The China-Pakistan Economic Corridor, or CPEC, has been the focus

of heated debate among observers of Asia — and, in particular,

South Asia — since its announcement in 2013. Proponents of the
project in China and Pakistan describe CPEC as a “gamechanger” that
will uplift Pakistan and adjacent areas of China and perhaps even
reshape the economic geography of the region. Critics of CPEC in
India, the United States, and other Western countries portray it as a
Chinese or Chinese-Pakistani strategic project with an economic
facade.

 Then-Pakistani Prime Minister Nawaz Sharif and Chinese President Xi Jinping inaugurate CPEC projects through video link in Islamabad on April 20, 2015. (Image Credit: Government of Pakistan)

The reality of CPEC, however, is far more complex. To address these

misconceptions, here’s a primer on CPEC that responds to frequently
asked questions about the initiative.

For a timeline of the “pre-history” of CPEC, click here.

What Is CPEC?
CPEC has been billed as a “$62 billion” economic connectivity initiative
linking China’s landlocked western region of Xinjiang with Pakistan’s
Arabian Sea ports: Karachi, Port Qasim, and Gwadar. (The CPEC
“routes” are depicted in the map below.) Beijing has described CPEC
as a “flagship project” of its broader Belt and Road Initiative or BRI.
However, the size of CPEC remains in flux. And its relationship to the
Belt and Road is unclear.
As of early 2019, approximately $18.9 billion in CPEC projects had been
initiated or completed. So we can safely say at the moment that the
value of active projects within the CPEC portfolio is in the tens of
billions of dollars. And that’s a lot of money for a country like
Pakistan, which has struggled to sustain foreign direct investment.
 Since the announcement of CPEC in 2013, some projects have been
added to the portfolio, while others have been removed.

An official map depicting the CPEC highway networks connecting China’s Xinjiang region with Pakistan. (Source: Planning Commission of Pakistan)
Whether CPEC will reach or exceed $62 billion is not only uncertain,
it’s also not that important. What is more important is the quality and
impact of Chinese aid and investment — more specifically, whether
they catalyze greater productivity in Pakistan, bolster and expand the
country’s exports, and help drive sustained, rapid, and equitable
economic growth, which has been elusive so far for Pakistan.

How Is CPEC Part of BRI?

Chinese officials have identified CPEC as a “flagship project” of the
Belt and Road Initiative. But how exactly CPEC factors into BRI
remains unclear. Beijing hasn’t explained what it means for CPEC to
be a “flagship project” of BRI, though the term clearly connotes at
least some symbolic importance for CPEC. The historic closeness of
China and Pakistan is likely one reason why the corridor has been given
such a status.
The decades-long partnership between the two countries confers
expectations that CPEC should easily succeed. And there are
reputational costs for Beijing should CPEC fail or be seen as failing.


The official map of the Belt and Road Initiative published in 2013. The initiative has since expanded to more countries, but Beijing has not published an updated map. (Image Credit: New China)

However, beyond the realm of perceptions, there is little indication that

CPEC alone will make or break the Belt and Road Initiative. The BRI has
grown so amorphous, extending beyond its initial focus of Eurasia
and Africa to the Arctic, South America, and even space. Indeed,
some today see BRI as a grand strategy for China, though the
motivations of actors in China — including provincial governments
and state-owned enterprises — are diffuse. While CPEC’s scope is
evolving alongside that of BRI, there’s a lot of redundancy built into
the Belt and Road, and so it’s unclear how CPEC relates to other BRI
corridors.
And while CPEC is said to be a “corridor” connecting China and
Pakistan, we see little public discussion of what is being built on the
Chinese side of the border. The projects included as part of the CPEC
portfolio are all Pakistan-based.

What Are the CPEC

Projects?
Presently, electric power projects make up the bulk of the CPEC
portfolio, in terms of project costs. Formally, these projects are
private investment, but the Pakistani state is indirectly liable for
them, as explained in the next section.


