Posts Tagged ‘Corridor’

CPEC: The Case for Full Disclosure

May 19, 2017

By Anjum Altaf

I am now less interested in CPEC, which is unstoppable, and more fascinated by how people think. Conventional wisdom has individuals using reason to objectively weigh the costs and benefits of an option and then choosing it if benefits exceed costs. More and more evidence on actual behavior suggests that individuals start with their minds already made up and then pick and choose arguments to support their positions.

At this time PML supporters are convinced CPEC is a game-changer while those opposed to the party believe it is a recipe for disaster. The former claim Nawaz Sharif is an astute industrialist and China a trusted friend. The latter argue Nawaz Sharif is corrupt and is using hype to distract attention from his troubles. Supporters are not willing to consider that their party can make bad decisions; opponents are unwilling to concede the the PML could get something right. No one is basing their position on factual information which remains irrelevant to the debate.   

Such attitudes make it difficult to convince anyone that their views might be mistaken. Objectively speaking, everyone should be neutral on the CPEC at this time as enough reliable information is not available to evaluate costs and benefits within reasonable bounds. The rational individual should be withholding judgement and demanding the numbers. Instead, stormtroopers on both sides are frothing at the mouth, ready to dismiss all contrary arguments as treason.

Although I am convinced that few minds are likely to be changed by my opinion, I still feel a responsibility to present the case for neutrality till more data is available for credible analysis. I believe my argument will make sense even to those lacking the expertise of  economists and financial analysts.

The starting point is the acknowledgement that $56 billion is a significant amount of money in the Pakistani context and that an infusion of this magnitude has the potential to do a lot of good. The big question is: Will the potential be realized?

Instead of answering this question on faith, I suggest participation in a thought experiment. Imagine your family is facing financial hardship and everyone you have approached has turned you down. Now someone comes along offering a loan of a million dollars, an amount that can solve all your problems and change your life. Would you accept the money with your eyes closed?

I am hoping you will ask for the terms of the loan. Suppose you are told you would be expected to convert to another religion. Or that you would have to indenture your children in case you fail to meet the repayment obligations. Would you accept the money on such terms?

These are hypothetical examples. I am not saying the Chinese are asking Pakistanis to give up their religion or indenture future generations. The extreme examples are only meant to dramatize the essential point that only a very foolish or reckless or desperate person would be willing to sign on the dotted line without knowing the terms of the deal. Is that an unreasonable conclusion?

Let us return to CPEC assuming the Chinese would not be asking for any such thing. But let us think of what the Chinese might ask for. Suppose they ask that whatever we buy with the money must be purchased from Chinese suppliers. Would you accept such a condition on a personal loan? If not, would you not worry if the nation is being asked for such an arrangement?

Consider the personal risks of accepting such a demand. The lender could sell you second-rate goods at above-market prices. Any tied arrangement would deprive you of better alternatives available in the market. At the national level, sole-sourcing would eliminate the efficiency gains resulting from procurement of supplies via competitive international bidding. Therefore, we should be reluctant to accept loans conditional on sole-sourcing.

The Chinese may not insist on sole-sourcing but ask instead for guaranteed charges and exorbitant rates of return on the investments independent of whether the projects are profitable or not. Many people know someone unfortunate enough to get enmeshed in exploitative arrangements with loan sharks and are aware of the consequences. This kind of outcome is not to be taken lightly.

These examples are speculative and may appear outlandish and I have no idea if CPEC involves anything of the kind. But that is exactly the point because such examples are by no means purely a figment of the imagination. Readers are well aware that usury, the charging of exorbitant rates of return on loans, is prohibited in most religions for good reason. They know that bonded labor still exists in some industries. Some who know their history would recall that the British passed an act in 1938 to rescue the heavily indebted Punjabi peasantry from the clutches of moneylenders. And there are records of violent opposition to alleged attempts by missionaries to influence people by offering them material temptations.     

The bottom line is that it is never a good practice to accept loans without full knowledge of the terms and conditions, more so when one is desperate for financial assistance. Readers would do well to read Shakespeare’s Merchant of Venice to reinforce this conclusion. And, if convinced, wouldn’t it be ethically wrong to urge the country to accept something that one would personally reject? You should not do to others what you would not do to yourself.

Intellectual honesty demands a stance of neutrality on CPEC till the terms and conditions are disclosed without which one cannot arrive at an objective assessment of whether it could be potentially beneficial for the country. Only then could one move to the next stage of appraisal knowing that even potentially beneficial projects of this magnitude depend for their success on many other factors. Asides from the truly random and uncontrollable ones, these would include the implementation capacity of Pakistani governments whose probity and track record is not one to inspire confidence. What would we need to do to hold the government’s feet to the fire and prevent another Reko Diq?

This opinion appeared in Dawn on May 15, 2017 and is reproduced here with permission of the author. See also, CPEC: Lessons from History and CPEC: Questions Persist.

