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Revitalizing Pakistan’s energy sector and the crucial role of CPEC

By Ziad Alahdad

The Critical Significance of CPEC

If one follows the general rhetoric prevalent in Pakistan including in the media, CPEC is characterized as the all-important, highly-visible, highly-praised yet highly-controversial and highly-criticized initiative. Among naysayers, it is largely touted as payback from China for allowing it access to the Arabian Sea, or as a dumping mechanism for Chinese goods. The fact that there is no consensus on the narrative indicates that the message from the authorities is either not convincing enough to a skeptical audience or has not as yet taken root. The table below summarizes the CPEC portfolio showing an overall investment of $46 billion of which the energy sector claims the lion’s share of $27 billion. The rest of it ($19 billion) covers the construction of roads, railways, Gwadar port and its transportation links (sea, air and land), fiber optics cable systems, and urban mass transportation schemes.

CPEC Portfolio

Since the program is expected to be implemented over a ten year period, the table can only be taken as indicative of the overall size and it is assumed that there will be many changes as individual components in each of the broad categories are designed and developed. In fact the updated list of projects as of January 2017 is estimated to cost $54 billion of which $35 billion is for energy projects.  A relatively small but not insignificant portion of the financing, $11 billion is on concessional terms (2% interest with 20-25 year repayment) disbursed through the Exim Bank of China, the China Development Bank and the Industrial and Commercial Bank of China. The bulk of the financing, including all the energy projects, will be on commercial terms and therefore depends on the strength of individual projects, the quality of the reform agenda and country risk, among other contingent factors.

If CPEC is implemented as envisaged, it would create 700,000 jobs, add 2-2.5% to the GDP, and add projects valued at 17% of Pakistan’s 2015 GDP, equivalent to all direct foreign investment since 1970. These are impressive figures the likes of which Pakistan has never encountered in its economic history. Ongoing projects are largely being implemented on schedule and some are even ahead of schedule. This is a welcome departure from the hitherto lackluster implementation performance in Pakistan. In November, 2016, the first consignment from China through the CPEC corridor was delivered to Gwadar Port for onward shipment to Africa and western Asia. One aspect does seem clear. CPEC is not about concessional handouts but, more importantly, it is implicitly calling upon Pakistan to catch up on the backlog of reform actions, improve governance, enhance security and build its capacity to enable it to mobilize commercial funding for the individual projects, presumably with guidance from Chinese authorities and experts. If this is the case, CPEC is a well-thought out initiative designed to develop Pakistan rather than increase its dependence on handouts  the kind of program that Pakistan needs for its long-term well-being. In effect, China is holding Pakistan’s feet to the fire, to do what Pakistan needs to do for its transition to an economically powerful nation. In serving its own strategic interest, China is also directly investing in CPEC’s success. Political analyst and journalist, Andrew Korybko writes: “If properly utilized, the coming years can become a godsend for Pakistan by assisting in its transformation from a regional leader to a hemispheric and potentially even globally influential Great Power, provided of course that Islamabad is keen enough to promote the convergence of civilizations which is destined to take place on its territory.”

On China’s strategic benefit, he says: “Once CPEC becomes fully operational, Pakistan will unofficially become China’s most important gateway to the rest of the world.” And “Upon completion, CPEC will make Pakistan the most reliable, cost-effective, and fastest route for carrying out trade with China …CPEC is a priceless gift to each of China’s partners and is expected to become one of the most widely utilized overland trade routes in the world.” Hence, if managed correctly, CPEC could turn the country around. If not, it could become a liability of immense proportions. There seems to be no middle ground. With the limited options the country has, this is an opportunity it cannot afford to squander. The next table details energy-specific investments.

CPEC energy projects (May, 2015)

Notwithstanding the inevitable changes over the ten year program period, a number of features stand out. CPEC is the largest consolidated program of energy investment in Pakistan eventually adding over 17, 000 MW of power capacity, nearly doubling the existing grid of 22, 500 MW. It focuses on indigenous energy sources and therefore is designed to reduce dependence and enhance energy security. It introduces solar and wind power at a scale never before envisaged in Pakistan. Looking at the individual components, there is clearly a balance between environmentally benign renewable energy resources (hydro, solar and wind) and a polluting fossil fuel (coal) the reserves of which are too large to ignore.

China has extensive world-class expertise in each of these areas from manufacturing, project design, installation through to operation. It is the world leader in research and development in solar and wind technology. The CPEC list of projects includes one of the largest solar farms in the world located at Bahawalpur, with an eventual capacity of 1,000 MW of which the first stage of 100 MW is already operational. In light of these facts, the program is clearly well-conceived and has been put together in the context of an integrated energy planning approach, tempered by strategic and energy security considerations, much like China’s own energy plans. Early progress is indicative of an implementation performance surpassing the lack-luster norm of the last few decades. If managed correctly, the CPEC energy program is a windfall and turning point for Pakistan’s energy sector.

Ziad Alahdad, Former Director of Operations, Lead Energy Specialist, World Bank Presentation at the Pakistan Embassy, Washington DC.

 

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