When Pakistan Prime Minister Nawaz Sharif travelled to China over the weekend to participate in the Belt and Road Forum, the top item on his agenda was finalising the long-term plan for the $46 billion China-Pakistan Economic Corridor (CPEC).
Details of this plan, kept secret even from Pakistan’s provincial governments, were leaked by the influential Dawn newspaper on Monday, causing many quarters to question the wisdom of the initiative.
According to the details, thousands of acres of agricultural land will be leased to Chinese enterprises to set up “demonstration projects” in areas ranging from seed varieties to irrigation technology, and a system of monitoring and surveillance will be built in cities from Peshawar to Karachi, with 24-hour video recording of roads and busy marketplaces for law and order.
A national fibre-optic backbone will be built for Pakistan, not only for internet traffic but also for terrestrial distribution of broadcast TV, which will cooperate with Chinese media in the “dissemination of Chinese culture”.
The Dawn reported the plan envisages a deep and broad-based penetration of most sectors of Pakistan’s economy and society by Chinese enterprises and culture. Its scope has no precedent in Pakistan’s history, in terms of how far it opens up Pakistan’s economy to participation by foreign enterprises.
The Dawn reported it had acquired exclusive access to the document and that its details were being publicly disclosed for the first time. The plan lays out in detail what China’s intentions and priorities are in Pakistan for the next decade-and-a-half.
Two versions of the long-term plan are with the government and the full version, running to 231 pages, is the one drawn up by the China Development Bank and the National Development and Reform Commission. The shortened version, dated February 2017, contains only broad descriptions of the various areas of cooperation.
The shorter plan, which has 30 pages, was drawn up for circulation to Pakistan’s provincial governments to obtain their assent. The only province that received the full version was Punjab, where Sharif’s younger brother Shahbaz Sharif is chief minister.
In some areas, the plan seeks to build on a market presence already established by Chinese enterprises such as Haier in household appliances, ChinaMobile and Huawei in telecommunications and China Metallurgical Group Corporation in mining and minerals.
In other cases, such as textiles and garments, cement and building materials, fertilisers and agricultural technologies, it calls for building infrastructure and a supporting policy environment to facilitate fresh entry. A key element in this is the creation of industrial parks, or special economic zones, which “must meet specified conditions, including availability of water…perfect infrastructure, sufficient supply of energy and the capacity of self service power”.
The report said the plan’s main thrust lies in agriculture, contrary to the image of CPEC as a massive industrial and transport undertaking, involving power plants and highways. The plan is most specific on this and lays out the largest number of projects and plans for their facilitation in agriculture.
For agriculture, the plan outlines an engagement that runs from one end of the supply chain to the other. Besides providing seeds and other inputs, such as fertilisers, credit and pesticides, Chinese enterprises will operate their own farms and processing facilities for fruits, vegetables and grain. Logistics companies will operate a large storage and transportation system for agrarian produce.
The plan identifies opportunities for entry by Chinese enterprises in areas where Pakistan’s agriculture sector lags behind.
In the longer term, the financial risk will be spread out through “new types of financing such as consortium loans, joint private equity and joint debt issuance, raise funds via multiple channels and decentralise financing risks”.
The plan proposes to harness the work of Xinjiang Production and Construction Corps to bring in mechanisation and scientific techniques in livestock breeding, development of hybrid varieties and precision irrigation.
The plan sees its main opportunity as helping the Kashgar Prefecture, whose total output in agriculture, forestry, animal husbandry and fishery amounted to just over $5 billion in 2012. With a population of less than 4 million in 2010, it is hardly a market with windfall gains for Pakistan.
The report discloses that 10 key areas for engagement have been identified with 17 specific projects. They include the construction of one NPK fertilizer plant as a starting point “with an annual output of 800,000 tons”. Enterprises will be inducted to lease farm implements, such as tractors, “efficient plant protection machinery, efficient energy saving pump equipment, precision fertilisation drip irrigation equipment” and planting and harvesting machinery.
The plan shows great interest in textiles in particular, but the interest is focused largely on yarn and coarse cloth.
Meat processing plants in Sukkur are planned with an annual output of 200,000 tons per year, and two demonstration plants processing 200,000 tons of milk per year. In crops, demonstration projects of more than 6,500 acres will be set up for high yield seeds and irrigation, mostly in Punjab.
In transport and storage, the plan aims to build “a nationwide logistics network, and enlarge the warehousing and distribution network between major cities of Pakistan” with a focus on grains, vegetables and fruits. Storage bases will be built first in Islamabad and Gwadar in the first phase, then Karachi, Lahore and another in Gwadar in the second phase, and between 2026 and 2030, Karachi, Lahore and Peshawar will each see another storage base.
