CPEC: When the alarm goes off

Published March 25, 2019
CPEC consists of numerous agreements, however these are not available to conduct a cost and benefit analysis of CPEC.
CPEC consists of numerous agreements, however these are not available to conduct a cost and benefit analysis of CPEC.

There is no doubt that successful completion of CPEC will revolutionize the power sector making it highly efficient. There are added benefits in the growth of GDP, export and balance of payments. However, its successful completion requires substantial policy making and enormous planning.

Publicly available policy related documents include CPEC Long Term Plan (LTP) and Belt and Road Initiative (BRI). CPEC consists of numerous agreements, however these agreements are not available to conduct a cost and benefit analysis of CPEC.

All publicly available documents discuss the benefits CPEC will generate and policy measures Government of Pakistan should take to ensure these benefits materialise. However, the benefits discussed are quite generic.

The veil of secrecy raises serious concerns when state institutions like SBP disclose lack of access to CPEC related agreements.

Extensive research shone light on the absence of any documents which specifically identified benefits with reference to original agreements. This veil of secrecy over CPEC raises serious concerns when state institutions like the State Bank of Pakistan (SBP) disclose lack of access to CPEC related agreements. A research on the financial and legal aspects of CPEC turns on alarm bells for the following matters

First, Pakistan’s attempt to make Saudi Arabia one of the strategic partners for CPEC has failed on account of presumably China’s reluctance to accept Saudi Arabia as a partner. There is no transparency to justify China reasons for doing this.

Second, IMF raised concerns over whether potential funding would be used to repay CPEC related debt to China. IMF requiring assurance from the government over the use of its funds also brings to question the financial structures applicable to CPEC.

Third, numbers available on the Board of Investment website indicate CPEC’s worth to be around $45 billion in investment that serves two sectors — energy and infrastructure. Energy sector consumes around $34bn of the investment whereas the infrastructure sector accounts for approximately $10bn.

However, the capital structures of CPEC related agreements are not available publicly. It is not possible to identify the exact amount of borrowing, and the cost of borrowing, the government has accepted from China. Therefore, CPEC related Chinese debt cannot be compared to debt available in international money markets to gauge whether it is cheaper or more expensive.

Fourth, SBP is unable to identify the source of finance for the import of machinery from China for CPEC related projects. Dr Ishrat Hussain, former governor SBP, explained that the only reason SBP has been unable to trace the source of funds is that the Chinese machinery is being financed by Chinese banks. In other words, Pakistan banking industry does not benefit through CPEC. Instead Pakistan’s import bill is increasing along with borrowings from Chinese banks. It is rather like Pakistan is borrowing from China to invest into Chinese machinery to carry out CPEC related projects.

Fifth, the capital requirement for foreign banks to open a bank head office in Pakistan is Rs3bn. However, there is a question of parity between capital requirements to open a bank in China versus opening a bank in Pakistan. Moreover, Habib Bank Limited has opened a bank branch in China two years back but the details of the operations of the branch are not available publicly (just like its branch operations in the UK, US and other parts of the world are available on the main website). Therefore, it is not possible to examine the benefits the bank is deriving through its China branch, particularly in the context of CPEC.

Finally, non-availability of actual agreements signed under CPEC is the reason there is no clarity regarding dispute resolution mechanism. It is not known what choice of law and jurisdiction are applicable to CPEC, nor is it possible to figure out potential venue for resolution of dispute. This is a serious issue since SBP has warned that in the past, trade agreements between Pakistan and China have always been more beneficial for the latter than the former.

It is high time for the government to engage the Finance Ministry and SBP to conduct a cost benefit analysis of CPEC agreements in terms of finance and law. This analysis has to be made public to ensure transparency as well as credibility of CPEC.

The writer is an Assistant Professor at Lums Law School

Published in Dawn, The Business and Finance Weekly, March 25th, 2019

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

‘Source of terror’
Updated 29 Mar, 2024

‘Source of terror’

It is clear that going after militant groups inside Afghanistan unilaterally presents its own set of difficulties.
Chipping in
29 Mar, 2024

Chipping in

FEDERAL infrastructure development schemes are located in the provinces. Most such projects — for instance,...
Toxic emitters
29 Mar, 2024

Toxic emitters

IT is concerning to note that dozens of industries have been violating environmental laws in and around Islamabad....
Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...