Gwadar: The Gateway to CPEC

The initiatives in the domain of Corporate Social Responsibility (CSR) undertaken by China Overseas Ports Holding Company (COPHC) and other Chinese firms in Gwadar are appreciable and are aimed at the right direction. 

Effective development communication and positive engagement with local communities is critical for the effectiveness and long-term success of these projects. 

All stakeholders should devise a mechanism for an integrated socio-economic development strategy and ensure inclusion of the hopes and aspiration of the inhabitants of Gwadar vis-à-vis China Pakistan Economic Corridor (CPEC).

This was the crux of a two-day media conclave and roundtable conference titled ‘CSR Initiatives in Gwadar: The Gateway to CPEC’ co-organized by Institute of Policy Studies (IPS), Islamabad and the University of Gwadar in collaboration with COPHC, Gwadar Port Authority (GPA) and Gwadar Development Authority (GDA) in the strategic port town.

Speaking on the occasion, Jawad Akhtar Khokhar, Advisor, Maritime Affairs, Ministry of Planning, Development & Special Initiatives gave a detailed overview of the development projects in Gwadar under various modalities and highlighted the CPEC projects in Gwadar worth US$2.1 billion so far.

He said so far three projects worth US$314 million have been completed. These projects included Gwadar Smart Port City Master Plan, physical infrastructure of Gwadar Port and Free Zone Phase-1, and Pak-China Technical and Vocational Institute.

Another seven projects worth US$1.44 billion are under implementation process. These projects include Eastbay Expressway, which is almost complete; facilities of fresh water treatment, water supply and distribution, which are 70% cent complete; New Gwadar International Airport; Pak-China Friendship Hospital Gwadar; infrastructure of Gwadar Free Zone Phase-II; 300 MW coal power plant and 1.2 million gallons’ desalination plant.

Khokhar said under the short-term strategy the prioritized projects include provision of water in three months and electricity in five months for Gwadar, Trading Corporation of Pakistan has been authorized to import one-third cargoes at Gwadar; and completion of M-8 motorway. Highlighting long-term strategy, he said the government is aiming to build LNG and POL terminals at Gwadar port and ensure availability of electricity, water and gas to enable phase-2 expansion of the port.

Naseer Khan Kashani, Chairman, Gwadar Port Authority (GPA) stressed the importance of bringing the locals together through CSR.  “We must prioritize people over infrastructure development. Drinkable water and electricity is the top priority of the authorities in Gwadar”, he stated.

Kashani said a desalination plant of about 1.2 million gallons would become operational in six to eight months that would provide drinkable water for the locals. Moreover, the newly inaugurated state-of-the-art Pak-China Vocational & Technical Training Institute will provide three years’ training to local youth, which is a big contribution by our Chinese friends, he added. “Chinese authorities have also recently provided 3,000 solar panels to the poorest of the poor in Gwadar for the provision of electricity,” he informed.

While delivering the keynote speech, Zhang Baozhong, Chairman COPHC spoke at length about the experiences of his seven-year stay in Gwadar. “We are cognizant of the fact that Gwadar deserves more rapid development to live up to the expectations of the local people. There is no denying the fact that it has developed much during the past seven years”, he remarked. 

He stated three reasons for the promising prospects of Gwadar: 1) cooperation of the Gwadar people, 2) its vast resources, and 3) its strategic location. “The inhabitants of Gwadar deserve respect and development according to their rightful demands”, Baozhong underscored.

“We are sending 20 students to China on scholarships every year. We have been running a primary school here for the last five years and soon we will construct a secondary school as well. More than 6000 solar panel units have been distributed among the people of Gwadar so far, and around 500,000 trees have been planted,” Shahzad Sultan, Country Head Marketing of COPHC informed while providing details of the CSR initiatives.

Chairman IPS Khalid Rahman highlighted the concept of CSR and elements that can improve the lives of the local inhabitants. “We must have solution-oriented recommendations, not problem-oriented,” he said adding that positive thinking and improvement in governance will bring a huge change in the life of the people of Gwadar. “CSR activities do not mean spending a share of your profit, it’s about creating an environment which is not harmful for the society in any way,” he added.

