Our Last Chance for Industrialization
China Pakistan Economic Corridor (CPEC) is supposed to be a game changer for Pakistan’s economy. Several new power projects were installed at a time when the country was losing 2-2.5 percent of GDP (Gross Domestic Product) every year due to severe loadshedding and no one in the world was ready to invest in the energy sector in Pakistan. China stepped in. Later, however, the projects in line for the second round or phase-II of CPEC almost halted due to economic slowdown and the growing circular debt. There may be some revival now as the JCC (Joint Cooperation Committee) meeting took place in September as planned and China’s President Xi Jinping called Prime Minister Imran Khan in October. Special Assistant to Prime Minister on CPEC affairs Khalid Mansoor recently described CPEC as Pakistan’s last chance for industrialization.
Pakistan is prematurely moving from agrarian to a service economy, and there is no way the country can cater for 220 million plus population without having an industrial base. Perhaps, the lack of industrial depth is the reason for Pakistan’s frequent boom and bust growth cycles. The world is not ready to finance the growing external imbalances without a promise of sustainable path of economic growth by Pakistan. And that sustainable path is hinged upon industrial growth in the country.
The government should work on a priority basis to speed up CPEC. One of the prime reasons for CPEC slowdown is delay in payments to Chinese investors in the power projects. Delays in IPPs’ (Independent Power Producers’) payment is a notorious norm in Pakistan. But the Chinese are not very amused at this treatment. Around Rs250 billion worth of payments are stuck due to which the projects are unable to pay dividends to the investors. Now, these investors are said to be reluctant to proceed further. Perhaps not surprisingly, the insurance premium on the projects is also rising. Reportedly, the delays in 6 power projects (mostly hydel and coal) are due to pending approvals from the insurer, Sinosure. This could be attributed to over-dues of power projects amounting to Rs250 billion. There are statements by government officials every now and then through which it is claimed that the government is renegotiating the rates of return on quasi-equity IPPs that are secured by sovereign guarantees. There is nothing new that has been offered to the Chinese. The return structure template was made under the 1994 Power Policy (the Benazir Bhutto government signed a number of IPP contracts under this policy). At that time, mainly businesspeople from the West invested in Pakistan, and later a similar structure was offered in the 2000s when local entrepreneurs emerged as major investors.
With the advent of circular debt that began to grow in 2010s and a bleak security situation, foreign investment was hard to come by while the power demand and supply gap kept growing. The Chinese committed to Pakistan and most investments were on the then-prevalent rate of return structure. Later, the government negotiated with local IPPs on their rates of return. It is, therefore, important to note that some in the government have been advocating a similar treatment or concession for CPEC projects. Efforts should, therefore, be aimed at expediting the remaining power projects in the CPEC and kick-starting the CPEC’s second and highly crucial round where private to private partnership in Special Economic Zones is important to bring foreign investment in efficiency-seeking sectors and technology transfer. In the past, the thrust of foreign investment was market-seeking projects, resulting in import substitution. Rarely did any investment come to efficiency-seeking projects where foreign exchange can be earned by generating exports and also saving on imports through import substitution. That is why expediting work on SEZs is imperative. That is why clearing the air on overdue payments is imperative. That is why authorities should be careful in making comments on CPEC publicly. All these have grave repercussions for Pakistan.