04 Oct A must read summary of CPEC & its repercussions on pakistan
The information which we have on the expected gains for Pakistan is long on generalities but very short on specifics. As stated earlier, about 1,560,000 TEUs containers shall be passing Pakistan in a year; 4,273 containers a day shall be existing/entering Sust which means 3 container every minute have to be custom-checked and cleared. The traffic shall be more than Karachi/Port Qasim Ports. We do not have that kind of set-up as yet and neither we are aware of any plans of that kind of expansion in Sust customs house. Chinese heavy trucks/trailors shall be plying on CPEC network of 2,653 km valued ( at current average construction cost of Rs1 billion/km) at Rs 2.653 trillion or $25.26 billion. The resurfacing cost of Islamabad-Lahore Motor Way has recently been determined at Rs 128 million/km. At this rate, after 10 years, the repair cost of the CPEC shall be-at the minimum – Rs400 billion giving an annual expense of Rs 40 billion or $400 million. We do not know how much transit fee Pakistan shall be able to charge from China for the containers passing thru CPEC. However, we have guesstimated that road side service shops and restaurants which shall be catering to the trailors’ staff generating about Rs50 billion revenue.
It was announced with full fanfare the establishment of Special Economic Zones on both side of the Corridor where 10 years tax holiday and exemption from import duties were given on the new projects. However, in September 2015, the Govt announced the deferment of the SEZ ostensibly due to unavailability of electricity. However, it is a moot point whether the existence of a motorway attracts investors to put up industries along the way. If it was so, there should have been dozens of medium and large projects along 337 km Lahore-Islamabad M-2 but in reality there hasn’t been any. The Government has probably realized this fact and taken a wise step of deferring the establishment of SEZs, specially in view of the fact that various small and medium industrial estates established decades ago in the country are still not fully occupied and hundreds of industries located in those estates are now closed.
There do not seem to be any attraction for the Chinese investors to come and invest either alongside CPEC or in other places. The western part of China, specially Xinjiang is underdeveloped with a minimum wage of Y1,310, equivalent to Rs20,600, against minimum salary of Rs14,000 in Pakistan. This 30% less minimum salary is not going to be a major factor in location-preference. The China’s first priority is to develop western part and bring it at par with Eastern which is only possible by job creation in new industries to be put up in the huge Kashgar Industrial Park covering 165 square kilometres and Urumqi Economic Zone .
The coal-based power generation projects shall sell electricity to NTDC/GOP, at US cents 9.0642 to cents 10.9247/ kwh which, after adding about Rs2.50/kw as TD losses, unpaid bills losses, expenses/margin of Discos etc, comes to Rs converts to Rs 12.02 to Rs 13.97/kwh. The electricity rate for industries in Xinjiang is Y0.348/kwh ( Rs5.47 kwh), against highest of Rs13.97/kwh (Siddiquesons Energy Ltd) to lowest of Rs12.01/kwh (Port Qasim Electric Power). If 10,400 mw priority projects are set up on these tarrifs and is utilized by the prospective Chinese investors, the additional cost of production due alone to higher electric tarrif in Pakistan ( as compared with Xinjiang) shall amount to Rs 637 billion or $6.073 billion per annum! If we add comparable inefficiencies of our workers with China’s, increased cost of doing business here and other unforeseen expenses, the additional cost shall be very daunting for any prospective investors. Further Chinese manufacturers who shall produce goods either in Xinjiang or Pakistan, shall be exporting to other countries . China give much better incentive to its exporters than Pakistan . It will much more economical for the Chinese investor individually and on a national level as well, to produce goods in Xinjiang and export to Africa, Middle East and Europe through CPEC, reaping full advantage of reduced time and freight which shall also make them more competitive.
We don’t seem to have any exportable surplus. We have surplus production of wheat and sugar but cant export even at huge discounted price due to our very high cost of production. World Economic Forum ranked Pakistan on Global Competitiveness Index at 91 in 2004, went down to 117 in 2010 and has worsened to 122 in 2016, as per latest WEF Report issued on 28 Sep, 2016 which also ranked Bangladesh 106, Sri Lanka 71, India 39 and China 28. Ease of Doing Business, as per World Bank , which ranked Pakistan at 69 in 2007, 74 in 2008, 85 in 2009, 83 in 2011,105 in 2012, 107 in 2013,110 in 2014, 136 in 2015 and 138 in 2016. This indicates that in the last 10 years , it has become twice as difficult to do business in Pakistan now in 2016 as it was in 2007. Our exports are already on southward journey declining from $25.1 billion in 2012-13 to $20.8 billion in 2015-6. This speaks for itself about our inability to manage our own house, make thing easier for the investors and the impossibility of utilizing the CPEC to enhance our exports. In the presence of these reports by the two prestigious institutions, we have to be recklessly over-optimistic in expecting that foreigners shall come and invest in Pakistan.
