Introduction: Need for Feasibility and Forensic Audit of the CPEC Project
Feasibility analysis is a critical component of the preparation stage of a contractual project. It is prudent for any project because it helps to evaluate the potential of the project to deliver on its intended purpose as well as the viability of the project. Approval of any international project is almost entirely dependent on feasibility studies. International projects involve complex macroeconomic and monetary relations between two or more countries. It involves financial interactions between organizations that have the ability and capacity to trade on a cross-border level- international infrastructure projects, non-profit projects, international corporations, governments, and the like. It involves complex dynamics of the international financial system, balance of payments, foreign direct investments, complex logistical & supply chain international systems, regulation, and their effect on international trade. As such, it is prudent for the feasibility and forensic audit of international projects to be conducted, before a nod is made to the execution of the project.
One of the largest, complex, and potentially consequential international projects, in terms of international trade, is the China-Pakistan Economic Corridor (CPEC). It is essentially an amalgamation of several infrastructural projects throughout Pakistan, valued at over $62 billion and almost exclusively funded by the Chinese government. The project was developed and conceptualized by both countries as a form of economic partnership between the two countries. The project is expected to rapidly upgrade Pakistan’s poor infrastructure, thereby strengthening its economy through the development of modern transport networks, energy projects, and special ‘economic zones’ (trade opportunities between Pakistan and China).
The project is only part of the larger Chinese Belt and Road Initiative (BRI), often called the One Belt One Road (OBOR) initiative- a global (and controversial) infrastructure development strategy by the Chinese government in 2013, that essentially involves infrastructure investments and development in more than 70 countries. The project is set to create a new global transport route, mimicking the ancient Chinese Silk Road, connecting Europe and Asia through Africa and the Middle East. It is set to increase Chinese trade influence in the region, as well as expand Chinese trade opportunities, which is the initial purpose of the project.
The CPEC project is unique because unlike the other infrastructure projects in the BRI, its funding is a bit different (concession loans and interest-free rates), making the conditions of the loan funding the favorable to Pakistan, reducing the ‘debt trap’ potential of CPEC, which is a major concern of many critics of the larger BRI project. It is therefore prudent to effectively analyze the project in terms of its financial viability to both countries, economic assessment of the effects of the project to both countries, risk assessment as well as the social and financial assessment of the project. The outcome and verdict of this paper’s assessment should offer a greater understanding of the benefits of the project to both countries and thereby determining whether the project is worth the pursuit.
China-Pakistan Economic Corridor (CPEC)- Background Information on the Infrastructure Projects
CPEC is, essentially, an amalgamation of numerous infrastructure projects throughout Pakistan. Although initially valued at $46 billion when the project was initially conceptualized in 2013, it rapidly rose to $51 billion by the end of 2016 (Kiani, 2016) and was valued at over $62 billion by the end of 2017. The project essentially consists of a vast network of highways and railways running across Pakistan as well as over $33 billion worth of energy infrastructure. The project is considered one of the most critical elements of the larger BRI because only a fifth of the project funding (20%) is funded on-loan basis and is set to contribute to around 2.5% growth of Pakistan’s annual GDP for 15 years (2015 to 2030) (Shah, 2016). Through CPEC, China also aims at strategically investing numerous energy projects throughout Pakistan, to meet a growing energy need in the country as well as special economic zones set to exclusively benefit China and Pakistan.
The primary objective of CPEC is to link the ports of Karachi and Gadwar (in Pakistan) with China and Central Asia through North Pakistan (Shah, 2016). The project includes over 1,100 kilometers of urban highways to be constructed between Karachi and Lahore. The project also consists of the Karakoram Highways, a stretch of modern highways that stretches to the China-Pakistan border from Hasan Abdal (Salman, 2016). The China-Pakistan Economic Corridor also involves the upgrading of several railway lines in Pakistan, more so the Karachi-Peshwar railway. Upgrading is intended to modernize the country’s railway network, making transport via trains traveling at speeds of up to 120 kilometers per hour possible, for the first time in Pakistan. The improved railway network is also intended to be lengthened to connect Kashgar and the Xinjiang Railway in Southern China. The total cost of the upgrading of the country’s railway networks is estimated to be around $11 billion, a bulk of which comes from Chinese concessionary loans, according to Salman (2016), a rather ‘lenient’ form of repayment, as compared to other infrastructure projects within the BRI initiative.