Professor Dr. Abdul Razzaq Sabir, Vice Chancellor, University of Gwadar, in his welcome address earlier appreciated the initiatives of IPS for identifying challenges in the area. He said giving back to the society is the biggest responsibility of corporate sector. Working on development of human resources should be the biggest priority of the government and private sector. As Gwadar is expanding after development of the port, it is important to learn from China’s experience and expertise through student exchange program. “We must train our youth to become productive elements of Gwadar.”

He was of the view that CSR must be defined in local perspective. Local issues could be considered to resolve people’s genuine and basic issues and problems through CSR initiatives. He emphasized that engaging local community and civil society could result in better planning, befitting solutions and better implementation with local wisdom and participation.

Dr. Rashid Aftab, director Riphah Institute of Public Policy (RIPP) commented that reservations of locals must be addressed with evidence-based data sharing with all relevant stakeholders.

Dolat Khan, Registrar, University of Gwadar and Arsalan Ali, Head of Investments, Gwadar Development Authority (GDA) also spoke on the occasion. Media conclave and roundtable conference was attended by a number of senior journalists and academics from Karachi, Islamabad and Gwadar. The delegates also visited China-Pakistan Vocational and Technical Training Institute and other sites under CSR to witness the pace of progress. They interacted with the local students and teachers to observe their views.

Can secret talks between India and Pakistan yield any result?

It is believed that both India and Pakistan are busy in minimizing tension on the instructions of some external forces. This may bring a temporary calm for a while, but just can’t establish sustainable peace. The lingering on of Kashmir issue can be attributed to super powers fighting a sort of proxy wars in the region, including Afghan war going on for nearly twenty years.

Analysts say that now besides United States, China and Russia are also controlling the string. Ironically, these super powers don’t wish to engage in any direct encounter but want the proxies to hit strategic interests of each other.

Let everyone keep in mind that Russia and other Central Asian countries want access to warm waters, though Afghanistan and Pakistan. Similarly, China wants full control and security of projects being constructed under the auspicious of CEPC.

According to a Reuters news, top intelligence officers from India and Pakistan held secret talks in Dubai in January this year in a new effort to calm military tension over the disputed Himalayan region of Kashmir.

While the super powers are pursuing their agenda, hawks present in India, Pakistan and Afghanistan continue to play the role of ‘spoilers’. Ironically the status of these hawks keeps on changing from friend to foe to friend.

Having read the preamble, now let us talk about secret talks going on between India and Pakistan on the behest of United Arab Emirates or to be little rude China and United States.

Keeping a few points in mind that over the last 74 years Kashmir issue has not been resolved, both the countries have fought numerous wars and attained the status of atomic powers to stain supremacy on each other, while millions of people on both sides of the border live below the poverty line, maintaining peace and tranquility in the regions seems only diabolic thinking

Both the Pakistan and Indian governments have re-opened a backdoor diplomacy aimed at a modest roadmap to normalizing ties. Such meetings have taken place in the past too, especially during times of crises but never been publicly acknowledged.

 It is not loner a secret that Indian and Pakistan intelligence officials have been meeting for several months in third countries. It is believed that these meeting have been held in Thailand, Dubai and London between the highest level people.

There is a lot that can still go wrong, it is fraught that is why nobody is talking it up in public, we don't even have a name for this, it's not a peace process, one can call it a re-engagement.

"It’s better for India and Pakistan to talk than not talk, and even better that it should be done quietly than in a glare of publicity," said Myra MacDonald, a former Reuters journalist who has just published a book on India, Pakistan and war on the frontiers of Kashmir.

Analysts don't see these meeting going beyond a basic management of tensions, possibly to tide both countries over a difficult period - Pakistan needs to address the fallout of the US withdrawal from Afghanistan, while India has to confront a far more volatile situation on its disputed frontier with China.

Investment opportunities in Pakistan

It is an undeniable fact that Pakistan suffers from two contentious problems: 1) low savings and 2) limited opportunities for investment. All the successive governments have been making efforts to lure foreign investors. However, they fail to understand that if the local investors are shy no foreign investor would be keen in investing in Pakistan. The problem is further aggravated because per capita income is low and there is hardly any incentive for saving. Those who have some money want to become rich overnight but mostly fall in the trap of cheaters and ultimately loose whatever amounts they have. The successive governments have not been doing anything more than lip service and regulators can be termed ‘sleeping watch dogs’. If one looks at the history of financial scams taking place in Pakistan, only the regulators could be held responsible for those.

