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About Centre of Excellence‐CPEC:
The Centre of Excellence for CPEC is a joint initiative of Pakistan Institute of Development
Economics and Ministry of Planning, Development and Reform, Islamabad. It is a leading
policy guiding Think‐tank for effective implementation of CPEC portfolio. The mandate of
the Centre is to conduct core research on CPEC (six themes), to promote true narrative of
CPEC, to guide implementers of CPEC on policy matters, and to train business community
on CPEC related business opportunities.

Following are the research themes of the Centre of Excellence for CPEC;

1. Socio Economic impact of CPEC

2. CPEC Trade and Industry Cooperation
3. Regional Connectivity under CPEC
4. Financing and Financial sector integration under CPEC
5. Urban development in Pakistan under CPEC
6. Job growth and human resource development

This booklet is also explaining the true narrative of CPEC for society at large.

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 Table of Contents

Introduction ........................................................................................................... 4

CPEC: Opportunities and Risks .............................................................................. 6

Chinese perceptions of CPEC .............................................................................. 10

A golden opportunity .......................................................................................... 13

Policy Imperatives for CPEC ................................................................................ 16

Financing burden of CPEC ................................................................................... 19

The economics of CPEC ....................................................................................... 22

CPEC Major Projects Details ................................................................................ 25

Appendix .............................................................................................................. 32

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 Introduction

One of the common reservations expressed about CPEC is that it lacks transparency and
non‐availability of complete information. The terms and conditions of financing at which
the Chinese companies are participating in these projects are not fully known and the
likely future financing burden on Pakistan’s balance of payments is not obvious. This
booklet attempts to address some of these issues to the extent that the projects have
been planned, agreed upon, finalized and implementation is under way. Only
approximately half of $ 45 billion committed originally for CPEC would be utilized for
these projects. Pakistan’s liability is therefore at present limited to this $ 23‐25 billion
only. Many other projects are at feasibility stage, discussion or negotiation stage between
the two governments or on hold. No amount has either been committed or disbursed for
these projects and the liability of Pakistan has not yet arisen.
It must be kept in mind that the planning of CPEC follows four stages and frim information
would flow only when we reach that stage. These stages are:
(i) Early Harvest 2015‐2019 Most of the projects relate to Energy sector which are
already completed or expected to be completed by 2019 adding approximately 7000
MW electricity to national grid and thus easing the energy shortages and load
shedding that had crippled the industry and exports
(ii) Short term projects up to 2022 mainly Roads, Gwadar Development, Optic fiber
network and the Hydel, coal mining and power projects
(iii) Medium projects up to 2025 Railways and Industrial zones
(iv) Long term projects up to 2030 Completion of Industrial zones, Agriculture, Tourism
etc.
The confusion arises when some of the commentators mix up industrial zones that would
spill over in the long term and on which very little planning or conceptual work has been
done with the energy projects that would add 13180 MW to the national grid by 2022 and
are at various stages of execution. A more disaggregated approach would help remove
this confusion. But the fact that the industrial zones are still at their initial stage provides
an opportunity for our private sector businesses to take active part in the design, policy
framework, institutional arrangements , incentive structure to ensure a level playing field
for all investors—domestic and foreign (Chinese or non‐Chinese) . Rather than remaining
by standers, skeptics and critics at various fora the business community should become a
stakeholder in this process. Two papers in this booklet specifically lay down the proposed
policy and institutional changes that can help us derive maximum benefits for CPEC.
One must also be cautious in not pinning and propagating exaggerated expectations from
CPEC. Over a period of 15 years the annual average investment under CPEC would amount
to $ 3 billion only or 6% of annual investment budget of the country. Therefore those who
claim that it would be a game changer for Pakistani economy are making too inflated and

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unrealistic claims and setting themselves up for failure. At the same time the detractors
and critics who propound the theory that Pakistan would be caught in the Chinese deb
trap and cede its territory i.e. Gwadar and sovereignty are also sadly mistaken. The oft
quoted example of Sri Lankan port Hambantotta is totally inapplicable even in the larger
context of the Sri Lankan economy. Neither of these prophecies are likely to materialize.
According to the IMF ( extract of their report of 2017 is attached in the appendix) the peak
outflows on account of CPEC debt servicing, profit and dividend repatriation and
increased imports would reach $ 3.5 ‐4‐5 billion in 2024/25 and gradually declining in the
long run. Export revenues in 2024 should rise to $ 40 billion and this additional amount
arising from the CPEC related outflows can be absorbed without much stress on the
balance of payments provided we continue to ensure that exports grow at least 10
percent annually( In the last nine months since the ease in energy shortages ,exports
have grown at 12 percent ) .
In the final analysis , what is going to be the likely outcome of CPEC very much depends
upon our collective response capacity i.e. of the Federal, provincial and local
governments, the private sector , the media and the civil society all working together in
unison and collaboratively. If that happens, the benefits to Pakistani economy and society
particularly Balochistan and Southern KP are likely to exceed the costs. But if we continue
with the Business as usual mode where bickering, blame game, point scoring, narrow
parochial and personal considerations, red tape, hesitation and delays in solving problems
and removing bottlenecks persist then we would certainly find ourselves entrapped in
heavy financial burden. The choice is entirely ours and not that of our Chinese partners.

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 CPEC: Opportunities and Risks

China Pakistan Economic Corridor (CPEC) has become a subject of increasing number of
conferences, talk shows. Op Ed pieces, articles etc. The interest it has sparked is not
limited to Pakistan but has spilled over across the border and into far distant places.
The basic thrust of the debate emanates from two different strands of thought, at the
geopolitical level, the One Belt One Road (OBOR) of which CPEC is an integral part is
considered as a manifestation of China’s ambitions to become a global power to reckon
with. The existing power structure is therefore threatened by the rising influence of a new
comer on the scene. New alliances such as US‐Japan‐India are emerging to contain the
ascendancy of China. South Asian archrivals‐India and Pakistan, are realigning themselves.
Pakistan, a longtime ally of the US, is drifting gradually towards Chin while India—a
traditional friend of the Soviet Union—is strengthening its links with the United States.
CPEC has accordingly been caught in the cross fire between these two rival camps. Some
of the criticism and skepticism about CPEC originates purely from the fear of china
possibly using Gwadar in future as a strategic naval base in a critical sea fare lane in the
Gulf.
As far as the geo‐economics of OBOR is concerned, as many as sixty countries would get
connected to China through a network of roads, highways, railways, pipelines, grids and
fibre optic. This connectivity at its peak would further enhance the competitiveness of
Chinese goods and services by reducing the transaction costs and expediting delivery
time. China is already flooding the international markets with its relatively cheap goods
and has become the top exporting nation of the world. Its comparative advantage would
thus be sustained over time. Its position as a magnet for global supply chain would be
further reinforced.
It is in the above context that the opportunities and risks arising from CPEC should be
examined dispassionately in a holistic manner. The foremost singular contribution that
has already made a significant and visible difference is the addition of 10,000MW to the
generation capacity in Pakistan in a span of four years, It has overcome chronic energy
shortages, altered the fuel mix, and substituted plants with 61 percent efficiency factor
in place of those operating at 28 percent bringing down the cost to consumers. Electricity
outages had cost the economy about 1.5 to 2 percentage points of GDP. Export orders
were cancelled and the buyers walked out of Pakistan as their traditional suppliers
couldn’t fulfill the orders on time because of energy shortages. The value of exports took
a dip, precipitating a balance of payments crisis. As new hydel, renewables, coal‐based
projects come on stream, there would be a corresponding shrinking of imports of
Furnace oil and Diesel.
The associated risk of additional supply of power is that unless we restructure or privatize
the Distribution companies or make Power Distribution sector competitive, the circular

