China’s $62 Billion Bet on Pakistan

When Maqbool Afridi, now a retired colonel, was stationed with the Pakistani army in Gwadar in the 1990s, he would sit along the coast and stare into the expanse of the Arabian Sea, imagining what the natural deep-sea port could become. He was inspired not only to write romantic Urdu poetry but also to purchase some land in what was then, and largely remains, a fishing village. His family ridiculed him for it, telling him that he was wasting his savings.

Today, Afridi’s venture seems prescient. Beijing has made the Gwadar port the centerpiece of the China-Pakistan Economic Corridor (CPEC), a series of Chinese-financed energy and infrastructure projects in Pakistan totaling upward of $62 billion in aid and investments. CPEC, according to Chinese officials, is a “flagship project” of the Belt and Road Initiative, Beijing’s massive push to create a unified economic corridor that runs through Eurasia and into Africa. A top goal is to connect the landlocked western Chinese city of Kashgar to the Arabian Sea via Gwadar, providing China an alternative route for shipping gas and oil, one that would bypass the southern tip of India and the Strait of Malacca, a chokepoint that could make China’s maritime trade vulnerable to interdiction by hostile states during a conflict.

CPEC is certain to benefit China’s troubled state-owned enterprises, allowing them to overcome the challenges of overcapacity and oversupply by going global. And for Pakistan, the project could help it quickly overcome deficits in its electric supply and revive its struggling domestic industries, positioning it for high rates of economic growth.

A GAME OF PORTS

CPEC’s biggest feat may very well be the port of Gwadar. Although Gwadar poses little to no threat at this time to Dubai’s Jebel Ali, the region’s premier container port, in five to ten years, Gwadar’s Chinese operators could position Gwadar as a niche but effective transshipment hub just outside the strategic Strait of Hormuz. A remarkable achievement it would be: it would amount to making something quite remarkable out of virtually nothing.

The story of Gwadar is one of many false starts. Pakistan purchased the Gwadar area from the sultanate of Oman in 1958, and in the following decades, it looked for a partner—first the Soviet Union, in 1969, then the United States, in 1973—to finance the area’s development. Neither partnership ever took off.

Finally, in 2001, China agreed to construct the port as a “favor” to Pakistan, according to a retired senior Pakistan diplomat, meaning that China’s motivations at the time were shaped by a desire to aid an ally rather than fulfill its own grand economic or strategic designs. After China completed the first phase of the port in 2005, at a cost of $248 million, Pakistan held an open bidding process for the port’s management and operational contract. In early 2007, it awarded it to Singapore’s PSA International. Pakistani officials had pitched Gwadar not only as a gateway to Central Asia but also as a port that would leave Dubai in the dust in no time. But for years, Gwadar lingered in PSA’s hands, only servicing the import of dry bulk shipments of components, including for fertilizer. The port lacked connections to the rest of the supply chain; it was reliant on a highway that passed through Karachi, a metropolitan area home to Pakistan’s two existing ports, to reach the rest of Pakistan. This made the new port ineffective, since shipping via truck is approximately three times as costly as shipping by sea. Meanwhile, until recently, a festering separatist insurgency in Baluchistan Province, where Gwadar is located, prevented the completion of road connectivity between Gwadar and central Pakistan.

In 2012, the China Overseas Ports Holding Company assumed control over the port’s operations after direct negotiations with PSA International, which had decided to pull out of the Gwadar contract after insecurity, litigation, and other factors stifled the port’s development. In 2013, China and Pakistan signed a vague agreement announcing CPEC. Later that year, China launched the Belt and Road Initiative. Also in 2013, new elections brought to power the center-right Pakistan Muslim League–Nawaz (PML-N), a pro-business party that was relatively better at governing than its predecessor, the Pakistan Peoples Party. This confluence of events broke the inertia in Gwadar.

