Sunday, November 23, 2014

China Deal Could Set New FDI Records, End Energy Crisis in Pakistan

China's state-owed banks will finance Chinese companies to fund, build and operate $45.6 billion worth of energy and infrastructure projects in Pakistan over the next six years, according to Reuters.

Major Chinese companies investing in Pakistan's energy sector will include China's Three Gorges Corp which built the world's biggest hydro power project, and China Power International Development Ltd.

Prime Minister Nawaz Sharif and President Xi Jinping

Under the agreement signed by Chinese and Pakistani leaders at a Beijing summit recently, $15.5 billion worth of coal, wind, solar and hydro energy projects will come online by 2017 and add 10,400 megawatts of energy to the national grid.  An additional 6,120 megawatts will be added to the national grid at a cost of $18.2 billion by 2021.

Total Foreign Direct Investment Source:  World Development Indicators 

Starting in 2015, the Chinese companies will invest an average of over $7 billion a year until 2021, a figure exceeding the previous record of $5.5 billion foreign direct investment in 2007 in Pakistan.

FDI As Percentage of GDP. Source: World Development Indicators

With over $7 billion a year, it will still, however, barely match the prior record of 3.75% of GDP set in 2007.

The biggest upside of this investment will be the generation of over 16,000 MW of additional electricity which should revitalize Pakistan's business and industry sectors and significantly boost its GDP.

The deal can be win-win for both if the Chinese companies coming in as independent power producers (IPPs)  enjoy significant returns of 17% to 27% a year on their investment while Pakistan actually alleviates the nation's crippling electricity crisis to get its economy moving again.  The assumption here is that Pakistan has learned from and corrected the prior mistakes in its existing cost-plus IPP contracts which guarantee significant profits to IPPs regardless of costs, efficiency and amount of power supplied to the grid.

Rapid increase in power generation is a well understood pre-requisite for accelerating industrialization and major improvements in productivity in this day and age. Pakistan needs sustained sharp focus on increasing electricity availability to improve productivity and living standards of its people.

Related Links:

Haq's Musings 

US-Pakistan Ties and New Silk Route

IPPs Enjoy Record Profits While Pakistan Suffers 

Can Pakistan Say No to US Aid?

Obama's Pakistan Connections

Seeing Bin Laden's Death in Wider Perspective

China's Investment and Trade in South Asia

China Signs Power Plant Deals with Pakistan

Soaring Imports from China Worry India

China's Checkbook Diplomacy

Yuan to Replace Dollar in World Trade?

China Sees Opportunities Where Others See Risk

Chinese Do Good and Do Well in Developing World

Can Chimerica Rescue the World Economy?


Rafay said...

the only problem is that return is guaranteed which technically means it is a loan. because any investment has to have some risk. if you want guaranteed return you can invest in fixed term deposit, t bills, govt bonds etc. but here pakistani govt is guaranteeing a $ return of 27%

Riaz Haq said...

Rafay: "the only problem is that return is guaranteed which technically means it is a loan. because any investment has to have some risk. if you want guaranteed return you can invest in fixed term deposit, t bills, govt bonds etc. but here pakistani govt is guaranteeing a $ return of 27%"

No it's not guaranteed. It's an estimate ranging from 17-27%. Besides, Pakistan has few other options with its extremely low domestic savings rate and little FDI from elsewhere.

Anonymous said...

This return on investment would be payable in USD/yuan(non PKR) I guess.

So the pak govt which can barely manage to payback soft imf loans is now guarenteeing 17% outflow on loans which come with strings attached(only chinese firms to be awarded contracts for these projects).


Riaz Haq said...

Anon: "So the pak govt which can barely manage to payback soft imf loans is now guarenteeing 17% outflow on loans"

Energy is fundamental to the economy. Solving the energy crisis will boost Pakistan's exports and foreign earnings and help reduce the current account deficit.

Riaz Haq said...

KARACHI: Foreign direct investment (FDI) increased by 47 per cent in the first four months of this fiscal year, mainly because of a big inflow from China.

The State Bank reported on Monday that the country received $423 million during July-October compared to $288m during the same period of last year.

The inflows posted a sudden increase in October, turning around a year-on-year fall of 26pc in July-September quarter to a 47pc rise in the four-month period.

Pakistan received just $169m as foreign direct investment in the first quarter. The inflows in October alone amounted to $252m.

However, the main inflow which changed the depressing situation was from China which invested $163m out of the total $423m. The government has been making efforts to bring Chinese investment in the country. Prime Minister Nawaz Sharif recently signed memoranda of understanding (MoUs) with Chinese companies for $42 billion investment here.

The United States and Hong Kong were other two countries who made significant investment of $75.2m and $74.6m, respectively.

Despite this sudden jump in October the overall situation is still unattractive since the size of FDI is extremely poor.

The overall FDI inflows and outflows during July-October were also surprising since both were very high in numbers. The inflows were $1.390 billion (112pc higher year-on-year) and outflows were $966m (up 163pc).

