Financing burden of CPEC

Neo

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Financing burden of CPEC
ISHRAT HUSAIN
The ongoing debate on the impact of CPEC projects on future external payments’ obligations is welcome, but should be informed by analysis based on facts rather than opinion.

The total committed amount under CPEC of $50 billion is divided into two broad categories: $35bn is allocated for energy projects while $15bn is for infrastructure, Gwadar development, industrial zones and mass transit schemes. The entire portfolio is to be completed by 2030. Therefore, the implementation schedule would determine the payments stream. Energy projects are planned for completion by 2020, but given the usual bureaucratic delays, it won’t be before 2023 that all projects are fully operational. Under the early harvest programme, 10,000 MW would be added to the national grid by 2018. Therefore, the disbursement schedule of energy projects is eight years (2015-2023). Infrastructure projects such as roads, highways, and port and airport development, amounting to $10bn, can reasonably be expected to be concluded by 2025, while the remaining projects worth $ 5bn would spill over into the 2025-30 period.

Examine: Hidden costs of CPEC

Given the above picture, it is possible to prepare a broad estimate of the additional burden on Pakistan’s external payment capacity in the coming years. As the details of each project become available, the aggregate picture can be refined further. The margin of error would not cause significant deviation.

It is possible to prepare an estimate of the additional burden on our external payments’ capacity.
The entire energy portfolio will be executed in the IPP mode —as applied to all private power producers in the country. Foreign investors’ financing comes under foreign direct investment; they are guaranteed a 17pc rate of return in dollar terms on their equity (only the equity portion, and not the entire project cost). The loans would be taken by Chinese companies, mainly from the China Development Bank and China Exim Bank, against their own balance sheets. They would service the debt from their own earnings without any obligation on the part of the Pakistani government.

Import of equipment and services from China for the projects would be shown under the current account, while the corresponding financing item would be FDI brought in by the Chinese under the capital and finance account. Therefore, where the balance of payments is concerned, there will not be any future liabilities for Pakistan.

To the extent that local material and services are used, a portion of free foreign exchange from the FDI inflows would become available. (Project sponsors would get the equivalent in rupees). For example, a highly conservative estimate is that only one-fourth of the total project cost would be spent locally and the country would benefit from an inflow of $9bn over an eight-year period, augmenting the aggregate FDI by more than $1bn annually. This amount can be used to either finance the current account deficit or reduce external borrowing requirements. Inflows for infrastructure projects for local spending would be another $4bn over 15 years.

Taking a highly generous capital structure of 60:40 debt-to-equity ratio for energy projects, the total equity investment would be $14bn. Further, assuming the extreme case that the entire equity would be financed by Chinese companies (although this is not true in the case of Hubco and Engro projects, where equity and loans are being shared by both Pakistani and Chinese partner companies) the 17pc guaranteed return on these projects would entail annual payments of $2.4bn from the current account.

CPEC’s second component, ie infrastructure, is to be financed through government-to-government loans amounting to $15bn. As announced, these loans would be concessional with 2pc interest to be repaid over a 20- to 25-year period. This amount’s debt servicing would be the Pakistan government’s obligation. Debt-servicing payments would rise by $910 million annually on account of CPEC loans (assuming a 20-year tenor). Going by these calculations, we can surmise that the additional burden on the external account should not exceed $3.5bn annually on a staggered basis depending on the project completion schedule.

As a proportion of our total foreign exchange earnings of 2016, this amounts to 7pc. These calculations do not take into account the incremental gains from GDP growth that will rise because of investment in energy and infrastructure. As the loan amounts would be disbursed in the next 15 years and repayments would be staggered, the adding of the entire $15bn to the existing stock of external debt and liabilities is not an accurate representation. The more realistic approach would be a tapered schedule, with $2bn to $3bn getting disbursed in the earlier years and slowing down in the second half.

The question is: how do we find the extra non-debt-creating resources of $3.5bn to offset this additional burden? If the export slowdown was due to energy shortages, the availability of increased supplies should boost exports fetching higher foreign exchange revenues. Exports have to grow by 14pc annually in dollar terms to compensate for these outflows if all other sources remain unchanged. This is not unprecedented as Pakistan has previously recorded this growth rate. Further, the substitution of imported fuels with domestic ones such as hydro, coal, wind and solar should be able to result in savings of at least $1bn annually. These measures will need concerted action.