Today, Gwadar is still a sparsely populated fishing town, with its residents numbering around 60,000. But the city’s newer (and largely uninhabited) settlements resemble Doha a few decades back. And that, ultimately, is what Gwadar can become—a midsize city like Doha or Muscat, with a population in the hundreds of thousands, composed largely of economic migrants.

The city government, staffed by ethnic Baluchis, is taking the lead in the construction of Marine Drive, a new coastal road, using local labor. Like Islamabad and other upscale enclaves in Pakistan, the new city of Gwadar will be fully planned. The basic infrastructure for some of its residential areas—the roads, the streetlights, and underground electric cables—is already in place.

Eventually, Gwadar is supposed to become a “smart city,” with information and communications technologies buttressing its basic services, say officials from the Gwadar Development Authority. To prevent a repeat of the massive real estate fraud that occurred in Gwadar in the early years of this century, local land records will be digitized. Security will also be upgraded. The territory will soon resemble the camera-laden cities of China. According to Khurram Shehzad, who heads an army brigade that provides security for Gwadar and its Chinese personnel, closed-circuit televisions will use radio-frequency identification to scan the license plates of all cars that enter and exit the area. It is a program that is being replicated in many of Pakistan’s largest cities, much like the system in Xinjiang’s Kashgar.

Although the shipping activity at the port remains infrequent, averaging one vessel visit a month, the port development is in full swing. Over the long term, Pakistani officials plan to expand the industrial area 30 miles eastward, making it the largest economic zone in the region. But in the short term, the heart of the Gwadar project will be the four completed berths, combined with a free economic zone, which is nearing completion. Chinese companies are in talks to establish on-site automobile assembly plants. Baosteel, the world’s second-largest steel company, could set up a steel mill outside the free zone. Gwadar Port Authority officials also envision an oil refinery and an LNG terminal. The port’s initial freight traffic will largely be made up of material for the development of Gwadar. But once critical land connectivity projects—including the Karachi–Lahore Motorway and the upgraded Karakoram Highway, connecting Islamabad to Kashgar—are completed, projected to be by the end of 2019, Pakistani officials expect trade with Xinjiang to make up a growing share of Gwadar’s traffic. Chinese transporters might also redirect some of their sea shipping volume from Dubai to Gwadar.

Chinese officials, including President Xi Jinping, often mention Gwadar and the Chinese-owned Greek port of Piraeus together. Indeed, the Chinese may do with Gwadar what they have done with Piraeus: transform a middling harbor in an economically troubled country into a regional transshipment hub serving smaller feeder ports. The competition, however, is fierce. Beyond Jebel Ali, there is competition from the nearby Indian-constructed port of Chabahar, in Iran, as well as from Sri Lanka’s Colombo and Hambantota ports, Oman’s Duqm and Sohar ports, and Abu Dhabi’s Khalifa port. Additionally, the port of Karachi has a new container terminal that is presently deeper than Gwadar’s, which means that Karachi could serve as Gwadar’s greatest competitor: Karachi is already an established, secure transshipment hub with reliable hinterland connectivity and a strong industrial ecosystem.

Gwadar may face stiff competition, but it is located at the crossroads of southern and eastern Eurasia, the world’s fastest-growing region. That means that there is a lot of need for shipping ports, which could allow Gwadar to become a niche transshipment, petrochemicals, and manufacturing hub. There are also decent prospects for hospitality and real estate in the area. An upscale residential and tourism enclave is planned for the city’s western half. As a result, Pakistanis, who make up the third-largest group of investors in Dubai real estate, may choose to vacation closer to home.

With transformation comes growing pains. Baluchistan has been home to multiple insurgencies—and the most recent one hasn’t ended. Separatist insurgents claim that the Pakistani state is merely exploiting Baluchistan’s natural resources. The mineral-rich province is Pakistan’s poorest, and its local population feels taken advantage of by Pakistan’s power elite. Water shortages in Gwadar, which will be remedied by dams and desalination plants, are a sign of how stark the gap is between Gwadar’s promise and the everyday reality for its native residents.

