Speaking Of Asia

Pakistan is where OBOR hits the road

Despite its fulsome promise, the US$62b plan by China to boost Pakistan's infrastructure may not be all good for the flailing South Asian economy.


For much of the world, the jury's still out on China's Belt and Road initiative, better known as the One Belt, One Road (OBOR) programme. While some countries have embraced it enthusiastically, others, such as the United States and Japan, have tried to be polite about it, going along warily without fulsome endorsement.

A few, India particularly, are openly disdainful, if not hostile to the plan. That's because they see it not as the Chinese grand design for globalisation that it is projected to be, but a Beijing plan to entrap the world in its grasp even as China looks for ready export markets for its tottering state-owned enterprises.

In the more than 60 nations that span President Xi Jinping's OBOR vision, none looms larger than Pakistan, possibly the Asian state strategically closest to Beijing after North Korea. The latest projected outlay for Chinese investment in that country under a plan called CPEC, or China Pakistan Economic Corridor, exceeds US$62 billion (S$85 billion) in loans and tied aid.

The vision is to link Kashgar in Xinjiang province to the warm water port of Gwadar in Pakistan's largest and most thinly populated province, Balochistan. In the bargain, Pakistan will get its biggest infrastructure boost since independence in 1947. China's strategic interest is to give itself all-weather access to the Arabian Sea bypassing the Strait of Malacca, a potential choke point that has India at one end and Singapore at the other, with Indonesia's Sumatra and the Malay peninsula in between.

While a good part of CPEC is about building road connectivity, the major investments are going into a series of power plants to shore up Pakistan's crumbling and hugely inefficient power grid that's made brown-outs of 12 hours a day common. The CPEC, according to available public information, will be built with not only Chinese capital, but Chinese labour and steel too. Because the so-called corridor traverses some intensely restive spots marked by periodic violence and terror attacks, Pakistan has raised a whole new army division to protect Chinese workers, marking a substantial recurring investment since pay and pensions tend to make up almost two-thirds of most military budgets in South Asia.

So far, so good. Few can take issue with Pakistan for accepting Chinese munificence, if indeed it is that, to fix its crumbling infrastructure. The dismal power situation had shaved off as much as 2 percentage points of growth annually, leaving the economy floundering at an expansion rate of less than 5 per cent, below potential. Having missed the services revolution that transformed next-door India because the poor security situation within its borders had made it risky to house outsourcing operations for Western firms, the energies of Pakistan's talented white-collar workforce had been unexploited to a large degree. As a result, India's significantly larger economy consistently outpaced that of its smaller neighbour, accelerating existing disparities.



What's more, Islamabad feels abandoned by Washington, which only in 2002 had deemed it a "major non-Nato ally". In the Pakistani narrative, the US used Pakistan to fight the Soviet occupation of Afghanistan, funnelling Saudi-funded arms to militant groups resisting the Soviets, then uncharitably abandoned it to favour India. In the wake of the 2008 terrorist attack on Mumbai, blamed on hitmen allegedly trained inside Pakistan, former US secretary of state Madeleine Albright referred to Pakistan as an "international migraine" with its combination of nuclear weapons, terrorism, extremism, corruption and poverty.

Little wonder then that Pakistan's Commerce Minister Khurram Dastgir Khan recently described China as "the only game in town".

Against that background it suited both Pakistan and China to tighten their decades-old strategic embrace. The Pakistanis, quite seriously, believe their relationship with China is, to use a phrase popularised by Beijing, "taller than the mountains, deeper than the valleys and sweeter than honey".

The problem is that too much of the CPEC plan is opaque, and not available publicly for a proper examination of its merits. This leads to apprehension that, especially in the light of South Asian neighbour Sri Lanka's experience with unviable Chinese investments that led it into a debt trap, Beijing's talk of a win-win means China wins twice.

The Chinese money for CPEC, it is increasingly clear, is largely on commercial terms. On the other hand, if power plants constitute a major chunk of the CPEC outlay, Islamabad may have a repayment problem when China eventually hands it a bill. Analysts point out that Pakistan has always sold power to its people at rates significantly below what it pays for the energy. Additionally, collection ratios are poor because of rampant power theft and defaults by companies owned by elite families. Unable to pay the producers in time, a problem of circular debt has ensued.


What's more, not everyone is convinced that the projects were conceived in Pakistan's interest. Some analysts say that four of the six thermal power plants being set up will run on imported coal, whereas Pakistan's plants have traditionally used furnace oil. There also is fear that at a time when oil prices seem set to tread the troughs for a substantial period, and solar energy is nudging grid parity with coal, Pakistan may be making the wrong choices.

It also has not gone unnoticed that China, despite the tight strategic relationship, has in past years generally not shown much appetite to invest in Pakistan. According to State Bank of Pakistan figures cited in the Pakistani press, total foreign direct investment (FDI) in the six months to December last year - the latest number available - was US$1.08 billion.

While that was a 10 per cent increase over the previous year, the jump was mostly on account of a single Dutch investment of US$460 million. Chinese FDI in the same period was US$48 million, about a tenth of what companies from the mainland put into India.

Still, it is not difficult to divine the Pakistani mindset. In the near term, Islamabad is clearly playing off its strategic sweet spot not just to power up its economy but also to allow China such a big say in it that it compels Beijing to also underwrite its security, if nothing else, to protect its investments.

The gap with India widened so much in the last two decades that it left Pakistan in pretty much the same situation that India finds itself in vis-a-vis China: a deepening sense of insecurity about the more powerful neighbour and fear of coming under its economic and political coercion. The sensible thing to do would seem to be to develop a closer economic relationship with India, not just on account of geography but also because Pakistani products are likely to be far more competitive against Indian goods rather than Chinese products. It is no secret though that the Pakistani deep state will not countenance this, even if Prime Minister Nawaz Sharif himself favours it.

For Pakistan, therefore, the CPEC plan - which apparently also envisages giving Chinese visa-free access and the Chinese language being promoted in a massive way across the country - marks a turning of the back on its broader South Asian heritage.

According to revelations made two months ago by Dawn, Pakistan's internationally respected broadsheet, the CPEC document talks of a national fibre-optic backbone meant to assist in the "dissemination of Chinese culture".

Yesterday, the newspaper said "the real game of CPEC is about granting access to Chinese enterprises to Pakistan's domestic markets, raw materials and the agrarian economy".

It is now up to China to make sure that the CPEC does not turn out to be one more lemon it sold to yet another vulnerable developing economy. Mr Ahsan Iqbal, the Wharton-educated Minister for Planning in Mr Sharif's Cabinet and a key architect of the CPEC programme, has called the earlier Dawn report "factually incorrect". More recently he told me on the sidelines of a conference that his department's assessments are that the projects under the plan meet the benchmarks for commercial viability.

If that is true, there ought to be no grounds to complain. But, if Beijing is seen to have stiffed its closest friends with unviable projects and burdensome repayment obligations, it will not go unnoticed around the world.

After all, OBOR is a 100-year project and public memory, while short, cannot be completely erased. In more ways than one, therefore, Pakistan is where OBOR hits the road.

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A version of this article appeared in the print edition of The Straits Times on July 21, 2017, with the headline Pakistan is where OBOR hits the road. Subscribe