To make this happen, Pakistan has to take some policy actions on a priority basis: (a) make coordinated efforts to increase the volume of exports by diversifying product mix, penetrating new markets, revising free trade agreements, reducing transaction costs; (b) attract foreign investment in manufacturing and export sectors and set up joint ventures in the industrial zones; (c) channel workers’ remittances though the banking system by reducing the differential between the open and inter-bank market rates; (d) accelerate training of skilled, technical and professional manpower who can take over jobs from the Chinese, thus bringing cost savings and reduced outflows; (e) reform the power sector by privatising DISCOs, mandating Nepra to develop competitive power markets and power exchanges by providing open access to producers for transmission and distribution, setting tariffs through open and transparent bidding, and introducing smart technologies. These measures would certainly help in easing the pressure on external accounts.

The writer is former governor of the State Bank of Pakistan.

Published in Dawn, February 11th, 2017
 

Hari Sud

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Does that mean that CPEC may be good on paper but a white elephant to operate and maintain. Again if Bulochistanis refuse to cooperate and India exerts pressure on the portion passing thru Pakistani Occupied Kashmir then none of the returns of this system will materialize. Then it becomes a liability. The fault is Chinese and Pakistani express desire to grab Kashmir from India, which they can dream but not going ever to happen.

Angry India can block Indus water flow somehow and make Pakistan a wasteland without firing a gun.
 
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Financing burden of CPEC
ISHRAT HUSAIN
The ongoing debate on the impact of CPEC projects on future external payments’ obligations is welcome, but should be informed by analysis based on facts rather than opinion.

The total committed amount under CPEC of $50 billion is divided into two broad categories: $35bn is allocated for energy projects while $15bn is for infrastructure, Gwadar development, industrial zones and mass transit schemes. The entire portfolio is to be completed by 2030. Therefore, the implementation schedule would determine the payments stream. Energy projects are planned for completion by 2020, but given the usual bureaucratic delays, it won’t be before 2023 that all projects are fully operational. Under the early harvest programme, 10,000 MW would be added to the national grid by 2018. Therefore, the disbursement schedule of energy projects is eight years (2015-2023). Infrastructure projects such as roads, highways, and port and airport development, amounting to $10bn, can reasonably be expected to be concluded by 2025, while the remaining projects worth $ 5bn would spill over into the 2025-30 period.

Examine: Hidden costs of CPEC

Given the above picture, it is possible to prepare a broad estimate of the additional burden on Pakistan’s external payment capacity in the coming years. As the details of each project become available, the aggregate picture can be refined further. The margin of error would not cause significant deviation.

It is possible to prepare an estimate of the additional burden on our external payments’ capacity.
The entire energy portfolio will be executed in the IPP mode —as applied to all private power producers in the country. Foreign investors’ financing comes under foreign direct investment; they are guaranteed a 17pc rate of return in dollar terms on their equity (only the equity portion, and not the entire project cost). The loans would be taken by Chinese companies, mainly from the China Development Bank and China Exim Bank, against their own balance sheets. They would service the debt from their own earnings without any obligation on the part of the Pakistani government.

Import of equipment and services from China for the projects would be shown under the current account, while the corresponding financing item would be FDI brought in by the Chinese under the capital and finance account. Therefore, where the balance of payments is concerned, there will not be any future liabilities for Pakistan.

To the extent that local material and services are used, a portion of free foreign exchange from the FDI inflows would become available. (Project sponsors would get the equivalent in rupees). For example, a highly conservative estimate is that only one-fourth of the total project cost would be spent locally and the country would benefit from an inflow of $9bn over an eight-year period, augmenting the aggregate FDI by more than $1bn annually. This amount can be used to either finance the current account deficit or reduce external borrowing requirements. Inflows for infrastructure projects for local spending would be another $4bn over 15 years.