In terms of cost, most of the CPEC portfolio consists of electric power projects. And the vast majority of those are coal power plants.
(Data sourced from the Planning Commission of Pakistan, compiled by CPECWire.com)

The vast majority of these electric power projects are coal-fired power

plants. CPEC’s emphasis on coal was in line with the national energy
policy of the Pakistan Muslim League – Nawaz (PML-N) party, which
ruled the country from 2013-18. The current coalition government in
Islamabad, led by ex-cricketer Imran Khan, has emphasized a shift
toward cleaner energy sources, and in particular, hydro-electric
power.
 The Port Qasim Coal-Fired Power Plant is one of the early electric power projects completed as part of the China-Pakistan Economic Corridor.
Most of the remaining CPEC projects are road and rail infrastructure,
which are primarily funded by sovereign loans. These infrastructure
projects include a section of the Karachi-Lahore Motorway, a
controlled-access highway connecting Pakistan’s two largest cities,
and a realigned section of the Karakoram Highway, which links
northern Pakistan to China. There are also two main rail projects: a
commuter rail line in Pakistan’s second-largest city, Lahore; and a
revamped main railway line (known as the ML-1), which stretches
from Karachi to Peshawar, near the border with Afghanistan.
The CPEC projects that have gained the most attention relate to the
port of Gwadar, located on Pakistan’s southwestern edge, in close
proximity to Iran. In 2013, before CPEC’s launch, leasing rights for the
Gwadar port’s commercial operations were transferred to a Chinese company.
Through the CPEC framework, an expressway bypassing the
Gwadar’s residential areas connecting straight to the national
highway network is being built. A free zone is being built. There are
plans to build additional berths at the port. And a new international
airport will be constructed.
The CPEC portfolio also includes a digital component — an optic fiber
line from Xinjiang to northern Pakistan — link to what China has branded
as the “Digital Silk Road.”

Is the Pakistani Government

Taking Out $62 Billion in
Loans from China?
No, the Pakistani government is not taking out $62 billion in loans from
China through CPEC. According to the World Bank, around 30 percent
 of CPEC expenditures is through loans taken out by the government
of Pakistan. The vast majority — the electric power projects — is
technically private investment. Independent power producers or IPPs
— not the government of Pakistan — have taken out loans from
banks to construct power plants in Pakistan. These IPPs are generally
single-purpose vehicles in which a Chinese state-owned enterprise is
at least the majority shareholder. And Chinese banks are doing the
financing.


Most of the CPEC inflows are in the form of foreign direct investment, though
the Pakistani government is indirectly liable for the repayment of loans taken
out by independent power producers. (Data Source: World Bank)

However, while the IPPs are directly liable for the loans, the
government of Pakistan is indirectly liable. CPEC power plants are
constructed through long-term power-purchasing agreements or
PPAs. The Pakistani government is contractually obligated to
purchase electric power from IPPs and even compensate them for
idle capacity (i.e. capacity payments).
For the IPPs to repay their bank loans, they must receive payment for
the power they’ve supplied to Pakistani government-owned regional
distribution companies or DISCOs. But Pakistan’s electric power and
broader energy systems have been plagued by rampant non-
payment of bills, blatant theft by consumers, and a dilapidated grid.

Pakistan’s electric power sector is based on a “single-buyer model.”

That single buyer is the government of Pakistan. But in recent
decades, the industry has been unbundled and partially privatized.
As Pakistan has built up electric power capacity to address growing
demand, it has failed to address inefficiency, non-payment, and theft
in the system. As a result, inter-company arrears — known in
Pakistan as “circular debt” — have become an endemic problem.
Pakistan’s circular debt, including payments owed to CPEC and non-
CPEC IPPs, stood at $12 billion as of mid-2020 and could reach $25
billion by 2025. The circular debt, in other words, is a ticking time
bomb. It will worsen as Pakistan builds up expensive electric power
capacity through CPEC and outside of CPEC and does little to drive
prices down and reform the system.
Will CPEC Boost Pakistan’s
Economy?
Sustained, rapid, and equitable economic growth has proved to be
elusive in Pakistan. And CPEC alone will not put Pakistan on that
trajectory.
At the moment, CPEC is about building Pakistan’s capacity in
infrastructure and electric power. While CPEC inflows did contribute
to a rise in economic growth in Pakistan from 2015-18, culminating in
a rate of 5.8 percent in the 2018-19 fiscal year, it exacerbated the
disequilibrium or imbalance in the economy. CPEC contributed to a
rise in imports (machinery and material for electric power plant and
road construction) as exports not only lagged behind, but actually
dropped in much of this period. The resulting balance of payments
crisis forced Pakistan to return to the International Monetary Fund
for the twenty-second time in 2019.