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debt would keep on rising. Distribution Losses and non‐recovery of dues have put
enormous pressure on public finances and the subsidies on this account may escalate if
institutional reforms are not undertaken.
The second area which would benefit Pakistan is the construction of highways and railway
line linking Gwadar with Kashgar and the Mass Transit systems within big cities. The
rehabilitation and upgrading of Main Railway Line with High speed trains would relieve
the businesses of high cost of domestic transportation of goods to and from Karachi as at
present bulk of the freight is carried by trucking fleet. Inner city Mass Transit systems in
Lahore, Peshawar, Karachi and Quetta would provide safe and affordable public transport
to the citizens who face a lot of inconveniences and spend a lot of time and money in
commuting to work. The reduced travel time and saving in transportation expenses would
increase their productivity and also augment the purchasing power of lower income and
low middle‐income group.
The Western route would open up the backward districts of Balochistan and Southern KP
and integrate them with the national markets. The communities living along the route
would be able to produce and sell their mining, livestock and poultry, horticulture,
fisheries output to a much larger segment of consumers. Their transportation costs would
become lower, the proportion of perishables and waste would go down, cool chains and
warehousing would become available and processing would become possible in the
adjoining Industrial zones. Access to large trucking fleet and containers with greater
frequency and reduced turnaround time may help in the scaling up of operations. Fibre
optic network would allow the citizens of these deprived districts access to latest 3G and
4 G broadband internet connections.
The risk is that the educational, health, drinking water, vocational training facilities may
not be available to the communities living outside the Industrial zones in these districts.
This may create resentment that the benefits are not accruing to the people at large in
these districts. Careful planning should be done as is the case with Sindh Engro Thar Coal
Mining project that the local population benefits in form of employment, contractual
services, rural roads and transport services, agriculture development and vocational and
on the job training. A special dedicated multiyear fund amounting to Rs 100 billion should
be set up for providing the basic services to the communities living in all the districts from
Gwadar to DI Khan along the Western route. This gesture would go a long way to spread
the benefits of CPEC to a much larger segment of the population in these remote,
disadvantaged areas of the country. It would also help in promoting social cohesion and
allaying the fears that the local communities would become marginalized. The detractors
who are propagating that the CPEC would only benefit Punjab would be exposed in their
nefarious game of creating polarization and discontent.
There is a systematic campaign orchestrated by some Pakistanis reverberated in other
not too friendly countries that the CPEC is designed for the benefit of the Chinese and
eventual economic domination of Pakistan. It is argued that a fragile and highly indebted

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economy with weak exports, dependent upon foreign assistance and prone to periodic
external payments crises would not be able to meet the additional debt obligations and
repatriation of profits created by the CPEC. China is entrapping Pakistan by giving
expensive loans and credits for projects of dubious economic value. If it is not able to
repay, China will take over the Gwadar port, land and assets in Pakistan as they have done
in case of Hambantota port in Sri Lanka. This agreement between China and Sri Lanka has
been widely touted as an example of the Chinese nefarious intentions to colonize poor
countries.
The above stated apprehensions are totally misplaced and based on conjectures, not on
actual facts. Out of total commitment of $ 50 billion, seventy percent or $ 35 billion would
be coming to Pakistan in form of Foreign Direct Investment. The Chinese companies are
following the established IPP policy of the Government which is applicable to all domestic
and foreign investors under which they are allowed 17 percent return on equity in US
dollar terms. Infrastructure projects would be financed by long term concessional loans
averaging interest rate of 2 percent and grants. It is estimated that the total annual
outflows on both these counts would average between 2.5 to 3 billion dollars annually.
How would this amount be repaid? The losses to national income due to energy shortages
amounted to $ 6 billion annually. AS these shortages are eased and efficiency gains are
realized the national income would rise at least by $ 6‐7 billion per annum. Resumption
of higher growth rate of 6 to 7 percent would not only suffice to repay these obligations
comfortably but also have ample resources available for new investment. Exports had
stumbled from $ 25 billion to 21 billion again because of outages. These are now
beginning to grow in double digits. It is estimated that a 14 percent growth rate of exports
would be able to finance the additional foreign exchange burden of all the repayments
on account of CPEC. Imports of capital goods would recede with completion of the energy
projects causing savings on the import bill. Similarly, as the demand for imported fuel oil
and diesel diminishes despite the LNG imports there would be easing of pressure on the
POL import bill. These savings on the import side have not been reflected in the above
analysis of repayment capacity. We also have not taken into account the transit fees in
these calculations as we do not know the volume of trade that would pass through the
corridor. These calculations also do not include the second order effects whereby
infrastructure projects make our industries more competitive for import substitutes and
new export products. The substantial inflow of Chinese investment is also changing the
perception about Pakistan and signaling to other countries that Pakistan was an attractive
and safe place to invest. To the extent that foreign investment from other countries is
also stepped up Pakistan’s capacity to repay would be further enhanced. It can be seen
that higher growth of economy and exports would enable Pakistan to meet its repayment
obligations comfortably.
In order to realize these opportunities and mitigate the risks the Government of Pakistan
has to take several policy and institutional reforms and streamline its bureaucratic

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processes. In absence of these measures the benefits may turn out to be lower than what
we have calculated and the risks may be elevated.

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 Chinese perceptions of CPEC
MOST discussions and analyses with regard to the China‐Pakistan Economic Corridor
(CPEC) have a Pakistan‐driven perspective, and rightly so. After all, we have to safeguard
our national interests and ensure maximum benefits for the country. These discussions
and writings have evoked a lot of interest in China. This article attempts to present a
limited cross section of the views articulated by Chinese scholars, academics, companies
engaged in CPEC, retired officials and other friends of Pakistan.

My past association with China as the region’s chief economist for the World Bank as well
as visits to China practically every year since then has allowed me to gather these points
of view. This year I also had the privilege of attending two international conferences on
CPEC, one in Beijing in March and the second in Shanghai in August and listening to the
candid views of the Chinese participants from various sections of the society. The goodwill
that Pakistan enjoys among the Chinese is perhaps unparalleled and therefore we have
to pay heed to their concerns and suggestions. The gist presented here is a composite
sketch of diverse views.

The Chinese have voiced concerns regarding negative CPEC talk, security and red tape.
Under its One Belt One Road Initiative announced in 2013, China is planning to invest
more than $1 trillion in 60 countries all over the world to establish six different corridors.
The receptivity in other countries to this proposal has been anything but enthusiastic;
however, some Chinese friends are puzzled by the skeptical and negative reactions from
certain quarters in Pakistan expressed in the media, particularly on social media. This
comes to them as a surprise because of the long uninterrupted record of strong bilateral
relations between the two countries that were not even affected by changes in political
leadership in either country. CPEC is the first project of its kind to foster economic
cooperation on a massive scale for building large infrastructural projects in Pakistan.
Although realizing that there are some external forces hostile to this initiative, Chinese
analysts and participants are concerned about what they see as the misrepresentation
of facts by many Pakistanis. It is not obvious to them as to what purpose is served by
raising doubts and fears about CPEC in the minds of the Pakistani population. The
aspersions being cast on the motives of the Chinese, such as the analogy with the East
India Company or Pakistan becoming a satellite of China, are very unnerving: external
detractors of CPEC pick up these reports and after bundling them as ‘risks’ of CPEC to
Pakistan, disseminate them widely.
The Chinese argue that the IPPs have been a policy instrument for investment in
Pakistan’s energy sector for a very long time. When the country was facing serious energy
shortages no one else came to Pakistan’s rescue and invested in the sector. Now that