Portfolio investment in this period also showed positive sign increasing by 144pc to $176m compared to only $72m in the same period of last year. However, foreign portfolio fell by 143pc during the four months. It was $69m during the same period last year while this year it was negative $29m.

Pakistan has been waiting for more than seven years for improvement in the FDI but the country hit by terrorism could not convince the foreign investors so far. The FY14 was better with FDI inflows of $2.3bn than FY13 when the figure was $1.57bn.

Anonymous said...

Can this FDI be pulled out at any time? How will the FDI be returned when time comes and its impact?

Riaz Haq said...

Anon: "Can this FDI be pulled out at any time? How will the FDI be returned when time comes and its impact?"

FDI is in the form of plant and equipment which are much more difficult to remove than selling off portfolio investments (FII) like stocks and bonds. Typically, FDI investors are allowed to repatriate profits from their investments which is a more gradual process.

Majumdar said...

Prof Riaz ul Haq sb,

God help Pakiland if PRC adds 6,000 MW of power at US$ 18 billion (USD 3 million MW) and gets 17-27% return on investment. Khair, I am not complaining......


Riaz Haq said...

Majumdar: "God help Pakiland if PRC adds 6,000 MW of power at US$ 18 billion (USD 3 million MW)"

I believe these are hydroelectric dam projects with water storage that cost more than other power plants.For example, Belo Monte dam in Brazil cost about $3.11 million per MW in 2011.

They also take longer to build, but the operating costs are much lower and cost per unit generated drops significantly over time.

Anonymous said...

Now atleast please give some credit to Nawaz Sharif!

Riaz Haq said...

Anon: "Now atleast please give some credit to Nawaz Sharif! "

Yes, I do give him credit for starting the process that was long overdue since the Chinese interest in such investments in Pakistan is several years old.

However, we are long way from seeing results which will depend on the following:

1. How well are the projects executed

2. How transparently it is done to truly benefit the people much more than the Nawaz Sharif family and friends. If the new IPP contracts with Chinese companies are like the cost-plus contracts without performance guarantees that were signed in 1990s by the PPP govt, then there could be another major power crisis a few years down the line when Pakistan govt and people are once again faced with declining power generation, longer power cuts and mounting circular debt.

Haider said...

How will any of this help with the real problem with the power sector, which is the circular debt?

Riaz Haq said...

Haider: "How will any of this help with the real problem with the power sector, which is the circular debt?"

Circular debt has a lot to do with the cost of power generation. New coal and hydro plants built by the Chinese will hopefully cut these costs significantly and reduce the gap between the cost and revenue.

Poser said...

Riaz, dont you think 8cents per unit will harm Pakistan in the long run like the IPPs of PPP?... Please shed some light on that w.r.t., even if our hands are tied, we should not sell short ( or buy expensive)

Haris said...

Does this mean that Pakistan can score 5% GDP growth for the next five years?

Riaz Haq said...

Haris: "Does this mean that Pakistan can score 5% GDP growth for the next five years?

Resolving energy crisis is a pre-requisite to higher economic growth. It's necessary but not sufficient to achieve higher growth. It's overall investment level that drives growth and resolving energy crisis will hopefully increase investment in Pakistan.

Kadeer said...

"How transparently it is done to truly benefit the people much more than the Nawaz Sharif family and friends."

There is a reason why the Chinese are preferred. Unlike US and Western firms, Chinese firms are not scrutinized by their media like WSJ etc so they don't have to worry about taking bribes, corruption in OVERSEAS business practices. When I was in Africa it was a common practice by higher ups in the government to have money wired directly into their accounts in the Cayman Islands for example.

I would prefer the Pakistani Government deal more with the Western or US Governments. There are more checks and balances and less corrupt practices. I am not saying it doesn't happen but today no Fortune 500 company want to ruin their reputation.

AM India said...

Unless Pakistan has a far more efficient land acquisition and rehabilitation program, hydro projects, especially ones including storage, take anywhere between 10-15 years to complete/commission. Hope for your sake you can do it faster.

From the comments above, usd 3 million per MW for Chinese P&M!!!. I know you guys are friends, but you might want to get an independent opinion on that. Chinese tech on large scale projects is very suspect... There are many indian companies who have burnt their fingers on that one in the last 5 -10 years.

Riaz Haq said...

AM India: "Unless Pakistan has a far more efficient land acquisition and rehabilitation program, hydro projects, especially ones including storage, take anywhere between 10-15 years to complete/commission"

I believe most of these projects have been through a lot of planning, feasibility and land acquisition exercises but execution has been held up by lack of funding. Chinese money should help expedite these projects.

HashK03 said...

Kadeer: "There is a reason why the Chinese are preferred. Unlike US and Western firms, Chinese firms are not scrutinized by their media ..... no Fortune 500 company want to ruin their reputation."

West or US is even more corrupt, more innovative corrupt practices have evolved in west then any other country on earth. If you live in west then try to read their literature and compare that literature to their practices, you will be amazed.

Don't forget about Enron and Worldcom. Many more like Halliburton were also involved in corrupt practices.

