CPEC & FTA: Deals built on Lies & Hurting Pakistan
I originally intended to write this back in 2014 after CPEC was first announced but lost my original copy around that time then I left PDF to focus on my career but have been so fed up with the lies told to Pakistani's I just had to come back and post.
Maybe I'm completely wrong, if you find fault feel free to let me know but my position is clear on FTA's and how CPEC is currently been implemented and I think time has already proven my case. I may write something more detailed for the FTA but thought I'd fit some points into this post anyways.
CPEC isn't entirely a bad idea, in fact it can be great for Pakistan but it seems to me a lot of what the public is fed is outright nonsense.
Transit Trade Profits
CPEC began on a lie, the lie that Chinese trade would transit through Pakistan.
Now this isn’t a complete lie but there are serious omissions of facts and completely exaggerated statements and numbers that have come out of the government particularly those of the PMLN. This was obvious to anyone that understood the distances and costs involved along with the location of China’s population and industries.
The first thing you need to realize is that 94% of China’s population and industries lie East of the Heihe Tengchong line:
In fact 56% of China’s total GDP originates from 48 cities almost all of which are again located on, close to or east of the Heihe Tengchong line:
As of right now probably the closest major industrial centre in China, Chengdu, lies about 6946 km by road from Gwadar.
What you always hear is how far it is to Kashgar but the city itself, in 2017, had a $12.5 Billion GDP with a GDP per capita comparable to Pakistan at $2729 whereas the more important cities like Chengdu which are much farther away have a GDP of $207.5 Billion USD with a per capita income of almost $13000 are the ones we should be talking about.
What Pakistani’s have never been explained is that different forms of freight incur different fees to move a ton of goods a particular distance. As per the US’ Bureau of Transportation Statics in 2004, the last year they updated figures for all forms of freight, transport by Truck cost 500% more than by Class I Rail which itself was about 30% more expensive than moving goods by sea.
https://www.bts.gov/content/average-freight-revenue-ton-mile
What this means is that even if transporting via Pakistan may be cheaper for a city like Kashgar it doesn’t mean that it’s cheaper for all Chinese cities particularly the wealthiest industrial hubs and population centres in China.
To highlight how utterly absurd this idea that Pakistan would be a transit hub for Chinese trade is you can view actual freight details for containers shipped out of any of the major Chinese industrial cities, like Chengdu, to any particular destination via
www.searates.com and NONE of them have highlighted Pakistan’s CPEC route as their preferred course while others disregard Gwadar entirely for Karachi port. Even if we built direct rail links with China it still couldn’t compete going the sea route for virtually every major industrial hub and population centre in China.
Based on my calculations which took distance and BTS freight revenues into account CPEC as a transit route could only service 3 of the most sparsely populated and poorest provinces in China (Xingjiang, Tibet and Qinghai) who have a combined GDP about the same as Bangladesh which itself handled approximately 24 Million tons of cargo (2016-2017) or about 2.8 Million TEU’s via the Chittagong Port. If we were to charge the fee originally proposed by the Chairman of Bangladesh’s Tariff Commission, Mujibur Rahman, of about $13/tonne of Indian cargo and storage fees of $12/TEU assuming that’s what passes through Pakistan at most you’re looking at earning about $348 Million USD in transit and storage fees not these insane billion dollar figures politicians keep telling the public.
http://cpa.portal.gov.bd/sites/default/files/files/cpa.portal.gov.bd/page/ec61825e_0e1a_4655_882e_fdc7d4097738/Container Handling Statistics_CPA Bangla -- _1_.pdf
https://www.thedailystar.net/frontpage/transit-fee-too-low-1239754
https://www.joc.com/port-news/asian...s-raising-fee-stored-containers_20180416.html
When you include the costs of exporting of $474/TEU (includes documentary compliance and border compliance costs) as per World Bank numbers for Pakistsan with the tariff estimates I cited before in the best case Scenario Pakistan is generating about $1.7 Billion USD in economic activity and revenue (or about 0.005% of GDP). Assuming we build direct rail links to Kashgar (and everything we need to pickup from Xinjiang, Tibet and Qinghai is waiting for us there) that leads directly to Gwadar the distance along with US’ BTS latest 2017 estimates of freight costs via Class I Rail would result in an additional $100 Million USD (about .0003% of GDP) in revenue or lets say about $1.8 Billion USD in economic activity (about 0.006% of GDP).