As I explained in 2018 for the South China Morning Post, Pakistan’s poor

economic policies — not CPEC — were the cause of Pakistan’s
current economic crisis. CPEC merely exacerbated the structural
imbalances in an economy whose growth has been driven by
consumption and government spending.
Boom-bust cycles are a feature of the Pakistani economy, as Masood
Ahmed, president of the Center for Global Development, explains
clearly in this brief. Growing domestic consumption, public spending,
and inflows of aid (and, to a lesser extent, investment) drive
Pakistan’s growth rate higher. Exports and foreign direct investment
lag behind, causing stress on the current account. The imbalance
between imports and exports grows and Pakistan — a net-energy
importer — struggles to find the dollars to pay for its imports. To
avert a default, Pakistan then turns to the IMF and is compelled to
compress economic activity (i.e. slow down the economy).
Policy and institutional reforms are necessary for Pakistan to escape this
cycle of boom and bust.
As I wrote for Foreign Policy earlier this year:
“The country’s import tariff policy, currently focused on revenue-
generation and protecting low-productivity local companies, should be
reformed to promote value-added exports. And Pakistan needs to
enact legal and regulatory reforms that protect investors, allow for
transparent dispute resolution, and encourage investment from beyond
China.”
Alongside these reforms, electric power rates in Pakistan (through
CPEC and non-CPEC IPPs) need to go down to make Pakistani exports
more competitive. Special economic zones planned through CPEC
can also serve as vehicles to grow and diversify Pakistan’s exports.
But foreign companies are more interested in accessing Pakistan’s
large domestic consumer market than leveraging Pakistani labor to
export goods to third-party countries.

Is CPEC a Form of Debt-

Trap Diplomacy?
There is little public evidence today that China aims to entrap Pakistan in
debt and gain strategic concessions in exchange for debt relief. In at least
one instance, China discouraged Pakistan from considering an
infrastructure project it could not afford. Khawaja Saad Rafique, a
previous railway minister in Pakistan, said that in the early stages of
CPEC’s planning, Pakistani officials asked Beijing to construct a bullet
train in their country. Chinese officials, he said, “laughed at us.”
Both countries have instead moved forward with upgrading the main
railway line by more than doubling its speed from 40mph to
100mph. The financing terms for that project, the ML-1, have yet to
be finalized. But it would be the single most expensive project in
CPEC and vastly increase the debt the government of Pakistan is
taking on through CPEC.

The size and questions about Pakistan’s ability to handle the fiscal
burden have delayed the ML-1. And the cost estimates for the project
have fluctuated from $7.2 billion when it was originally announced,
later growing to $9.2 billion. More recently, it has dipped to $6.8
billion.

Beijing has opposed multilateralizing the ML-1 project, which is

described as “strategic” by Chinese and Pakistani officials. The terms
of Chinese financing may reveal their intent. If loan terms are
adjusted to allow for a 20-year grace period, then the debt will
become much more manageable for Pakistan. However, if China
insists on earlier repayment, with a 7-10 year grace period, then a
“strategic” project financed and constructed by Beijing alone under
somewhat onerous terms would give weight to the debt-trap
narrative.

What Is the U.S. Position on

CPEC?
U.S. officials initially welcomed CPEC, but now the project has become
enmeshed in the emerging U.S-China Cold War. In 2016, a spokesperson
for the State Department said that CPEC “could contribute to stability
 and prosperity in Pakistan and the region.” However, the Trump
administration took a more critical posture toward China and BRI
upon coming into office. Several senior U.S. officials have since used the
example of CPEC to criticize Beijing’s alleged predatory practices and
flouting of global norms under BRI.


In October 2017, then-U.S. Secretary of Defense James Mattis alleged

that CPEC runs through “disputed territory.” Months later, Mattis
declared “great power competition” and the rivalry with “revisionist
states” like China and Russia as the focus of U.S. national security.
And in late 2019, then-Acting Assistant Secretary of State for South
and Central Asia Alice Wells gave a public address singularly focused
on CPEC. She said that Chinese-funded projects lacked transparency
and rely “primarily on Chinese workers and supplies” and contrasted
it with an “American” model of aid that she claimed was more
responsible, sustainable, and transparent.