Dr Ishrat Husain provides clarity on some of the most frequently asked questions about CPEC.
Published June 1, 2018

By Dr Ishrat Husain

Dr Ishrat Husain provides clarity on some of the most frequently asked questions about CPEC. The success of the project, in his opinion, will depend on Pakistan's willingness to dispense with negative mindsets and archaic business models.

THERE are five often asked questions about the CPEC. The first one relates to the total size committed by China, the different components of CPEC, and the phasing of the whole programme.

The other ones are: Where do we stand and what has the CPEC achieved so far and what should we expect in the future? What net benefits are likely to accrue to the Pakistan economy and the society at large? How much financing burden the CPEC projects would impose on Pakistan’s external account? And, finally, what are the possible risks to the economy that should be avoided?


In 2015, China committed a total amount of $46 billion for investment and financing of the CPEC programme over a period of 15 years. The portfolio consists of 43 projects of which 22 are under implementation. Additions and deletions have taken place since then, but it is advisable to stick to this committed amount.

The four major components of the program are: Energy US$34 billion; Infrastructure US$11 billion; Gwadar US$0.8 billion; and Industrial Zones. It may be seen that except for Gwadar Free Zone, no allocations have been made for Industrial Zones as the studies for these Zones are still under preparation and discussion.

The phasing of the programme is as follows: Early Harvest Projects – up to 2019; Short-term Projects – up to 2022; Medium-term Projects – up to 2025; and Long-term Projects – 2030 and beyond.

We should remember that the Long Term Plan (LTP) has been announced only a few months ago and is still on the drawing board. The confusion arises mainly when we lump together Early Harvest Projects, which are under implementation, with the Medium Term Projects, for which financing has not yet been indicated, and Long Term Projects, which have not been conceptualised.

Most of the misunderstandings about the CPEC arise because of this mix-up between firm ongoing projects and those which have not yet been agreed upon and require a lot of preparatory work including feasibility studies.

Those who complain about the lack of information refer to the elusive projects which are not yet on the drawing board. However, it is fortuitous in case of Industrial Zones that these zones are still at initial stages of planning and design as the authorities can benefit from the active involvement of the private sector by seeking and nurturing their ownership. After all, the success of these zones would not depend upon the hardware created in the zones by the Government but by the investment decisions made by the Pakistani, Chinese and non-Chinese investors.

The fears, apprehensions and concerns of the private sector in Pakistan can be allayed when they themselves feel assured that the government policies are investor-neutral, non-discriminatory and a level playing field would become available to all the players.


Since 2015, the priority has been given to Energy projects. These projects are at different stages of implementation. Quaid-e-Azam Solar, Sahiwal Coal, Port Qasim Coal, Hydrochina Dawood Wind, Sachal Wind have been completed and added to the National Grid, while another three to four would be completed by the end of 2018. These projects together would add about 7,620MW to the grid.

The projects that have been approved and are at different levels of implementation, consist of four Wind, three Coal-mining, seven Coal-fired, three Hydro and one Solar, while there are two transmission projects.

Once all these projects are completed, the total addition to the country’s generation capacity would be more than 13000MW i.e. almost 60 per cent more than what the country had in 2015.

Under Infrastructure, at least six ongoing projects are expected to be completed by the end of 2018, and cross-border Optical Fibre Cable that has attained about 60pc target would also be laid by the end of 2018.

It should be clarified that although the entire Western route is included in the CPEC umbrella, some sections are being financed exclusively by the Government of Pakistan out of its Public Sector Development Programme (PSDP) and this financing is over and above the $11 billion allocated by the Chinese for infrastructure.

The investments made on the projects completed and under implementation have been approximately $23-25 billion so far. The exact number keeps on changing every month.

Looking forward, most of the coal-mining, Thar coal-fired, Hydel and renewable projects, fibre optic cable network and several roads would be completed more or less around their completion dates.

However, it must be alerted that the ML1 railway project would suffer delays as the present cost estimate, according to the Pakistani authorities, are high and the scope and specifications need to be revised to make it economically viable.


Pakistan’s exports recorded a serious decline from about $25 billion in 2012-13 to $20 billion in 2016-17, mainly due to energy crisis. Had the exporters not faced power shortages, Pakistani exports would have reached $40 billion by 2017-18 assuming 10pc annual growth rate.

Even at a more modest growth rate of 5pc, the exports would have touched $32 billion by 2017-18, shrinking our Current Account deficit from projected $16 billion to $5 billion only, easing the pressure on external payments, and reducing the borrowing requirements.

As energy supply has rested to normalcy, exports have shown a growth rate of 13pc during the first nine months of the current fiscal year. It is estimated that the Current Account would gradually decline over next year as exceptional imports for power generating machinery and equipment slow down and exports pick up speed.

The demonstration effect of large Chinese investment in Pakistan has been positive as it has aroused the interest of investors from other countries which are thinking of CPEC as a door opener for them.