Just few years ago banks here in UK were bailed through tax payers money, they were scrutinized by media, but nothing changed in their way of working. They still are as corrupt as they were before. If an individual, an organisation or whole country is determined to do something wrong then no matter how much you scrutinize them they will find a way to achieve their objective. Invasion of Iraq may be a good example here.

I believe if Pakistan want's short term prosperity then handshake with west is a good idea but if Pakistan want's long term prosperity then certainly we need to look somewhere else. Perhaps we should look everywhere on globe to provide and receive good quality products and services. Historically Pakistan is too dependent on few centers of power. It's upto politicians as well as general population to find more centres around the globe.

Mike Singh said...

You should know that these high profile visits dont lead to the signing of big deals

the discussions on Big deals are just initiated during such visits
Deals are finalised after many rounds of negotiations between officials

This is true of every country every where in the world

Pakistani leaders just visit China for reassurance

The basic problems of Pakistani economy and energy sector are far too
complex ie

1 No manufacture of indigenous equipment
2 Fuel problems
3 shortage of technical manpower who install the plant and equipment
4 Shortage of forex reserves which is needed for repatriation of profits
5 Internal problems such as recovery of dues and circular debt

China is asking for very healthy rate of return which Pakistan cannot afford

And this is not the first time such big announcements
of several billions of investments have been made

The implementation of such MOUs is the real thing

Riaz Haq said...

Singh: "You should know that these high profile visits dont lead to the signing of big deals..the discussions on Big deals are just initiated during such visits..Deals are finalised after many rounds of negotiations between officials ...The implementation of such MOUs is the real thing"

We'll just have to wait and see how much of it is executed, though I do know that PMLN is better at execution than the previous PPP govt whose performance was horrible.

As to Chinese equipment, money and personnel, it's true everywhere, including your country. There are tens of thousands of Chinese workers building power plants in India today.

Chinese are now supplying equipment for about 25% of the new generating capacity India is adding to its national grid, up from almost nothing a few years ago. There are thousands of skilled Chinese expatriates at Indian plant sites, along with Chinese chefs, Chinese television and ping pong.

Riaz Haq said...

Excerpt of Dawn Op Ed by Shahid Kardar:

it is particularly disturbing that agreements with the Chinese on power/coal-fired power projects are shrouded in secrecy. Nepra, the power regulator, has determined a rate of return of up to 27pc in dollar terms on such projects that would supposedly also apply to the Chinese investors. This rate is much higher than what is on offer anywhere in the world — the country’s poor image is a significant factor contributing to the lack of investors offering competitive tariffs.

Existing IPPs that were promised a rate of return of roughly 17.5pc actually earn more than double this amount (based on an examination of their financial statements). The resulting outflows of foreign exchange to those investing in power systems will become an unsustainable burden. For a product or service to be sold in local currency, it is a mistake to provide a guarantee against exchange rate fluctuations. The heavy outflows in foreign exchange to ‘service’ these investments/loans will encumber our external account, pressurising a renegotiation of these agreements.

It is the distribution end of the electricity supply chain where management and governance is at its worst. However, privatising these monopolies (DISCOs) would be a complex task without a highly competent regulator in the form of Nepra. Instead of promoting competition, the inadequately equipped Nepra merely functions as a calculator of tariffs. In the UK, there was incentive regulation in place to reduce costs and improve efficiency of operations. Nepra has adopted cost plus guaranteed return-based pricing, an approach discarded by the rest of the world ages ago. Part of the problem is that Nepra was set up with distribution of power as the sole responsibility of the public sector.

The managements of these agencies prefer a cosy relationship with the government so that the independent regulator does not demand improved performance. Even donors and the IMF, on whose insistence Nepra was established in the first place, do not themselves believe in the need for, and efficacy of, such institutions, since the conditonalities attached to their loans have built-in clauses for tariff revision that require Nepra to merely serve as a rubber-stamping authority.

Riaz Haq said...

My comments on Kardar's Op Ed in Dawn:

Investors do expect higher returns when risks are higher but these guarantees and the actual current returns to IPPS are outrageous.

If Kardar's claims are correct, then it seems that Pakistani leaders are repeating the mistakes of the bad IPP contracts of 1990s which have come back to haunt Pakistanis. It's truly alarming.

Bilal said...

- Bill payment is continuously improving and excluding PSC at 89.2% at present while for PSCS it's 62.1%

- T and D losses are down to 29.4% (used to be in tune of 40%)

- Fleet efficiency is increasing and stands at 37.1%

- Projects like smart grid( being piloted) are set to improve losses and power management

- Most importantly the once white elephant is making profit

Bial said...

In fact, just realised that it's an old report. According to the latest report the numbers have improved further.

K-Electric's T&D losses are now down to 25% in 2014 from 35% in 2009. Briefing.pdf

AJ said...

