimately, the economy.

“Although Pakistan has ended the IMF program, it is gradually slipping into the dragon’s teeth”, said the same analyst.

Salman Rafi Sheikh is a Pakistan-based academic and regular contributor to Asia Sentinel