Lately, some of the cheats ripped off people and the event was termed ‘Modaraba Scam’. Interestingly media flashed headlines, which gave an impression as if the Modarabas listed at Pakistan Stock Exchange (PSX) were involved in the scam. In fact a few clerics belonging to KPK were the master minds, who cheated the innocent people. The amount involved is estimated from Rs6 billion to Rs45 billion. The most regrettable point is that the regulators failed in identifying the crisis, while it was brewing. According to a financial analyst, “State Bank of Pakistan (SBP) considered it an issue which pertained to Securities and Exchange Commission of Pakistan (SECP) and the high ups at the Commission had an opposite view”. Another analyst said, “The quantum of money involved is still not known because some of those having given the money to the cheaters preferred to remain silent and also didn’t lodge any claim because they couldn’t provide evidence of source of fund”.

As stated above there is little incentive for saving in the country, not only that the opportunities are limited, the investors are penalized by the government in one way or the other for making investment. To begin with, people having other sources of income have to pay tax, often at a fabulous rate, but the income of feudal lords is tax exempt because it is termed income from agriculture. It has been highlighted by experts repeatedly that that now business tycoons have also learnt the trick of clubbing income from other sources into income from agriculture.

It would not be out of context to cite two example, rate of tax applicable on the income of listed companies and tax charged on dividend income. The number of listed companies at Pakistan Stock Exchange (formerly Karachi Stock Exchange) is on constant decline because of merger and acquisitions and voluntary delisting. At an average the listed companies pay above 30% tax on their income and when they distribute dividend, on that income tax/withholding tax is charged. The rationale put forward is that listed company is a legal entity and shareholders are different, therefore both have to pay tax on their income. The propagators of this philosophy tend to forget that listed companies also pay taxes on import of machinery and raw material, GST on finished goods and effectively act as tax collection agents for the government. Therefore, not more than 5% tax should be charged on the income of listed companies. On top of all these listed companies are the providers of employment and also the earners of much needed foreign exchange for the country.

Investment in listed companies is still considered risky by the small investors, particularly after the global financial crisis of 2008. Unlike developed countries, Pakistan didn’t suffer from ‘sub-prime loans issue’. However, imposition of floor for a long time, did not allow the small shareholders to take an exit. On top of all shares kept by investors in subaccounts were sold by some of the brokerage houses that created the real havoc. This disheartened many investors of stock market, who pulled out their investment from capital market and invested it real estate, foreign exchange and precious metals.

Around the world mutual funds are considered a safe haven for the small investors. The logic is simple that asset management companies have substantial investments in various types of funds and that any decline in the income of on particular company does not affect the overall income of a particular type of fund and in turn the income of the unit holders. Along with this there is constant sale and redemption by the unit holders that save does not causes spikes in value of the asset under management (AUM). However, in various funds bulk of the investment is by corporates and large net worth investors that results in sudden rise and fall in the value of AUM.

The big investors also invest in real estate, foreign exchange, precious metals and energy products. One of the reasons for investing in these products is the lack of documentation, which allows the investors to evade tax payment. It is estimated that the documented economy constitutes only one-third of county’s total economy and size of undocumented economy is always increasing due to exemptions and evasions. There is always an incentive for the evasion because the incumbent governments have been offering amnesty schemes with regular intervals. It is also on record that billions of rupees are being sent out of Pakistan in the form of US dollars every year. According to certain estimates, funds kept by Pakistanis outside the country range from US$50 billion to US$500 billion. Bulk of this amount has been invested in real estate, international trading and manufacturing facilities. Some of the favorite destinations are India, UAE, Malaysia and Singapore. If the government of Pakistan is serious in accelerating GDP growth rate, it has to ensure that each penny saved is invested in Pakistan.

This article was originally published in Pakistan & Gulf economist

CPEC Myths and Realities

In Pakistan a lot is being said and talked about China Pakistan Economic Corridor (CPEC). While some analysts term it a mega initiative by Pakistan’s ‘time tested friend’, cynics label it ‘another East India Company in Making”. Another group says, “British Raj undertook many mega developmental project in Indian subcontinent but most of these were aimed at taking the raw materials from one of its bountiful colony to the home town and sell its finished products to one of the huge markets enjoying substantial purchasing power, as against this CPEC is aimed at ushering prosperity in the rural areas of Pakistan”.