Installed generation capacity has been enhanced by approx. 1,000 MW and overall efficiency has improved from 30.4% to 37.0%

53% reduction in transformer tripping in FY2014 vs. FY2009

Significant transmission losses reduced by 2.8 percentage points coming down from over 4% in 2008 to c. 1.4% in June 2014

88% decrease in theft in FY 2014 vs. FY 2009]

These are the things which the govt can improve without any significant expense. I really wonder if this skewed focus on more and more projects is because of some financial incentive in the form of commissions or intellectual bankruptcy of the ruling elite?

Riaz Haq said...

AJ: "These are the things which the govt can improve without any significant expense. I really wonder if this skewed focus on more and more projects is because of some financial incentive in the form of commissions or intellectual bankruptcy of the ruling elite?"

Pakistan needs capacity as well as better management in the power sector.

Although Pakistan's 14 million BTUs per capita energy use is ahead of Bangladesh's 6 million BTUs and Sri Lanka's 10 million BTUs, it is less than India's 18 million BTUs, and far behind China's 68 million BTUs and Malaysia's 97 million BTUs.

Riaz Haq said...

The Karachi stocks market witnessed a bullish trend Tuesday as the analysts said investors’ sentiments were boosted by the inflation numbers which dropped to an 11-year low during November.

Easing consumer price index (CPI) inflation, which the analysts believe would clock in at six percent during fiscal year 2014-15, would pave the way for further monetary easing by the central bank in its monetary policy statement due in January next year. The analysts said the month’s CPI reading was lowest since November 2003 when the index had stood at 4.2 per cent.

Amid higher trades, Tuesday saw the KSE 100-share index gaining 381 points or 1.22 per cent to close at 31,680.72 points as against 31,299.72 points of Monday.

With intraday high and low, respectively, standing at 31,721.83 and 31,299.72, the trading volume at the ready-counter was recorded at 337.8 million shares, showing a growth of Rs 14 million shares when compared to 323.9 million of the previous trading session.

The day saw 397 scrips exchanging hands. Overall value of the stakes traded contracted to Rs 15.6 billion from Monday’s Rs 17.7 billion. Of the traded stocks, 258 gained value, 125 lost and 14 remained unchanged. The market capitalization rose slightly to Rs 7.2 trillion from Rs 7.1 trillion of the previous session. The free-float KSE 30-share index gained 288.61 points and ended at 20,636.17 points.

“Stocks closed high amid higher trades after CPI inflation stood 11 year low in Nov ’14 at 3.96pc (Year-on-Year),” viewed equity analyst Ahsan Mehanti.

Expectations for SBP discount rate cut, fall in NSS rates and easing political concerns after PTI altered dates for protests played a catalyst role in bullish activity at KSE, opined Mehanti, a director at Arif Habib Corporation.

Backed by declining international crude oil prices the CPI inflation in the country is considered to be a major determinant for the State Bank to decide its monetary policy which currently stands at 9.5 percent.

“The lower CPI indicates that further 50-100bps room is still available in SBP discount rate,” said Abdul Azeem, an analyst at InvestCap Research. The low interest rates scenario, the analyst said, would provide further impetus to the country’s equity market, particularly the leveraged sectors.

This is what exactly happened on Tuesday as equity analyst Mehanti said an oversold oil sector led the day’s rally followed by leveraged stocks in cement, textile and fertilizer sectors.

The list of 10 best performing scrips was topped by K-Electric Limited which counted 8.24 million of its listed shares as traded on the day. The utility’s stakes made a 0.2-paisa gain to close at Rs 8.26.

Others to follow were PIA with 26.1 million share trading, Summit Bank 13.9 million, Jahangir Siddiqui 13.1 million, TRG Pakistan 13 million, Bank Al-Falah 12.7 million, Azgard Nine 11.5 million, Engro Fertilizer 10.8 million, Maple Leaf Cement 9.9 million and Engro Foods 9.9 million shares.

“Coupled with likely improvement in forex reserves position, we expect higher cut in policy rate in 2015,” viewed analysts at Topline Research.

Another senior equity analyst Khurram Schehzad said: “there is a lot of value potential left to be topped at the country’s stocks market which stood the best performing equity market in November and the second best frontier market in CY14 to date.”

Riaz Haq said...

Pakistan, which is currently in negotiations with Qatar for liquefied natural gas (LNG) supplies, has opened its farm sector to investments from Qatar, which has placed utmost priority on food security.

Punjab province Chief Minister Shabaz Sharif invited investments in his meeting with the Qatari Businessmen Association (QBA), where both the sides discussed ways of enhancing trade co-operation and investment as parts of strengthening bilateral relations between the countries.

The meeting was also attended by Shahid Khaqan Abassi, Pakistan’s Minister of Petroleum and Natural Resources, and Shehzad Ahmed, Pakistan’s ambassador in Doha; while the QBA was represented by its chairman Sheikh Faisal bin Qassim al-Thani and other officials such as Nasser Sulaiman al-Haidar, Maqbool Habeeb Khalfan and Sarah Abdullah.

During his presentation, the visiting chief minister highlighted the investment opportunities available in Pakistan in different sectors, especially in electricity generation, and the energy sector in general.