http://www.doingbusiness.org/en/data/exploretopics/trading-across-borders
This is nothing close to the ridiculous figures put out by the former government about generating $75 Billion USD from tolls on transit trade alone which gullible Pakistani’s were lead to believe and many still think is going to materialize.
https://www.thenews.com.pk/print/234547-CPEC-toll-income-to-be-thrice-the-budget-of-Pakistan-BoI
Here’s another problem, my rough estimates are assuming all of the exports/imports of that trade is travelling across Pakistan which won’t happen because a lot of it will travel East via rail within China and some via the Yiwu–London railway line or by truck to other Central Asian states. Furthermore, the 3 provinces I mentioned (Qinghai, XinJiang and Tibet) either don’t export much intended for foreign markets instead it’s meant for the domestic Chinese consumption (ex. Oil, ores, etc...) or produce goods in direct competition with Pakistani manufacturers (ex. Textiles).
It should be obvious to everyone now that the PMLN, PPP and even both the Military Generals and PTI themselves either seem to have no clue or have been lying to the Pakistani public about this imagined stimulus from transit trade through Pakistan hence why now 6 years after CPEC was established under the government lead by Nawaz Sharif and the PMLN no direct rail link connecting Pakistan and Kashgar exists nor have I seen any actual plans to build one rather all I hear about are stories of “feasibility studies” that were conducted none of which have ever been released to the public at least I can’t find even one.
The same promises made about CPEC were made under Military rule headed by Musharraf and PPP rule under Zardari about the FTA with China yet within 5 years of it being signed our trade deficit with China increased over 53% and none of the proposed benefits materialized in fact our top export is nothing more than non retail pure cotton yarn (
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Furthermore, the issue isn’t with the interest rates on the loans taken out from Chinese banks instead it’s the
ROE (Return on Equity) which is based on capacity not actual electricity produced/consumed so regardless of whether Pakistan needs the electricity or can even pay for it none of that matters because as long as those plants exist they get paid. From what I’ve read about these agreements it’s
the ROE (Return on Equity) on these projects which is INSANE not the interest rates on the loans for them.
To understand how utterly ridiculous this all is look no further than the Port Qasim Coal Fired Power Plant which, as per agreements filed with NEPRA, was estimated to cost $2.3 Billion USD and the IPP borrowed $1.424 Billion USD then would pay back the principal along with $392.78 Million USD in interest to Chinese banks. However, what is most striking is the
ROE (Return on Equity) on this project of about $5.963 Billion or 259% (680%) versus the average for power plants in the US and Canada being about 10%. Considering Sinohydro owns 51% stake in the power plant that amounts to about $3.04 Billion USD which alongside the $392.78 Million going back to the Chinese bank in interest payments would result in a total of $3.43 Billion in foreign exchange lost as the money is repatriated into Yuan.
https://nepra.org.pk/Tariff/IPPs/00...ont Coal Determination 13-02-2015 1839-41.PDF
Then you have the insane agreements signed for solar and wind power projects.
The "State of Industry Report" for 2014 released by NEPRA itself stated
the Pakistani government was offering a total levelized costs for wind energy of 16.3063 (South Region) to 17.006 (North Region) US cents/KWh.
https://www.nepra.org.pk/Publications/State of Industry Reports/State of Industry Report 2014.pdf
A far poorer Pakistani public would be paying even more than the Germans for wind energy.
Solar isn’t much better with NEPRA having published the tariffs for the
100 MW Quaid-e-Azam Solar power project back in 2014 citing that the levelized tariff for the project would be 14.1516 US cents/KWh for the first 10 years.
http://www.nepra.org.pk/Tariff/IPPs...tional Acceptance of Upfront Tariff Solar.pdf
Remember these are tariffs were negotiated when Pakistan had an exchange rate of about Rs 100/USD whereas the exchange rate now is RS. 141/USD (a 40% increase in 5 years) and they’re even projecting that exchange rates could climb all the way to Rs. 200/USD
https://www.valuewalk.com/2019/05/pakistan-economic-crisis-usd-200-pkr/
Mind you these are just 3 examples and there was, last I had checked, more than $35 Billion advertised which would be spent specifically on the power sector. At those returns and interest rates the power projects alone would net Chinese banks and businesses $52.5 Billion USD.