Security challenges in Gwadar—coming from ethnic Baluch separatists, sectarian terrorists, and antistate jihadists—remain significant. Beijing’s growing footprint makes Chinese personnel a target. Since the formal launch of CPEC in April 2015, militant violence in Baluchistan has increased. A Chinese worker and his Pakistani driver were injured in an attack in Karachi in May 2016. But the Pakistani state seems to have adapted since then by raising a 15,000-personnel army division to secure the corridor projects and developing strict security protocols for Chinese workers. It now appears largely able to contain the violence. In a July 2017 attack, for instance, Chinese workers passed by an improvised explosive device unscathed. It exploded minutes later, with the frequency-jamming feature of the Pakistani army’s security patrol that protects the Chinese workers having done its job.

Another sign that Islamabad has learned from the mistakes of its past is that there is a strong level of local ownership in Gwadar, a marked change from the Pakistani center’s historically neglectful approach to its poor periphery. The Pakistani central government is making a concerted effort to incorporate the local population into Gwadar’s future economy. A vocational school in the city will train local youth for port operation jobs. Hundreds of local students will also attend educational institutions in China.

Still, demographic change will be a force to contend with. The local Makrani Baluch population will undoubtedly become a minority in the coming decades. But local officials are already developing policies to protect, if not privilege, the economic and political rights of the indigenous population.

At any rate, these areas were once off-limits to Pakistani forces. But now, traveling along the M-8 motorway toward Turbat, one can see steady traffic on the newly established road. Water tankers service small clusters of settlements separated by miles of empty terrain. Oil tankers provide fuel to other parts of Pakistan. Laborers make their way to and from Gwadar on buses. And families take trips from other parts of the province just to view this virgin strip of Arabian Sea coast.

KEEPING THE LIGHTS ON

CPEC is more than the Gwadar port. Roughly 64 percent of China’s CPEC expenditures go toward electric power projects in all of Pakistan’s four provinces. The reason for the emphasis on electricity is obvious to any visitor to Pakistan. Since the early years of this century, Pakistan has suffered from crippling electricity shortages. It also faces shortages of natural gas, which is critical not just for automobile fuel but also for home heating, electricity, and industrial use. Pakistani factories are offline for much of the year as a result of these shortages. The country’s once famed textile industry is a laggard, having lost market share to upstarts such as Bangladesh and Vietnam.

Critics of CPEC, such as the Pakistani columnist Farrukh Saleem, say the Chinese projects will overburden Pakistan with debt while providing high, fixed returns to Chinese companies. But most of the CPEC projects involve private energy. Principally, it is Pakistani electricity consumers who will pay back Chinese companies for their investments in electric power generation. That does not mean the government has no liability when it comes to CPEC’s electricity projects. All but one of Pakistan’s electricity distribution companies are publicly owned. And because Pakistani consumers, including the country’s top politicians, too often don’t pay their bills, Islamabad has had to assume the role of a guarantor on CPEC’s electricity projects. It has agreed to establish a so-called revolving fund of around 22 percent of the estimated monthly payments to Chinese electric power generating companies to ensure that they are paid on time.

Electricity theft is a big contributor to Pakistan’s endemic electric power debt. Some local communities establish illicit connections to power lines. Additional transmission and distribution losses on top of all of this theft result in $4 billion a year in “circular debt”—accumulated arrears of the Pakistani government to electric power generating companies as a result of consumer nonpayment, electricity theft, and other factors. Initial momentum by the PML-N to tackle nonpayment and electricity theft has subsided as the party decided that installing new power plants, rather than getting tough on those who steal electricity, would endear it to voters before the 2018 general election. Although the government of Pakistan has no direct debt liabilities through CPEC’s electricity projects, it will be liable for end-user arrears if it fails to implement the necessary reforms in its electric power industry, including combating nonpayment and theft.

In addition to electricity, CPEC involves building new public transportation, which may also add to Pakistan’s debt. Infrastructure loans, which form 35 percent of CPEC’s allocations, will likely grow with the inclusion of three rail and road projects between Gwadar and the border with China.