China has one of the largest population and industrial base. The country is deficient in indigenous production of energy products. To keep the factories running it has to import huge quantities of crude oil and finished products. Bulk of these products comes from Middle East and North Africa (MENA). Carrying these through ships takes long time and the cost is also high. Presence of navies of various super powers, particularly the US Navy, poses serious security risks for the ship carrying oil to China. Therefore, another route has to be constructed that is short, efficient and cost effective. Taking goods from Gwadar to Kashgar though Pakistan does not pose serious problems because most of the road and rail network is already in place, which can be further improvised at a faster pace and with lesser expenditures.

China, the fast growing economic power has embarked upon ‘One Road, One Belt’ program, which consists of economic belt and maritime road. A closer look at the illustration hardly shows any road or railway track passing through Pakistan. This implies that Pakistan is not the sole beneficiary of this grand plan but will reap the benefits to the extent it is able to use the corridor. At the best it will collect transit fee and the roads may make any contribution in boosting Pakistan’s GDP. The experts having futuristic vision say that adding to power generation and developing robust infrastructure can help in containing electricity outages and post-harvest losses, which means additional contribution to country’s GDP. However, reaping benefits will totally depend on conceiving right policies and their implementation in letter and spirit. The overwhelming perception is that the Government of Pakistan has not come up with any ‘home grown plan’ to fully exploit the true potential of CPEC.  

It is being said that CPEC envisages investment ranging from US$46 billion to US$72 billion. However, only scanty details are available about the projects and component of equity and debt. The overwhelming perception is that bulk of the money will come as debt and Pakistan may face serious debt serving constraints. Drawing substantial and sustainable income from infrastructure projects is a long drawn process. Sri Lanka already faces such a problem. Therefore, local policy planners have to take swift remedial steps to avoid a similar situation. It may be true that CPEC may yield enormous benefits for Pakistan, but it is more important to take into account any potential fallout and come up with ‘Disaster Recovery Plan’.

One of the basic lessons taught in management sciences is having a recovery plan in case the original plan fails. This is unavoidable because Pakistan faces internal and external treats. Even after seventy years of independence Pakistan is surviving on aid, grants, and loans and on the crutches of multilateral donors, particularly International Monetary Fund (IMF).

The primary obstacle to the CPEC’s full implementation is security. To address Chinese concerns and ensure the safety of these projects, Pakistan has created a dedicated CPEC force, but even a force of that size may not prove substantial. Many of the constituent projects are being constructed in the areas having sanctuaries of terrorist and anti-state groups. Attacks on the work force or Chinese engineers could delay or derail the CPEC.

A decades-long insurgency simmers in Baluchistan, where a number of important CPEC projects are underway. The CPEC also faces domestic political opposition in Pakistan, with infighting between provinces and the central government over the allocation of investments. The lack of transparency surrounding the negotiated deals has heightened concerns and skepticism that only a select few, if any in Pakistan, will benefit from the investments. In case Pakistan is unable to provide sufficient security or address the concerns of domestic opponents, projects will have trouble getting off the ground and will fail to prompt follow-on investments or deliver commercial success.

On the external front, CPEC face threats from the United States, India and Afghanistan. Indian Prime Minister has already lodged protest with China. Washington is likely to join hands with India, having concerns about the CPEC, as it represents the leading edge of China’s expanding access to, and likely influence within Eurasia. Any direct intervention by the US or India could be costly, unwinnable and almost certainly counterproductive to other US goals in Pakistan and the region.

This article was originally published in Pakistan & Gulf Economist

Pakistani entrepreneurs seeking joint venture partners

For more than quarter of a century I have been working as economic analysts. Later on, I ventured into political economy and the new focus is geopolitical affairs. Ever since Pakistan and China have agreed to build China Pakistan Economic Corridor (CPEC) both the local and global investors are trying to understand the importance and economic implication of this project. Without going into too many details it may be said that CPEC is a game changer and those who get associated with the main and even peripheral projects now will enjoy the ‘early bird’ advantage.