Overall this $35 Billion in FDI will result in $90 Billion USD of repayments if you go by my previous projections.
Remember former Chief Justice of Pakistan Mian Saqib Nisar referred to these IPP’s as a “noose around our necks” yet we have and continue to sign new agreements with them:
https://www.geo.tv/latest/224559-agreements-with-ipps-are-a-noose-around-our-necks-cjp
If we don’t pay they simply go to the ICSID, which Pakistan is a signatory of, and they sue us there in fact IPP’s have already done this successfully.
https://www.iisd.org/itn/2018/10/17...sses-pakistans-counterclaim-amr-arafa-hasaan/
Others have also sued us with LICA (London International Court of Arbitration) successfully.
https://www.dawn.com/news/1367589
We need to come to the realization that this is by the very definition of the word debt and predatory/exploitative projects need to be cancelled. The economic policies pursued by both Military and Civilian governments since the 90s are destroying Pakistan and we MUST reverse course.
What’s even stupider about all this is that Pakistani businesses can’t even take out loans from Pakistani banks to build up their businesses, construct these power plants nor can average Pakistani’s take loans to purchase homes that would boost infrastructure development in the country because of high interest rates offered by local banks (we have loans offered at 15% interest rates for real estate purchases alone). This is because the SBP has to keep interest rates high in order to control inflation which itself results from the FTA to China as well as the neo liberal economic policies initially pushed by Musharraf, the PPP and PMLN that have seen a lack of investment in local industries and an implementation of an import substitution policy while there is a surge in imports.
https://tribune.com.pk/story/1976840/2-monetary-policy-sbp-hikes-interest-rate-150bps-12-25/
What I literally warned about back on PDF as far back as 2010 post FTA with China and continued to echo well past 2013 after CPEC was introduced has been confirmed correct. I have always made it clear FTA’s are bad for Pakistan at this stage of development, Pakistan simply does not have the industrial capacity to support these types of agreements. Simply look at the Pakistan Business Council (PBC’s) own report from 2013 which confirms how little we’re capable of utilizing them in comparison to a more developed Chinese industry (
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In fact to highlight how utterly foolish Imran Khan and the PTI government are acting by signing FTA 2.0 the report itself stated 6 years ago:
“Many believe that the product coverage of the FTA should be increased i.e. increasing the number of products part of the current FTA. Given the low utilization (5%), this would be an exercise in futility. A more appropriate measure would be to renegotiate the FTA in such a way that products that have high potential of exports as well as enjoy a comparative advantage against the rest of the world are given higher concessions”
Why is it everyone refuses to acknowledge that Pakistan simply does not have the industrial capacity at this point? This refusal is literally killing Pakistan.
Aside from a focus on domestic lignite as a source of power generation my view has always been we should have instead focused on pipelines to china to transport refined fuel and natural gas. If we could meet 50% of China’s oil import requirements, about 4 Million bbl/day, turning that oil into refined petroleum with a profit margin of about $10/bbl we would easily earn almost $15 Billion USD in profit per year from exports to China with the pipeline(s) costing about $40 Billion USD. Guess what one of if not our fastest growing export to China also happens to be refined petroleum (
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View attachment 563261
Mind you China’s oil and natural gas imports will grow dramatically over the coming years while the project can be further expanded to meet Japan’s needs as well all while circumventing India and the US’ abilities to blockade China during tensions while also bridging gaps between China and Japan. Meeting 100% of China’s natural gas imports with a tariff of $0.2/mmbtu would itself net Pakistan about $11 Billion USD/year at current consumption requirements but note that China’s oil/gas requirements will increase dramatically over the coming years.
Investments
The next big lie that’s been spread about CPEC is relatied to “investments” which in fact is debt taken out by Pakistan regardless of how government officials try to spin it
In total it’s projected about $35 Billion alone would be invested in the power sector going towards building power plants that largely run on imported coal and natural gas resulting in us hemorrhaging foreign exchange while limited money goes towards local Thar lignite.
How they attempt to fool the public is by stating that these power plants aren’t being constructed by the government instead by IPP’s which took out loans from Chinese banks so its not government debt. However, those loans don’t start until they break ground and that only happens after they’ve signed long term contracts with the government of Pakistan who would purchase the electricity produced at fixed rates (adjusted for inflation) while paying fee’s (i.e. ROE) based on capacity factor not actual electricity produced and consumed.