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China has come forward with a planned investment of $35 billion or 70 per cent of the
total CPEC allocation under the same policy, questions are being raised.
Had it involved extraction of natural resources from Pakistan for the benefit of the
Chinese, this criticism would have been justifiable. On the contrary, the benefits of this
investment would be exclusively appropriated by Pakistan’s industries and households
that would no longer face load‐shedding while the country would record a 2pc annual rise
in GDP growth.
Chinese state‐owned companies, designated by the Chinese government based on their
expertise and experience, are executing the projects with loans provided by government‐
owned banks on concessional terms both in tenor and pricing. In several projects, Chinese
and Pakistani companies have entered into joint ventures. The repatriation of profits and
debt‐servicing in foreign exchange arising out of these obligations would become possible
after an increase in the volume of exports as a result of the Chinese‐Pakistani joint
ventures relocating their industries to the Gwadar Free Economic Zone and the nine
industrial zones to be established under CPEC.
In the opinion of some, the negative feelings can have unintended adverse consequences
for the personal security of Chinese nationals working on these projects, particularly in
some sensitive areas of Balochistan. Some elements unhappy with the Pakistani state and
government and possibly acting at the behest of foreign powers hostile to CPEC appear
to have created conditions in which the murders and kidnappings of Chinese nationals
that were almost non‐existent have begun to take place. Our interlocutors were grateful
for the new division being raised by the Pakistan Army for protection of the Chinese; but
the security risk is raising premiums for relocation to some of the vulnerable areas.
The other area which bothered CPEC’s project managers was the red tape and
cumbersome decision‐making within the Pakistani government. Too many agencies are
involved in the clearance and approval process, each one taking its own time. These
delays cost them money and disrupt the schedule of activities and completion time table.
Power tariffs, according to them, should be reasonable, predictable, sustainable, and valid
for a multi‐year period and not subject to frequent changes. They request that a focal
point in the government be established and empowered to secure all approvals and
decisions.
The next point raised was to have a high‐level joint coordination committee to redress
the grievances and complaints of the Chinese companies. The existing joint working
groups operate at the government‐to‐government level but there is no platform available
for the Chinese companies or their Pakistani joint venture partners to approach.
Continuous federal‐provincial‐local government coordination is essential to move the
projects along till completion. Land acquisition is a provincial local subject and the process
takes too much time.

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When questioned about the Pakistani private‐sector companies partnering with them,
the Chinese executives told us that the dearth of qualified and experienced Pakistani
entities was an acute problem. Their own cost of production would be lowered if they
were able to deploy Pakistani managers, skilled workers, equipment operators and labour
as part of their deal with the local companies. These perceptions may be right or
misplaced but we have to investigate and take measures to resolve some of the genuine
problems faced by our Chinese partners.
Published in Dawn, September 12th, 2017

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 A golden opportunity

INFRASTRUCTURE projects all over the world have a tendency towards cost overruns and
schedule delays. Pakistan’s implementation record has been relatively worse, irrespective
of the form of government or party in power. It is characterized by sluggishness, frequent
change of managers, passing on the buck and not accepting responsibility. The recent
increase in load‐shedding epitomizes this trend as the planned addition to generation
could not be achieved on time.
To be successful, the China‐Pakistan Economic Corridor requires an entirely different
approach, i.e. clear delineation of responsibilities, specific goals and targets, a defined set
of indicators along with incentives and penalties for performance and non‐performance
and finally, transparent accountability. If a beginning is made with CPEC under the sharp
scrutiny of the Chinese as well as our own political leaders — both in government and in
the opposition — this new paradigm might gradually permeate our bureaucratic nervous
system.
At present we have the ‘too much too little’ accountability syndrome. Honest and
competent officers have given up doing their best because of the constant fear of their
names and reputations being unnecessarily tarnished by the FIA, NAB, Public Accounts
Committee and media, particularly the free‐for‐all social media. Taking cognizance of
these ‘allegations and accusations’ suo motu, the courts step in and drag the officers into
the fray. For such officers, the sensible choice is ‘do not commit’ and ‘do not take any
decision’.
CPEC provides a chance to improve our institutions of governance.
On the other hand, those who are complicit in corruption go scot‐free with the help of
their political godfathers. The National Reconciliation Ordinance, various implicit or
explicit compacts, open or secret deals between major political parties, etc. have impaired
the credibility and the deterrent effect of the accountability process. In the ultimate
analysis, the officers belonging to the group of ‘actor officers’ may in the short run suffer
some temporary inconvenience or dislocation but in the long run, they are better off
having amassed so much wealth that they and their next generations can live comfortably
in Canada, Dubai and London, etc.
In the event their political godfathers are back in power, they can return and resume their
activities. The country hence suffers both ways: firstly, competent and honest officers shy
away from doing their jobs leading to a paralysis in decision‐making and suboptimal
results, and secondly, public resources are utilized for ‘personal gain’ rather than the
public good. Implementation is thus either paralyzed or attained at a huge cost to the
public exchequer.

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What needs to be done is well known and documented but no action has been taken by
successive political leaderships. Short‐ sighted leaders with an eye to the next electoral
cycle do not find it in their interest to undertake ‘unpopular’ reforms. Only a visionary
leader, whose aim is to lift Pakistan into the upper tiers of economic ascendency and
make it competitive in the global economy, is capable of bringing about these changes.
Unfortunately, external pressures from the US, World Bank, the Asian Development Bank
and IMF have not made much of a dent on our institutions of governance. CPEC provides
such an opportunity. Whether it is the ministries, provincial departments or executing
agencies, they have to deliver within the time‐bound, resource‐specified plan agreed with
the Chinese government. To meet this goal officials responsible for planning,
coordination, regulation and execution of CPEC projects should be:
Selected on merit, technical and/or managerial competence, and integrity rather than on
loyalty and connections.
Assured security of tenure until the project’s completion and not at risk of being
transferred on the whims of the “competent authority” while the project is being
implemented.
Provided requisite resources, autonomy to operate without too much interference,
monitored regularly and their performance evaluated against pre‐agreed indicators.
Given full support and protection against frivolous accusations and character
assassinations.
Held accountable for results and outcomes.
As institutional reforms across the board have been stymied by lack of political will, a
more selective approach may be adopted, targeting the ministries, provincial
departments and executing agencies involved in the planning, coordination, regulation,
supervision and implementation of CPEC projects.
For example, it is a gigantic undertaking to lay the track, and rehabilitate, upgrade and
construct the double track extending several thousand kilometers on BOT (build, operate,
transfer) basis. This undertaking exceeds Pakistan Railways’ present capacity. Until it is
completely restructured and reorganized, and the reforms outlined here put in place, the
risks of non‐completion, shoddy work and cost and time overruns would remain elevated.
It is useful to remind the political parties that CPEC timelines extend over 15‐20 years,
and the impact of these reforms may be felt when any of these parties is in power. The
consensus reached on them now can benefit almost all the political parties in the form of
efficient and expeditious completion of projects without much effort on their part when
they assume power. As they say in Urdu: “Paki pakai kheer khanay ko mil jae gee” (we will
get ready‐made pudding to consume). These reforms have to be institutionalized and
given broad political support and approved by parliament to ensure their continuity even

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when there is a regime change. They will take an extended period of time to get rooted
and any attempt to derail them prematurely would have highly pernicious effects. CPEC
projects in the absence of these reforms may cost the nation way beyond current
estimates with much lower benefits.
It is important to recognize that the risks are quite high. The reforms will meet
obstruction, resistance and may be accepted in principle and on paper, but their
substance may be deformed and obfuscated in actual practice. Those glib talkers who are
going to be the losers in this game may find all kinds of flaws and loopholes in them. They
may try to convince the decision‐makers that they are being taken for a ride as their
powers and authority are being curtailed, that the people of Pakistan have given them
the mandate to do whatever they wish and these reforms are in fact an abridgement of
that mandate. But my hope against hope is that our leaders will be able to see through
this game.
Published in Dawn, April 25th, 2017

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 Policy Imperatives for CPEC

