The China-Pakistan Economic Corridor is being termed as a ‘game and fate changer’ for Pakistan. But if the past is prologue, the new projects under it may not have much of a future, and both Pakistan and China know this.
The China-Pakistan Economic Corridor (CPEC), around which 51 agreements were signed during Chinese President Xi Jinping’s visit to Pakistan in April 2015, promises such massive investments that it is not surprising that the Pakistani government gushes over it as being a “game and fate changer”. Against the $46 billion announced, American baksheesh for Pakistan’s tenuous support in Afghanistan seems mealy-mouthed; its Enhanced Partnership with Pakistan Act of 2009 tripled economic assistance to $7.5 billion, spread over five years, but only $5.5 billion was actually appropriated. The annual aid to Pakistan from the Organisation for Economic Co-operation and Development (OECD), including the United States, has rarely risen above $3 billion. And most private investors, like tourists, have stayed away. Therefore, this Chinese largesse in the financial desert in which Pakistan wanders is a blizzard of manna.
Beyond Gwadar
Some here rail at the injustice of it all, as proof that crime pays, or fear it as being a harbinger of worse to come, a Chinese supari on India. But only $6 billion of the investment announced is for what furrows brows here — the improvement of facilities in and around Gwadar, and the building or expansion of roads that will reach all the way up from there to the enlarged Karakoram Highway, giving China access to the Arabian Sea. Another $5 billion has been set aside for a metro for Lahore, and to modernise the railway track from Karachi to Peshawar. Reports of the corridor being a network of roads, railways and pipelines from Gwadar to Kashgar are, at least for now, fantasies. China established a decade ago that it would be prohibitively expensive to pump or carry oil and gas over the Karakorams to Xinjiang. Since then, to sidestep a blockade of the Malacca Straits, it has invested heavily in Kyaukpyu in Myanmar, through which oil, gas and goods will travel via road, rail and pipelines to Yunnan. Gwadar is less crucial to China now than it may once have been.
Pakistan’s energy crisis
Of the investments announced, $33.8 billion is for thermal, hydro, solar and wind projects to tackle Pakistan’s energy crisis, which is now so bad that in March this year there was speculation in its media that it could bring the government down. This looks like selfless assistance to a friend in need, but China has agreed more than once before to finance huge power projects in Pakistan, which its companies have then abandoned claiming that they were not feasible. In January, Chinese investors pulled out of a 6,600 MW power project in Gadani in Baluchistan, which was part of the Economic Corridor. In February, work stopped on five Chinese-backed power projects in the Punjab, which would also have generated 6,600 MW. These projects envisaged investments of about $16 billion, almost half of what those now announced will cost. The Han giveth and the Han taketh away, blessed be the name of the Han.
Pakistan’s installed capacity is 22,800 MW, more than enough for the current demand of 19,000 MW, but it produces only 12,000 MW. The problem is the circular debt, presently standing at $5 billion, that plagues its energy sector. The Government pays power companies Rs.15 per kWh, charges the consumer Rs.10, but gets around Rs.4.5, since evasion is rampant. Unable in its penury to cope with a shortfall of Rs. 10.5 per kWh, it either stops or delays payments to the power companies, which cannot then pay fuel suppliers, which suspend shipments. Production spirals downwards.
“ China established a decade ago that it would be prohibitively expensive to pump or carry oil and gas over the Karakorams to Xinjiang... Gwadar is less crucial to China now than it may once have been. ”
Therefore, adding production capacity will not end Pakistan’s power crisis; the new plants would join their brethren in rapid bankruptcy because they will not be paid. And they cannot be because no government there can close the gap between what it earns and what it pays; politics wedges it open. The largest defaulters are the companies and estates owned by the ruling elite who will not pay their bills. Raising tariffs to try to recover part of the shortfall from the middle-class who do is political suicide for the Pakistan Muslim League (PML), with its base in the Punjab, which takes most of the power. The Government admits that the Chinese companies pulled out of Gadani because they feared they would not be paid, even though it offered to set up a revolving fund for them. Unless its word has since become sterling in Chinese boardrooms, there is no reason why those now roped in should be more gullible.
Thermal and solar dreams
There are other stupendous problems. Like the plants in Baluchistan and the Punjab, aborted by the Chinese, four out of the six thermal power projects for which agreements have now been signed are predicated on imported coal, in place of imported furnace oil, from which 60 per cent of Pakistan’s power is now generated. With the price of oil plummeting, this is not a cheaper alternative, not least because the infrastructure has first to be built to land and transport the massive amounts of coal needed. The other two projects will mine lignite in the Thar and generate power at the pithead which is a must, since lignite is susceptible to spontaneous combustion, making carriage hazardous. This means, though, running thirsty power plants in a desert which has no water. Chinese designs are slightly more thrifty with water than ours, but still demand volumes simply not available in the Thar, unless the needs of its residents who already live on the edge are ignored.
The solar park at Bahawalpur was already up and running, funded by the Government of Punjab; 100 MW, installed by a Chinese company in four months, came on stream this April. Now, another Chinese company will invest $1.5 billion to add 900 MW. This will be about five per cent of Pakistan’s current installed power capacity when it is completed in 2016, over eight per cent of its current production, so it is a very significant project.
Unlike the thermal power projects, which face almost insuperable problems, this has none, but the question of payments remains. Solar power in Pakistan, as elsewhere, is still not as cheap as thermal. The government has announced that it will buy solar power at Rs.15 per kWh, which is what it pays for thermal power. Whether this will be profitable for the Chinese company is moot, but it will certainly expect to see the colour of Pakistan’s money. The sun will set very fast on this project otherwise.
More ‘cut and run’
This will also be the case with the Chinese companies that will build and operate the two hydropower projects announced; Suki Kinari in Pakhtunkhwa and Karot in the Punjab, which, between them, will add 1,600 MW to the grid. These are substantial additions to installed capacity, but which pale in comparison to the Dasu on the Indus, for which ground was broken in June 2014, which will add 4,320 MW to the grid. There too, a Chinese bank is the lead financier, putting up $2 billion of the $4.3 billion the first phase will cost, with the World Bank and Deutsche Bank sharing most of the rest.
If these new projects go through, it is a given that the Chinese have received guarantees, more credible than those on the projects they abandoned, that their fees will be paid by the Government of Pakistan in full and on time. Since the government’s kitty remains the same, this means that there will be even less for Pakistan’s own long-suffering power companies. The crisis may therefore get worse before it gets any better, if at all. In fact, what these agreements set up is a bizarre mirror image of a Ponzi scheme, with money taken from old investors to pay off the new. Like the usual rumours about its imminent death, those circulating from April about Pakistan’s renaissance may therefore be greatly exaggerated.
Given all this, it will be fascinating to see how many of the projects now announced the Chinese will actually build. If they are built, and crucially, if they run profitably, they will of course help change the game for Pakistan, but so far this year, Chinese companies have cut and run. If the past is prologue, these new projects may not have much of a future, and both governments know this, so this odd couple is playing odder games. Pakistan’s is blind man’s bluff. Deeper than the sea, its partner plays Chinese chuckers.
(Satyabrata Pal is a former member of the National Human Rights Commission, India and former High Commissioner of India to Pakistan.)
