As the euphoria of mega investment inflow through CPEC is settling down, worries about   its cost benefits and massive outflow obligations in years ahead are refusing to go away. As Early Harvest Projects are near to completion, bulk of Energy projects investment over USD 21 billion is in pipeline at various stages. So is the bulk of investment earmarked for Gawadar Port. With many projects at advance level of execution, it is now more appropriate to confront these worries.

CPEC project size was originally envisaged as USD 46 billion; a whopping USD 34 billion; about 3/4th was allocated for energy sector. It was aimed to address the chronic shortage of power which swelled over the years due to lack of regular investments during last one decade or so. Demand kept growing but generation stagnated. Looming gas shortages further worsened the generation prospects. The vicious spiral of power shortages pulled down significant chunk of GDP growth and made industrial and agricultural output falling.  Power generation is long gestation business and requires huge sum of investment. The PML-N government grabbed the opportunity of CPEC’s generous investment opportunity to fill the void back in 2014.

The logic is hard to disagree but the haste, extraordinary terms offered and dubious secrecy adopted for most of power generation projects ignited many worries. At a time when the world is moving away from pollutant fossil fuel of coal, Pakistan decided to commit heavily for coal for projects. Thar Coal project was offered attractive terms to pave the way to use indigenous Thar coal. But rest of the projects are dependent on imported fuel; mostly coal followed by RLNG. The decade of 90’s and afterwards witnessed a major chunk of imports of oil (as high as more than 1/3rd of total import bill) as regular feature of ever deteriorating Current Account to keep running the power houses based on oil. The industry expert fears another kind of shift; this time from oil to coal and RLNG.

The extra ordinary attractive terms offered to energy project investors, often wrapped in secrecy, raised many eyebrows too. The tariff determination process attracted lot of critique. Return of investment offered for few early projects was as high as 27% which was later reduced in the range of 17-20% in general. Sovereign guarantees were offered as additional consolation and comfort. Tariff offered for solar and wind projects in particular and coal in general are sighted as one of the highest in the region. Industry pundits are worried that when all energy projects with these investments come on stream, basket prices would significantly rise to an uneconomical level; hardly sustainable by industry, commercial and household consumers. This may seriously compromise the competitiveness industry in general and export industry in particular.

Most of the energy projects are based on imported fuel of RLNG or coal; linked with international oil market prices and require foreign reserves to foot the import bill. Pakistan exports have dropped from USD 25 billion mark during 2012 to less than USD 20 billion during 2016.  With a low value added export product mix, a miraculous turn around in export earning is not in sight.  With the widening trade deficit, country may soon face a dire situation of depleting foreign reserves. Repayment of loan obligations on these commercial loans combined with fuel import and any devalued exchange rate is feared to create a snow ball; almost impossible to handle by our fragile economy.

Transparency of most of projects has been another point of concern. Government kept the structure of CPEC investments awell-guarded secret until Mr. Sartaj Aziz, Advisor Foreign Affairs disclosed a few months ago that bulk of CPEC investments are commercial loans and balance are soft loans. Original CPEC invest package has been revised upward and now stands as over USD 50 billion with the inclusion of few more projects and enhanced allocation for railways. Total debt burden of Pakistan is already ballooning and is well over 64%. Addition of new state to state loans and commercial loans backed by sovereign guarantees would increase debt burden to new heights. Many economists are worried about the sustainability of this high debt level.

Infrastructure projects of CPEC include Gwadar Port and city development, road & railway infrastructure and industrial parks development. All these projects are expected to usher a new era of industrial and trading activities across various parts of the country; many of them joining first time the industrial and commercial map of the country. It is expected that improved industrial and commercial output would help growth of the national economy. Though most of the blueprints of Industrial Parks initiative are yet to be finalized but so far export led industrial growth does not seem to be a guiding principle. Any meaningful impact of industrial output from Industrial Parks component of CPEC to national GDP is still many years away. It would be highly appropriate and essential to leverage Chinese Export led industrial growth model as a guiding principle while embarking on development of Industrial Parks. If planned and achieved, export led industrial investment could take care of many worries as cited above.

Conscious efforts should be orchestrated at Joint Cooperation Committee level to integrate the industrial manufacturing at proposed Industrial Parks with local investors and industry. Forging and promoting joint ventures and a meaningful strategy to ensure technology transfer can make Industrial Parks component of CPEC as self-sustainable, export oriented and valued added. If managed so, this component can be the real change agent for industrial and commercial landscape of the country towards the completion of CPEC.

Local chambers of commerce and industries from Lahore, Sialkot and Karachi have already started complaining that usage of local material and equipment in under construction projects is minimal. Local managerial level participation is also minimum as Chinese Investors have preferred to stick with their native fellow colleagues. However, labour work to locals is being offered which in effect does not infuse large sums in local economy. If this practice continues for next wave of projects too, hopes of surge in labour market opportunities would be hard to realize.

Pakistan could attract only USD 29.5 billion during 2000-13 where its FDI flow during later years of 2010-2013 stood a paltry USD 5.5 billion. Whereas India attracted an FDI of USD 214 billion and Vietnam as USD 53 billion during 2000-2014. Pakistan has been an FDI deficit country for various reasons. Such low level of investment has constrained capacity building to plan big ticket and complex projects swiftly and execute rapidly.    CPEC is the moment of test and prudence for the country. As a saying goes; failure is not an option. But then, guaranteed success is not a foregone conclusion either. In case of failure, Mr. Ahsan Iqbal very explicitly predicted the other day in Islamabad that “….we will not be able to bear the burden of this investment if a political crises is created”. It warning equally applies on our capability and prudence too. CPEC can be a game changer but worries attached to its priorities and execution are real too.