Most of the discussion about CPEC has so far focused on the financing and indebtedness
in the future but the success of this initiative lies in the successful interaction between
investment, institutions and policy. What kind of policies are needed to maximize benefits
and minimize costs to the country. There are several but at least six areas need careful
design and execution.
Energy Policy:
The addition of 10000 MW of electricity that is scheduled to become available to the
National Grid by 2018 would overcome the energy shortages. However, it may create
unintended adverse consequences for the public finances and liquidity of the companies
involved in the energy supply chain if other components of energy policy are not put right.
The Circular Debt that has now become a perennial problem would get worse if the gap
between the purchase price of power paid by the DISCOs and the sale revenues collected
by them is not bridged. The uniform tariff rate, the Transmission and Distribution losses
and energy thefts, the discrepancy in the amount billed and the amount recovered, and
the growing account receivables underpin this problem. Unless the DISCOs are either
privatized or restructured to become commercial organizations free from political
interference, this growing circular debt would end up widening the fiscal deficit. The cost
of generation to the end users can be reduced if competitive energy markets and energy
exchanges are set up, auctions are held for tariff determination and multiple buyers are
introduced instead of the present single buyer model The NTDC would recover only the
Wheeling Charges for the use of their transmission infrastructure.
Industrial Policy:
The Special Economic Zones (SEZs), Industrial parks etc. to be set up along the Corridor
should be open to Pakistani firms on the same terms as to the Chinese. Any incentives
given to the Chinese would be equally applicable to all investors. Land is to be allotted on
long term lease rather than outright purchase. The leases should be auctioned only to
genuine, pre‐qualified and screened bidders to eliminate land grabbers and speculators.
In Balochistan, some portion should be reserved for local investors wherever it is feasible
to do so without the right of alienation. The lease should incorporate a provision that the
allotment of land would be cancelled if the project is not operational within three years...
All infrastructure works – power, gas, water, roads, effluent plants, amenities – should be
in place before the possession is passed on.
Pre‐Feasibility studies should be carried out by the Zone authorities through expert
Consultancy firms or universities, to provide base line data and information about the
kind of projects that can be established in different zones.

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Trade Policy:
External payments on account of repatriation of profits and debt servicing of CPEC
projects would put pressure on the Current Account. Exports have to grow at least 15
percent annually to meet these new obligations and remittances have to increase at their
historical level. Exchange rate has to be managed deftly to stimulate new export products,
new firms, and penetration into new markets, but ensuring that prices of imports of
capital goods, machinery and equipment are not hiked up to make new investments
unattractive. Pakistani and other foreign companies winning competitive bidding should
receive the same tax treatment to ensure level playing field.
Free Trade Agreements have to be renegotiated to preserve the comparative advantage
of Pakistani exports and tariff quotas introduced to safeguard against material injury to
Pakistani manufacturers. Import tariff rates have to be gradually reduced to enable
Pakistani companies to participate in global supply chain.
Foreign Exchange Regime:
The current foreign exchange Regime is becoming too restrictive, for making timely
payments to suppliers, vendors, and financiers. Further restrictions would only divert
inflows towards informal channels, resulting in a vicious cycle. As inflows through official
channels recede, and the demand for outflows through banking channels at interbank
rates rise, the State Bank of Pakistan (SBP) would have to further tighten external
payments, prolong the timing and disallow certain genuine payments to conserve their
reserves.
As more payments are pushed to the kerb market, the differential between the official
and open market rates would widen. Exporters and remitters would channel their
earnings at the higher open market rate, reducing the supply in the interbank market. The
increased demand by importers and other consumers of foreign exchange at the lower
official rate would lead to a demand‐supply disequilibrium.
Market sentiment plays an important role in the determination of exchange rate, and any
hint that outflows on account of payments to the Chinese would lead to further restriction
in foreign exchange regime would erode the confidence of the market players
Financial Policy:
Commercial banks should finance Pakistani Companies either stand alone or in joint
ventures with the Chinese companies in collaboration with the Infrastructure
Development Fund that would carefully scrutinize the proposals from potential investors,
calculate the future cash flows, and carry out scenario analysis for risk mitigation. For the
small and medium enterprises working either as sub‐ contractors to the large firms, or
providing goods and services for the CPEC projects, or setting start‐up businesses, the
existing Funds set up by DFID, USAID etc. should be geared up to meet this demand.

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In Balochistan, Southern KP, GB, urban and rural infrastructure projects that link the main
highways and motorways under CPEC with the communities should be given priority by
the respective governments in the allocation of the Provincial Development budgets.
Skill Development Policy:
One of the prospective benefits for CPEC projects for Pakistan would be the training and
development of skilled manpower. Plans have to be made to assess the long term
manpower requirements, both for construction as well as operational phases of CPEC
projects.
In light of this assessment, different categories and different levels of training programs
have to be designed and then assigned to credible pre‐qualified providers. Particular
attention should be given to train the youth from the backward districts of the country,
starting with Gwadar all the way to the Karakoram Highway.
A number of private and non‐profit organizations are actively engaged in quality
vocational and technical training, mainly in Karachi and Punjab. These organizations
should be invited to set up similar facilities in other parts of the Country, where CPEC
projects are being executed.
In addition to this formal training, internships and attachments with the Chinese
companies working on the projects should be made an integral part of the curriculum. IF
there is one lasting legacy for which CPEC should be remembered it is this investment in
producing skilled and trained technical manpower of different levels of expertise.
The other missing link in which Pakistan is weak is the institutional capacity for which a
separate analysis would be required.
Published in Dawn, April 10th, 2017

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 Financing burden of CPEC

The ongoing debate on the impact of CPEC projects on future external payments’
obligations is welcome, but should be informed by analysis based on facts rather than
opinion.
The total committed amount under CPEC of $50 billion is divided into two broad
categories: $35bn is allocated for energy projects while $15bn is for infrastructure,
Gwadar development, industrial zones and mass transit schemes. The entire portfolio is
to be completed by 2030.
Therefore, the implementation schedule would determine the payments stream. Energy
projects are planned for completion by 2020, but given the usual bureaucratic delays, it
won’t be before 2023 that all projects are fully operational. Under the early harvest
programme, 10,000 MW would be added to the national grid by 2018. Therefore, the
disbursement schedule of energy projects is eight years (2015‐2023). Infrastructure
projects such as roads, highways, and port and airport development, amounting to
$10bn, can reasonably be expected to be concluded by 2025, while the remaining
projects worth $ 5bn would spill over into the 2025‐30 period.
Given the above picture, it is possible to prepare a broad estimate of the additional
burden on Pakistan’s external payment capacity in the coming years. As the details of
each project become available, the aggregate picture can be refined further. The margin
of error would not cause significant deviation.
It is possible to prepare an estimate of the additional burden on our external
payments’ capacity.
The entire energy portfolio will be executed in the IPP mode —as applied to all private
power producers in the country. Foreign investors’ financing comes under foreign direct
investment; they are guaranteed a 17pc rate of return in dollar terms on their equity
(only the equity portion, and not the entire project cost). The loans would be taken by
Chinese companies, mainly from the China Development Bank and China Exim Bank,
against their own balance sheets. They would service the debt from their own earnings
without any obligation on the part of the Pakistani government.
Import of equipment and services from China for the projects would be shown under
the current account, while the corresponding financing item would be FDI brought in by
the Chinese under the capital and finance account. Therefore, where the balance of
payments is concerned, there will not be any future liabilities for Pakistan.
To the extent that local material and services are used, a portion of free foreign
exchange from the FDI inflows would become available. (Project sponsors would get the
equivalent in rupees). For example, a highly conservative estimate is that only one‐