Secretary of the Ministry of Petroleum and Natural Resources Abid Saeed had said last week that the Pakistani government was making arrangements to import 2bn cu ft of LNG per day in the next two years to meet energy needs.

The first LNG terminal would be completed by Elengy Terminal Pakistan Limited at the Port Qasim by the end of February next year, he said.

In addition to the energy sector, Pakistan, Sharif said, is also keen to attract investments in agriculture, which can strengthen Qatar’s food security programme.

The Qatar National Programme for Food Security, which was established in 2008, is aimed at developing a sustainable food security programme for Qatar by enhancing domestic agricultural production and strengthening the reliability of food imports from abroad.

Pakistan has been witnessing increasing interests in corporate farming, which has brightened the prospects for fresh investments in different areas of the sector in Punjab, Sindh and Khyber Pakhtunkhwa provinces.

QBA chairman Sheikh Faisal expressed the interest of Qatari businessmen to explore investment opportunities in Pakistan, particularly the transport and construction, electricity generation, and tourism and hotel sectors.

He requested the Punjab chief minister to provide QBA members with detailed studies of different projects available in Pakistan for investment as a preliminary step to organise a (business) delegation to Pakistan.

Qatar has signed a number of bilateral agreements with Pakistan, including an agreement on promotion and protection of mutual investments; an agreement to regulate the recruitment of Pakistani workers in Qatar; a memorandum of understanding between the Qatar Investment Authority and Pakistan regarding the establishment of an Islamic Bank and an insurance company; and an agreement to avoid double taxation and prevention of fiscal evasion.

Trade volume between Qatar and Pakistan reached $800mn in recent years compared to $450mn in 2006.

Pakistan’s economy depends mostly on the service sector, which constitute 53.1% of the GDP, followed by the agricultural sector which amounts for 25.3%, while the industrial sector amount for 21.6%.,-farm-investments

Riaz Haq said...

Sharifs using friends as middlemen?

The politics related to liquefied natural gas (LNG) import have again intensified after Pakistan State Oil (PSO) cancelled an import tender in which top global companies like British Petroleum and Shell could have taken part.
Similarly, many tenders were scrapped in the past, but this time experts were hoping for clinching a deal following encouraging response from renowned companies. But the same old episode has been repeated again.

Punjab Chief Minister Shahbaz Sharif and Petroleum and Natural Resources Minister Shahid Khaqan Abbasi left for Qatar, which could be a major source of LNG supply, soon after the PSO tender was cancelled.
This has sparked speculation that the government has already planned to strike an import deal with Doha in a government-to-government contract through one of Prime Minister Nawaz Sharif’s close cronies, who has been residing in the Gulf Arab state for a long time.
During the previous government of Pakistan Peoples Party (PPP), some ministers had reportedly alleged that the man had blocked a gas deal between Pakistan and Qatar. Despite signing of a memorandum of understanding (MoU) between the two countries, Doha at that time did not push ahead with the gas export programme.
Speaking at a public rally, Awami Muslim League President Sheikh Rasheed Ahmed has also accused the PML-N government of favouring some blue-eyed boys in Qatar through a state-to-state LNG contract with Qatar Gas. He said the government was going to strike the LNG deal with Qatar through one of premier’s cronies, Saifur Rehman, who is residing in Doha.
He also pointed out that the government seemed to be in a hurry as it had assigned the special task of finalising an agreement to Pakistan’s ambassador-designate to Qatar.
These speculations seem to be spreading after the chief minister of Punjab went to Doha and met top officials. Then the minister of petroleum joined him.
This suggests two important things. First, the chief minister has a key role in reaching an LNG deal with Qatar and second, the government has made up its mind for an agreement with Qatar and PSO’s tender was mere eyewash.
However, with these developments, Pakistan is going to lose the opportunity of importing LNG at a competitive price. Now, the ball is in Doha’s court and it can demand a price of its choice.

During the previous PPP government, Qatar had revised downwards the LNG price offer to $17.437 per million British thermal units (mmbtu), a 0.5% discount over the previous price of $18.002. This would have led to savings of $1 billion over the 20-year lifetime of the project.
If all charges are included, LNG supplies from Qatar will cost $19.521 per mmbtu and Pakistan will have to spend $200 million on developing infrastructure for handling imports.
Another tender
Separately, in response to a tender floated by Sui Southern Gas Company (SSGC) for an LNG integrated project, Pakistan Gas Port had offered a bid of $17.7074 per mmbtu while Global Energy International quoted a price of $18.16 per mmbtu.
According to officials, if the government had awarded the contract to the lowest bidder, the price would have stood at $10 per mmbtu following a sharp fall in oil prices in the world market. These prices were even lower than the revised price quoted by Qatar.

Riaz Haq said...

Excerpts From National Interest article by China critic Gordon Chang:

In early November in Beijing, Sharif signed Corridor pacts authorizing $45.6 billion in projects in his country. Of that total, $33.8 billion is allocated for electricity generation—the addition of 16,520 megawatts by 2021—and $11.8 billion for transportation infrastructure.

