Chinese investment

January 15, 2017


RECENTLY, one has begun to hear apprehensions on the Chinese investment in Pakistan with a few commentators even likening it to the East India Company. On the opposite side one hears mindless platitudes in praise of the initiatives. This reflects confusion on our own part. Pakistan has to first decide whether it needs foreign direct investment or not.

In order to better perceive the implications of what’s going on we would need to unbundle FDI into its different constituent types. Broadly, FDI is of two types. Brown­field investments are investments in existing assets and enterprises like Shanghai Electric’s imminent takeover of Karachi’s electricity utility (KE). In addition, the Chi­n­ese are taking a stake in the Pakistan Stock Exchange. The other variety, greenfield investment goes into building new assets and capacity — like the coal-fired power generation projects under construction.

Further afield, Chinese entities have shown interest in new airline operations and in the banking sector as well. These investments are not characteristically different from Etisalat’s takeover of PTCL and of National Power’s development of Pakistan’s largest IPP, the Hub power plant in the 1990s. On these there should be little confusion. These are private entities choosing to do business in Pakistan and Pakistan is open for business to foreigners.

Are the CPEC projects loans or FDI?

Another type of ‘investment’ is the one in Lahore’s Orange Line metro train. To be clear, while this is capital formation it is not really an investment in the sense of the traditional definition of FDI. Instead, it is procurement by the Punjab government. The land acquisition has been financed from funds from the provincial government’s development programme. The civil works and rolling stock are being procured using a soft loan for which the government will assume all business risks while remaining liable for the payment of the loan.

The operating contract is also being awarded to a private firm whose expenses eventually will be paid by the government together with instalments of the loan repayment after the grace period has expired. In that sense it qualifies as procurement of services. Capital spending of this nature will of course justifiably raise questions around priority of development spending, the transparency of the procurement process and the economic viability of the project over the long term and the government would need to satisfy all questions of public interest.

Which brings us to a second confusion that widely seems to prevail in official and private quarters: are the CPEC projects loans or FDI? Generally speaking, for a project to qualify as FDI there has to be an identifiable investor who is assuming some share of business risk. This can be a private investor — like National Power was in the case of Hubco or even a foreign state-owned entity as in the case of Shanghai Electric for KE or Etisalat for PTCL. So far most of the money coming in for CPEC projects is in the form of heavy electrical equipment (for power plants) and a smaller part in the form of contracting funds for civil works with which to pay subcontractors. The thermal power plants component is FDI without question because the investors are Chinese companies who will assume the business risk.

Any loans here are contracted by private entities that remain liable for repayment — sovereign guarantees extended to power projects notwithstanding. A sovereign guarantee mitigates risk but does not change the nature of the transaction in which an investor, other than the Pakistan government or its entity is assuming the risk exposure. If there is a local joint venture partner or a component of debt being raised from the local market, then that part of funds are not to be counted towards the FDI calculation.

On the other hand, transportation projects such as road construction, railways upgrade and the Lahore Orange Line metro rail are entirely public spending and cannot be categorised as FDI. Neither can the hydropower projects. These are loans and government spending from the infrastructure component of the public sector development programmes of the federal and provincial governments.

The third confusion is on whether the loans are on hard or soft terms. Generally, loans for commercial projects such as power plants are being extended on commercial terms. Those for public-sector works are being extended on softer terms.

So how should one assess the Chinese investment? Massive Chinese capital is pouring into Pakistan. Previously, we have clamoured for FDI and for loans for development projects from multilateral financial institutions. Will the Chinese come to control our economy as some fear? Nothing of the sort will happen. At worst, Chinese business interests in power production may come to represent a lobby, like the lobbies we have in other sectors of the economy. The answer to that lies in strengthening our regulatory mechanisms.

The writer is the author of Putting Pakistan Right: Standpoints on the War on Terror, Energy, Transit Corridors & Economic Development.

Published in Dawn, January 15th, 2017