KARACHI: Islamabad should renegotiate some of the terms and agreements under the China-Pakistan Economic Corridor (CPEC), the country’s business community says, as the new government prepares to tackle economic challenges and the pressure to reap benefits of the multi-billion dollar project.
CPEC is part of China’s Belt and Road Initiative (BRI) and involves billions of dollars worth of energy and infrastructure projects including the development of Gwadar Port in Balochistan, arguably Pakistan’s most neglected and underdeveloped province. While the previous government hailed and sold the project as a ‘game-changer’, onlookers as well as stakeholders feel details of the agreements under CPEC remain opaque, raising questions on the extent of the benefit to Pakistan and the simultaneous debt burden on the South Asian economy.
With the country’s economic managers now facing a headache over the balance of payments’ position amid depleting foreign currency reserves, the business community feels this would be the right time to revisit some of the finer details of CPEC agreements as Pakistan Tehreek-e-Insaf’s (PTI) government prepares to take over to navigate the way forward.
“There is a need to renegotiate returns of power producers,” Ehsan Malik, chief executive of the Pakistan Business Council (PBC), told The Express Tribune. “The question needs to be asked if the new government can sustain this (high guaranteed returns).”
Under the framework agreement, Pakistan has set up a revolving fund and is required to deposit 22% of the value of power generated by CPEC energy projects to protect Chinese companies from the adverse effects of inter-corporate circular debt.
On the issue of investments and loans extended by Beijing and Chinese companies, Malik said Pakistan needs to make realistic projections and compile a comprehensive record of financial flows in a centralised manner to understand its debt burden and address its sustainability concerns. “There have been no projections and very little transparency. A financial close for the next 10 years needs to be developed by the central bank.”
Arif Habib, chairman of Pakistani conglomerate Arif Habib Group, feels the financial close of some projects under CPEC has remained slow, adding to cost escalation and inefficiency.
Additionally, while CPEC brings with it a number of benefits for Pakistan, including cheaper power, Gwadar Port’s transit fees could have been higher, said Habib.
His comments come in the wake of reports last year that 91% of the revenue to be generated from the Gwadar Port would go to China with Pakistan bagging the remaining share for the next 40 years.
However, Ahsan Iqbal, Pakistan’s former minister for planning, development and reform, and the man who spearheaded CPEC negotiations with China during the previous government’s tenure, said a higher transit fees could make Gwadar Port uncompetitive. “If we increase the fees, the Chinese would increase the cost of port handling, which will make it uncompetitive,” said Iqbal in an emailed response to The Express Tribune. “No new concessions have been given to China in Gwadar. The Chinese were given the same treatment offered to the Singapore Port Authority for running Gwadar Port.
“Instead of increasing the fees, turnover should be increased to make the port an attractive destination.”
However, Iqbal agreed that some CPEC projects were facing delays due to fulfillment of procedural requirements. “They took time in securing NOCs and Environment Protection Agency clearances. (However) almost all priority energy projects have achieved financial close.” While projects under CPEC continue, the business community has also argued moving labour-intensive and export-based Chinese industries to Pakistan.
“The government could argue relocating Chinese industries to industrial zones in Pakistan,” said Habib, adding that the export-based companies could take advantage of various incentives.
Malik echoed the same view, but with words of caution. “Labour-intensive industries face a higher cost in western and eastern China. You get apparel-making industries to move to Pakistan as long as it is a win-win.
“We have to realise that any incentive offered under CPEC needs to result in a net increase – be it a net increase in jobs or foreign exchange reserves or a net increase in production. Simply getting Chinese industries to move and giving them incentives at the expense of present businesses will not benefit the country.”
Malik said the PTI is well-positioned to make its case. “The PTI remains a better organised party that understands business, and is well-informed.” The PBC chief said the combination of “astute leadership” and the fact that PTI will enjoy a stronghold in two of the four provinces and easy sailing in the third will augur well for its negotiations.
Published in The Express Tribune, August 17th, 2018.