Apart from these infrastructural projects throughout Pakistan, CPEC also involves numerous investments in the energy sector, design to benefit both countries, worth more than $33 billion. The investments in the energy sector were initially set to add over 10,500 MW of electricity to the Pakistani national grid by the end of 2018, as part of the Chinese government’s efforts to hasten the implementation of CPEC (web.archive.org, 2015). However, the highlight of the energy investments within the CPEC project is the development of a pipeline from Iran to China, mostly through Pakistan worth over $2.5 million (Shah, 2016). The pipeline would link Iran through Gwadar in Pakistan, moving through Nawabashah before entering China. Other components of the energy investments involve renewable energy sources- hydroelectric power, solar, and wind energy throughout Pakistan. The largest investment in renewable energy is the construction of the largest solar farms in Pakistan (the Quaid-e-Azam Solar Park), one of the largest in the world, with a power capacity of over 100 MW.
Financial and Economic Assessment of the China-Pakistan Economic Corridor
CPEC Financing
Almost the entire CPEC is funded by the Chinese government or Chinese corporations. The financing of the project, as already stated, is unique because it is very beneficial to Pakistan and the Pakistani economy, contrary to other funding mechanisms and repayment conditions for other projects within the greater BRI. CPES is funded in three main ways- concessionary loans, interest-free loans, and private consortia (as well as assistance from ADB).
Concessionary Loans
It is estimated that around $11 billion of infrastructure-based projects developed by the government in Pakistan would be financed by the Chinese governments at an interest rate of just 1.6%. This agreement followed the successful lobbying of the Chinese government by the Pakistan government to reduce the interest rate from the initial 3% (Butt, 2015). These concessionary loans come at a relatively lower cost, as compared to infrastructure projects financed by the World Bank, which average interest rates of between 5-8.5%. Interests rates on market loans approximately average 12%.
The Pakistani government is in charge of the planning and execution of infrastructure projects. The contractual agreements between the two countries required the Pakistani government to fund 10% of all projects funded by concessionary loans through the Public Sector Development Program (PSDP) while the Chinese government funds the remaining 90%. Final approvals to a loan worth $2.9 billion were given by the Chinese government, a green light to the disbursement of the loans, on concessionary basis (Butt, 2015). The loans were disbursed through China Development Bank, Exim Bank of China, and the ICBC.
Interest-Free Loans
In August 2015, the government of China announced the conversion of several infrastructure projects in the Gwadar region, valued at over $757 million to 0% interest loans, further reducing the cost and risk of the infrastructure projects in the Pakistani government and people (Naveed, 2015). The Chinese government also announced, in September 2015 that the Gwadar International Airport project, valued at over $230 million would be converted from concessionary loans to grants by China to the Pakistani government. This further reduces the cost of the infrastructure project on Pakistan. It also places the risk of the project on China, since it changed the contractual agreement between the two countries in these cases, where China allowed Pakistan to relinquish its responsibility to repay the loans.
Private Consortia and Financing by ADB (Asian Development Bank)
A bulk of CPEC’s energy projects would be constructed by a joint consortium of Pakistani-Chinese firms as opposed to the governments of either Pakistan or China. These loans are set to exclusively benefit firms in China and Pakistan, creating employment for citizens from both countries. These firms would receive funding from the Exim Bank of China, through loans at interest rates of between 5-6% (Naveed, 2015). The contractual agreement also required the Pakistani government to exclusively purchase the electricity produced from these energy projects at rates that are intended to be pre-negotiated. This is intended to create a subtle energy economic zone, an almost exclusive energy partnership between the two countries.
The Asian Development Bank (ADB) is also set to finance several CPEC projects worth a total of $372 million (The Daily Times, 2015). The largest of which is the E-35 expressway in Pakistan, which forms a critical part of the highway connecting Gwadar and china. Other ADB-funded projects in Pakistan part of the larger CPEC include the N70 and N50 national highways, valued at over $195 million.