Dr Qaiser Bengali had openly stated recently in the Senate Standing Committee that CPEC shall destroy our local industries. I agree with him on four counts. First Chinese governments give full support and facilities including export subsidies, in addition to duty drawbacks, which enable the exporters to sometime sell at cost. Second, the menace of under invoicing which amounted to US$-billion in 2015 causing a duty evasion of over Rs200 billion in addition to causing the closure of lot of small and medium industries. Third, as detailed supra, 1560,000 containers shall pass through CPEC, giving an average of 4,273 containers crossing customs checkpost at Sust /Gawader every day i.e. 3 containers every minute. With around 8 days travel time and 1 or 2 days for loading /unloading, a chain of about 42,730 containers shall always be on the roads of Pakistan at any time, with about 128,000 Chinese trailer drivers/assistants. It will be impossible for any customs staff or any other force irrespective of its size and commitment to keep an eye on these containers. The containers coming from China, ostensibly meant for export or containers picked up from Gawader ostensibly meant for import in China, may very well end up in local market. This may give an impetus to the already rampant smuggling. Mr HaroonAkhtar, Advisor to Ministry of Finance is on record saying that goods worth $9 billion are being smuggled every year which are mainly from China and India. Fourthly, we should allow Chinese to put up industries to produce goods under Chapter 84 and 85 of HS Codes (all machinery and instruments) in which we are far behind. If Chinese are allowed to set up industrial estates, plastic industries, textiles and alongwith 10 years tax holiday, all the existing industries of these and other sectors shall collapse.
The Government had issued an SRO allowing all projects over 25 MW to import everything, even if made in Pakistan, duty free. So all power generation projects shall import everything from China except bricks, sand and cement. Steel and all other building materials, furniture, cables, miscellaneous machinery/parts are cheaper in China.
Pakistan doesn’t have much of exportable surplus of anything or goods which we can make cheaper here which China needs except perhaps fruits from GilgitBaltistan. The imports of Xinjiang from Pakistan in 2013 were $14.01 million consisting of dried fruit, carpets, walnuts and yarn while exports to Pakistan was $133.15 million mainly, textile, garments, footwear, small appliances, toys, and transformers. With CPEC in full operation, this trend of trade is likely to continue ; the only difference being the negative trade balance with Xinjiang may be much worse.
In 2015, 145 mill Chinese visited other countries. It is estimated that 5% of these may be business travellers which works out to 7.25 mill business travellers. If only 5% of these business travellers visit Pakistan ( to conduct 20% of their business thru CPEC) , it shall mean about about 362,500 Chinese travellers shall be visiting Pakistan. If each traveller stays here for 3 days, we shall need 3,000 more hotel rooms on 3, 4 and 5 stars ( costing a minimum of Rs30 billion) which are neither available nor are under construction. To carry these passengers , we shall need 5 inbound flights from China every day. Luckily, Karachi, Lahore, Islamabad, Peshawar airports are underutilized and have the capacity to handle this additional estimated inflow. These figures are an extreme guesswork and on the consertive side but shows the quantum of logistics required to successfully operate the CPEC.
The $46 billion which is being borrowed has to be returned with interest @ 1.6% pa on $11 billion (repayable in 25 years) and 4.95% on $35 billion energy projects (payable in 10 years) . The principal repayment which work out to about $3.940 billion per annum and interest to about $1.908 billion, totaling $5.858 billion. About 2% of our current GDP shall be utilized to repay these debts. There is a likelihood though, given that all projects after commencing operation shall definitely increase GDP by a minimum of 2% to 3%.
The readers shall note that China is well aware of quantum of its investment, security of its investment, the profits it is going to make and money which has to be paid back to them either in the shape of direct repayment of loans or indirect repayment of amount invested in energy products through tarrif, both direct/indirect payments being guaranteed by the Government. However, on our side we are not aware of any specific information as to how much China has to pay us to use CPEC, what real investment (apart from energy and infrastructure projects) in high-tech and high value-added industries shall be; how we are going to repay the energy charges, guaranteed by the GOP; how we are going to maintain the road networks; how we shall ensure to protect our industries. Whatever agreements signed and policies are made , our foremost priority should be to exploit CPEC to achieve economic strategic depth.