Spearhead Analysis – 16.05.2017
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
“Sometimes a journey arises out of hope and instinct, the heady conviction, as your finger travels along the map: Yes, here and here … and here. These are the nerve-ends of the world …” [Colin Thubron, Shadow of the Silk Road]
The recently concluded Belt and Road infrastructure summit in China, under the One Belt One Road (OBOR) initiative, pointed towards a new ‘golden age’ of Gloablisation based on economic cooperation. The multi-billion dollar OBOR initiative has been termed as the most ambitious economic and trade development project to transform the world as China looks to re-enact the ancient Silk Road to expand its global presence. The Beijing summit was attended by 29 heads of states, including the President of Russia Vladimir Putin. The Modi government of India chose to boycott the summit, citing the US$900 Billion plus initiative as “little more than a colonial enterprise [that would leave] debt and broken communities in its wake”. The United States upgraded its presence, while Pakistan was represented by the Prime Minister and the four provincial Chief Ministers.
In his address, President Xi told of a “project of the century”; to usher in a new era of globalization stretching from Asia, across Europe and Africa and all the way to the Americas. World leaders at the summit heaped praise on the initiative, citing the benefits it would bring to their countries and the broader economy. Perhaps the British Chancellor rightly summed it up as a ‘bold and visionary ground-breaking initiative… spanning more than 65 countries, across four continents, with the potential to raise the living standards of 70% of the global population.’
There is no dearth of sceptics who have expressed doubts over the real intentions of OBOR initiative, stating that it is a means by China of enticing less powerful and economically disadvantaged nations and bringing them under its economic influence. India, one of the more vocal opponents has stated that such initiatives “must be based on universally recognised international norms, good governance, rule of law, openness, transparency and equality”. However, China has categorically stated that it “… harbours no intention to control or threaten any other nation.”
With the waning fortunes of Great Britain and a gradual withdrawal from the global arena by the Trump Administration, the summit was an ideal opportunity for the economically powerful China to propagate OBOR and to take the lead in filling the vacuum within the globalization space. China has grasped the opportunity and at a time when its domestic economy is starting to show signs of strain, it has chosen to divert the surplus production outwards and in the process gain access to world markets and maintain China’s growth momentum. It is pumping in massive amounts of money into a horde of countries to improve connectivity and facilitate the flow of goods and services. Massive infrastructure projects, are being planned and undertaken across Asia, Africa and Europe, to forge ties, create new markets and form economic and diplomatic relationships.
While there may be skepticism over the real intentions of the OBOR initiative, there is no denying that it cannot be ignored. At a time when the United States chose to opt out of the Trans-Pacific Partnership (TPP) signaling its intent to usher in protectionism, China is looking to expand the economic boundaries through forging alliances and strategic linkages. The fact that the United States upgraded its participation to the summit by sending the Senior Director for Asia at the National Security Council, goes on to show that the Trump Administration realizes the importance of the summit and are not ready to ignore it, as India did.
The summit in Beijing held extreme importance for Pakistan and the Prime Minister of Pakistan, as it allowed finalization of the Long Term Plan (LTP) for CPEC, which details the Chinese projects till 2030. Presence at the Belt and Road summit was also important in the context of the signing of a Memorandum of Understanding (MoU) between the two countries for an investment to the tune of an additional US$50 Billion for development and the start of the North Indus River Cascade project in Pakistan’s Gilgit-Baltistan region. This investment is over and above the US$46 Billion China-Pakistan Economic Corridor (CPEC). It is expected that some 40,000 MW of electricity can be produced in the region known as the North Indus River Cascade, which stretches from Skardu in Gilgit-Baltistan and runs through Khyber-Pakhtunkhwa as far as Tarbela. This investment puts Pakistan in the number one slot as the recipient of Chinese investment in infrastructure development.
OBOR and Pakistan:
From Pakistan’s standpoint CPEC under the OBOR initiative holds great significance in terms of the potential economic benefits promised to a beleaguered nation. With details of the plan emerging after the publication in DAWN, there is greater clarity on CPEC and the planned Chinese growth. LTP is purportedly a detailed document drawn up by the China Development Bank and the National Development Reform Commission of China, which identifies certain priority areas in the context of Pakistan. Under the plan:
- Thousands of acres of agricultural land will be leased to Chinese enterprises to set up “demonstration projects” in various areas to enhance productivity and the use of technology.
- A system of monitoring and surveillance is planned to be built across cities from Peshawar to Karachi, for law and order purposes.
- A national fibre-optic network is to be built not only for internet traffic, but also terrestrial distribution of broadcast TV.
It is a fact that a state of the art surveillance system has been built for Lahore and is in operation. Apparently, the control room appears to mimic a scene from a Bond movie. The Chinese influence and acceptance in the social mainstream is being promoted through advertisements – the recent one being about Shaan spices, where a Chinese couple is shown settling in through adoption of local cuisine and culture.
The plan envisages building infrastructure and capacity in areas such as textiles, garments, cement, building materials, fertilizer, and agricultural technologies. One of the areas that is specifically mentioned is the development of special economic zones, which “must meet specified conditions, including availability of water…perfect infrastructure, sufficient supply of energy and the capacity of self-service power”. Thus, while the Chinese plan is to set-up and develop the infrastructure it is based on stringent requirements and conditionalities, which given the current state of affairs in Pakistan, might be difficult to meet.
Agriculture is the focal point for the Chinese covering the whole spectrum of the supply chain, where the Chinese enterprises will operate their own farms, processing facilities for fruits and vegetables and grain and have logistics to operate a large storage and transportation system for agrarian produce. The Chinese firms will aim to address the large gaps within the Pakistan agricultural sector and capitalize on such opportunities through introduction of systems and technology. The Chinese firms will be provided with concessionary financing and access within the Pakistan and Chinese governments.