19
fourth of the total project cost would be spent locally and the country would benefit
from an inflow of $9bn over an eight‐year period, augmenting the aggregate FDI by more
than $1bn annually. This amount can be used to either finance the current account
deficit or reduce external borrowing requirements. Inflows for infrastructure projects
for local spending would be another $4bn over 15 years.
Taking a highly generous capital structure of 60:40 debt‐to‐equity ratio for energy
projects, the total equity investment would be $14bn. Further, assuming the extreme
case that the entire equity would be financed by Chinese companies (although this is
not true in the case of Hubco and Engro projects, where equity and loans are being
shared by both Pakistani and Chinese partner companies) the 17pc guaranteed return
on these projects would entail annual payments of $2.4bn from the current account.
CPEC’s second component, i.e. infrastructure, is to be financed through government‐to‐
government loans amounting to $15bn. As announced, these loans would be
concessional with 2pc interest to be repaid over a 20‐ to 25‐year period. This amount’s
debt servicing would be the Pakistan government’s obligation. Debt‐servicing payments
would rise by $910 million annually on account of CPEC loans (assuming a 20‐year tenor).
Going by these calculations, we can surmise that the additional burden on the external
account should not exceed $3.5bn annually on a staggered basis depending on the
project completion schedule.
As a proportion of our total foreign exchange earnings of 2016, this amounts to 7pc.
These calculations do not take into account the incremental gains from GDP growth that
will rise because of investment in energy and infrastructure. As the loan amounts would
be disbursed in the next 15 years and repayments would be staggered, the adding of the
entire $15bn to the existing stock of external debt and liabilities is not an accurate
representation. The more realistic approach would be a tapered schedule, with $2bn to
$3bn getting disbursed in the earlier years and slowing down in the second half.
The question is: how do we find the extra non‐debt‐creating resources of $3.5bn to
offset this additional burden? If the export slowdown was due to energy shortages, the
availability of increased supplies should boost exports fetching higher foreign exchange
revenues. Exports have to grow by 14pc annually in dollar terms to compensate for these
outflows if all other sources remain unchanged. This is not unprecedented as Pakistan
has previously recorded this growth rate. Further, the substitution of imported fuels
with domestic ones such as hydro, coal, wind and solar should be able to result in savings
of at least $1bn annually. These measures will need concerted action.
To make this happen, Pakistan has to take some policy actions on a priority basis: (a)
make coordinated efforts to increase the volume of exports by diversifying product mix,
penetrating new markets, revising free trade agreements, reducing transaction costs;
(b) attract foreign investment in manufacturing and export sectors and set up joint
ventures in the industrial zones; (c) channel workers’ remittances though the banking

20
system by reducing the differential between the open and inter‐bank market rates; (d)
accelerate training of skilled, technical and professional manpower who can take over
jobs from the Chinese, thus bringing cost savings and reduced outflows; (e) reform the
power sector by privatizing DISCOs, mandating Nepra to develop competitive power
markets and power exchanges by providing open access to producers for transmission
and distribution, setting tariffs through open and transparent bidding, and introducing
smart technologies. These measures would certainly help in easing the pressure on
external accounts.
Published in Dawn, February 11th, 2017

21
 The economics of CPEC

IN a country where negativity and cynicism reign supreme, critics and detractors of all
kinds are revered, and emotional outbursts and fabricated stories dominate the air
waves and social media, it is difficult to present a dispassionate analysis of national
issues.
Since China announced the China Pakistan Economic Corridor (CPEC), more time and
energy has been spent in finding faults, poking holes and raising doubts based on
speculation and conjecture. Had this investment been announced in another developing
country, the national reaction would be: how do we plan to ensure maximization of
benefits to the economy? What are the weaknesses and deficiencies in the existing set‐
up we need to overcome? But this type of thinking is not in our DNA. We are either in a
mood for celebration and self‐congratulations or outright condemnation and depiction
of exaggerated pitfalls.
There are three types of reservations against CPEC. First, those who believe that this
whole endeavor is designed to benefit Punjab to the neglect of the three smaller
provinces. Fanning parochial and ethnic prejudices, doubts are created about the
narrow impact of these projects. Second that the country would be saddled with costly
external loans and outflows forcing Pakistan to go for another bailout. Frightening
numbers such as totals of $110 billion are floating around. Third, some Baloch youth
believe that they would become a minority in their own province. Mistrust and not
perceived economic gains underlies such anxiety.
The government has not helped matters as it has not placed all the data and information
about capital structure, detailed sources of financing, project sponsors etc. pertaining to
CPEC, in the public domain.
There are three types of reservations against CPEC. How can we address them?
This article, to allay some of the reservations, proposes that the Planning Commission
and PIDE use the well‐ established framework of cost‐benefit analysis to evaluate and
monitor the net benefits of CPEC projects. Benefits can be of three kinds: (a) direct,
measured by incremental contribution to gross value added in energy and
infrastructure. Assuming energy elasticity of greater than one, a two per cent growth in
energy production and usage would increase GDP by more than 2pc from the current
level (b) indirect, measured by the multiplier effect of activities resulting from the direct
demand of goods and services and (c) induced effects or externalities: e.g. bringing in
roads and electricity may make some economic activities feasible and reduce
outmigration of skilled labour from those areas. Costs can be of four types: (a) direct
costs associated with investment in electricity generation, transmission and distribution
or construction of roads; (b) indirect costs: large scale investment projects create

22
scarcity premiums and domestic prices of some goods and services are bid up. These
premiums get reduced when competition sets in; (c) unavoidable incremental costs: in
the absence of the required amount of domestic supplies of quality and specifications,
imports have to make up the shortfall; and (d) avoidable incremental costs: proper
planning, coordination and active management can substitute high‐cost inputs by low‐
cost inputs keeping quality intact.
Net benefits are thus estimated as the difference between the discounted flow of
aggregated benefits and the discounted flow of all types of costs over the given time
horizon. This calculation is not straightforward and is beset with many conceptual,
empirical and measurement difficulties. The most problematic area is the aggregation
of easily quantifiable direct benefits or costs with estimated indirect and induced
benefits and costs. The latter are sensitive to the assumptions on which they are based.
Economists, by setting up monitoring experiments, discover new data that helps in fine‐
tuning and refining the original estimates. The outcomes therefore depend upon
minimization of avoidable costs and expansion of induced benefits thus enlarging the
quantum of net benefits.
The avoidable costs phenomenon can be illustrated with the help of two examples. If
the Chinese managers, skilled and technical staff continue to be deployed throughout
the duration of the project, the unit cost of labour after taking into account the
expatriate wage premium, security, housing and mobility expenses would be relatively
much higher compared to a situation where preponderantly Pakistanis were employed.
If the government makes advance plans for these positions to be transferred to
Pakistanis over a staggered period through training, on the job apprenticeship,
attachments and under study assignments supervised by Chinese trainers, cost savings
would be substantial and net benefits much larger. This requires coordination, target
setting, monitoring and outsourcing to vocational and technical training institutes,
private providers and the provincial governments.
Similarly, it is guesstimated that at least 100,000 additional trucks would be needed to
transport construction materials, movement of export‐import trade and increased
volume of goods. If investment in the sub sector is not carried out well ahead of the
CPEC projects’ peak load demand, the prices of trucking would escalate, putting
Pakistani exports at a competitive disadvantage. The cost matrix of CPEC projects would
also move upwards thus increasing the indirect costs. However, if Pakistani truck
manufacturers are provided ballpark figures they can invest in expansion of existing
capacity in tandem with the suppliers of parts and components. Indirect benefits would
increase through creation of new jobs in the industry and efficiency gains from the
economies of scale.
On the benefit side, it must be ensured that the most dynamic and enduring benefits
from CPEC accrue to the people living in the deprived districts of Baluchistan and
southern KP. The opening up and integration of these districts with the unified national

23
market of goods and services would make their fisheries, mining, livestock, horticulture
and other activities economically feasible, creating incomes and jobs and helping lift
them out of poverty. Roads and electricity are precursors for broad‐based development
as they minimize post‐harvest losses, waste and spoilage of perishable agriculture
commodities, reduce the cost of delivery to market towns, and confer purchasing power
in the hands of farmers who then use it to buy consumer goods, generating a second
round of economic activities in these districts
By playing a more active role in maximizing the benefits to the people of deprived
districts and containing avoidable costs, the government would be able to allay a lot of
misapprehensions and doubts.
Published in Dawn, January 3rd, 2017

24
 Summary of China Pakistan Economic Corridor's Major Projects

Major Categories # of Projects Estimated Cost (US $ Million) Projected Cost (US $ Million) Direct Job Opportunities
Energy 21 26,370 for 13,810MW 33,000 for 17,045MW 71,959
Infrastructure (Road) 5 5,341 5,341 31,474
Infrastructure (Rail) 3 8,237 8,237 14,400
Infrastructure (Optical Fiber) 1 44 44 1,294
Gwadar 12 793 10,000‐14,000 77,700