The November pacts follow those signed this February, when the two countries inked deals to improve the Karakoram Highway and build an airport in Gwadar, a port on the Arabian Sea near the Iran border. The February agreements in turn came on the heels of one signed last year, when China and Pakistan agreed to build a fibre-optic cable from the Chinese border to the city of Rawalpindi, next to Pakistan’s capital.

Chinese premier Li Keqiang called the Corridor, during his visit to Pakistan in May of last year, a “flagship,” and the ambitious undertaking is indeed a wonder to behold. The transport and communication links—roads, railways, cable, and oil and gas pipelines—will stretch 2,700 kilometers from Gwadar to the Khunjerab Pass, where the Karakoram Highway leaves Kashmir and enters China, not far from the Chinese city of Kashgar.

Moreover, Islamabad will establish special economic zones in the Corridor where Chinese companies will locate operations. Beijing, as Tarique Niazi of the University of Wisconsin observed, is trying to “integrate Pakistan into the Chinese economy by outsourcing low-tech, labor-absorbing, resource-intensive industrial production,” and the Corridor initiative makes it easier to transform the client state “into a giant factory floor for China.”

Beijing has obviously gone all-in on Pakistan. Sharif’s government will provide 15 percent of the financing for the cable to Rawalpindi, but almost all the rest of the Corridor projects will be on China’s tab. Pakistan does not have the money to pay for the large projects, and according to Khawaja Asif, Pakistan’s minister for water and power, Pakistan will not be incurring debt.

Beijing, it appears, will be providing almost all the funding, which means it will, one way or another, own resulting cash flows as the projects are supposed to be profit-making. Chinese companies will participate in the building of the infrastructure, and Chinese banks, especially the China Development Bank and Industrial and Commercial Bank of China, will be providing financing. The Beijing-sponsored Asian Infrastructure Investment Bank, when it opens its doors for business next year, will probably support Corridor projects as well. Sharif, therefore, should be worried that the tide of Chinese cash will effectively turn his country into Beijing’s newest colony.

For now, Beijing’s strategy is to build additional facilities in the port area so that it can then offload oil there and send it across the Himalayas to Xinjiang. On paper, the overland route eliminates the need to ship crude through the easily blocked Malacca Strait, but the Gwadar-Kashgar plan has its own vulnerabilities, especially at both ends.

Riaz Haq said...

The term special economic zone (SEZ) is commonly used as a generic term to refer to any modern economic zone. In these zones business and trades laws differ from the rest of the country. Broadly, SEZs are located within a country's national borders. The aims of the zones include: increased trade, increased investment, job creation and effective administration. To encourage businesses to set up in the zone liberal policies are introduced. There policies typically regard investing, taxation, trading, quotas, customs and labour regulations. Additionally, companies may be offered tax holidays.

The creation of special economic zones by the host country may be motivated by the desire to attract foreign direct investment (FDI).[1][2] The benefits a company gains by being in a Special Economic Zone may mean it can produce and trade goods at a globally competitive price.[1][3] The operating definition of an economic zone is determined individually by each country. In some countries the zones have been criticized for being little more than Chinese labor camps, where labor rights are denied for workers.[4][5]
Taking the example of the Chinese success with their SEZs, China is helping Pakistan develop the RUBA SEZ on the outskirts of Lahore. RUBA SEZ PVT LTD is a subsidiary of RUBA Group of Companies and was expanded from existing Haier – RUBA Economic Zone.

Other economic zones include the China-Pakistan economic zone open only to Chinese investors and also the future crown jewel of Pakistan, Gwadar.

There are also talks of creating a Japanese city for foreign investors from Japan only.

There has also been new SEZ proposed on the currently under construction Sialkot-Lahore motorway, Qatar has proposed an investment for $1 billion in a new SEZ along the motorway.

There is also a new zone under construction in Faislababd, which will be the biggest industrial estate of Pakistan when complete, it has sections for each country and the first phase is already complete with a special Chinese zone in it.

Special economic zones in Pakistan:

Karachi Export Processing Zone, Karachi, Sindh
Risalpur Export Processing Zone, Risalpur
Sialkot Export Processing Zone, Sialkot, Punjab
Gujranwala Export Processing Zone, Gujranwala, Punjab
Khairpur Special Economic Zone, Khairpur, Sindh

Riaz Haq said...