Taking a highly generous capital structure of 60:40 debt-to-equity ratio for energy projects, the total equity investment would be $14bn. Further, assuming the extreme case that the entire equity would be financed by Chinese companies (although this is not true in the case of Hubco and Engro projects, where equity and loans are being shared by both Pakistani and Chinese partner companies) the 17pc guaranteed return on these projects would entail annual payments of $2.4bn from the current account.

CPEC’s second component, ie infrastructure, is to be financed through government-to-government loans amounting to $15bn. As announced, these loans would be concessional with 2pc interest to be repaid over a 20- to 25-year period. This amount’s debt servicing would be the Pakistan government’s obligation. Debt-servicing payments would rise by $910 million annually on account of CPEC loans (assuming a 20-year tenor). Going by these calculations, we can surmise that the additional burden on the external account should not exceed $3.5bn annually on a staggered basis depending on the project completion schedule.

As a proportion of our total foreign exchange earnings of 2016, this amounts to 7pc. These calculations do not take into account the incremental gains from GDP growth that will rise because of investment in energy and infrastructure. As the loan amounts would be disbursed in the next 15 years and repayments would be staggered, the adding of the entire $15bn to the existing stock of external debt and liabilities is not an accurate representation. The more realistic approach would be a tapered schedule, with $2bn to $3bn getting disbursed in the earlier years and slowing down in the second half.

The question is: how do we find the extra non-debt-creating resources of $3.5bn to offset this additional burden? If the export slowdown was due to energy shortages, the availability of increased supplies should boost exports fetching higher foreign exchange revenues. Exports have to grow by 14pc annually in dollar terms to compensate for these outflows if all other sources remain unchanged. This is not unprecedented as Pakistan has previously recorded this growth rate. Further, the substitution of imported fuels with domestic ones such as hydro, coal, wind and solar should be able to result in savings of at least $1bn annually. These measures will need concerted action.

To make this happen, Pakistan has to take some policy actions on a priority basis: (a) make coordinated efforts to increase the volume of exports by diversifying product mix, penetrating new markets, revising free trade agreements, reducing transaction costs; (b) attract foreign investment in manufacturing and export sectors and set up joint ventures in the industrial zones; (c) channel workers’ remittances though the banking system by reducing the differential between the open and inter-bank market rates; (d) accelerate training of skilled, technical and professional manpower who can take over jobs from the Chinese, thus bringing cost savings and reduced outflows; (e) reform the power sector by privatising DISCOs, mandating Nepra to develop competitive power markets and power exchanges by providing open access to producers for transmission and distribution, setting tariffs through open and transparent bidding, and introducing smart technologies. These measures would certainly help in easing the pressure on external accounts.

The writer is former governor of the State Bank of Pakistan.

Published in Dawn, February 11th, 2017
Why didn't post in main CPEC thread?
 

IndianHawk

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2pc interest to be repaid over a 20- to 25-year period.
Now compare that to Japanese loan to India for bullet train 15billion $ for 0.5% over 50 years .

I'd say china is ripping pakistan off. Pakistan should better have gone to Japan for infra development.:biggrin2:
 

Mikesingh

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Lol.....:pound:



And why a separate thread? There's one dedicated to the CPEC disaster already running here.
 

Neo

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Why didn't post in main CPEC thread?
This is the first such detailed cost analysis by a credible source and I didn't want it to be buried under other posts hence I created a new thread; it will be easier for find for future refs.

@pmaitra, kindly seek your permission not to merge this with the main CPEC thread. Thx.
 

Mikesingh

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This is the first such detailed cost analysis by a credible source and I didn't want it to be buried under other posts hence I created a new thread; it will be easier for find for future refs.
OK. Then check out the detailed cost analysis.....

Calculating Container Shipping Time

Let’s assume that a driver drives for 12 hour per day. It would take him 91.57 hours to reach Kashghar from Gwadar, which would be equal to 7.7 days or 8.7 days taking pit stops into account.

Let's assume that it takes only a day to transfer cargo from a Pakistani to a Chinese truck. That Truck would take 170 Hours to reach Shanghai from Kashghar. ie 14 days of driving and assuming two days for pit stops, 16 days.

Now if we assume that Gwadar is as efficient as the port of Karachi, it would take 6 days to clear import formalities.

