CPEC And Pakistan’s Great Expectations – OpEd

Since Islamabad has been bandying the China-Pakistan Economic Corridor (CPEC) as the ultimate panacea for all the financial woes that Pakistan is facing as well as a “game changer for the region,” it doesn’t take very kindly, any contrarian views on this issue.

Islamabad’s extreme sensitivity to any comments describing the unfavourable terms and conditions of CPEC project as a ‘sell-off’ is understandable – no nation would like to be told that it is being taken for a royal ride by another country that’s not only an “all weather friend,” but also the sole neighbour out of four with whom Islamabad has no problems. But Islamabad’s decision to keep the contract details of this project under wraps to avoid criticism has only ended up attracting more attention.

The general consensus about CPEC is that Pakistan has chewed off more than it can swallow and since Beijing has a history of being a ruthless enforcer, it would not make any allowances when it came to extracting its pound of flesh. Within a year of the CPEC agreement being signed, the World Bank in its Global Economic Prospects 2016 report had warned that “Sovereign guarantees associated with CPEC could pose substantial fiscal risks over the medium term.”

In the same year, the International Monetary Fund (IMF) too had warned that once Chinese investors commence repatriating profits, “Pakistan will need to manage increasing CPEC-related outflows,” as this “could add up to a significant level given the magnitude of the FDI.”

The IMF also stressed on “a need to ensure transparency and accountability in project management and monitoring,” with its mission chief for Pakistan, Harold Finger adding that “We believe it’s important that information on contracts should be provided transparently as soon as it emerges so that we can factor it in.”

Even the Asian Development Bank Country Director Xiaohong Yang (who is incidentally a Chinese national) warned Islamabad that Main Line 1 project (upgradation of railway from Peshawar to Karachi and construction of Havelian Dry Port)  estimated at a whopping $8.2 billion “is a very expensive mega project and the government needs to explore all possible ways to make sure that the project is financially sustainable.”

It seems that Islamabad did take some notice of this advice because in October 2018, Railways Minister Sheikh Rasheed announced that after renegotiations, the cost of this project had been brought down to $6.2 billion because, “Pakistan is a poor country that cannot afford huge burden of the loans,” and that he wished to further reduce it to $4 billion.

How did Rasheed manage to bring down the loan estimate by more than 24 percent remains unknown, but it would be naïve to expect that this was due to his “Pakistan is a poor country” plea. Such a substantial reduction could only have been possible if the scope of the project was reduced, its technical specifications lowered or the profit margin slashed significantly.

Since there has been no formal announcement regarding any downgrading the scope of CPEC or lowering its specifications, the only conclusion is that Beijing trimmed its profit margin on the request of Islamabad. Whereas one way of looking at the $2 billion cost reduction is in line with its oft expressed “all weather friendship’ relations with Islamabad and China has, turned itself into the biblical ‘Good Samaritan’ and waived off this amount.

But if this is the case, then a very disturbing question arises — should a rich “all weather friend” exploit the financial vulnerability of his poor counterpart by fleecing him through abnormally inflated profit margins? Something is certainly fishy as far as CPEC financing is concerned.

The CPEC isn’t even complete, yet skeletons have already started tumbling out of Beijing’s closet. As per ‘Profit Pakistan Today’, which broke this story, a high-powered nine-member committee from different organisations (including one from army spy agency ISI) was constituted by Prime Minister Khan to examine the unusually heavy losses that were occurring in the power sector.

In its 278-page long report titled ‘Committee for Power Sector Audit, Circular Debt Reservation, and Future Roadmap’, this committee is believed to have discovered that the exchequer had lost a staggering amount of about 100 billion Pakistani rupees.

The losses were attributed to “violation of the Standard Operating Procedures (SOPs) that include the cost of the installation of Independent Power Producers (IPPs), government agreements, alleged embezzlement in fuel consumption, power tariff, guaranteed profit in dollars, and certain conditions of power purchase.” The culprits-Chinese private power producers.

Though the report has (for obvious reasons) carefully avoided any mention of CPEC , its ‘fingerprints’ are all over because corruption at such a massive sale in CPEC related projects isn’t possible without some institutional connivance, more so in China’s case were corruption can make you end up staring at the gun muzzles of an execution squad.

Some of the committee’s findings that vindicate the international financial institutions and organisations’ concerns regarding the unacceptably high levels of opaqueness in CPEC contracts are as follows:Though National Electric Power Regulatory Authority (NEPRA) has set a 15 percent upper limit on annual profits, IPPs have been earning as much as 50 to 70 percent. How?

• “IPPs owners showed the extra cost to get extra tariff at the time of the contract, with NEPRA failing to check the veracity of the cost. The cost of the power plant prepared by the companies was also accepted by the authorities.” Why?
• As per the committee report, IPPs have illogically pocketed 350 billion Pakistani rupees since 1994 by altering actual costs by Rs 2 to Rs 15 billion and one “owner of a coal power plant offered a cost which was Rs 30 billion more than the actual cost in order to obtain higher power tariff.” What check!
• The committee’s report reveals that IPPs even earned “unjust” profits in fuel consumption because NEPRA never ascertained the efficiency of fuel consumption- how negligent! To make problems worse, the owners had also resisted signing the agreement for regular audit. How arrogant!
• The government and power consumers are forced to pay billions of rupees annually even if the power plants are closed or produce low electricity due to cut in power demand. While the government is bound to pay billion Pakistani rupees to power plants under the head capacity payments, it will have to pay a capacity payment of 1500 billion Pakistani rupees by 2025 according to the agreement.
• In addition, NEPRA has also grossly violated the four to five years period for the guaranteed profit clause to a whopping 25 years. No wonder the committee reports notes that “These lop-sided agreements caused unbearable loss to the exchequer. The prevalent practice also led to a hike in power tariffs.” How irresponsible.

A country that’s literally surviving on dole doesn’t have the luxury to be pennywise and pound foolish. Similarly, it can’t consider sobriquets like “all weather friends” used by Beijing and its own poetic reciprocation of “sweeter than honey” to quantify this friendship as an open and indefinite ticket for free lunches. The power sector scam unearthed is just the tip of the iceberg and it won’t be long before a deluge of skeletons come tumbling out of the CPEC cupboard.  

So, while Islamabad may rubbish international concerns regarding the inevitable consequences of reckless CPEC spending by blaming a ‘jealous’ India or a ‘spurned’ Washington of spreading misinformation, not losing touch with reality would do Islamabad some good.

Tailpiece: In 2017, the Sri Lankan government had to hand over Hambantota port to China on a 99 years lease after failing to repay billions of dollars in loans. The very next year, Zambia lost control over Kenneth Kaunda International Airport due to debt repayment failure. Last year, China started to tighten its grip over the Kenyan government and is eyeing to take over the Mombasa port due to unpaid loans. Yet, having been very fond of fairy tales and a staunch believer in the ‘lived happily ever after’ endings as a child, the ‘all weather’ and ‘sweeter than honey’ friendship stuff gives a feeling of déjà vu and so, may this association (the only one of its type) flourish by leap and bounds — but more importantly, also survive when the fateful day of clearing dues finally arrives.