Translating CPEC into a game changer


-Editorial

WEB DESK: The onslaught by the political opposition on the PML(N)-led government over the location of Special Economic Zones (SEZs) envisaged under the China-Pakistan Economic Corridor (CPEC) is not a good omen. It has resulted in China mulling delineating a back-up route via Iran and investing in maritime routes for better economic prospects.

Therefore, it needs to be clearly understood that China wants a linkage of western China with waters of the Arabian Sea to develop its western region as well as with Europe, because Western China is far less developed than cities closer to the coast alongside the South China Sea. President Xi Jinping’s `One Belt, One Road’ plan envisages this.

The PML(N) government first wants the existing infrastructure to be used as a start- up and special economic zones developed at places where the density of the population is thick. There is nothing wrong with this approach. It is abundantly clear that in the CPEC scheme, the emphasis of Pakistani government is on generation of more electricity while the Chinese focus is more on transportation network. Thus, the aims of both the countries are not in tandem. In other words, the major chunk of the $46 billion CPEC, at present, constitutes power projects while China wants greater rail and road connectivity. Fortunately, both the civilian and military leadership have put their weight behind the CPEC.

Priority power projects of 10,400MW are under way at a cost of $21.486 billion out of which only $3 billion is going to be spent on transmission lines ie, Matiari to Lahore ($1.5 billion) and Matiari to Faisalabad ($1.5 billion), giving rise to anger in Khyber Pakhtunkhwa (KP). However, the biggest power project is the Suki Kinari Dam, to be built at a cost of over $1.8 billion. However, this project is scheduled to be completed by 2022. So where is the beef?

Perhaps, the governments in minority provinces are not comfortable with Sahiwal coal-fired project. And also at rolling in of projects envisaged earlier like Engro-Thar coal-fired and surface mine Thar Coal Block 2 and the power plant (1320MW) that would cost $2 billion. Surely, the opposition cannot be unaware that financial close of these coal-fired projects is needed and that other multilateral agencies such as the World Bank and Asian Development Bank have moved away from coal-fired plants and are not willing to finance them.

We have already converted our big business groups into a rentier class by guaranteeing them very high rate of return on equity (21 to 22 percent) in dollar terms, and also provided them with sovereign guarantees on debt incurred on account of repayment as part of our power policy. These business groups are only interested in power projects despite not being paid on time. The reasons: not only is the rate of return unprecedented, the rate of return on equity is hedged in dollars. Perhaps, we could do the same in transmission and distribution because our T&D system needs to be overhauled. The T&D system is now archaic and collapses when load in excess of 15,000MW is placed on it. An additional $3 billion investment is therefore sorely needed.

Now the government is learning that it can establish generation plants at half the cost and is opting to do so. Providing sovereign guarantees to private sector projects only adds to our debt even though guarantees are regarded as intangibles. We are diving head-on into power projects under the CPEC without doing a proper real cost-benefit analysis. Pakistan would need to raise its GDP by more than 7 percent every year to pay back the Chinese ‘soft loans’ as the equipment for generation would come from Beijing.

The debt incurred on these projects carries sovereign guarantees as well. We need to dig deeper into each project’s feasibility and ensure that the local purchases of building material as well as spares are made through domestic sources; and these are not carried out under the China-Pakistan Free Trade Agreement (FTA). Only then will we able to utilise our existing capacity and also ensure utilisation of enhanced capacity of our domestic plants. Unless and until local output of goods and services is beefed up, we will not be in a position repay the dollar loans on electricity generation and transmission and distribution projects envisaged under the CPEC. We need to remember that there is excess capacity in China due to global slowdown. And, China would like to utilise this excess output by exporting it to us.

The Chinese investment is indeed very welcome but will not be a game changer until our investment gap with domestic savings is completely bridged which CPEC alone cannot do. Thus, we need to come up with solutions to raise our growth rate. Both the Planning Commission and the Ministry of Finance should work at this. Loans have to be repaid. Sinosure is charging a fee of 7 percent for debt servicing. As such, the capital cost of a coal-fired project at Port Qasim is not $767.9 million. But in reality it is 956.1 million dollars. Sinosure financing fee in the first two years is 33.3 percent and 13.33 in third year and 20 percent in the fourth year. And, a return of 27.2 percent has been guaranteed. The scenario becomes even bleaker if there are delays. Electricity has to be delivered to consumers at affordable rates to translate the CPEC into a real game changer.

Source: Business Recorder

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