Building confidence for CPEC’s success

The first unit of the Suki Kinari Hydropower project, one of the many power projects being built by China in Mansehra, was connected to the national grid in the middle of last month, marking yet another milestone in the bilateral economic cooperation under the framework of the China-Pakistan Economic Corridor (CPEC).

The project is expected to provide more than one million Pakistani households with clean electricity each year in the future and contribute to Pakistan’s adjustment of the national power energy structure. On becoming fully functional later this year, it will generate some 3.2 billion units of clean electricity annually, replacing 1.3m tonnes of coal and reducing 2.5m tonnes of carbon dioxide emissions per year.
China has invested a total of $25.4bn in direct investment with several other projects worth billions of dollars in different stages of planning or execution, creating 155,000 direct jobs, building 510km of motorways and expressways, adding more than 8,200MW of new power capacity, and building 886km of core power transmission grid to Pakistan in the first phase of the Corridor initiative.
The first phase focused mainly on energy and transport infrastructure development in Pakistan in its first decade. Other transport and infrastructure schemes worth several billions of dollars are at different stages of execution or planning.
The project has certainly helped Pakistan improve its power and transport infrastructure. Based on the achievements of the CPEC in its first phase, the second phase, CPEC 2.0 — mostly based on business-to-business cooperation — is expected by officials to yield further economic dividends for Pakistan, besides translating those benefits into higher productivity, growth, and exports through Chinese investments in manufacturing, agriculture and technology.
In June, the two countries agreed on CPEC’s upgradation by building several new corridors, including growth, livelihood, innovation, and green corridors in its second phase during a meeting between Prime Minister Shehbaz Sharif and President Xi Jinping.
The consensus was reached on high quality development under the CPEC framework during Mr Sharif’s first visit to China following the February elections. The premier had also held meetings with several banks and Chinese investors. The trip has produced 23 memorandums of understanding (MoUs) and agreements aiming at “deepening cooperation in technology, transport, industry, infrastructure, energy, agriculture, media, health, water, and socio-economic development.”
It is, however, is still unclear what projects these MoUs will materialise into or if these will propel the corridor project into its second phase for its monetisation to help Islamabad pay back its debt.
“[We] mutually decided to enhance economic cooperation through timely completion of ongoing CPEC initiatives as it enters into the next phase with five new corridors: [growth corridor, economic development projects corridor, innovation corridor, green corridor, and regional connectivity corridor],” the premier said after meeting China’s leader.
The two sides announced that CPEC would be made an open and inclusive platform, and third parties would be welcomed to participate in its priority areas of industry, agriculture, information and communication technology, science and technology, and mining. Previously, the two countries had agreed to extend CPEC only to Afghanistan.
The two governments also signed an ‘Action Plan for Framework Agreement on Industrial Cooperation’. The Chinese side committed to encouraging Chinese companies to invest in Pakistan’s Special Economic Zones (SEZs) while Pakistan agreed to “optimise its business environment and policy framework” to facilitate Chinese investments.
Another significant project is the upgrade of the ML-1 railway track connecting Peshawar with Karachi, which will be implemented in a phased manner. This project has already been delayed, which has caused the price tag to go up.
These plans, including the upgrade of CPEC, are ambitious as MoUs would not automatically translate into projects. For that, the Pakistani authorities would need to create a conducive business environment, eliminate red tape and fast-track investor facilitation. More importantly, the government must complete the development of SEZs to attract Chinese companies here.
In recent years, the security of Chinese workers employed at CPEC sites has emerged as a serious issue. The terrorist and suicide attacks on Chinese nationals are a serious issue for both Chinese authorities as well as companies. In his meeting with the prime minister, President Xi raised his concerns in this regard and asked Islamabad to ensure the security of the CPEC projects and the safety of Chinese workers.
However, these concerns were voiced more unequivocally by Liu Jianchao, who heads the International Department of the Communist Party of China, during his interaction with the representatives of Pakistan’s mainstream parties in Islamabad. He said that the security situation here was “shaking the confidence of Chinese investors” and also called for improving the business environment, reiterated the necessity for political stability, and stressed a “CPEC-friendly media environment”.
The fact that China chose a public forum to air its concerns speaks of the seriousness Beijing attaches to security. The premier himself had, multiple times, sought to reassure Chinese investors in his meetings with them that the security and safety of Chinese workers were of utmost importance for his government as he empha­sised the need for business-to-business cooperation between the two nations.
Investment opportunities to Chinese investors remain a hard sell for Pakistan, not just because of security issues but also owing to its liquidity crunch. Due to significant external sector pressure and meeting one of the International Monetary Fund bailout conditions, Islamabad has recently approached Beijing for energy debt relief of over $15bn, asking it to roll over its $4bn loan for 3-5 years.
The Chinese have always obliged Pakistan. But this time around, they haven’t been as forthcoming as in the past. Therefore, it is crucial that China’s concerns are addressed, as the country needs all the support and investment it can get from Beijing.
The recent campaign targeting independent power producers, especially Chinese power companies, and calls for renegotiating or terminating power purchase agreements with them hasn’t gone well either with Chinese authorities or investors. Pakistan has little choice but to honour commitments with Chinese investors if CPEC 2.0 is to materialise.
Published in Dawn, The Business and Finance Weekly, September 2nd, 2024