Total 42 $40,784 $58,622 196,827

CPEC Major Projects Details

25
 CPEC-Energy Priority Projects
Estimated Cost Mode of Financing Company/ Coordinating Capacity in Type of Energy Debt/Equity NAPRA Levelized tariff Expected Commercial Provinces/ Direct Job
# Project Name Supervising Agency
US$ Millions Financing Sponsors Ministry MW /Technology Ratio Rate (US Cents /kWh) Operation Date (COD) Regions Opportunities
Port Qasim Electric Private Power and Coal
2×660MW Coal‐Fired Power Ministry of Water
1 1,980 IPP Power Company 1,320 Infrastructure Board (Imported)/Super 75/25 8.3601 June 2018. Sindh 6,500
Plants at Port Qasim Karachi and Power
(Private) Limited (PPIB) Critical
Suki Kinari Hydro power Suki Kinari Hydro (Pvt) Ministry of Water District
2 1,802 IPP 870 PPIB Hydel 70/30 8.8145 2020/2021. 6,250
Station, Naran, KPK Ltd and Power Mansehra, KPK
Huaneng Punjab Power Coal
Sahiwal 2x660MW Coal‐fired Ministry of Water
3 1,600 IPP Shandong Rui Group, 1,320 Development Board (Imported)/Super 75/25 8.3601 May 2017. Punjab 8,278
Power Plant, Punjab and Power
China (PPDB) Critical
Engro Thar Block ll 2*330 MW
Coal‐Fired Power Plant,TEL
1*330 MW Mine Mouth
Engro Power Gen Thar
Lignite Fird Power Project at
LTd. / China Machinery Ministry of Water PPIB Coal (Local)/ Sub
Thar Block ll, Sindh, 2,000 IPP 1,320 75/26 8.5461 June, 2019 Sindh 4,100
Engineering Corporation and Power Critical
ThalNova 1*330 MW Mine
(CMEC)
Mouth Lignite Fired Power
4
Project at Thar Block‐ll,
Sindh.
China Machinery Ministry of Water
Surface Mine In Block II Of
Engineering Corporation and Power / Thar Coal Energy Board
Thar Coal Field, 6.5 Metric
1,470 (CMEC) / Sindh Engro Ministry of (TCEB) Coal/Open Pit Mining Decemebr 2018. Sindh
Ton Per Annum (Mtpa), Thar
Coal Mining Company Petroleum and
Sindh
(SECMC) Natural Resources
M/s Hydrochina Dawood Alternative Energy
Hydro China Dawood 50 MW Ministry of Water
5 125 IPP Power Pvt. Limited 50 Development Board Wind/ Wind Turbine 80/20 11.8750 April, 2017 Sindh 325
Wind Farm (Gharo, Thatta) and Power
(HDPPL) (AEDB)
Gwadar Port Authority
China Communications
300 MW Imported Coal Based To be (GPA) / Gwadar
6 600 Construction Company 300 Coal (Imported) 8.3601 Baluchistan 2,500
Power Project at Gwadar. decided Development Authority
(CCCC)
(GDA)
Quaid‐e‐Azam 1000 MW Ministry of Water COD of 3 x 100 MW
7 1,302 IPP Zonergy 1,000 PPDB / AEDB Solar 72/28 14.1516 Punjab 1,600
Solar Park (Bahawalpur) and Power attained in August 2016.

26
 Estimated Cost Mode of Financing Company/ Coordinating Capacity in Type of Energy Debt/Equity NAPRA Levelized tariff Expected Commercial Provinces/ Direct Job
# Project Name Supervising Agency
US$ Millions Financing Sponsors Ministry MW /Technology Ratio Rate (US Cents /kWh) Operation Date (COD) Regions Opportunities
Hydro China (EPC) Gold
Ministry of Water
UEP 100MW Wind Farm, Wind China (Supplier) / 100% Foreign
8 250 IPP and Power 100 AEDB Wind/ Wind Turbine 13.1998 June, 2017 Sindh 653
Jhimpir,Thatta United Energy Pakistan Loan
(Pvt.) Ltd

Sachal 50MW Wind Farm, Hydro China / Arif Habib Ministry of Water
9 134 IPP 50 AEDB Wind/ Wind Turbine 80/20 14.8618 April, 2017 Sindh 325
Jhimpir, Thatta, Sindh Corporation Limited and Power

SSRL Thar Coal Block‐l, 6.8 Shanghai Electric Power

Ministry of Water Coal (Local)/Sub
10 mtpa & SEC Mine Mouth 3,300 IPP Company Limited / 1,320 PPIB 75/25 8.3341 2018 / 2019 Sindh 8,278
and Power Critical
Power Plant (2×660 MW ) CCTEG and SSRL
Karot Power Company
Karot Hydropower Station, Ltd. (KPCL) / CSAIL/ CTGI Ministry of Water Hydel
11 1,420 IPP 720 PPIB 80/20 5.3977 2020/2021. AJK / Punjab 6,250
AJK & Punjab /CTG (China Three and Power
Gorges)
Three Gorges Second Wind Karot Power Company
Power Project Three Gorges Ltd. (KPCL) / CSAIL/ CTGI Ministry of Water 100% Foreign
12 150 IPP 100 AEDB Wind/Wind Turbine 10.4481 & 10.6048 Sep, 2018. Sindh 644
Third Wind Power Project /CTG (China Three and Power Loan
(2*50 MW) Gorges)
CPHGC 1320 MW Coal‐Fired China Power Hub Coal
Ministry of Water
13 Power Plant , Hub, 1,940 IPP Generation Company 1,320 PPIB (Imported)/Super 75/25 8.3601 2018/2019 Baluchistan 8,278
and Power
Balochistan (Private) Limited Critical
China Electric Power
Matiari to Lahore +660Kv Equipment and
ITC Ministry of Water
HVDC Transmission line 1,500 Technology Co.Ltd.(CET) 2018 / 2019. Sindh and Punjab
and Power 2000 MW with
Project. (878km) / State Grid Corporation ±660 KW Bipole HCDC
10% National Transmission &
of China (SGCC) with Converter/
14 overloaded Despatch Company 9,700
China Electric Power Grounding Electrode
capability for 2 (NTDC)
Matiari (Port Qasim) To Equipment and Stations
Ministry of Water hours
Faisalabad Transmission Line 1,500 ITC Technology Co.Ltd.(CET) 2018 / 2019. Sindh and Punjab
and Power
Project. / State Grid Corporation
of China (SGCC)

ThalMine Mouth Oracle & M/s Oracle Coalfields Ministry of Water

15 1,300 IPP 1,320 PPIB Local Coal 75/25 8.5015 Under Feasibility Sindh 8,278
Surface Mine, Thar Sindh SEPCO and Yanzhou Coal and Power

Sub Total 22,373 11,110 71,959

27
 CPEC-Energy Actively Promoted Projects
Estimated Cost Mode of Financing Company/ Coordinating Capacity in Type of Energy Debt/Equity NAPRA Levelized tariff Expected Commercial Provinces/ Direct Job
# Project Name Supervising Agency
US$ Millions Financing Sponsors Ministry MW /Technology Ratio Rate (US Cents /kWh) Operation Date (COD) Regions Opportunities
CTG/CWEI (China Three Private Power and
Ministry of Water
16 Kohala Hydel Project, AJK 2,397 IPP Gorges) / (CWE 1,100 Infrastructure Board Hydel 2023 AJK
and Power
Investment Crop) (PPIB)
Punjab Power Coal
Rahimyar Khan imported Huaneng Shandong Ministry of Water
17 1,600 IPP 1,320 Development Board (Imported)/Super 75/25 8.3601 Punjab
Fuel Power Plant Power and Power
(PPDB) Critical
Cacho 50MW Wind Power Ministry of Water
18 IPP 50 Alternative Energy Wind/Wind Turbine Sindh
Project and Power
Development Board
Western Energy (Pvt.) Ltd. Ministry of Water
19 IPP 50 (AEDB) Wind/Wind Turbine Sindh
50MW Wind Power Project and Power
Sub Total 3,997 2,520