Asadabad, Islamabad, Lahore and Gwadar will see a vegetable processing plant, with annual output of 20,000 tons, fruit juice and jam plant of 10,000 tons and grain processing of 1 million tons. A cotton processing plant is also planned initially, with output of 100,000 tons per year.
The report noted that in each field, Chinese enterprises will play the lead role. “China-invested enterprises will establish factories to produce fertilisers, pesticides, vaccines and feedstuffs”, the government document stated about the production of agricultural materials.
The report said one of the most intriguing chapters in the plan speaks of a long belt of coastal entertainment industry that includes yacht wharfs, cruise home ports, nightlife, city parks, public squares, theaters, golf courses and spas, hot spring hotels and water sports.
In places, the plan appears to be addressing investors in China. It stated that Chinese enterprises should seek “coordinated cooperation with Pakistani enterprises” and “maintain orderly competition and mutual coordination”. It advised them to make an effort “seeking for powerful strategic partners for bundling interest in Pakistan.”
Given the diversity and far reaching projects that have been proposed, enterprises will be advised “to respect the religions and customs of the local people, treat people as equals and live in harmony”. They will also be advised to “increase local employment and contribute to local society by means of subcontracting and consortiums”.
In the final sentence of the chapter on agriculture, the plan says the Chinese government will “(s)trengthen the safety cooperation with key countries, regions and international organisations, jointly prevent and crack down on terrorist acts that endanger the safety of Chinese overseas enterprises and their staff.”
For industry, the plan divides Pakistan into three zones: western and northwestern, central, and southern. Each zone is marked to receive specific industries in designated industrial parks, of which only a few are actually mentioned.
The western and northwestern zone, covering most of Balochistan and Khyber-Pakhtunkhwa provinces, is marked for mineral extraction, with potential in chrome ore, gold reserves and diamonds. One big mineral product the plan discusses is marble. Already, China is Pakistan’s largest buyer of processed marble, at almost 80,000 tons per year. The plan looks to set up 12 marble and granite processing sites in locations ranging from Gilgit and Kohistan in the north, to Khuzdar in the south.
The central zone is marked for textiles, household appliances and cement. Four separate locations are pointed out for future cement clusters: Daudkhel, Khushab, Esakhel and Mianwali. The case of cement is interesting, because the plan notes that Pakistan is surplus in cement capacity, then goes on to say that “in the future, there is a larger space of cooperation for China to invest in the cement process transformation”.
For the southern zone, the plan recommends “Pakistan develop petrochemical, iron and steel, harbour industry, engineering machinery, trade processing and auto and auto parts (assembly)” due to the proximity of Karachi and its ports.
Gwadar, also in the southern zone, “is positioned as the direct hinterland connecting Balochistan and Afghanistan.” As a CPEC entreport, the plan recommends it be built into “a base of heavy and chemical industries, such as iron and steel/petrochemical”. It notes that “some Chinese enterprises have started investment and construction in Gwadar” taking advantage of its “superior geographical position and cheap shipping costs to import crude oil from the Middle East, iron ore and coking coal resources from South Africa and New Zealand” for onward supply to the local market “as well as South Asia and Middle East after processing at port.”
In many aspects, the plan to invest in Pakistan “also has to do with helping industry at home (in China)”, comments the Dawn report. The project shows great interest in the textiles industry, with the focus largely on yarn and coarse cloth. The reason, the plan says, is that the textile industry in Xinjiang has already attained higher levels of productivity. Therefore, “China can make the most of the Pakistani market in cheap raw materials to develop the textiles and garments industry and help soak up surplus labour forces in Kashgar”.
The ensuing strategy has been described, somewhat cryptically, as the principle of “introducing foreign capital and establishing domestic connections as a crossover of West and East”.
The plan says preferential policies are necessary to attract enterprises to come to new industrial parks envisioned under the plan, with areas such as “land, tax, logistics and services” identified for the same, along with land price, “enterprise income tax, tariff reduction and exemption and sales tax rate.”
One of the oldest priorities for the Chinese government since talks on CPEC began is fibre optic connectivity between China and Pakistan. Beijing and Islamabad signed a memorandum of understanding for such a link was signed in July 2013, when the CPEC project was still in its infancy and was merely a road connection between Kashgar and Gwadar. But the plan reveals that the link goes far beyond a simple fibre optic set up.
Daily Dawn says that China has various reasons for wanting a terrestrial fibre optic link with Pakistan, including its own limited number of submarine landing stations and international gateway exchanges, which can serve as a bottleneck to future growth of internet traffic, especially in its western provinces.
“Moreover, China’s telecom services to Africa need to be transferred in Europe, so there is certain hidden danger of the overall security” says the plan.
