03rd Oct 2016

By: Maqsood A. Butt

CPEC- AN OBJECTIVE ANALYSIS-I

CPEC is often termed as ‘” game changer” and “ fate changer” which it could be -----rather
should be , since it has emerged at a very critical juncture in the 69 years history of Pakistan.
Pakistan which is located in a very strategic position , shall gain unmatched importance by
connecting directly western China, Turkmenstan, Uzbekistan, Kyrgyzstan, Kazakhistan and
southern Russia (thru Central Asian States) directly to the warm waters which was a very old
dream of Russia/China curtailing thousands of kms and weeks of travel time to reach the
Arabian Sea at the doorsteps of Middle East and East Africa. China, Russia and 4 central
states have a combined population of 1.575 bill which is 21% of the world population , with a
combined GDP of USD 12,488 Bill , about 17% of world GDP. The transportation of goods and
services to these countries from/to Pakistan which previously had no direct accessibility and
entailed prohibitive logistical expenses, is now possible at a fraction of previous cost ,
improving the possibility of quantum jump in mutual trade. These and other similar
enthusiastically discussed scenarios are very exhilarating, raising hopes of imminent
actualization of these plans . However, now that the initial euphoria has settled, there are lots
of caveats to be seriously looked into to translate the goals into reality.

First and foremost is the fact that we always write and discuss to prove the importance and
utility of CPEC thru the prism of China, at least economically. CPEC is part of an ambitious
plan of One Belt, One Road (OBOR) of China to gain access to the markets of Asia, Africa
and Europe. This being a “flagship project”, it is of extreme importance for China to complete it
successfully and in shortest possible time. CPEC shall not only give it access to Indian Ocean
overcoming its Malacca overhang but also cut its distance and travel time to Arabian Sea,
saving billions of dollars only in freight plus unquantifiable value of time saving. This is in
additions to the widely held belief of India and USA of China’s enhanced strategic capability of
monitoring their navel activities in Indian Ocean which explains the opposition , anger and
dilemma of these two strategic allies .

China is fast developing its softbelly western provinces, the largest being Xinjiang Uygur
Autonomous Region (which borders 9 countries i.e. Russia, Kazakhstan, Kyrgyzstan,
Tajikistan, Pakistan, Mongolia, India and Afghanistan)to bring them at par with its eastern
provinces. Urumqi Economic and Technical Development Zone which was conceived in
August, 1994 is now operative on an area of 480 sq km with thousands of projects including
15 top Fortune 500 companies., In addition to this , another industrial zone called Kashgar
Central and Southern Asia Industrial Park has been set up in 2010 on 165 sq km area. Installed
power generation capacity in Xinjiang is 49,790 mw while additional 19,132 mw coal projects
were approved by China in 2015, raising total installed capacity to 68,922 mw , out of which
51,000 mw shall be on coal. Xinjiang has coal reserves of 2,190 bill tons (which are 40% of the
entire Chinese coal reserves) against a miniscule reserve of 175 bill tons in Thar. The price of
electricity for industries in Xinjiang is Y 0.348/kwh ($0.0521) .

All the projects under CPEC are to be financed by Chinese banks to Chinese investors in
Pakistan. There is no international bidding of the cost of the project and whatever the Chinese
companies offer, has to be accepted. The infrastructure projects funding of about $11 bill is at
1.6% per annum payable in 25 years while electric generation projects valuing about $ 35 bill
are at 4.95% per annum ( Libor 0.5% + spread od 4.50%) alongwith guaranteed rate of return
on equity varying from 27% p.a. to 30.65% p.a. , all repayable in dollars.
The priority power projects of 10,400 mw are stated to commence operation in 2017-18; hence
the repayment of loans , cost of imported coal and profits(which are included in the tarrif) shall
become payable instantly on fortnightly basis. The Government of Pakistan has given a
sovereign guarantee to purchase for 30 years the generated electricity ( wether we need it or
not) and pay for it as per agreed tarrif. If all 10,400 mw projects are on coal, the annual
payment to be remitted to Chinese investors in foreign currency may be to the tune of $ 2.48
bill per annum; this figure is liable to change if the generation mix is changed. The tarriffor coal-
based projects is fixed at highest of USD 0.109247/kwh and lowest at $ 0.090642 /kw. These
rates are liable to increase every year equivalent to increase by consumer price index in
Pakistan ( for local currency input-cost component ) and CPI of USA for foreign currency input-
cost component.. This tarrif may also increase after every 5 years with the major overhaul of the
generating sets which is generally done after 40,000 hours.