Introduction of mechanization, scientific techniques in livestock breeding, development of hybrid varieties and precision irrigation is part of the LTP. The Chinese focus is on assisting the Kashgar Prefecture, which is plagued by a poverty incidence of 50 per cent, and vast distances that make it difficult to connect to larger markets to promote development. The other opportunity for the Chinese is the domestic market in Pakistan. How the local agricultural sector will fare in this ‘onslaught’ of the Chinese is difficult to assess. It could gain from the efficiencies planned by the Chinese through adoption, or it could languish in the face of competition if unable to establish their competiveness.
With the establishment of efficient supply chain networks and logistics the wastage in agricultural produce is expected to be reduced. Water conservation methods will reduce the incidence of seepage and help improve irrigation efficiency. Modern feed, livestock and meat processing plants would be set-up, with ancillary industries such as feed, vaccines, and food processing. In all cases Chinese enterprises are expected to take the lead and endeavor to forge alliances and strategic partnerships with local businesses. The opportunities are there for the Pakistan businesses to develop within this sphere of activity, how they grasp them will determine the future.
The industrial plan has split Pakistan into three industrial zones: western and northwestern, central and southern.
- The western and northwestern zone, covering most of Balochistan and KP province, is marked for mineral extraction, – chrome ore, gold, diamonds, and marble and looks to set up 12 marble and granite processing sites in locations ranging from Gilgit and Kohistan in the north, to Khuzdar in the south.
- The central zone is marked for textiles, household appliances and cement. Four separate locations are pointed out for future cement clusters: Daudkhel, Khushab, Esakhel and Mianwali. The interest in textile appears to be restricted to yarn and coarse cloth to feed the Xinjiang textile region.
- The southern zone, is recommended for developing petrochemical, iron and steel, harbor industry, engineering machinery, trade processing and auto and auto parts (assembly). Gwadar is in the southern zone and it is recommended that it be built into “a base of heavy and chemical industries, such as iron and steel/petrochemical”.
Monitoring and Surveillance:
China is looking to develop a terrestrial fibre-optic link with Pakistan, given its own limited number of submarine landing stations and international gateway exchanges, which can serve as a bottleneck to future growth of internet traffic. The plan envisages a terrestrial cable across the Khunjerab pass to Islamabad, and a submarine landing station in Gwadar, linked to Sukkur. From there, the backbone will link the two in Islamabad, as well as all major cities in Pakistan.
It also seeks to create an electronic monitoring and control system for the border in Khunjerab, as well as run a “safe cities” project. It remains to be seen whether Pakistan would man the surveillance process and centers or Chinese, as this could have serious security ramifications.
There are extensive plans for the development of a “coastal tourism” industry, with yacht wharfs, cruise homeports, nightlife, city parks, public squares, theaters, golf courses and spas, hot spring hotels and water sports. The belt will run from Keti Bunder to Jiwani, the last habitation before the Iranian border. Such initiatives can only be implemented once the security dynamics within the country are conducive.
Finance and Risks:
The long term plan discusses Pakistan’s financial sector, government debt market, depth of commercial banking and the overall health of the financial system and has highlighted the risks faced by long term investments in Pakistan’s economy.
The main risk the plan identifies is politics and security. The next big risk is inflation, which the plan says has averaged 11.6 per cent over the past 6 years It asks for financial guarantees and based on the assessments of the IMF, World Bank and the ADB, it notes that Pakistan’s economy cannot absorb FDI much above US$2 Billion per year without giving rise to stresses in its economy. Therefore, it recommends that China’s maximum annual direct investment in Pakistan should be around US$1 Billion, and ceiling for preferential loans should be US$1 billion, and for non-preferential loans no more than US$1.5 Billion per year.
The other big risk the plan refers to is exchange rate risk, highlighting the severe weakness in Pakistan’s ability to earn foreign exchange. To mitigate this, the plan proposes tripling the size of the swap mechanism between the RMB and the Pakistani rupee to 30 billion Yuan, diversifying power purchase payments beyond the dollar into RMB and rupee basket, tapping the Hong Kong market for RMB bonds, and diversifying enterprise loans from a wide array of sources.
It would appear that China has drafted a comprehensive plan for its involvement in Pakistan and the region. It is not clear how the businesses in Pakistan will fare in the face of Chinese investments and enterprises. For the moment it appears that the Pakistani counterparts are more interested in short term gains through acquisition and sale of real estate rather than forging alliances for meaningful business. In the process they might lose out in the long run as the Chinese firms fill the empty spaces and establish a competitive advantage. The summit in China highlighted the benefits of OBOR and the LTP serves to reinforce that opportunity for China and Pakistan.
The Modi government by ignoring the Chinese overtures has virtually isolated itself from the many benefits of the OBOR initiative. Three major Indian news publications in their editorials or op-eds have largely criticised India’s refusal to attend the summit in Beijing, calling it a failure of the country’s foreign policy and diplomacy. Marginalised from OBOR, the Indian government could try and create difficulties for the initiative through creating disruptions within Pakistan. This could be in the form of heightened border tension or subversive acts within the country. Pakistan needs to be prepared for such eventualities. The writing is on the wall and India by ignoring it will suffer in the longer term.
Pakistan has started to see the Chinese investment in other areas such as the Chinese stakes in K-Electric and the Pakistan Stock Exchange. With time such investments would increase, and it is up to Pakistan to capitalize on these opportunities for its own self-interest. The Chinese have drawn up comprehensive plans highlighting their priorities, and it is for Pakistan to now provide the environment for facilitating those plans and drawing up its own plans for the betterment of Pakistan.