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CPEC: Questions Persist

March 20, 2017

By Anjum Altaf

Is there a fruitful line of inquiry regarding the China Pakistan Economic Corridor (CPEC)? That depends on the questions with which one initiates the inquiry.

Would CPEC be a game-changer for Pakistan? This drawing-room question is particularly useless to begin with. With so much uncertainty and so many variables beyond human control no one except a clairvoyant can predict with any confidence. It is just as pointless, if not actually silly, to take sides. Enough hard information is not available for one side to convince the other on the basis of analysis – believers will continue to believe and doubters will continue to doubt for reasons having little to do with the intricacies of the initiative.

The following questions pertaining to details of the deal are more useful: Under what conditions are the various components of the initiative being negotiated? What are the financial obligations and terms of repayment? What tax concessions are being offered? What are the revenue and capital cost projections of the various components? Who will bear the operating and maintenance costs?

Citizens responsible for the debt liabilities have a right to ask for this information and expect it to be provided. What are the reasons for the secrecy? What is there to hide? The numbers that are filtering out in dribs and drabs on guaranteed rates of return are not very reassuring. The very fact that information is not being fully shared is a major cause for doubt – people are naturally apprehensive in the absence of transparency.

It is good that the government has set up a CPEC website (http://cpec.gov.pk/) but at this time it is only a list of projects with costs and timelines. The terms of financing and revenue projections are missing. In addition, the website suffers from information overload. For example, it includes the Karachi Circular Railway, Peshawar Mass Transit, Quetta Mass Transit, and the Lahore Orange Train.

These are all plausible projects with individual justifications and may all involve Chinese funding but what do they have to do with the corridor? It seems suspiciously the case that various stakeholders are being bought off by including their pet projects under the CPEC umbrella.

The case with the power projects listed on the website is similar. Each might be justified but why is a wind farm in Bhambore lumped under the CPEC? Wouldn’t it make more sense to treat them as independent projects with separate feasibility studies as is the norm. The indiscriminate lumping together of everything happening in the country is another red flag regarding the coherence of the initiative.

It would help to strip out the core corridor investments and share details of their financing and cost-benefit projections. It is reasonable to expect that barring unforeseen events, a functioning corridor would be beneficial for China. But what would be in it for Pakistan except collecting a toll on the transit trade? How much toll collection is being projected? What would Pakistan be exporting via the corridor given its grossly uncompetitive economy? Why would industrial estates succeed along the isolated corridor when they have failed in major locations like Peshawar and Quetta? How many permanent jobs are expected to be created?

These are legitimate questions deserving answers in order to build consensus and take citizens into confidence. It is not enough for the government to say ‘trust us’ because governments in Pakistan have done nothing to earn that trust. Neither international agencies nor Pakistani citizens believe the various governments have been upfront with facts. Such behavior is not unique to Pakistan – after all, Bush and Blair lied to their citizens to invade Iraq.

In the absence of honest answers, those without vested interest in deal-making can only point to historical precedents and past evidence. Take, for example, one of the most significant trade corridors of recent times, the Suez Canal. Was it a game-changer for the people of Egypt? Or take the game-changers for Pakistan promised in the past – Thar Coal, Saindak, Reko-diq, all, incidentally, with Chinese involvement. What happened? They certainly changed the game for those involved in the multiple transactions but is there anything to show for the people of Pakistan or even the locals of the project sites?

The attempt to turn such questioning into issues of patriotism or of maligning our best friends strengthens the impression that all is not above board. These are the standard tactics of those who wish to divert discussion from facts and stifle inquiry with intimidation. Under normal circumstances citizens would be within their rights to examine the track record of Chinese investments in other countries like Sri Lanka (Google Hambantota) or prior deals with Pakistan like the railway locomotives. In all such cases the Chinese are not to blame – ‘buyer beware’ is rule of the market. The concern is with those negotiating the deals on our behalf and the question remains the same: Do you trust them? If so, on what basis?

Given the lack of transparency and the historical evidence, the following outcomes appear likely: For better or for worse, the CPEC momentum is unstoppable; It will be beneficial for the Chinese economy; It will generate toll revenues for Pakistan which may be more or less than operating costs depending upon contractual terms, much as for the Lahore-Islamabad motorway; Without inclusiveness, economic gains might be outweighed by political stresses; It will definitely change the fortunes of a few thousand individuals in Pakistan; It is unlikely to be a game-changer for the Pakistani people much as the Suez Canal was not one for Egyptians.

On the other hand, this could be the mother of all miracles. Let us bow our heads and pray while the untethered camel wanders into Kashgar.

This opinion was published in The News on March 19, 2017 and is reproduced here with permission of the author. See also, CPEC: Lessons from History.

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CPEC: Lessons from History

January 18, 2017

By Anjum Altaf

How does one get a grip on the proposed China-Pakistan Economic Corridor (CPEC) and its associated investments without any hard information except for the hype? In the absence of any mechanism for credible evaluation I suggest we hold it up against a historical parallel and see what emerges by way of tentative conclusions. Some discussion grounded in real experience may be better than taking sides in the dark.