The Government has allowed the Chinese companies to hire private security guards for their
personal security. China has given lease of Gwadar port with a land area of 2,300 acres for
40 years with 20 years tax holiday to the port operator and 10 years tax holiday to the projects
put up in Gwadar Zone as well as in other approved Special Economic Zones.

China’s total international trade in 2014 was USD 4.301 tril( exports USD 2,342 tr + imports
USD 1.959 Tr). Due to savings in time and money, it is estimated that major portion of this trade
may be routed through CPEC. However, for calculation purposes, if only 20% of this trade is
routed thru CPEC/Gwadar, it means about 1,560,000 TUEs containers ( assuming cargo value
of USD500,000 per TUE) shall pass thru CPEC/Gwadar every year, 4273 containers per day.
And if on average 20 days are curtailed from each shipment period, it means about $ 42 Bill
less investment by China in goods-in-transit plus millions of dollars in freight savings. It may
not be viable for China to import Oil thru CPEC unless a pipeline is laid all the way from
Gwadar to Khunjrab/Urumqi which may take years to accomplish. So in all likelihood, the
quantum of exports thru CPEC shall be much more than import ; which in turn means that it
shall always be Chinese transporter who shall be carrying goods for export from China to
Gwadar and shall, on their way back, pick up cargo from Gwadar or other Pakistani markets to
carry back to China, denying any chance to the Pakistani transporters.

It is evident from above, China knows exactly what it has to spend and what it shall get in
return—strategically and economically. There is no chance of any loss of the $ 36 bill energy
projects since the purchase of its generation and payment thereof are guaranteed by Govt of
Pakistan. For the rest of $ 10 bill, it shall be owningGwadar port for 40 years.

In the second part of this article, we shall see what is in it for Pakistan .

(The writer is a Chartered Accountant and can be reached at

president@economywatch.com.pk)
04th Oct 2016
By: Maqsood A. Butt

CPEC – AN OBJECTIVE ANALYSIS-II

Maqsood A. Butt

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 bill/KM ) at Rs,2.653 TriL or USD 25.26 Bill. The resurfacing cost of Isl-Lhr motor way has
recently been determined at Rs 128 mill /km. At this rate, after 10 years, the repair cost of the
CPEC shall be—at the minimum---Rs400 bill giving an annual expense of Rs 40 bill or USD400
mill. 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 bill 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 Y 1,310 , equivalent to Rs 20,600 , 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 sq km 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 Rs.2.50/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 Y 0.348/kwh ( Rs5.47 kwh), against highest of
Rs 13.97/kwh ( Siddiquesons Energy Ltd) to lowest of Rs 12.01/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 bill or USD 6.073 bill 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 Bill in 2012-13 to $ 20.8 Bill 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.

DrQaiser 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$ ----bill 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. MrHaroonAkhtar, Advisor to Ministry of Finance is on record saying that
goods worth US$ 9 bill 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 US$ 14.01 mill consisting of dried fruit, carpets, walnuts
and yarn while exports to Pakistan was US$ 133.15 mill 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 bill ) 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 bill which is being borrowed has to be returned with interest @ 1.6% pa on $11 bill
( repayable in 25 years) and 4.95% on $ 35 bill energy projects ( payable in 10 years) . The
principal repayment which work out to about $ 3.940 bill per annum and interest to about $
1.908 Bill, totaling $ 5.858 bill. 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 .

(The writer is a Chartered Accountant and can be reached at

president@economywatch.com.pk)