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Jazib NelsonResearch Associate, PRIME InstitutePakistanChina-Pakistan Economic Corridor

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Contents PRIME Institute2CPEC: Part of One belt, one roadWhat is CPEC?CPEC narrative in PakistanCPEC: Project portfolioCPEC: Financial aspectCPEC: Incentive measures by Govt. of PakistanCPEC: Benefit matrixCPEC: Challenges and risks

CPEC: Part of One belt, one roadPRIME Institute3OBOR is an ambitious Chinese development strategy.OBOR aims to improve regional connectivity by connecting Eurasian economies. Less distance to travel for Chinese goods to Europe, Africa, and the Middle East.CPEC is one of six corridors to be built under OBOR.

What is CPEC?PRIME Institute4Collection of energy and construction projects worth $51 billion.Most of the CPEC investment is on Pakistans power sector.Comprises of three routes Central, Western, and Eastern that connects Gwadar in Pakistan to Kashgar in China. The three routes trace through some of the most deprived areas of Pakistan.

CPEC Investment Breakdown

CPEC narrative in PakistanPRIME Institute5Political Route controversySecurity Regional politics DevelopmentBusinessCPEC expo, 2016

CPEC: Project portfolioPRIME Institute6A large share of CPEC projects belong to power sector. Energy mix in CPEC energy projects is dominated by coal.Energy projects are being built under build-own-transfer principle.Projects are staggered:Early harvest projects (mostly energy projects) to be completed by 2018.Expected to add 10, 400 MW to Pakistans electricity gird.Other projects are divided into short-term (2020), medium-term (2025), and long-term (2030).

CPEC: Financial aspectsPRIME Institute7Debt-to-equity ratio is 75:25 on average for power projectsEquity component is equally shared between Pakistani and Chinese companies on averageDebt component is mostly financed by loans from Chinese banksPakistani banks are also providing loans for power projectsInfrastructure, communication, and transport projects are financed by Chinese governmentNational Highway Authority (NHA) is massively involved in infrastructure and transport projects.

CPEC: Incentive measures by Gov. of PakistanPRIME Institute8Electricity tariffs already notified for CPEC power projectsSovereign guarantees are also set up for power projects23 year tax holiday for businesses in Gwadar Free ZoneChinese Overseas Port Holding Company Limited (COPHCL) and its associated operating companies exempted from 1 percent income taxCOPHCL granted full exemption on tax on dividendsCOPHCL exempted from all customs duties on impact of raw materials and other materials for 40 yearsProfit on debt exempted from taxes

CPEC: Economic ZonesPRIME Institute9

CPEC: Benefit matrixChinaPakistanPRIME Institute10China is expected to save approximately $2 billion on supply of oil through shortest CPEC routeExport goods from western China to ports: CPEC route: 2,442 km; Current route: 4,457 kmEconomic development in Xianjing provinceStrong regional presence

Revamp Pakistans ailing road and energy infrastructureIncrease Pakistans GDP by 2 percent per year in the short termBoast Pakistans exports Promote development in poor regions of Pakistan

CPEC against regional developmental projectsPRIME Institute11

CPEC: Challenges and risksPRIME Institute12High risks come with high connectivity (effects of slowdown in Chinese growth on Pakistans economy)Pakistans trade balance with China may worsen (exports from Xianjing province of China will increase)Lack of institutional/governance experience in Pakistan with handling CPEC-scale projects in the past (inability of Gwadar Development Authority to solve water crisis in Gwadar is hurting development of CPEC projects in the area)Coal-fired power projects may become liability on Pakistan in the future (as global economies move towards non-fossil fuel based energy, GoP may find it hard to rope in foreign investments to operate them)Investment incentives prerogative of Chinese investors only (may reduce country-diversity of foreign investment in Pakistan)CPEC power projects may induce external borrowing in Pakistan ( Pakistans forex reserve may not be sufficient to cover rising import bill due to import of raw materials for CPEC projects)Lack of transparency in CPEC-related contracting Political outlook in Pakistan and issues of regional security