Economic Assessment of CPEC
The financial assessment of the project reveals an indifference in the Chinese approach to CPEC as compared to the larger BRI. The indifference is largely due to the Chinese government opting to contractually absorbing most of the risk and cost of the project, reducing the interest rates on concessionary loans offered to Pakistan, converting some concessionary loans to 0% interest rates and even converting some concessionary loans to grants requiring no repayment. This change in the contractual relationship between the two countries means the cost of the project on Pakistan is significantly reduced, increasing the potential economic benefit of CPEC. It also raises questions and induces inquiry into the incentives of the Chinese government to make such a bold and unorthodox contractual move. The Chinese have government has a broader incentive as compared to the immediate and direct benefits of CPEC.
Economic Assessment from the Chinese Perspective- Special Incentives for the CPEC
As part of the greater BRI, CPEC offers China an opportunity to broaden its trade routes, increasing capacity and control. However, the major reason for the Chinese taking the risk away from Pakistan is the oil pipeline that would link China and Iran, through Pakistan. China’s energy needs are on a constant rise, as its manufacturing and economic expansion continues. This is part of the larger ‘Malacca Dilemma’ facing the Chinese ambition for growth.
The Malacca Dilemma Solved
The shortest maritime route connecting China and Europe, Africa, and the Middle East is through the Straits of Malacca, part of the larger South China Sea Route. It is estimated that 80% of Chinese energy imports from the largest oil-producing region in the world, the Middle East, passes through the Straits of Malacca. However, the Straits pose additional risk to the Chinese, since the area is frequently patrolled by the US Navy (Chowdhary, 2015). The recent trade and diplomatic disputes between the Chinese and US governments mean energy imports are at the risk of sabotage by the US government.
Therefore, the Chinese government would reduce this risk through the construction of shorter, cheaper access to the Middle East, hence the need for the $2.5 billion oil pipeline connecting China and Iran through Pakistan (Chowdhary, 2015). Although the initial cost of construction is relatively high, with added risk, the rewards from CPEC mean increased security of energy imports from the Middle East at lower long-term costs. The South China Sea Route is estimated to be over 12,000 kilometers long (Chowdhary, 2015). The comparable distance between Xinjiang Province in Western China and Gwadar Port in Pakistan is estimated to be around 3,00 kilometers, significantly reducing the time of importing natural gas and petroleum from the Middle East. This would significantly reduce the cost of energy for Chinese firms, further reducing the cost of manufacturing in China by an estimated 12% by 2030. This strategic move is set to increase the Chinese hold on international trade.
The CPEC project is also expected to increase the connectivity and access to the Xinjiang Province in its western region. The region has been slow and considered resistive to attracting public and private investment. This incentive, described by the Chinese government as the ‘Western Development Plan’ is set to positively impact the Tibet and Qinghai regions in Western China.
The proximity between Pakistan and West China is the reason for the economic and diplomatic relationships between the two countries, which has contributed to the implementation of the various infrastructure projects throughout Pakistan by the Chinese government. Pakistani offers china one of the greatest opportunity for achieving energy efficiency and further cementing its position in world trade, as the largest mass manufacturer of cheap products in the world. The long term benefits outweigh the short-term costs of the project, according to the Heckscher-Ohlin Theorem. The theorem justifies the Chinese decision to absorb all the risks since it suggests that in relations between a capital-abundant country (China) and a capital-scarce country (Pakistan), control over trade relations and international projects between the two countries would be dependent on the financial risk and political leverage (Pugel, 2016, p. 341). The Chinese government, therefore, stands to gain more control over the projects since it has both political leverage and absorbs all the financial risk. This increased control, as compared to other infrastructure investments part of the greater BRI region is necessary, from the Chinese perspective because of the direct long-term benefits of CPEC to China.
Impacts on the Pakistani Economy
Pakistan Escapes Chinese Neo-Colonialism
China has faced a lot of criticism over the BRI and its constituent infrastructural projects in various regions. China is accused of masking its true intentions of modern socio-economic imperialism with its globalization and development of global trade partnerships agenda. China is accused of using ‘debt traps,’ constructing expensive infrastructure projects in developing countries, exploiting their inability to repay funding for construction to influence the developing country.
