Pushed by Chinese investment, there is indeed great economic activity in

Pakistan around projects connected with the China-Pakistan Economic

Corridor (CPEC). But, as the old adage goes, ‘there ain’t no such thing as a free
lunch.’

The Lahore Metro Train is one of the several energy and transport
infrastructure projects being built with Chinese money under the CPEC
initiative, the new 3,200km long trade route that would connect Kashgar in
China’s landlocked northwestern Xinjiang region with the Middle East,
Europe and Africa via Pakistan’s deep sea port in its southernmost city of
Gwadar through a network of highways, railways and pipelines. The Pakistan
Muslim League-Nawaz (PML-N) government is fast-tracking several of these
projects before its five-year term expires in May 2018.

Civil works on the 1.65-billion-dollar Metro Train project in Lahore, for

example, are moving full steam ahead and the Shahbaz Sharif government
hopes to finish the job long before the elections next year. This is despite a
legal challenge from civil society activists, who obtained a court order in
August last year that halted construction of the track in front of the city’s 11
heritage sites, including the historic Shalamar Gardens. Yet the administration
doesn’t seem too worried about it.

Although money is being pumped in by China on the CPEC project, much of

the opportunity is being exploited by Chinese companies rather than
Pakistani ones. And the financial burdens are still obscured.

The value of the power and infrastructure deals concluded around the trade
corridor has increased from the original 46 billion dollars to an estimated 57
billion dollars. Costs have swelled with the inclusion of Chinese financing for
Pakistan Railways and transport projects in the provincial capitals of Sindh,
Khyber-Pakhtunkhwa and Balochistan. While Beijing will pay for the larger
part of the CPEC bill through commercial loans, soft loans, grants and private
equity investment, Islamabad is also required to chip in funds for transport
projects.

Almost 28 billion dollars of the proposed investment has been allocated for
‘early harvest’ projects — 18 billion dollars for power projects and 10 billion
dollars for rail, road and port infrastructure — and the rest of the investment
is expected to materialise by 2030 and beyond. Power plants are being funded
through foreign direct investment by Chinese firms and commercial loans at
the rate of six to seven percent from Chinese banks. The financing for the
transport sector is provided by the Chinese government and the respective
state-owned Chinese banks mostly as concessional loans have been taken at
two to 2.4 percent mark-up.

Ever since President Xi Jinping showed up in Islamabad in April 2015 to sign

the investment deals around the trade route, the corridor project has created
huge expectations about future growth among the common people,
businesspersons and the government. Even multilateral lenders such as the
International Monetary Fund (IMF) in September last year described the
CPEC initiative as an “opportunity for Pakistan to boost investment and
growth.”

According to the IMF: “The CPEC could go a long way towards alleviating
Pakistan’s long-standing supply-side bottlenecks and lifting its long-term
potential output… power supply will improve for exports. Transport
infrastructure (roads, rail and port) will allow easier and low-cost access to
domestic and overseas markets, promoting inter-regional and international
merchandise trade. Services trade will also benefit from the increased trade
traffic from China ... (and the initiative) would catalyse private business
investment and boost productivity.”

No wonder then that the Nawaz Sharif government is increasingly betting on

Beijing’s commitment to pour money into energy and transport projects in
Pakistan. The great hope is that it will reinvigorate Pakistan’s flagging
economy, boost manufacturing, and create jobs for the millions of young
people entering the job market every year as foreign private and official capital
inflows from the West dry up and exports fall.

But the question is: has Pakistan safeguarded its interests when inking these
deals? Or have we surrendered our autonomy in desperation for funds?

THE COST OF CHINESE INVESTMENT

Illustration by Essa Malik

Little less than two years after the two all-weather friends signed the
investment deals, Chinese officials claim their government and companies
have already spent about $14bn on various power and transport infrastructure
projects in Pakistan. As work on CPEC-related projects makes ‘rapid’ progress,
the focus of public debates is gradually shifting from ‘Will CPEC projects ever
materialise?’ to ‘What is the price tag that will come attached to the Chinese
investments for the ordinary Pakistani consumers?’
The government’s policy of keeping a tight leash on information relating to the
financing of CPEC projects and the manner of their execution isn’t helping
mitigate public concerns about the direct, indirect and hidden costs of the
deals. Many fear that the deals made with China are going to impose
enormous costs on the budget and consequently on the people.

In the case of power projects, the government has gone many steps further
to appease Chinese investors. In some instances, it has forced Nepra to
bump up tariff that the regulator had originally determined for the projects
sponsored by the Chinese firms and investors. Take the case of the 660KV
Matiari-Lahore DC (direct current) transmission line — Nepra was forced
to raise the original tariff of 71 paisas per unit that it had determined to 74
paisas after the contractor refused to undertake the project at that price.

“We must pay a very, very heavy price before the Chinese money can help us,”
asserts Ijaz A. Mumtaz, former president of the Lahore Chamber of Commerce
and Industry (LCCI). “Given the poor state of our economy that stopped
producing jobs many years ago, the CPEC initiative was unavoidable [for
boosting growth]. So are its costs for the [national] budget and the ordinary
citizen.”

These costs are piling up in different ways: expensive credit, hefty tax
incentives for Chinese contractors and investors, higher power tariff and
capital expenditure allowed for the CPEC power projects, preference given to
Chinese enterprises in the award of the contracts, and so on and so forth.

Pakistan Business Council (PBC) chief executive officer Ehsan Malik points
out that the industry and the people are still in the dark regarding the terms of
the deal signed almost two years back. “We are being told by the government
that the CPEC is a ‘gift horse’ from China. But who knows? It could turn out to
be a Trojan horse for us. Unless the government ensures transparency in the
deals it has made with the Chinese, the concerns will continue to rise.”

Mumtaz echoes this viewpoint. He argues that the exact price tag attached
with CPEC deals cannot be calculated unless “we know how much of the
promised Chinese money is coming as commercial debt, investors’ equity and
soft loans. The government must ensure transparency about details of deals
signed with China to put public worries to rest.”

While the exact price tag attached with the Chinese investments will become
known over time as the work on the projects progresses, the costs they are
going to impose on the budget have already started to unfold. On January 6,
for example, the Economic Coordination Council of the Cabinet approved tax
exemptions and reductions estimated at 20 billion rupees on imported
machinery and equipment for the Lahore Metro Train project.

The Council made the decision on the demand of the Shahbaz Sharif
government, which feared the mass transit project’s final cost would escalate
to 1.845 billion dollars without the requested tax benefits. The provincial
government had rested its case on the argument that similar preferential
treatment had been extended to several power, transport and infrastructure
projects underway across the country as part of the Corridor project.

Indeed, the Metro Train isn’t the first CPEC-related project to get tax benefits.
Nor will it be the last one to secure tax discounts. “The ‘hidden’ costs of the
power and transport infrastructure being developed under the CPEC initiative
are building up,” contends Maqsood Ahmed Butt, a Lahore-based
businessman “These are costs that no one had told us about. Nor had we
anticipated them. And as the euphoria over the multi-billion-dollar power and
transport infrastructure development deals melts down, even the supporters
of the ruling party will start feeling the pinch.”