Pakistan has four submarine cables to handle its internet traffic, but only one landing station, which raises security risks as well.
The plan envisages a terrestrial cable across the Khunjerab pass — on the borders of Gilgit-Baltistan and Xinjiang — to Islamabad, and a submarine landing station in Gwadar which would be linked to Sukkur. From there, the backbone will link the two in Islamabad, as well as all major cities in Pakistan.
The expanded bandwidth that will open up will enable terrestrial broadcast of digital HD television, called Digital Television Terrestrial Multimedia Broadcasting (DTMB), which the plan refers to as a “cultural transmission carrier” as it will be “beneficial to disseminating Chinese culture in Pakistan, further enhancing mutual understanding between the two countries and the traditional friendship between the two countries”.
It also seeks to create an electronic monitoring and control system for the border in Khunjerab, as well as run a “safe cities” project, under which real-time monitoring and 24-hour video recording of “major roads, case-prone areas and crowded places…in urban areas” will be undertaken, with all data transmitted to a command centre. However, the plan says nothing about who will staff the command centre, what sort of signs they will look for, and who will provide the response.
The pilot “safe city” will be built in Peshawar, followed by Islamabad, Lahore and Karachi.
As far as tourism is concerned, the plan speaks of coastal entertainment, including yacht wharfs, cruise homeports, nightlife, city parks, public squares, theatres, golf courses, spas, hot spring hotels and water sports.
The plan also calls for visa-free tourism with China to provide a “more convenient policy support for Chinese tourists to Pakistan”. However, there is no mention of a reciprocal arrangement for Pakistani nationals visiting China.
The plan drawn up by the China Development Bank is very critical of Pakistan’s financial sector, government debt market, depth of commercial banking and the overall health of the financial system. According to the bank, the greatest risks identified are politics — “such as competing parties, religion, tribes, terrorists, and Western intervention” — and the security situation, which the plan says is “the worst in recent years”.
The plan has also identified inflation as a major risk, stating that inflation in Pakistan has averaged 11.6% over the past six years and could lead to “a rise of project-related costs and a decline in profits”.
According to the plan, efforts will be made to furnish “free and low interest loans to Pakistan” once the costs of the corridor begin to come in. However, it cautions that this is no “free ride”, stating that Pakistan’s federal and involved local governments should also bear part of the responsibility for financing. It calls for financial guarantees “to provide credit enhancement support for financing major projects, enhancing financing capacity, and protect the interests of creditors”.
Noting the International Monetary Fund, World Bank and Asian Development Bank assessments, the plan says Pakistan’s economy cannot absorb FDI over $2 billion per year without “stresses in its economy” and recommends China’s maximum annual direct investment in Pakistan be $1 billion per annum. It also recommends Pakistan’s ceiling for preferential loans be $1 billion per annum, and for non preferential loans, $1.5 billion per annum.
It advises its own enterprises to take precautions to protect their own investments. “International business cooperation with Pakistan should be conducted mainly with the government as a support, the banks as intermediary agents and enterprises as the mainstay.”
Another risk identified is the exchange rate risk, with the plan noting Pakistan’s “severe weakness” to earn foreign exchange. To mitigate this, the plan proposes tripling the size of the swap mechanism between the Renminbi (RMB) and the Pakistani rupee to 30 billion Yuan, diversifying power purchase payments beyond the dollar into RMB and Pakistani rupee basket, tapping the Hong Kong market for RMB bonds, and diversifying enterprise loans. The growing role of the RMB in Pakistan’s economy is a clearly stated objective of the measures proposed.
The plan also seeks the internationalization of the RMB, as well as diversify the risks faced by Chinese enterprises entering Pakistan.
In some areas, the plan seeks to build on an already established market presence by Chinese enterprises, like in the household appliances, telecommunications and mining and minerals sectors.
Gwadar is mentioned only in passing, and that too for its capacity to serve as a port of exit for minerals from Balochistan and Afghanistan, and as an entrepot for wider trade in the Indian Ocean, right from South Africa to New Zealand. The plan makes no mention of China’s external trade being routed through Gwadar.
The Dawn report notes that it appears that Pakistan is pushing China to begin work on the Gwadar International Airport, whereas China is pushing for early completion of the East Bay Expressway, a controlled access road in the port city.
The report concludes by saying that the entry of Chinese firms will not be limited to the CPEC framework alone, as the recent acquisition of the Pakistan Stock Exchange and the impending acquisition of K-Electric (formerly Karachi Electric Supply Company) demonstrate.
“In fact, CPEC is only the opening of the door. What comes through once that door has been opened is difficult to forecast,” the Dawn report concludes.