Chinese involvement in Pakistan is argued to be motivated by, primarily, the intention to take control of major trade routes in the world. Since China is one of the largest importers and exporters in the world, pivoting Pakistan’s international trade on CPEC is thought to make the country dependent on Chinese goods since there would be an increased flow of Chinese goods between the two countries (Hanjra et al., 2017). However, this claim is based on critical speculation and prediction, not a careful analysis of the situation. It fails to take into consideration the fact that the contractual agreements changed as the Chinese government opted to hasten the implementation of the project. Only 20% of all infrastructure projects in CPEC are funded through loans. The rest is funded through joint ventures between Chinese and Pakistani firms, which further reduces the debt-trap risk of the project (Shah, 2016). It significantly reduced the interest rates of the concession loans after lobbying by the Pakistani government, converted a portion of the funding to interest free-rates and grants, making it easier for the Pakistani government to repay loans.
Benefits to the Government of Pakistan and the Pakistani Economy
The China-Pakistan Economic Corridor has been hailed by the Pakistani Government as ‘a landmark project’ for the country. CPEC is the largest infrastructure initiative in Pakistani history since its independence set to completely transform the Pakistani economy and international trade, transforming the country to an economic hub in the greater South Asia region. The project is set to affect almost all areas of the Pakistani economy. According to Shah (2016), CPEC is set to create more than 2.3 million jobs by 2030. CPEC is welcomed by the Pakistan government owing to the infrastructural and employment benefits. The project is estimated to save the country over 3.5% of its annual GDP every year, losses due to the poor transport infrastructure in the region. These are indicative of the country’s poor infrastructure network that has limited international trade for centuries.
Mitigating Energy Shortfalls in Pakistan
Figure 1: Projected Industrial Energy Consumption Due to the CPEC (Mirza, Fatima and Ullah, 2019)
The figure above shows the estimated and projected energy consumption in Pakistan between 1977 and 2030. The energy consumption rates remained relatively stagnant from 1977 to 2012, indicative of the limitation of Pakistan’s energy capacity throughout this period (Mirza, Fatima and Ullah, 2019). The major impact of CPEC on the Pakistani economy is meeting the country’s energy shortages, which total 4,500 MW daily, translating to power cuts of up to 12 hours every day. The losses associated with energy inefficiency and inadequacy cost the country between 2.5-3.5% of the country’s GDP every year (Fingar, 2016). The figure is reflective of Pakistan’s struggle with energy, which translates to potential economic stagnancy since the inadequacy caused by inefficiency and inadequacy in the energy sector attracts very few foreign investors. This is a major incentive for the Pakistani government to actively take part in the project, since it would offer one of the best opportunities to develop its energy capacity and mitigate its energy shortfalls, for the prospects of making energy cheap and easily available, making the country more attractive to foreign investors. CPEC is Pakistan’s greatest chance at fast-tracking the development of its energy sector, transforming its potential to attracting investors and growing its economy since very few countries have invested in the Pakistani energy sector, which is thought to significantly contribute to the stagnation of the country’s energy sector.
Earnings from CPEC
Figure 2: Pakistan’s Comparative Earnings With or Without CPEC (Ali et al., 2019)
It is estimated that the Pakistani government will be required to pay $90 billion in loan repayments to the government of China, spread out over three decades. This essentially means the Pakistani government would be required to pay between $3-4 million every year. According to the figure, the CPEC is set to significantly improve the Pakistani economy, earning the country between $400-$500 million annually. The project is also set to increase the country’s exports by more than 4.5% every year until 2030. The project offers direct benefits to the Pakistani economy and is the largest foreign infrastructure project in the country since its independence. The project is thought to facilitate this sharp and exponential growth in earnings and international trade due to the benefits of increased energy capacity, efficiency, and availability, which has limited the growth of Pakistan’s economy for decades.
As such, the direct investment by the Chinese government in Pakistan is set to completely transform the country’s economy through mitigating the most derailing challenge to its success- energy and infrastructure. The projections by Ali et al. (2019) are indicative of the potential gains to Pakistan from the infrastructure project. Such incentives, together with the financial benefits of CPEC- better terms of payment, increased grace period for repaying the loans, and reduced costs of repayment through grants and interest-free loans mean Pakistan realistically stands more to gain from CPEC. The project is feasible, at least, from a financial and economic point of view.
