What is China-Pakistan Economic Corridor?

What is China-Pakistan Economic Corridor?

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  Jazib Nelson Research Associate,PRIME Institute Pakistan China-Pakistan Economic Corridor
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  Contents PRIME Institute2  CPEC:Part of “One belt, one road”  What is CPEC?  CPEC narrative in Pakistan  CPEC: Project portfolio  CPEC: Financial aspect  CPEC: Incentive measures by Govt. of Pakistan  CPEC: Benefit matrix  CPEC: Challenges and risks
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  CPEC: Part of“One belt, one road” PRIME Institute3  OBOR is an ambitious Chinese development strategy.  OBOR aims to improve regional connectivity by connecting Eurasian economies.  Less distance to travel for Chinese goods to Europe, Africa, and the Middle East.  CPEC is one of six corridors to be built under OBOR.
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  What is CPEC? PRIMEInstitute4  Collection of energy and construction projects worth $51 billion.  Most of the CPEC investment is on Pakistan’s power sector.  Comprises of three routes – Central, Western, and Eastern – that connects Gwadar in Pakistan to Kashgar in China.  The three routes trace through some of the most deprived areas of Pakistan. 68% 32% Energy Transport/Infrastructure/Communication CPEC Investment Breakdown
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  CPEC narrative inPakistan PRIME Institute5  Political  Route controversy  Security  Regional politics  Development  Business  CPEC expo, 2016
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  CPEC: Project portfolio PRIMEInstitute6  A large share of CPEC projects belong to power sector.  Energy mix in CPEC energy projects is dominated by coal.  Energy projects are being built under build-own-transfer principle.  Projects are staggered:  Early harvest projects (mostly energy projects) to be completed by 2018.Expected to add 10, 400 MW to Pakistan’s electricity gird.  Other projects are divided into short-term (2020), medium- term (2025), and long-term (2030).
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  CPEC: Financial aspects PRIMEInstitute7  Debt-to-equity ratio is 75:25 on average for power projects  Equity component is equally shared between Pakistani and Chinese companies on average  Debt component is mostly financed by loans from Chinese banks  Pakistani banks are also providing loans for power projects  Infrastructure, communication, and transport projects are financed by Chinese government  National Highway Authority (NHA) is massively involved in infrastructure and transport $33 billion $18 billion Private investment Bilateral loans
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  CPEC: Incentive measuresby Gov. of Pakistan PRIME Institute8  Electricity tariffs already notified for CPEC power projects  Sovereign guarantees are also set up for power projects  23 year tax holiday for businesses in Gwadar Free Zone  Chinese Overseas Port Holding Company Limited (COPHCL) and its associated operating companies exempted from 1 percent income tax  COPHCL granted full exemption on tax on dividends  COPHCL exempted from all customs duties on impact of raw materials and other materials for 40 years  Profit on debt exempted from taxes
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  CPEC: Economic Zones PRIMEInstitute9
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  CPEC: Benefit matrix ChinaPakistan PRIME Institute10  China is expected to save approximately $2 billion on supply of oil through shortest CPEC route  Export goods from western China to ports: CPEC route: 2,442 km; Current route: 4,457 km  Economic development in Xianjing province  Strong regional presence  Revamp Pakistan’s ailing road and energy infrastructure  Increase Pakistan’s GDP by 2 percent per year in the short term  Boast Pakistan’s exports  Promote development in poor regions of Pakistan
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  CPEC against regional developmentalprojects PRIME Institute11
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  CPEC: Challenges andrisks PRIME Institute12  High risks come with high connectivity (effects of slowdown in Chinese growth on Pakistan’s economy)  Pakistan’s trade balance with China may worsen (exports from Xianjing province of China will increase)  Lack of institutional/governance experience in Pakistan with handling CPEC-scale projects in the past (inability of Gwadar Development Authority to solve water crisis in Gwadar is hurting development of CPEC projects in the area)  Coal-fired power projects may become liability on Pakistan in the future (as global economies move towards non-fossil fuel based energy, GoP may find it hard to rope in foreign investments to operate them)  Investment incentives prerogative of Chinese investors only (may reduce country-diversity of foreign investment in Pakistan)  CPEC power projects may induce external borrowing in Pakistan ( Pakistan’s forex reserve may not be sufficient to cover rising import bill due to import of raw materials for CPEC projects)  Lack of transparency in CPEC-related contracting  Political outlook in Pakistan and issues of regional security