Thus the total time it would need to transport goods from Dubai to Shanghai via Gwadar would be 37 days compared to 15 days it would take to reach Dubai from Shanghai via Malacca. Even reaching the China-Pakistan border would take more time (21 days vs 15 days) than transporting a container from Dubai to remotest part of the Chinese seaboard.

Demography and Growth Potential Calculation for CPEC

Following provinces are close to the CPEC:


1. XinXiang: Area 1,664,900 Sq Km; Pop 22.09 million

2. Qinghai: Area 720,000 Sq km; Pop 5.58 million

3. Gansu : Area 425,800 Sq Km; Pop 25.64 million

4. Inner Mongolia: Area 1183,000Sq Km; Pop 24.82 million

5. Tibet: Area 1,228,400 Sq Km; Pop 3.145 million

Total area of these provinces = 5,222,100 Sq km. This is 54% of Total area of China, and an area 6.6 times that of Pakistan; while its population is just 81 million which is 6% of Chinese population and less than half (0.44 times) of Pakistan's population.



This is the extent of how sparsely populated the Western part of China is. Highway and Economic corridors bring prosperity when Economic depression of a region is due to that region being cut off from rest of country. But In this case, underdevelopment is due to geographical factors, not due to infrastructure factors. Deserts, cold arid regions and mountains reduce economic potential (unless you harness them for tourism like Switzerland).You cannot put up factories in deserts. You cannot build cities in deserts (Las Vegas would not count as that city exists because of the Hoover dam).

An area with such low population density does not have a consumer base to build a consumption driven economy. You cannot build service industries in deserts or any other low population density areas because there is not enough qualified labour available as well as well as non availability of access to ports/land terminals.The CPEC is connecting China in the North-West corner of China ie Western corner of Xinjiang. The only provinces that it could affect are Xinjiang and its neighbours Tibet, Qinghai, Gansu in Western China, and Inner Mongolia in Northern China. Xinjiang itself is so large that CPEC has no chance of affecting even its neighbours.

People usually cannot fathom the fact that some provinces (mostly in Western China) are many times larger than even Pakistan itself. Xinjiang is 2.1 times larger than Pakistan, Tibet is 1.54 times larger, Inner Mongolia 1.48 times larger, Qinghai equal to Pakistan, and Gansu half of Pakistan.

It needs to be understood that the Eastern part of Western China is further away from Pakistan than even Europe! For example capital of Shaanxi (Taiyuan) is as far away from Islamabad by air (3559 Km) as Ankara (3600 Km). Thus it is difficult to understand this optimism of serving Eastern part of Western China.

Let's do some analysis. All distance henceforth are by road.

(Shaanxi), Capital (Taiyuan).
Distance of capital from Islamabad = 4904.3 Km
Distance of capital from nearest Chinese seaport (Tianjin)=943 Km
Distance of capital from Gwadar = 6644 Km

(Ningxia), Capital (Yinchuan)

Distance of capital from Islamabad = 4337 Km
Distance of capital from nearest Chinese seaport (Tianjin)= 1200 Km
Distance of capital from Gwadar = 6077 Km

(Chongquing)


Distance of Chongquibg from Islamabad = 5069 Km
Distance of Chongquing from nearest Chinese seaport = 0 Km. After construction of Three Gorges Dam, barring largest cargo Ship, Ocean going ships could sail upto Chongquing.
But still distance between Chongquing and Shanghai is 1689 Km
Distance of Chongquing from Gwadar = 6843 Km

(Guzihou) , capital (gulyang)

Distance of capital from Islamabad = 5459 Km
Distance of capital from nearest Chinese seaport (Beihai) = 796 Km
Distance of capital from Gwadar = 7199 Km

(Yunnan) , capital (Kuming)

Distance of capital from Islamabad = 5859 Km
Distance of capital from nearest Chinese seaport (Beihai) = 1024 Km
Distance of capital from Gwadar = 7635 Km

(Sichuan) , capital (Chengdu)


Distance of capital from Islamabad = 4976 Km
Distance of capital from nearest Chinese seaport (Chongquing) = 326 Km and (Shanghai) = 1968 Km
Distance of capital from Gwadar = 6716 Km

It is therefore seen that all these Western provinces of China are farther away from Gwadar than Western Europe is from Pakistan by Road. Distance between Islamabad and Berlin by road is 6353 Km, and of Paris is 7300 Km; nearly of the order of distance of Gwadar from any of Eastern provinces of Western China.