The Social Feasibility of CPEC
The CPEC is a crucial project for both China and Pakistan because of the economic as well as the social possibilities of the project. The project is set to improve Pakistan’s economy, which has a direct implication on the social welfare of the Pakistani people. The project is set to create 2.3 million jobs in Pakistan alone, and thousands more in China. Employment is particularly beneficial to the Pakistani economy and people because it has a rapidly growing population, exerting pressure on Pakistan’s limited resources. Employment is critical in the fight against social exclusion and poverty, which have plagued Pakistan for decades.
CPEC offers the Pakistani government a chance to expand economic activities in the country, generating job opportunities to a ballooning employment pool with very little opportunities. It is estimated that around 1 million youths join the available labor force in the country, piling employment pressure (Javaid, 2019). CPEC is also predicted to have an enormous socioeconomic impact in other aspects that describe social welfare- health, housing and education, sectors that have experienced challenges since its independence. CPEC, as a major infrastructure project in Pakistan, is set to grow Pakistan’s social welfare by 5% every year until 2030. The projects would result in the development of social amenities like hospitals, schools, and affordable housing, due to the ripple effect of the project. Funding would result in increased employment, therefore increasing PPP and create a demand for better social amenities (Javaid, 2019). The project will also require foreign workers (mostly from China) to see through the project, increasing the demand for better social amenities. This would result in almost uniform socio-economic development since CPEC transcends almost all regions in Pakistan- KP, Sindh, Balochistan, and Punjab.
The project is also estimated to reduce the cost of energy in China, through the development of an alternative transport route for energy imported from the Middle East. The pipeline connecting China and Iran through Pakistan is thought to contribute to the reduction of the cost of energy, making it cheaper and easier to manufacture. This would cause the reduction of the price of goods in China, which essentially increases the living standards in China, in the long term, since the alternative pipeline is set to increase China’s manufacturing capacity and in the process, further increasing export earnings, growing the Chinese economy. The project would avail more resources to the Chinese government for social welfare, which is thought to further increase the social well-being of the Chinese people.
Environmental Assessment
The project’s major challenge remains the potential impact on the environment, primarily because of energy investments in Pakistan. While the economic benefits of the project offer financial incentives for pursuing the project, the environmental cost-benefit analysis of CPEC indicates huge environmental challenges as a result of the project. CPEC involves setting up several coal power plants, set to significantly contribute to electricity generation, albeit at the cost of sustainability (Baloch, 2018).
In 2012, around 46% of Pakistan’s greenhouse emissions came from its underdeveloped energy sector, which primarily included coal-powered power plants. CPEC would result in doubling of Pakistan’s emissions from coal, at a time when coal consumption around the world is dropping (drops by an estimated 2% every year) (Baloch, 2018). China is currently responsible for more than half of the entire world’s global coal consumption but reduces consumption by more than 1.5%. The project would seriously derail global efforts of mitigating climate change since coal consumption would significantly increase at a time when the global trend is reducing the largest contributor to climate change in the past century.
Other environmental concerns regarding the environment are the methods used to dispose of ash produced during this process. The poor disposal methods, which mostly involve discharge to the environment is set to reduce air quality in the region, affecting millions of people in the process.
Conclusion
These environmental concerns are the major blot to an otherwise beneficial project to both Pakistan and China as well as its people. Although a part of the larger Belt and Road Initiative by the Chinese government, CPEC is unique because it is a critical aspect of both country’s future economic growth. For Pakistan, the project offers a chance to mitigate its long-standing energy inadequacies and efficiencies and in the process attract foreign investments, thus rippling economic growth. For China, the project aims at developing a strategic alternative energy import route to the south China Sea Route, marred by diplomatic risks. The prudence of CPEC made the Chinese government to rethink the contractual and financial terms of its trade agreements with Pakistan, taking in all risks and acquiring political leverage (control) of the projects through reducing interest rates and converting concession loans to zero-interest loans and grants. This makes the project more attractive and beneficial to Pakistan, increasing the bilateral trade and diplomatic relations between the two countries.