CPEC portfolio keeps increasing, but does it really add value?

Published: April 24, 2017
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Prime Minister Nawaz Sahrif and Chinese President Xi Jinping. PHOTO: REUTERS

Prime Minister Nawaz Sahrif and Chinese President Xi Jinping. PHOTO: REUTERS

ISLAMABAD: It was January 2017 and a big day for China as the island nation Sri Lanka handed over the Hambantota deep sea port as well as 15,000 acres of its rich agricultural land to establish a new Chinese-operated industrial zone – in exchange of writing-off its $1.1 billion debt.

Sri Lanka’s premier called it a “once in a lifetime opportunity” but there were scores of Buddhist Monks protesting against conversion of their land into a Chinese Colony.

‘CPEC to transform Pakistan into regional hub of socio-economic activities’

In Myanmar, anti-Chinese sentiments are growing as the Chinese-financed landmark $3.6 billion Myitsone Dam project would cause permanent harm to the dynamic of river settlements – destroying fishery stocks and displacing thousands of villagers.

The question of the hour is: What goes wrong with these billion dollar infrastructure investments by China?

China has emerged as the leading source of development assistance with a focus on infrastructure and energy sector. Developing countries with diminishing foreign reserves are eager to accept such investments without thoroughly working out the business case.

Now we see that in Hambantota, Chinese construction companies have built the world’s emptiest airport – not to mention other white elephants such as a five-star hotel, world-class convention centre and a cricket stadium. It is still unknown if these infrastructure investments provided any economic uplift to this poor region.

Similarly, in Myanmar, the wrong dam project was given the go-ahead and by the time the government realised its mistake, it was too late. Now if the project is scrapped, the government has to pay a whopping $800 million to Chinese against costs for conducting feasibility studies. Moreover, China is its biggest trading partner so backing-off from a megaproject deal might not be a good idea.

Similarly, Africans have reservations too, that China has taken proprietorship of their resources without transferring skills and technology and they take away primary goods to sells back manufactured ones.

Root cause of failed investments

The key to take away here is to realise that China is no doubt a specialist in building infrastructure but it is primarily the responsibility of the loan-recipient country to conduct extensive project appraisal and feasibility studies.

One solid symptom of a weak business case is a lack of any Private-Public Partnership (PPP) based arrangements in project financing. If the primary funding of any infrastructure project involves only sovereign guarantees with no Special Purpose Vehicle (SPV) to isolate project-based cash flows, it is a ‘red flag’ that the business case is not market-driven and not lucrative enough for investors.

Drawing parallels with CPEC

When it comes to finalising the scope of the China-Pakistan Economic Corridor (CPEC), the government seems to be kicking the can down the road. The portfolio cost has already increased to $62 billion as the brand CPEC has become a magic word that ensures acceptance of any project – relevant or not.

China catalyst for Pakistan’s uplift: Shehbaz

The portfolio is losing its focus and costs are spiralling out of control. We don’t see any focus on designing a set of enabling policies that will ensure organic growth (not Chinese-led) of special-economic zones on CPEC routes. At the same time, we also see that projects with good business case (such as Tarbela extension and motorways) are not a part of CPEC but funded by the likes of Asian Development Bank.

Adopting a corridor approach to CPEC means that the government has to engage a wide array of regional stakeholder with possibly conflicting interests. The key strategic bits of the CPEC master plan should be based on our regional trading partners and identifying trade bottlenecks – both hardware (infrastructure) and software (policy blueprints).

This thought process should become a litmus test for proposing a new project in CPEC portfolio. For example, before approving a cricket stadium project as part of CPEC, it is important to ask the question whether developing a stadium add to the CPEC vision of eliminating trade bottlenecks.

The writer is a Cambridge graduate and is working as a management consultant.

 

Published in The Express Tribune, April 24th, 2017.

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Reader Comments (9)

  • kamal
    Apr 24, 2017 - 9:54AM

    Its like swiping the credit card…so much fun when you spend but real real pain when bill comes at higher interest rates.Recommend

  • Said Mustafa
    Apr 24, 2017 - 10:08AM

    I totally agree.. wonder if someone from planning would like to comment ? they never doRecommend

  • Feroz
    Apr 24, 2017 - 10:21AM

    So much pain for Sri Lanka with a mere $ 1.1B in debt — loss of port plus other related infrastructure along with gift of 15,000 acres of prime agricultural land. Please calculate the equivalent for $ 62 B applicable for Pakistan. Good Luck !Recommend

  • Faisal A Malik
    Apr 24, 2017 - 11:36AM

    While there seems to be too much bad press associated with CPEC we need to realize that through this we ware investing in much needed infrastrucutre projects. It is upto us how to take benefits of these projects on the long run becuase Chineese cannot be asked to provide us the know how they have developed so painstakingly over the years. It is up to us to stand up and take advantage of these associated opportunities. Recommend

  • RItz
    Apr 24, 2017 - 12:05PM

    “One can’t remain indifferent from what happens in its surrounding” As the mighty Chinese is investing plenty of Money. They know how to recover it as it is well quoted in the above article with some example. The point to PONDER here is whether it can generate enough revenue to repay the Loan .If answer is yes then how many years it will take. Also Chinese will keep minting money as much as they can on their terms and the Country like PAKISTAN,SRILANKA,NEPAL,MAYANMAR could hardly do anything. They will leverage anything and everything they can from these countries not becoz of their Economy Might but also military light. In last ” its a general mentality that people are so much carried away by the current benefits of a thing that they ignore the minor flaws..But remember the flaws can keep accumulating and become an incurable disease. I am not an economic expert but it hardly takes a common sense to realize it. Being an Indian Doesn’t mean will have only negative perception about Pakistan . Becoz “if your neighboris unstable you can’t enjoy a healthy sleep” Recommend

  • Tyggar
    Apr 24, 2017 - 12:13PM

    Chinese construction companies have built the world’s emptiest airport

    Not a surprise since the Chinese have been building empty ghost cities in their country for quite some time now. Basically they need to keep their people busy to prevent any unrestRecommend

  • Arif Mohammed
    Apr 24, 2017 - 12:29PM

    The first mistake we are doing is that we are thinking that CPEC is a solution to all our problems even medical.Recommend

  • curious2
    Apr 24, 2017 - 6:00PM

    Nice article which outlines a couple of major flaws in CPEC. First – NOBODY has ever done an economic feasibility analysis of any CPEC project (which might acct for the secrecy and the inability to explain how these projects are going to be repaid) . Secondly – these projects are being funded with govt Guarantees which essentially means they aren’t economically viable enough to obtain normal financing (which brings us back to the lack of the economic/feasibility study).Recommend

  • Hulra Hafeez
    Apr 24, 2017 - 10:44PM

    We brothers keep fighting amongst ourselves while outsiders eat the cake.. India Pakistan should join hands for everRecommend

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