28
 CPEC-Potential Energy Projects
Estimated Cost Mode of Financing Company/ Coordinating Capacity in Type of Energy Debt/Equity NAPRA Levelized tariff Expected Commercial Provinces/ Direct Job
# Project Name Supervising Agency
US$ Millions Financing Sponsors Ministry MW /Technology Ratio Rate (US Cents /kWh) Operation Date (COD) Regions Opportunities
Ministry of Water
20 Phandar Hydropower Station IPP 80 PPIB/PPDB Hydro Giglit Baltistan
and Power
Ministry of Water
21 Gilgit KIU Hydropower IPP 100 PPIB/PPDB Hydro Giglit Baltistan
and Power
Sub Total ‐ 180

Estimated Total 26,370 13,810 71,959

29
 Roads Projects of CPEC
Estimated Cost Length Expected Commercial Direct Job
# Project Name Mode of Financing Coordinating Ministry Supervising Agency Provinces
US$ Millions KM Operation Date (COD) Opportunities
KKH Phase II (Thakot ‐Havelian Chinese Government Ministry of Communications M/s China Communications
1 1,366 120 March,2020 GB & KPK 7,800
Section) Concessional Loan (GCL) (MoC) construction company Ltd
Peshawar‐Karachi Motorway (Multan‐ M/s China State Construction
2 2,980 GCL MoC 392 August,2019 Punjab & Sindh 15,174
Sukkur Section) Engineering Corporation
3 Khuzdar‐Basima Road N‐30 (110 km) 80 Procedural formalities to be completed shortly 110 Balochistan 800
Upgradation of D.I.Khan (Yarik) ‐
4 195 210 KPK & Balochistan 6,700
Zhob, N‐50 Phase‐I
5 KKH Thakot‐Raikot N35 remaining 719.8 Procedural formalities to be completed shortly 136 GB & KPK 1,000
Sub Total 5,341 968 31,474
Railway Projects of CPEC
Expansion and reconstruction of Ministry of Railway, Ministry KPK ‐ Balochistan
1 8,172 GCL 1,872 2022 14,400
existing Line ML‐1 of Communication Punjab
Havelian Dry port (450 M. Twenty‐ Ministry of Railway, Ministry
2 65 GCL KPK
Foot Equivalent Units) of Communication
Capacity Development of Pakistan
3 Focus groups be established for effective training and capacity enhancement
Railways
Sub Total 8,237 1,872 14,400
CPEC Optical Fiber (Khunjrab to Islamabad)
Chinese Government Special Communication
1 Cross Border Optical Fiber Cable 44 835 SCO December, 2018 GB‐KPK‐Punjab 1,294
Concessional Loan (GCL) Organization (SCO)
Sub Total 44 835 1,294

Total 13,622 3,675 47,168

30
 Gwadar Projects
Direct Job
# Project Name Estimated Cost(US$ M) Financing Coordinating Ministry COD
Opportunities
1 Development of Free Zone 32 Chinese GCL GPA, Ministry of Ports & Shipping (MoPS) 2018 1,100

2 New Gwadar International Airport 230 Chinese Government Grant (CGG) Civil Aviation Authority
3 Construction of Breakwaters 123 Mix of Chinese GCL & Grant GPA, MoPS
4 Dredging of berthing areas & channels 27 Chinese GCL GPA, MoPS
5 Gwadar East‐Bay Expressway 141 Mix of Chinese GCL & Grant GPA, MoPS 2018
Necessary facilities of fresh water treatment, supply and P&D Dept. Govt. of Balochistan and
6 130 CGG 2018
distribution MoPDR
GDA, P&D Dept., Government of
7 Pak China Friendship Hospital 100 CGG
Balochistan and MoPDR
76,600
8 Technical and Vocational Institute at Gwadar 10 CGG MoPS, MoPDR
9 Gwadar Smart Port City Master Plan 2018
Bao Steel Park, petrochemicals, stainless steel and other
10
industries in Gwadar
Development of Gwadar University (Social Sector
11
Development)
Upgradation and development of fishing, boat making
12 and maintenance services to protect and promote
livelihoods of local population

Total 793 77,700

31
 Appendix

The Macroeconomics of Pakistan’s Quest for Energy and The

CPEC 1 (IMF)
Pakistan Selected Issues
IMF Country Report No. 17/213
July 2017

32
 PAKISTAN

THE MACROECONOMICS OF PAKISTAN'S QUEST FOR

ENERGY AND THE CPEC1
Pakistan has embarked on a massive investment program in energy and infrastructure sectors, partly
in the context of the China-Pakistan Economic Corridor (CPEC). This chapter discusses some of the
expected benefits of these investments as well as their potential macroeconomic impact. The planned
investments are expected to eliminate Pakistan’s energy deficit, improve the economy’s fuel mix,
reduce energy costs, raise overall business productivity and trade connectivity, and provide a positive
boost to output and exports. At the same time, the potential medium-term impact on the balance of
payments—through higher loan repayments, repatriation of profits from FDI, and fuel imports—points
to the need for a strong policy focus on boosting exports and building external buffers, bringing the
distribution sector to full cost recovery, prudent management of project costs and fiscal incentives, as
well as careful phasing in of new external commitments.2

1. Over the past decade, Pakistan has faced chronic energy shortages and substantial
underinvestment in infrastructure. The authorities estimate the cost of these challenges to the
economy at about 2 percent of GDP per annum. Excessive reliance on furnace oil amid rising oil
prices combined with administrative and operational inefficiencies and inadequate tariff setting
produced large and persistent losses in the power sector which, in turn, led to the accumulation
of power sector arrears (so-called "circular debt"), underutilization of existing capacity, and
underinvestment in new energy supply. The resulting gap between demand and supply of energy
was manifested in power outages averaging 10–12 hours a day in FY2012/13. Alongside, public
investment averaged only about 3.5 percent of GDP-substantially lower than the average of over
6 percent of GDP in other emerging economies.

2. The authorities' reforms have led to notable improvement in recent years. Lower oil
prices, combined with efforts to bring power tariffs closer to cost recovery as well as improved
collections and reduced losses have helped bring power outages to about 6 hours a day on average
in the residential sector and less than two hours a day in the industrial sector in FY2015/16. In
parallel, accumulation of circular debt has slowed down and efforts to raise tax revenue and
rationalize expenditure have created space to expand the public sector development program by
0.5 percent of GDP cumulatively over the last three years.

1
Prepared by Hiba Zaidi and Tokhir Mirzoev.
2
Medium-term projections presented in this note represent a preliminary assessment which is likely to change over
time. These projections have already been incorporated in the IMF staff’s macroeconomic framework balance of
payments projections. The calculations are based on available information and, where applicable, staff’s own
assumptions.

INTERNATIONAL MONETARY FUND 65

PAKISTAN

3. Alongside, Pakistan has embarked on a wide-ranging initiative to increase and

diversify its energy supply and improve infrastructure to help realize the country's growth
potential. The China-Pakistan Economic
Summary of CPEC and Other Power Sector Projects 1/
Corridor (CPEC) is a large package of
investment projects, potentially totaling No. projects Investment (US$ bn.)
about $55 billion (19 percent of FY2015/16 CPEC 19 23.6
GDP) over the next decade, aimed at Energy 15 17.7
upgrading infrastructure, boosting and Infrastructure 4 5.9
diversifying energy supply, and improving Non-CPEC energy 13 25.4
regional trade connectivity thereby Total 32 49.0
Source: Staff estimates based on discussions with the Pakistani authorities.
stimulating investment. The estimated size of
1/ Includes only projects in implementation or advanced planning stage.
CPEC will likely change over time. The
analysis below is based on realization of 19 CPEC projects ($17.7 billion in energy sector and
$5.9 billion in infrastructure) and several non-CPEC energy sector projects ($25.4 billion), which are
either in advanced planning stages or already in the process of implementation. Investments in the
energy sector include a combination of generation projects based on coal and liquefied natural gas,
hydro power stations, nuclear power plants, and several solar and wind farms. Substantial
investment has already taken place and, going forward, inflows are expected to peak at about
$12 billion, gradually declining in the following four years.