Nadeem Javaid, the chief economist of Pakistan’s Planning Commission, has estimated that CPEC repayments and profit repatriation will start at $1.5–$1.9 billion in 2019 and peak at $5 billion in 2022. He has said that the Pakistani state will collect $6–$8 billion in tolls and other fees as part of CPEC. That is an ambitious figure and totally dependent on economic activity in Xinjiang, Gwadar, and the remainder of Pakistan. Tolls depend on goods to transport. Goods require raw materials to be extracted and transported—and from them, products to be made.

It is indeed possible to get such an economic surge to take place. But it will require Pakistan to depart from its present mode of economic-policy making, which is focused on maximizing revenue collection from those already in the tax net. Instead, and for CPEC to succeed in helping drive Pakistan to high growth rates of seven percent and above, Islamabad must enact macroeconomic policies that bolster existing export sectors and help generate new ones. With a retooled export and investment policy, Pakistan could see significant growth in agriculture, automotive manufacturing, real estate, textiles, and tourism. For Pakistan, CPEC debt is manageable, but it requires an immediate rise in exports and productivity.

BRIDGING THE GAPS

The economics of CPEC are one thing, but the politics are another. The project encompasses all of Pakistan’s provinces and the Gilgit-Baltistan region, and given that it is a 15-year endeavor, it will be overseen by three different governments. Pakistan needs a political consensus on CPEC to sustain progress.

The problem is that the ruling Punjab-based PML-N has lagged in securing a durable political consensus with the political forces in the smaller provinces. There has been encouraging progress toward this in the past year, but the divide between Punjab and the rest of the country is a recurring theme in Pakistani politics. For example, many Baluchis resent that their natural gas reserves have been used to fuel Punjab’s industries, while their own homes lack heating. As a result, a committed approach by Punjab-based leaders is necessary to build trust outside the province.

The lack of transparency on CPEC and the unequal distribution of CPEC projects, meanwhile, have rekindled political fights in Pakistan’s smaller provinces. Although these political feuds do not constitute an existential threat to CPEC, they could slow the pace of progress of individual projects and add to their costs. Changes in government, by elections or other means, also add to the uncertainty. A consensus-based approach would reduce the risk of a change in policy should opposition parties come to power at the center or in any of the provinces.

Take Afrasiab Khattak, for example. He represents the antiestablishment branch of the Awami National Party, a secular Pashtun nationalist party. Portraits of Che Guevara and Fidel Castro adorn the wall in the leftist politician’s dining room. Now retired from the Senate, he remains an influential intellectual voice within the party and among Pakistan’s ethnic Pashtuns. Having fled Pakistan when it was under military rule, he spent his time in Soviet-occupied Afghanistan and was targeted by the Pakistani Taliban for much of the post-9/11 era. During the peak of the U.S. presence in Afghanistan, American officials saw him as a reliable partner, a Pakistani liberal, and an anti-Taliban force.

Today, the soft-spoken, erudite Khattak speaks glowingly of what he sees as Chinese plans to revive cultural connectivity among Pakistan, Afghanistan, Central Asia, and China’s own Muslim hinterland. Like many, he has faith in China but is dubious about his own government’s ability to ensure equitableness. He is aggrieved by the lack of transparency in how the PML-N is handling CPEC and by the offensive behavior of Ahsan Iqbal, a senior PML-N official who has been the party’s lead coordinator on CPEC. Iqbal’s often brash style has ruffled the feathers of Khattak and other politicians from Pakistan’s smaller provinces.