Brookings on economic and industrial corridors:

The two leaders (LeKiang and Sharif) agreed on the areas of cooperation in the near future under the framework of the Long-Term Plan for China-Pakistan Economic Corridor such as: start the China-Pakistan Cross-border Fiber Optic Cable project at an appropriate time, upgrade and realign the Karakoram Highway on a fast-track basis, explore cooperation on solar energy and biomass energy, explore construction of industrial parks along the Pakistan-China Economic Corridor, launch at an early date inter-governmental consultations to implement the Digital Television Terrestrial Multimedia Broadcasting (DTMB) in Pakistan, coordinate the commercial operation of TD-LTE in Pakistan, and enhance cooperation in the wireless broadband area. (APP 2013)

Economic corridors are meant to attract investment and generate economic activities within a contiguous region, on the foundation of an efficient transportation system. They are meant to provide two important inputs for competitiveness: lower distribution costs and high-quality real estate. The corridor approach for industrial development primarily takes advantage of the existence of proven, inherent and underutilized economic development potential within the region.
Apart from the development of infrastructure, long-term advantages to business and industry along the corridor include benefits arising from smooth access to the industrial production units, decreased transportation and communications costs, improved delivery time and reduction in inventory cost. The strategy of an industrial corridor is thus intended to develop a sound industrial base, served by competitive infrastructure as a prerequisite for attracting investments into export oriented industries and manufacturing. Table 1 provides a categorization of corridors in terms of their scope and economic impact. The most comprehensive form, the economic corridor integrates infrastructure development with the trade, investment, and other economic potentials of a set of specific geographical areas, while at the same time undertaking efforts to address social, environmental, and other potentially adverse impacts of increased connectivity.

Riaz Haq said...

ADB provides loan to Pakistan to improve power transmission
Dec 12,2014
ISLAMABAD, Dec. 12 (Xinhua) -- The Asian Development Bank (ADB) and Pakistan signed a 248-million-dollar loan agreement Friday to upgrade the country's power transmission operation and management in a bid to boost energy security, officials said.

The loan, which is the fourth under ADB's multitranche financing facility for the Power Transmission Enhancement Investment Program, will fund 10 subprojects, the ADB said.

They include providing upgrading systems to evacuate power generated from new thermal, wind and hydro power plants and to reduce power losses, and measures to strengthen network safety and security requirements.

This is the final tranche of the 800-million-dollar financing facility which was originally approved in December 2006. The state- owned National Transmission and Dispatch Company will continue as the executing and implementing agency for the program.

The infrastructure to be built or upgraded includes 281 kilometers of 500-kilovolt (kV) transmission lines from the Muzaffargarh grid station in eastern Punjab province, four new 220- kV grid stations, and an extension of 500-kV grid stations at Jamshoro in southern Sindh province and Gujranwala in Punjab.

Mohammad Saleem Sethi, secretary of economic affairs division for the Government of Pakistan and Werner E. Liepach, ADB's country director for Pakistan signed the loan agreement.

"Expanding and upgrading the transmission backbone will provide reliable and high-quality energy supplies to meet increasing demand from industrial, commercial, agricultural, and domestic customers," said Liepach. "It will support the government's strategy to provide people with better access to affordable electricity."

Riaz Haq said...

If enacted, that (Pak-China Corridor) plan would enable China’s naval vessels and merchants to bypass the Malacca Strait, long a haven for pirates and militants who prey on unsuspecting ships. The CPEC would allow the government and banks in the mainland to lend to Chinese companies operating in Pakistan, facilitating construction along the route. Some of the other line items in the deal aim to fix Pakistan’s failing energy infrastructure: the CPEC calls for $15.5 billion in investments ranging from coal to solar and hydroelectric power, scheduled to become part of Pakistan’s national electricity mix in 2017. That will follow a fiber optic cable linking Xinjiang and Rawalpindi, which will come at the cost of $44 million.

China has plenty of incentive to unleash a spigot of investment, despite fears that Pakistani radicals are stoking violence in Xinjiang among the 10 million Uyghur Muslims that live there. Beijing has already pushed heavily for other projects in the region, including the 1,240 km Karachi-Lahore motorway, a six-lane, high speed corridor expected to be completed in the fall of 2017, and orchestrating upgrades to public transportation, including metro and bus service, in six cities, including Lahore, Karachi, and Rawalpindi. Modernizing the Karakoram highway, which runs 1,300 km from Kashgar, the ancient silk road crossing in Xinjiang, all the way into the heart of the Punjab, Pakistan’s biggest province, will also prove critical.

All of that leads to Gwadar, which China hopes to transform into a free-trade zone on the order of a Singapore or a Hong Kong, another major focus for Chinese investors. That carries geopolitical weight. China’s aid to Pakistan now exceeds American spending, which has totaled $31 billion since 2002. Washington’s investments have slowed since counterterrorism funding authorized by Congress during the Afghan surge has dried up.

It’s not as though China isn’t interested in military issues. President Xi also used the occasion to finalize a deal to send eight submarines to Pakistan, in a long-promised deal. They’re also working to get on shared ideological ground: the Research and Development International think tank (RANDI), will be chaired by Pakistani and Chinese leaders. That unfortunate acronym became the butt of plenty of Twitter jokes on Monday. But the group could wield serious influence, especially in thinking up plans to help Pakistan fight terror and potentially determining the role of mediators in talks with the Taliban in neighboring Afghanistan.

China’s grand plan for Pakistan’s infrastructure has taken shape over the course of President Xi’s visit. It will have a major impact on what the future holds for Islamabad, and the entire Indian Ocean basin.