The fuel mix of power generation and efficiency level of plans are likely to improve when CPEC projects become operational. Furnace oil would lose its share from 38pc to 14pc while renewables, hydro, coal and LNG would gain. The unit costs by closing down low-efficiency plants (operating at 20pc factor) which are generating about 3,000MW at present would decline by 22pc (Rs.10.08 to Rs.8.3 per KWh).

The transit fees for using the Western, Central and Eastern Corridors by the Chinese traders can amount to $4-6 billion annually, assuming that only 4pc of the total Chinese export and import trade of $4 trillion passes through these Corridors, i.e. flow of $160 billion only.

The losses incurred during the energy crisis have diminished GDP growth by two percentage points (pps) annually. The availability of normal supplies and additional generation should restore the growth rate and raise it by 2pps with positive consequences for employment and living standards.

In my view, the most positive outcome of the CPEC would be the integration of the backward districts of Balochistan and southern Khyber Pakhtunkhwa (KP) into the national market. The goods produced in these areas — fisheries, horticulture, mining etc would be able to reach the larger consuming centres of the country on time with reduced transportation costs, enhancing the incomes of the poor population of these backward districts.

This endeavour would not be automatic but has to be carefully planned through construction of feeder roads connecting to the main highways, technical and financial assistance, skill development programmes etc.


It must be clarified that there is a mix of different financing structures that pin the CPEC projects:

The first component is the IPP mode in which the investors are granted an upfront tariff based on debt-equity structure. Chinese investors are getting most of the financing from Chinese EX-IM, Chinese Development Bank or ICBC. They would be entitled to a 17pc Return on Equity in US dollar terms (excepting coal and renewables where the rate is much higher), which they can repatriate as profits to their home countries. The terms of financing are agreed between the Chinese companies and their lenders. The Government of Pakistan does not bear any debt servicing obligation on these loans.

The second component is the Government-to-Government loans for infrastructure projects. These are concessional long-term loans with average rate of interest of 2pc, and repayment period stretching over 20-25 years.

Then come the grants from the Chinese Government, mainly for the development of Gwadar.

And, finally, private direct investment in the form of joint ventures with Pakistani companies in which the obligation for Pakistan is to permit repatriation of profits and dividends in foreign exchange if these ventures are profitable.

Our estimates, which are also shared by Sakib Sherani, show that the average annual outflows to the Chinese investors and government would lie in the range of $2.5-3 billion. IMF has estimated that the peak outflows would reach $3.5-4.5 billion by 2024-25, or 1.2-1.6pc of GDP, and then gradually decline.

If our exports attain a level of $40 billion by then (assuming a conservative growth rate of 5pc p.a.) then this would not cause any stress on balance of payments and can be easily absorbed.


The main risk arises from the current mindset and the model of doing business as usual. If we continue the practices of bickering, blame-game, point scoring, driven by narrow parochial and personal considerations, strewn by red tape, hesitation and delays in solving problems and removing bottlenecks, then the country would find itself entrapped in heavy financial burden. The projects would not be completed on time or would be hit by constant overruns, diminishing the net benefits and therefore our repayment capacity.

The other risk is that as we expand the power-generating capacity without repairing the distribution companies, the circular debt burden would keep on rising, causing serious problem for public finances. Low recovery rates, electricity theft, leakages, inefficiencies, and line losses would create further wedge between the purchase price and sales revenues.

The restructuring and reform of distribution companies has been overdue for quite some time, but the risk would be amplified when we move from 20,000MW generation to 30,000MW capacity. A competitive power market with multiple buyers and multiple sellers is needed to overcome this highly problematic issue.

Another risk may arise if the quality of our machinery does not conform to international standards. The toxic combination of purchasing second-hand machinery and over-invoicing of imports has proved lethal to both the productivity of our industry as well as to our external payments regime.

International inspection companies of repute should be engaged for certifying the machinery and equipment that would be brought to CPEC industrial zones.


To sum up, the above analysis shows that CPEC projects are most likely to bring positive net economic and social benefits to Pakistan, provided we strengthen our response and absorptive capacity in terms of business model, institutions and policies.

Those who think that CPEC would be a game-changer should wait to make such bold claims until we are able to design and implement export led investment in the manufacturing sector in the nine industrial zones to be built under CPEC. At present, the average annual investment of $3-4 billion under the CPEC amounts to only 6-8pc of our annual investment spending of $45-50 billion.

Similarly, those who are propagating unnecessary fear and despair by arguing that Pakistan would become so entrapped in debt burden that it would lose its economic sovereignty and forced to cede its territory i.e., Gwadar port to China are sadly mistaken.

The analysis above clearly shows that Pakistan can easily absorb even the peak payments from its own foreign exchange earnings but it would require concerted efforts to keep the export growth rate above 10pc annually. This is not such a difficult goal to achieve as we have done so in the past and under the new energy supply scenario, which pushed our exports down the curve, it is possible to get back on that path.

The writer is a former Governor of the State Bank of Pakistan.

This article is part of the CPEC 2018 summit supplement. To read more from the supplement, visit the archive.