By this time it has become evident that China is developing two routes to minimize the distance covered by its imports and exports. These two routes have been termed ‘Silk Routes’, one on land and the other in waters. Let one point be kept in mind that various roads/railway tracks already exist, which are now being interconnected. Similarly, ports are already operating in almost all the countries, though enjoying different levels of technology. Effectively China is creating interconnectivity and upgrading technologies under CPEC.

One of the most recent examples is the commencement of a rail service that passes through various countries and offers the ultimate connectivity between China and Turkey. On the sea front two new ports are being developed; Chabahar and Gwadar. Chabahar is located in Iran and Gwadar is situated in Pakistan. The key objective behind the construction of both the ports is to get access to land locked Central Asian countries, Russia and China. Other countries will also benefit from these ports and the biggest beneficiary is Afghanistan as it will get cost efficient connectivity for its transit trade.

If one looks at the map of the region, Pakistan can be rightly termed ‘natural corridor for trade and energy’ because two of the proposed mega gas pipelines; Iran-Pakistan-India (IPI) and Turkmenistan-Afghanistan-Pakistan-India (TAPI) will also pass through Pakistan. It is no secret that even today Pakistan offers the shortest and most cost efficient route to Afghanistan.

For ensuring the most efficient service, Pakistani entrepreneurs will have to focus on three key areas: 1) logistic, 2) warehousing and 3) collateral management services. I will admit it point blank that Pakistan is weak in all the three areas, mainly because of shortage of funds as well as lack of expertise. Therefore, the entrepreneurs are seeking joint venture partners, who have the capital as well as the expertise.

Pakistan’s central bank, with the help of multilateral donors, is also ready to offer loans on concessional interest rate. However, little success has been achieved as local entrepreneurs have not been able to get in touch with overseas investors. One of the reasons for the poor response from the overseas investors is that those are shy in investing in Pakistan, due to geopolitical condition of the region.

However, regional landscape is changing fast. China, Russia and United States seem to be arriving at the consensus that ‘enough is enough’ and for boosting the global economy policy must shift to cooperation from confrontation. Global downturn must be reversed and this will not be possible without establishing peace and tranquility in the region.

P.S. The foreign investors keen in locating joint venture partners in Pakistan are invited to contact us in locating a trustworthy business partner. They may send their queries at shkazmipk@gmail.com

Pakistan must address structural issues on top priority

Historically Pakistan and International Monetary Fund (IMF) has lived with each other, at times with comfort and at tome with some unease. While the IMF role as ‘lender of last resort’ has helped Pakistan in overcoming economic malice, the loan covenants are often seen by Pakistani’s rather stringent.

Ideally the ruling regime in Pakistan should be more careful in formulation of policies and implementing these in letter and spirit but the overall impression is that the successive governments sooner or later suffer from complacency. It may also be said that political agenda pushes economic agenda in the back ground. Many analysts strongly believe that condoning deviation may not be difficult had appropriate efforts were made. In other words these deviations are the result of not following the ‘IMF Recipe’.

A team of AKD Securities, Pakistan’s leading brokerage house, recently met the IMF Regional Representative for a discussion on Pakistan’s progress on the macro front in the context of the ongoing EFF program. After the meeting it has also released a report that has many takeaways.

While progress on reform agenda so far remains commendable, continued reform implementation post completion of the program was stressed, where energy crisis and low revenue collection continue to rank as high priority issue areas.

The IMF, though cognizant of likely delays, sees room for steady structural changes even post completion of the program based on higher GoP resolve. Benefits of low oil prices and earlier reforms have placed Pakistan in a macro sweet spot with economic indicators marking record levels.

Agreeing with the IMF, AKD team believes this opens room for addressing deeper structural issues that can help Pakistan sustain recent economic gains where key reform areas highlighted were: 1) exports sector revival, 2) tax base expansion and 3) efficient expenditure and resource allocation between federal and provincial governments.      

Key takeaways

Priority on energy and revenue: Key issue areas for reforms that retain the highest priority were Energy and Revenues expansion – both resonated by all participants. Resolution to the country’s energy problems was highlighted, particularly in the context of its impact on industrial growth. Also, revenue collection remains equally crucial where considerable focus should be directed towards structural changes both through a) regulatory/legislative action and b) operational changes in FBR/tax collection mechanisms.

