Chinese investment in Pakistan: A quick fix?

11/07/2016

by Mustafa Omar

Pakistan’s economy lacks growth, and is experiencing a crippling energy crisis and high unemployment.

Despite a drop in oil prices, there is also a substantial shortage in Pakistan’s energy supply. Households can be without power for up to 12 hours a day. The impact of this is significant on Pakistan’s economy, which must grow by at least 7% per year to create jobs for 3m new entrants to the labour market. The energy shortage is estimated to have already reduced Pakistan’s GDP growth by 2%.

In 2015, China agreed to invest £35bn in Pakistan’s roads, railways, power and ports over the next 15 years. The China-Pakistan Economic Corridor (CPEC) investment is Pakistan’s largest source of foreign direct investment, and equals the total amount of foreign direct investment since the 1970s. Some £26bn will fund power generation projects and the remaining £9bn will be spent on road construction and railway expansion over 1677 miles.

This is the first step towards China’s global ‘One Belt-One Road’ initiative, which will connect China’s north-eastern Xinjiang province with central Asian, Middle Eastern and European markets. This will significantly reduce freight costs from China to these regions.

Soon after the agreement was made, Pakistan saw the largest so-called ‘greenfield’ investment of £14.3bn in 2015 – more than double the investment of 5.7bn in 2014. China was the number one source country for investment in Pakistan, surpassing the United Arab Emirates, since the creation of the CPEC.

But can Pakistan’s economy grow powerfully enough to take advantage of the opportunity provided by the CPEC? The government faces numerous challenges; weak strategic planning, a lack of transparency and inadequate institutional capacity can all lead to poor decision-making and negotiations.

There is still limited evidence, data or research available to make informed decisions, for example, identifying road routes or selecting the correct type of power projects. Recently, the Chinese Machinery Engineering Corporation (CMEC) withdrew from a coal mining and power-generation project in the Salt Range of Punjab, claiming that the project was not feasible due to higher transport costs and low-quality coal.

The government’s current premise that Pakistan’s energy crisis will be resolved by adding more generation projects is problematic. Even today the output across Pakistan’s public and privately-owned generation facilities exceeds peak demand. The crisis derives from persistent unwillingness to pay for the electricity produced by weak governance, and government policies which refuse to adjust power tariffs despite increases in the costs of generation. The total size of the government subsidy exceeds £1.5bn per year. Unless there are significant improvements in energy governance and policy, CPEC projects could make this subsidy unsustainable for the fiscally-strained economy.

The readiness and ability of Pakistan’s industry and manpower holds a wealth of opportunity to contribute to CPEC. This is important for job creation, industrial growth and skills development. According to the World Bank, 24% of Pakistani businesses identified the lack of a trained workforce as a constraint to growth, compared to 9% in India. Decision makers need to ensure local manpower and industry is represented well in projects through smart negotiations with counterparts in China.

To ensure maximum potential is achieved through CPEC, more assistance in planning, research, coordination and negotiations is needed. An energy master plan mapping large-scale power generation projects to determine financial viability would also greatly benefit the government. The government must develop and implement a reform roadmap to address the energy governance challenges.

There is wide recognition that CPEC is a historic opportunity for Pakistan, and it would be difficult to dispute this. It can put the country back on a high growth path, create jobs, improve critical infrastructure and increase access to energy. The power for implementation is there and with the right application and structure, CPEC has the potential to be one of the biggest economic transformations of the future.