Around the turn of the twentieth century the British invested vast sums of money in the part of the subcontinent that now comprises Pakistan. Amongst these investments were the network of canals and barrages, the post and telegraph, and roads and railways. All included it would have likely added up in real terms to be bigger than the $56 billion associated with the CPEC.

What came of all that investment and what economic transformations did it sustain? At the macro level, Pakistan remains a desperately poor country with around a third of its population struggling to survive below the poverty line. Almost half the population is functionally illiterate without access to safe water and sanitation or adequate health care. Stunting, malnutrition, and infant and maternal mortality are at levels considered unacceptable in the rest of the world.

The sobering conclusion would be that even if the investments had huge economic payoffs, extremely venal governance ensured that while some people became phenomenally rich very few of the benefits trickled down to the majority in any meaningful sense.

Notwithstanding the issues of governance and distribution, which remain as critical now as then, the question remains: Did the investments have huge economic payoffs? Even to speculate intelligently on the question one would need to disaggregate the investments and consider them separately.

Take the canal colonies and the barrages. I believe most people would accept that the outcomes were positive and significant. One can assess the outcomes in terms of crop outputs, crop yields, employment created, or incomes generated for farming households.

Next, consider the railways where the comparisons become more interesting. The link between Karachi and Peshawar via Hyderabad, Sukkur, Multan, Lahore, and Rawalpindi can be considered the central artery of the Pakistani economy capable of transporting people and products efficiently and economically. Once again, I believe there would be agreement that the outcomes were positive and the payoffs significant.

Now consider some other investments in the railways that turned out differently. Among these were the links between Peshawar and Landikotal on the Afghanistan border, the link between Quetta and Chaman that was intended to have been extended to Kandahar in Afghanistan, and the Trans-Balochistan railroad from Quetta to Zahedan, inside Iran.

All these could be considered as economic corridors of their time. Even if they were not intended as such, they could have become so after the independence of Pakistan. The Trans-Balochistan railroad extended 455 miles with 38 stops linking very friendly countries between which much trade was possible. Indeed, under the Regional Cooperation for Development there was the possibility of extending the link to Turkey and thereby into Europe, an opening with immense economic potential. Today, the Peshawar-Landikotal link is inoperative, and the Quetta-Zahedan link operates on a nominal frequency of twice a month. None of these corridors had any transformative impact on the local or national economies.

Take roads as another example. The British upgraded and extended the Grand Trunk Road, an ancient trade route linking populated habitations, to great and sustained benefit. Contrast the limited economic impact of the more recent Lahore-Peshawar motorway. The equally recent Karakoram and Thar-Karachi highways have had virtually no significant transformative impacts on the local economies except to make it easier for local labor to migrate to more prosperous areas for employment.

Some tentative conclusions can be adduced. For investments to yield economic benefits, it seems a necessary, if not a sufficient, condition for them to either generate employment or to connect populated locations at relatively comparable levels of economic development. The historical evidence suggests that routing corridors through sparsely populated territory even with associated investments that create very few jobs is unlikely to be transformative. And linking disproportionately developed areas without prior complementary investments may just accelerate a drain of people and resources from the less developed regions.

It is indeed possible that investments in roads in some sparsely populated areas, e.g., in the Northern Areas or along the Mekran coast, would pay off economically if as a result a significant inflow of people is facilitated as would be the case with a major boost to tourism. But such prospects are scarce given Pakistan’s security conditions and increasing social conservatism.   

It will no doubt be argued that the unsuccessful rail corridors mentioned above were not made by the British for economic but for strategic military purposes and therefore comparisons with the CPEC are invalid. However, as mentioned before, there was nothing to prevent the conversion of the ready-made investments to economic purposes after 1947. There was significant trade potential both with Afghanistan and Iran and the latter was a very friendly country at the time. The shrivelling of the corridors should prompt serious questions inquiring what went wrong after all the investments were made.

At the same time it could be argued in turn that the CPEC is an equally strategic initiative of the Chinese presented as one with transformative economic payoff for Pakistan. The latter remains to be demonstrated independently and objectively. The historical evidence cautions that mere hand-waving is not enough.

One should also consider what might be the fate of the CPEC if relations with China turn sour in the future. This may seem a far-fetched concern at this time but the evolution of the relationship with Iran should provide a reality check. Pakistan’s abysmal relations with all its primary neighbors does not leave much room for complacency and demand a credible fall-back alternative.  

If the national objective is to further the development of the lagging provinces of Balochistan and Khyber-Pakhtunkhwa, it might be better to think in terms of employment-generating investments in the regional economies much as the canal colonies created jobs in the Punjab in the twentieth century. It might make more sense for economic corridors to follow and not precede such investments.

Anjum Altaf is a Fellow at the Centre for Development Policy Research in Lahore. This opinion appeared in Dawn on January 17, 2016 and is reproduced here with permission of the author.

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