Actual Amount “Invested”
Another lie about CPEC is the total amount we would see in “investment”.
We are continually told different figures but the most popular one now is $62 Billion.
However, we need to take into account that this is to be invested over the course of 15 years maybe even longer now who even knows if the full amount would be invested in light of cancelled projects like the Gadani Power Project which was shelved back in 2015 as was a proposed coal fired power plant in Jehlum back in 2016, the Diamer-Bhasha dam in 2017 and the Rahim Yar Khan Coal power plant just this year 2019 which combined would have cost about $18 Billion USD.
https://www.dawn.com/news/1282883
https://tribune.com.pk/story/1211361/coal-based-projects-work-7000mw-power-plants-likely-abandoned/
https://www.scmp.com/news/china/dip...an-pulls-plug-dam-deal-over-chinas-too-strict
https://en.dailypakistan.com.pk/headline/pakistan-finally-shelves-coal-power-project-under-cpec/
You have cancellations of other projects outside of the power sector like the Quetta Mass Transit project while massive delays exist in the Karachi Circular Railway which is already 2 years behind schedule and no one can be entirely sure if it’ll even be built.
http://balochistanvoices.com/2017/1...and-water-supply-projects-dropped-in-7th-jcc/
Law & Order Issues
We’ve seen many cases of Chinese citizens in Pakistan violating our laws:
https://www.ndtv.com/world-news/chi...r-harassing-them-at-cpec-project-site-1833792
We’ve got issues with Chinese peoples in Pakistan completely disrespecting our culture/traditions:
https://www.aljazeera.com/indepth/f...an-slice-china-islamabad-170830081303813.html
Chinese firms evading taxes in Pakistan:
https://tribune.com.pk/story/1710155/2-pakistan-catches-chinese-firm-evading-rs1-12b-taxes/
You have this cancer now exploiting our poor women many times it seems that girls are even being sold into prostitution or for their organs:
https://www.voanews.com/a/pakistani...tchmaking-draw-chinese-response-/4874646.html
This is exactly what I warned against years ago, Pakistan needs to limit Chinese travel in Pakistan solely to a few persons for major projects, education and religious tourism specifically for the Muslim community in China and nothing more.
I support oil pipelines through Pakistan to China and military ties between our countries but nothing more.
What do we need to do:
1. Cancel all FTA’s starting with our FTA to China focusing strictly on energy exports to China instead.
2. Cancel any CPEC project that is uneconomical or predatory/exploitative (ex. Like Port Qasim coal power plant where IPP’s are offered ridiculous ROE’s or solar and wind projects producing electricity at high tariffs). Solar can be a great source of energy for Pakistan but this needs to be produced domestically.
3. Raise import tariff rates back to where they were pre ‘99 coup (40-50% simple mean applied tariff on all products) though we should have no tariffs on the import of capital goods that aren’t produced domestically.
4. Dramatically increase funding for the FBR so they can hire the personnel, buy the equipment and purchase the third party services they require to investigate and prosecute tax thieves and enforce tax compliance. Based on my estimates the FBR is underfunded anywhere from 500-1400% and this has been going on for decades. This will also need to be coupled with dramatic increases in budgets for Pakistani customs.
5. Invest all additional tax revenue generated into our own industries, nothing else (not schools or hospitals), with a primary focus on import substitution starting with the primary sector (agriculture and mining), heavy machinery for the primary sector and low income housing.
Only after our industries have established themselves within Pakistan and can compete globally should our economy be opened up to foreign competition and challenging industries/companies in foreign markets.
I said this 8 years ago and warned that without doing this our economy was going to continue to tank.
The past and present government has reversed course on some CPEC projects they recognized as predatory, uneconomical and/or unsustainable but more needs to be done and instead of cancelling our FTA to China they’ve instead signed FTA 2.0 which is doomed to fail.
It’s time Pakistani’s realized what is happening to this country and stop fantasizing about quick fixes like Imran Khan and the PTI’s prayers for the Kekra 1 oil well which never should have been calculated into plans for development or this ridiculous notion of quickly retrieving who even knows how much illicit funds are stored in offshore bank accounts considering it takes years to prosecute these cases and most globally have met with little success.