There have also been disputes over the route of CPEC. Originally conceived as a singular line passing through Pakistan’s least developed areas bordering Afghanistan, CPEC was redirected by the PML-N toward Punjab, and later the PML-N said that there would be three routes: a central, an eastern, and a western one. Although the central and western routes will pass through Pakistan’s less developed areas, only the eastern route will feature a controlled-access six-lane motorway. Some observers interpret this as meaning that the eastern route is meant to be the only economically viable route. Political activists from Pakistan’s smaller provinces do not resent CPEC; rather, they fear it is a train that will pass them by. They believe that the disparity in spending on infrastructure and electric power, favoring Pakistan’s populous Punjab Province, will translate into less spending for their regions when it comes to the development of industrial zones. This will, in turn, compound the wealth and power divide between Punjab and the rest of the provinces.

The debate over CPEC began in mid-2014, when politicians from Pakistan’s ethnic Pashtun regions began to allege that the route of CPEC had been changed. In addition to perceptions of inequity in the distribution of CPEC projects, there have also been concerns about transparency, the inclusiveness of decision-making on CPEC, and the fiscal burden on the Pakistani state.Interprovincial tensions over CPEC eased in December 2016 when the Joint Coordination Committee of CPEC agreed to include municipal rail and special economic zone projects for all four provinces in CPEC. A more equitable distribution of the CPEC pie has quieted the acrimonious debate among Pakistan’s provinces.

On the other side of Islamabad is the office of Mushahid Hussain, a senator and perhaps the most connected civilian in Pakistani politics. Hussain is a smooth-talking networker, a voice of the establishment but also a force for consensus. He is now the head of the Parliamentary Committee on CPEC and leads a think tank known as the Pakistan-China Institute. Hussain uses his people skills to ensure that a consensus in favor of CPEC is forged and endures. He is perhaps its most effective bridger of gaps between civilians and the military and among the elder statesmen of the political class. For example, Hussain has led multiparty delegations to China, assembling diverse arrays of politicians from both the government and the opposition and from different regions. In facilitating such interactions, Hussain—perhaps more than the Pakistani federal government—has enabled CPEC to largely overcome the partisan, regional, and ethnic divides that normally color political debate in Pakistan.

DIRHAMS TO DOLLARS

The bus journey from Islamabad to Hunza, near Pakistan’s border with China, takes over 24 hours. The Karakoram Highway, which covers much of that route, is a glorified local road and moves at a snail’s pace even late at night. This road is being diverted as part of CPEC to enable high-speed traffic. But once you arrive near the city of Gilgit, the Karakoram Highway becomes a two-lane road, whose upgrades China completed early last year. Some of the once extremely dangerous road has been replaced with smooth pavements lined with railings. Heading toward the border, one passes through an impressive series of tunnels built by the Chinese to bypass a massive landslide that had closed off the road for four years.

The Chinese have proved that they have the engineering prowess to build world-class infrastructure in Pakistan. But what remains to be seen is whether that infrastructure can lift Pakistan’s middling economy and put it on a path toward joining Asia’s “tigers.”

There are reasons to be cautiously optimistic. Although neither Gwadar nor CPEC will be a panacea for many of Pakistan’s ills—including political instability, misgovernance, and terrorism—the country is demonstrating that it may be capable of overcoming these problems on its own. Civilian deaths due to terrorism were down by 80 percent in 2016 as compared with 2013. The improved security has helped revive Pakistan’s economy. The World Bank and other multilateral development banks expect Pakistan to sustain its present five-percent-plus GDP growth rates into 2020, as long as it contains macroeconomic risks. Today, Pakistan is home to the world’s fastest-growing retail market. And now, with the injection of Chinese capital, in the coming years, Pakistan—once regarded as “the world’s most dangerous country”—may surprise many as a fast-growing emerging market.

In one of his poems, Afridi, the retired colonel, beckons the “traders and merchants of the world” to bring their “dirhams and dollars” and “euros and yuan” to Gwadar. His hopes reflect an aspiration of many in Pakistan: to transition from different notions of connectivity—from AfPak to CPEC, or from terror to trade. Strengthening linkages with what will soon be the world’s largest economy may help Pakistan release itself from the chokehold of the United States’ “war on terror” and allow it to reap the benefits of the emerging century of Asian affluence.