Riaz Haq said...

The ADB project report mentioned that Pakistan's domestic investment and trade flows concentrate on one major north-south transport corridor, which connects the key centres of economic activity. Comprising national highways and motorways with a total length of about 1,800km, the corridor runs from the port city of Karachi in the south, passes through primary production and population centres, including Khanewal, Multan, Muzaffargarh, Lahore, Faisalabad, Islamabad and Peshawar, before reaching Torkham, on the northern border with Afghanistan. The economy of the area served by the corridor accounts for 80 85 percent of Pakistan's GDP. As a result of Pakistan's accession to the Central Asia Regional Economic Cooperation (CAREC) Programme in 2010, this transport corridor now forms an integral part of the CAREC Corridors 5 and 6, opening a vital trading link between landlocked Central Asian nations and the country's warm water ports of Gwadar, Karachi, and Port Qasim, on the Arabian Sea, ADB report added.

The Motorway M-4 is a key part of the north-south transport corridor. Its area of influence, which includes Faisalabad, Multan, and the entire Punjab Province, accounts for approximately 56 percent of the country's population and 59% of the country's GDP. The M-4 motorway will extend the already completed M-1, M-2, and M-3 motorways southward and shorten the distance between Multan and the twin cities of Islamabad and Rawalpindi in the north. The Faisalabad to Gojra section (58km) of M-4 was completed in 2014 under ADB financing and the Khanewal to Multan section (57 km) will be completed in 2015 under financing from the Islamic Development Bank.

The project will finance the construction of the 62km Gojra Shorkot section, followed by the construction in 2016 of the remaining 64km Shorkot Khanewal section. The new motorway will provide a 4-lane access controlled alternative to the existing narrow and congested routes. This will be essential in providing relief for the heavily trafficked Faisalabad and Khanewal Multan Muzaffargarh areas.

ADB report revealed that the national highway N-5 is part of the north south transport corridor and Pakistan's longest and most important highway. Its section between Lahore and Multan is a 4-lane road that passes through highly urbanized areas carrying an average daily traffic volume of 20,000 vehicles. The completed M-4 will alleviate traffic congestion along the parallel N-5, and offer an efficient international link between the north of Pakistan and beyond, and southern Punjab, Sindh, and the ports of Karachi and Gwadar in southern Pakistan.

Riaz Haq said...

More than 70% of China’s trade and energy imports travel through the Indian Ocean and the pirate-swarmed Strait of Malacca, both patrolled by the United States and Indian navies. But this possible chokepoint is a security issue for China, particularly in terms of oil (40% of its general consumption passes through the strait). Any sort of conflict could cut off the country’s energy supply, and ships would need to travel an extra 500 miles to avoid the strait, currently the fastest route from the Indian Ocean to the Pacific. China, aware of this vulnerability, is looking to Pakistan to provide a shorter and safer alternative.
The China-Pakistan Economic Corridor (CPEC), first proposed in 2013, is a massive project of rail links, special economic zones, dry ports and other infrastructure projects across Pakistan allowing for direct access to the Indian Ocean. It would connect Gwadar to Kashgar, a major trading hub in China, and abbreviate the current route to the Persian Gulf by more than 10,000 kilometers. Instead of 45 days, it would take China a mere 10 days to get its imports—all while avoiding any potentially contested channels near Taiwan, Vietnam, the Philippines, Indonesia and India, and eventually lowering shipping costs.
The CPEC would also provide China with an entry point to the Arabian Gulf, thus widening its geopolitical influence and possibly its military presence in the region. (Some Indian intellectuals suspect the Gwadar port will serve as a Chinese naval facility.) And it only comes at a cost of about $40 billion.

This isn’t the only investment China has planned in Pakistan. In fact, the money going to the country is double what Pakistan has received in foreign direct investment since 2008, and larger than any shape of assistance from the U.S. The list below (including CPEC) is just a snapshot of upcoming projects, likely funded by the Bank of China, the Export-Import Bank of China and the proposed Asian Infrastructure Development Bank:
$3.7 billion for a Karachi-Lahore-Peshawar rail line
$2.8 billion for developing four coal-fired stations with a capacity of 1,980 megawatts in Thar (Sindh)
$2.2 billion for two coal-mining blocks in Thar (Sindh)
$2 billion to build a natural gas pipeline between Gwadar and Nawabshah, then connecting to Iran
$2 billion to develop coal-fired generation plants at Port Qasim Karachi
$1.6 billion for a hydropower project in Karot
$1.2 billion for a solar power park in Bahawalpur
$930 million to link the Karakoram highway to Islamabad and Havelien
$260 million for a 100 megawatt wind farm in Jhimpir
$230 million to build the Gwadar International Airport
It is all part of China’s quest for influence throughout the continent via aid and investment. After decades of shying away from aggressive foreign policy moves, China now wants to play a much bigger regional role and is pushing plans for interconnected infrastructure networks to better link its economy with rest of Asia, the Middle East, Africa and Europe. Think of it as the new Silk Road.