4. The authorities have facilitated a variety of financing modalities for the various
investment plans. CPEC infrastructure and transport projects are financed by long term
concessional government borrowing from
CPEC and Other Power Sector Investment Plans
China. CPEC projects in the energy sector (In billions of US dollars)

involve foreign direct investment and 14

Infrastracture

commercial borrowing from Chinese financial

12
Energy CPEC

institutions, either by majority foreign-owned

10
Energy non-CPEC

joint ventures or Chinese investors.3 Financing

8

of non-CPEC energy projects ranges from

6

private domestic financing to private

4

2
commercial as well as government concessional
0
borrowing from international financial 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22

institutions. Source: Pakistan authorities, NEPRA, news reports, and staff estimates.
Based on projects in implementation or in advanced planning stages.

3
Energy sector projects will operate as independent power producers (IPPs) with guaranteed sales through power
purchasing agreements or guaranteed rates of return through energy tariffs.

66 INTERNATIONAL MONETARY FUND

 PAKISTAN

Projected Power Sector Capacity and Demand Projected Evolution of the Fuel Mix
(In MW) (In percent)
40,000 100 3 3 4 4 4 4
6 7 9
3 4 4 4 4 9
4
90 5 3
3 3
35,000 7 13
17
Energy Demand 80 30 30
21 23
20 18 18
(6% growth)
30,000 70 26 18 12
Non-CPEC 11 12 10 9 8
60
25,000
50 28 28 23 22
30 31 26
30
20,000 24 29
CPEC 40

15,000 30

20 36 36 38 40
10,000 31 30 31 30 29
33
Existing capacity 10
5,000 0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
0
2016 2017 2018 2019 2020 2021 2022 2023 2024 Hydro Natural gas and LNG Furnace Oil Coal Solar and Wind Nuclear

Source: IMF staff estimates based on data from Pakistani authorities, NEPRA, and own assumptions. Sources: Pakistan authorities, NEPRA, news reports, and staff estimates.
Based on projects in implementation or in advanced planning stages. Demand and supply during NTDC's system Based on projects in implementation or in advanced planning stages.
peak hours.

5. If implemented on schedule, these investments could help close Pakistan's power

deficit and significantly improve energy costs and the fuel mix. The current investment plans
envisage an addition of about 24 GW in installed capacity, of which 8.6 GW owing to CPEC, over the
next 7–9 years. Assuming annual growth in energy demand of around 6 percent and an average
capacity utilization of 85 percent, this expansion will help eliminate Pakistan's deficit of about 6 GW
in 2016 to a surplus as early as end-2018. In the process, Pakistan's reliance on furnace oil
(30 percent of the fuel mix in 2015) would be significantly reduced, making the energy sector more
independent and resilient to abrupt changes in international oil prices.

6. Alongside, these investments will provide a boost to Pakistan's GDP. This boost will
likely come in three stages: construction, power
Direct Contribution to GDP from CPEC and other Energy Projects
generation once the installed capacity becomes (In billions of US dollars)
14
operational, and-over time-second-round effects
on broader economic activity owing to increased
12

productivity, lower costs, and improved trade 10

connectivity owing to improved infrastructure. 8 Non-CPEC

energy projects
The first two stages (direct contribution) will likely 6

materialize in the next several years, while the 4

CPEC projects
second-round effects will likely accrue more 2

gradually and could lead to a significant 0

contribution in the long run, although the exact 2017 2018 2019 2020 2021 2022
Source: IMF staff estimates based on data from Pakistan authorities, NEPRA, and own assumptions.
2023 2024

impact will depend on many other supportive

Based on projects in implementation or in advanced planning stages. Direct contribution includes impact from
construction phase as well as value added in electricity generation (using NEPRA-determined tariffs), and does not
include potential second-round effects. Assumes 70% import content during construction. Value added is estimated by
factors. subtracting the import content of investment, and the cost of imported fuel.

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7. At the same time, Pakistan's investment initiatives will likely create long-term balance
of payments outflows. In the medium term, the
operation of these projects will require balance of BoP Flows Owing to CPEC and non-CPEC Energy Projects
(In billions of US dollars)

payments (BoP) outflows in the form of loan 0

repayment, profit repatriation, and imports of -1

input fuel. These outflows- which will be

-2

-3
moderated by the expected savings from phasing -4
out of the oil-based electricity generation -are -5

expected to rise in the next several years, peaking -6

at about $3.5–$4.5 billion by FY2024/25 (1.2– -7

1.6 percent of FY2015/16 GDP) and gradually -8

2016/17 2018/19 2020/21 2022/23 2024/25 2026/27 2028/29 2030/31 2032/33 2034/35

declining in the long run. A slower growth of Source: IMF staff estimates based on data from Pakistani authorities, NEPRA, and own assumptions.
Based on projects currently in implementation or in advanced planning stages. The range of estimates

energy demand or a faster phasing out of oil- corresponds to different plausible assumptions about the rate of displacement of furnace oil -based
electricity generation, rate of profit repatriation, energy demand growth, fuel prices, and capacity

based energy generation capacity, among other

utilization.

factors, will help lower these outflows.

8. Exports will need to increase substantially to meet the increased foreign currency
financing needs. A positive impact of these projects on exports will further offset the expected
outflows in the medium term. However, the effect of these investment initiatives will likely accrue
gradually over time given the time required to build up additional export capacity from productivity
improvements.

9. These considerations warrant policymakers' attention to two priority areas in order to

realize the transformational potential of Pakistan's investment program while maintaining
external stability:

Generating export revenue and further building the external buffers. Taking advantage of
the still low oil prices to substantially augment the foreign exchange reserves of the State Bank
of Pakistan (SBP)will be important to cushion the period of increased BoP outflows. Strong and
sustained reform efforts aimed at raising exports by improving competitiveness and the
business climate will be critical to maintain long-term external sustainability and realize the
potential benefits of CPEC from improved energy supply and transport infrastructure.

Bringing the distribution sector to full cost recovery. Routing the increased generation
capacity through a loss-making distribution sector could result in faster accumulation of circular
debt and fiscal costs, as well as undermine long-term financial sustainability of the new energy
projects. Therefore, despite the recent progress, a significant acceleration of energy sector
reforms, including strengthening of governance in the distribution companies (DISCOs),
attracting private investment to reduce line losses and improve metering and collection, and
maintaining a strong and enabling regulatory framework will be important in the period ahead.

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10. Looking ahead, containing fiscal costs, maintaining a supportive environment for all
investments, and a gradual phasing in of new external commitments will help maintain
macroeconomic stability and strengthen growth sustainability. In this context, it would be
important to rationalize and limit tax incentives and exemptions; maintain uniformity of the tax
regime with respect to all investments; and synchronize phasing in of new external commitments
with the expected balance of payments trends.

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References
Government of Pakistan, 2016, Economic Survey of Pakistan 2015-16, pp. (i), available at
http://finance.gov.pk/survey/chapters_16/Overview_of_the_Economy.pdf

China Pakistan Economic Corridor (CPEC) official website http://www.cpec.gov.pk/

National Electric Power Regulatory Authority (NEPRA), 2016, State of Industry Report, 2015

National Electric Power Regulatory Authority (NEPRA), 2017, Tariff determination (Generation),
available at:
Coal: http://nepra.org.pk/tariff_coal.htm;
Hydel: http://nepra.org.pk/tariff_hpg.htm
Solar: http://nepra.org.pk/tariff_solar.htm
Wind: http://nepra.org.pk/tariff_wpg.htm
Thermal: http://nepra.org.pk/tariff_ipps.htm

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