Privatization to slowdown: The privatization program remains on agenda, however it is likely to stretch beyond the current program as political opposition in PIA’s strategic divestment and labor union concerns in case of DISCOs continue to be major hurdles. That said, recent road shows for DISCOs’ sell-off were regarded as a key positive. Analysts expect revision of current timeline in the upcoming IMF review report for December 2015. Moreover, with the current government resorting to populist decisions in the run up to next general elections (expected 2018), the brokerage house highlight heightened risks to PSE sell-offs.

Another program unlikely: With the current program effectively concluding in June 2016, rollover to another program remains unlikely on account of Pakistan’s stable Balance of Position position. However the Fund is likely to remain engaged in a consultative process with the GoP to monitor current program objectives, though without imposition of conditions/targets.

CPEC – lack of clarity lingers: The Fund views the landmark China Pakistan Economic Corridor (CPEC) agreement as largely positive, though details on nature of agreements remain sketchy and are yet to be factored in fiscal expectations/targets. Alongside, infrastructure projects need for investment in export oriented sectors was also noted. 

Key malicious US interests in Pakistan

For more than six decades Pakistan has been fighting proxy US war in the region. Those in power are reluctant in admitting this harsh reality. The US terms Pakistan front-line partner in war against terrorism. The country might have received peanuts in terms of military support but the focus of economic cooperation has remained India.

The US has been a major buyer of textiles and clothing but when it comes to outsourcing India is the preferred choice. The logic is that India is one of the biggest democracies, its economic policies are consistent and above all foreign investment in that country is more secure. Political instability and precarious law and order situation does not permit American investors to make any substantial investment in Pakistan.

In one of the previous blogs I have stated categorically that the US install and dislodges governments in various countries to pursue its foreign policy and more importantly establish its hegemony in any specific area. South Asia and MENA have remained prime focus, it was to counter communism in the past and now controlling natural resources, particularly oil.

An important point to be kept in mind is that the US first creates phantoms like Al Qaeda and ISIS, which get funds and arms to pave way for the entry of US combat forces under the disguise of UN approved assaults or peace keeping forces, the worst examples are Afghanistan, Iraq and Syria.

The facts of US policy become evident when one reads the details of briefing of Marine Corps General Joseph F. Dunford Jr. He currently heads the US Marine Corps and is the next chairman of the US Joint Chiefs of Staff. According to him the areas of divergent interest with Pakistan include “our views on the use of proxies and the importance of a positive and stable Pakistan-India relationship”.

He specified the US still has three key interests in Pakistan, averting Al Qaeda’s re-emergence, preventing the proliferation of nuclear weapons and promoting regional stability. He said that the US-led coalition and the Afghan government were closely watching the ISIS’s attempt to expand its reach to Afghanistan and Pakistan and were collaborating closely to prevent this threat from expanding.

The US-Pakistan relationship, according to general, was fundamental to US vital national security interests. The US needs to continue cooperation with Pakistan to defeat Al Qaeda, support Pakistan’s stability and achieve a lasting peace in Afghanistan.

Dunford said, “Regional partners have an important role to play in ensuring a stable, democratic Afghanistan. We have encouraged stronger ties between Afghanistan and Pakistan and have been pleased with their recent bilateral efforts to address their security concerns.”

Dunford said Pakistan had been, and remained, the largest recipient of the Coalition Support Fund. It is in US interests to have an enduring partnership with Pakistan. He expressed his commitment by saying “I will continue to evaluate the efficacy of the mil-to- mil cooperation we have with Pakistan and identify ways in which we can work with Pakistan to enhance regional stability.”

Do more mantra was also evident as Dunford said the US assistance to Pakistan had enabled operations in Afghanistan and operations against Al Qaeda and helped secure its strategic interests. “If confirmed, I will continue to work with the Pakistani military to ensure that they continue to do more.”

His statement has come at a time China is supporting Pakistan in the development of infrastructure under China Pakistan Economic Corridor (CPEC). One fears that the US once again wishes Pakistan to fight its proxy war rather than focusing of its economic development. For the implementation of projects under CPEC peace is the prime requirement, which can’t be achieved unless all the militants, be it foreign or funded by outsiders are weeded out.