Anyway, China does not even intend to use Gwadar for these provinces. It already has a corridor via Myanmaar (Yunnan border Myanmar) for redundancy.

So the question is, what does Pakistan intend using the CPEC for? Trade through this route is an unviable option due to lack of markets, time, distance and most importantly cost constraints.


Next......

Is the CPEC Financially Viable?

Calculations tell us that shipping through Gwadar port is costlier and more time consuming than transporting through seas, and distance between Pakistani cities and Chinese cities is as much as the distance between Pakistani cities and major European cities. Thus, if there is no land route trade happening between Europe and Pakistan, then certainly no trade will happen between china and Pakistan on a large scale. Andanything which is cheaper and quicker is always preferred, which is not the case for transporting through Gwadar and Kashghar by road.

Cost comparison for viability of CPEC.

Distance betweenShanghai and Kashghar = 5121 Km
Distance betweenKashghar and Gwadar = 2747 Km

Average Trucking cost per Ton per Km in China = 7 cents.
Average Trucking cost per Ton per Km in Pakistan = 3 cents.


This is the most conservative calculation not taking into account Hazard premium tha tthe nature of Terrain imposes on Pakistan (Karakoram Highway is rated world's fourth most dangerous highway. There's a hazard premium that China has to pay for transporting good through Takla Makan Desert, Kulun Shan mountains range, and Altai Shan mountain range). But still let us calculate cost of transporting a Ton of goods from Shanghai to Gwadar.

Cost incurred in Chinese territory = 0.07 X 5121 =$358.47


Cost incurred in Pakistani territory = 0.03 X 2747 =$82.41

So total cost from Shanghai to Gwadar for a ton of goods by road = $440.88 or approx Rs 50,000 PKR per ton.

(Since Pakistan doesn't export high value goods but mainly low value textiles, the cost of transportation itself will far more than the cost of production! Thus Pak exports to China via the CPEC will be a non starter!)

Now let destination port be Dubai.


Cost of Transporting 1 ton via sea from Dubai to Shanghai via Malacca = $28.93

Cost of Transporting 1 Ton via sea from Karachi to Dubai = $5.787

Therefore, total cost of Shipping a Ton from Shanghai to Dubai via Gwadar = $446.67.

But the total cost of Shipping directly by sea from Shanghai to Dubai via Malacca = $28.93 which is 16 times less than that of Transporting via Gwadar!!!

Heck, the total cost of Transport from Gwadar to the Chinese border is more than what would be required for Transport from Dubai to Shanghai by sea!

The truth is that the CPEC is basically meant as an alternative route to China in case of any disruption in the Strait of Malacca.

However, more importantly, Gwadar is being developed by the Chinese to establish a PLAAN base there and the CPEC is being built basically for its logistics support.


A Chinese naval base at Gwadar will enable them to dominate the Strait of Hormuz as well as the IOR region. For Pakistan it would be an insurance policy against any Indian naval attack on its facilities due to the Chinese naval presence at Gwadar.

So there you have it. Any comments on the above?
 

Villager

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4 Chinese nationals arrested in another ATM skimming incident in Karachi

Karachi police have arrested four Chinese nationals suspected of ATM skimming fraud and have recovered Rs2.3 million and 350 ATM cards from their possession, Clifton Superintendent Police (SP) Dr Asad Malhi said on Sunday.

Dr Malhi said that the police acted on information regarding suspicious activities of a group of Chinese men in Defence Phase-II area on Saturday night and arrested the three men, however, two other accomplices managed to escape.

Earlier in the week, two Chinese men were arrested for allegedly planting a skimming device at a Habib Bank Ltd ATM in Zainab Market while another was arrested today in Bahadurabad.
___________________________
What's up with Pakistani brethrens being constantly robbed by its elder iron Chinese brothers.
 

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