FeaturedNationalVOLUME 18 ISSUE # 35

Assessing the challenges and potential of CPEC after 10 years

Ten years later, the China Pakistan Economic Corridor (CPEC) has faced various challenges and controversies. While China has likely been continuously analyzing its performance, the people of Pakistan believe that the promised economic development by their politicians and policymakers at the beginning of the initiative has not been achieved.

Over the past decade, China has become Pakistan’s largest source of investment, loans, grants, and trading partner. Under the flagship connectivity and investment corridor project, a part of China’s Belt and Road Initiative, Islamabad has received $25.4 billion in direct Chinese investment for various transport, energy, and infrastructure projects. Additionally, China has provided significant loans and a currency swap arrangement worth CN¥30 billion to support Pakistan’s economy, alleviate debt repayment pressure, and reduce its dependence on the US dollar for trade.

However, the CPEC initiative has not been without challenges and controversies. Concerns have been raised about the lack of transparency in awarding contracts to Chinese firms without competition, the tax incentives granted to them, and the high returns guaranteed for power generation projects under the CPEC. Some have viewed the project as a potential debt trap due to doubts raised by certain foreign entities. Although most controversies surrounding the transport and infrastructure initiative have diminished over time, concerns about the lack of transparency in approving investment schemes persist. These concerns have hindered the development of greater bilateral cooperation in the industrial and agricultural sectors during the CPEC’s second phase over the past five years.

As both countries mark the ten-year milestone, it presents an opportunity to assess the achievements thus far and chart a path for enhanced economic connectivity. Pakistan needs to update its outdated industrial and agricultural policies to attract Chinese investment and technology, which is crucial for increasing productivity, bridging the trade gap, and addressing the balance-of-payments crisis. Closing the $20 billion trade deficit with Beijing requires swift completion of special economic zones to entice Chinese companies to relocate their manufacturing facilities for export purposes. Additionally, leveraging Chinese experience and technology can bolster agricultural output, reduce rural poverty, and create surplus for export. Moreover, efforts should be intensified to connect Afghanistan, Central Asian states, and potentially India and other South Asian economies to fully capitalize on the CPEC potential.

Undoubtedly, China has provided vital support in developing critical infrastructure, such as roads and energy security, when Pakistan needed it most. However, attracting global investors and financiers remains a significant challenge for this South Asian country. Therefore, the question arises as to whether the ten years of CPEC constitute a true success story.

In 2013, when CPEC was envisioned, urban Punjab experienced severe power loadshedding for 12-14 hours. The country heavily relied on dirtier and imported fuels, resulting in low efficiency of power plants and significant dependence on captive power generation in industries. Although some long-term projects were already underway, the government embarked on numerous power projects under the CPEC within a short period. While these projects addressed energy production and generation capacity deficiencies, they came at a cost.

Pakistan failed to learn from the power policies of 1994 and 2002, where an excessive number of projects led to a supply glut and circular debt issues due to high returns in dollar terms. The CPEC introduced an even higher quantity of projects with greater returns. Consequently, circular debt has increased in recent years despite the power consumption not proportionally rising. The intention behind having a larger number of power projects was to cater to the demand from industries relocating from China, for which Special Economic Zones (SEZs) were crucial components of CPEC. The idea was to replicate the success of economic zones in China, which played a significant role in the country’s consistent economic growth.

However, SEZs in Pakistan have been largely unsuccessful to date, with many becoming primarily focused on real estate rather than industrial development. The tax exemptions and regulatory relief specified in the SEZ Act have not been fully implemented. After 11 years since the passage of the SEZ Act in 2012, 60% of SEZ land remains unoccupied. Chinese businesses are still interested in relocating to Pakistan, but only if taxation and regulatory issues are adequately addressed.

It is essential for Pakistani authorities and stakeholders to assess the situation, learn from past mistakes, and improve the effectiveness of the CPEC. Criticism of the CPEC by opposition parties should not be merely for the sake of it. A holistic approach is necessary, including the genuine development of SEZs to promote industrialization, improvement of power transmission and distribution networks to maximize the utilization of installed power plants, and addressing the challenges of the “take or pay” arrangement in the future. Additionally, focus should be placed on the railways and Gwadar Port, as they are crucial areas of interest for the Chinese within the CPEC framework.

After ten years, numerous gaps still exist. The second decade of CPEC should yield more fruitful results for Pakistan’s economic development and progress.