Plans for a corridor stretching from the Chinese border to Pakistan’s deep water ports on the Arabian Sea date back to the 1950s, and motivated construction of the Karakoram Highway beginning in 1959. Chinese interest in Pakistan’s deep-water harbour at Gwadar had been rekindled by 2000, and in 2002 China began construction at Gwadar port which was completed in 2006. Expansion of Gwadar Port then ceased thereafter owing to political instability in Pakistan following the fall of General Pervez Musharraf.
The current form of the project was first proposed by Chinese Premier Li Keqiang and Nawaz Sharif on 22 May 2013 in Islamabad, resulting in the establishment of The Pak-China Economic Corridor Secretariat on 27 August 2013.
The China Pakistan Economic Corridor (CPEC) is a collection of projects currently under construction at a cost of $46 billion which is intended to rapidly expand and upgrade Pakistani infrastructure, as well as deepen and broaden economic links between Pakistan and the People’s Republic of China. The corridor is considered to be an extension of China’s ambitious proposed 21st century Silk Road initiative, and is considered central to China Pakistan relations.
While economic opportunities and development will largely benefit Pakistan, CPEC’s importance to China’s geopolitical and economic goals is reflected by the inclusion of the project as part of China’s 13th five-year development plan. Should all the planned projects be implemented, the value of those projects would be equal to all foreign direct investment in Pakistan since 1970, and would be equivalent to 17% of Pakistan’s 2015 gross domestic product. Pakistan estimates the corridor project will create some 700,000 direct jobs between 2015–2030 and add up to 2.5 percentage points to the country’s growth rate.
Infrastructure projects under the aegis of CPEC will span the length and breadth of Pakistan, and will eventually link the Pakistani city of Gwadar in southwestern to China’s northwestern autonomous region of Xinjiang via a vast network of highways and railways. Proposed infrastructure projects are worth approximately $11 billion, and will be financed by heavily-subsidized concessionary loans at an interest rate of 1.6% that will be dispersed to the Government of Pakistan by the Exim Bank of China, China Development Bank, and the Industrial and Commercial Bank of China.
As part of infrastructure projects worth approximately $11 billion, an 1,100 kilometre long motorway will be constructed between the cities of Karachi and Lahore, while the Karakoram Highway between Rawalpindi and the Chinese border will be completely reconstructed and overhauled. The Karachi–Peshawar main railway line will also be upgraded to allow for train travel at up to 160 kilometres per hour by December 2019. Pakistan’s railway network will also be extended to eventually connect to China’s Southern Xinjiang Railway in Kashgar. A network of pipelines to transport liquefied natural gas and oil will also be laid as part of the project, including a $2.5 billion pipeline between Gwadar and Nawabshah to transport gas from Iran.
Over $33 billion worth of energy infrastructure will be constructed by private consortia to help alleviate Pakistan’s chronic energy shortages, which regularly amount to over 4,500MW, and have shed an estimated 2-2.5% off Pakistan’s annual GDP. With approximately $33 billion expected to be invested in energy sector projects, power generation assumes an important role in the CPEC project. Over 10,400MW of energy generating capacity is to be developed between 2018 and 2020 as part of the corridor’s fast-tracked “Early Harvest” projects. Projects in Gwadar Port and City.
Gwadar Port has been partially operational since 2007.
Gwadar forms the crux of the CPEC project, as it is envisaged to be the link between China’s ambitious One Belt, One Road project, and its Maritime Silk Road project. In total, more than $1 billion worth of projects are to be developed around the port of Gwadar by December 2017.
Loans to the Pakistani Government
Approximately $11 billion worth of infrastructure projects being developed by the Pakistani government will be financed by concessionary loans, with interest rates of 1.6%, after Pakistan successfully lobbied the Chinese government to reduce interest rates from an initial 3%.The loans are subsidised by the government of China, and are to be dispersed by the Exim Bank of China and the China Development Bank. For comparison, loans for previous Pakistani infrastructure projects financed by the World Bank carried an interest rate between 5% and 8.5%, while interest rates on market loans approach 12%.
The loan money would be used to finance projects which are planned and executed by the Pakistani government. Portions of the approximately $6.6 billion Karachi–Lahore Motorway are already under construction. The $2.5 billion phase which will connect the city of Multan to the city of Sukkur over a distance of 387 kilometres has also been approved, with 90% of costs to be financed by the Chinese government at 1.6% interest rates, while the remaining 10% is to be financed by the Public Sector Development Programme of the Pakistani government.
The 487 kilometre portion of the Northern Alignment between Burhan and Raikot will be reconstructed at a cost of $920 million, and will be financed by the China Development Bank.
The long-planned 27.1 km long $1.6 billion Orange Line of the Lahore Metro is regarded as a commercial project project, and does not qualify for the Exim Bank’s 1.6% interest rate. It will instead by financed at a 2.4% interest rate after China agreed to reduce interest rates from an originally planned rate of 3.4%.
The $44 million Cross Border Optic Fiber Project, a 1,300 km long fibre optic wire connecting Pakistan and China, will be constructed using concessionary loans at an interest rate of 2%, rather than the 1.6% rate applied to other projects.
Special interest-free loans for Gwadar
The government of China in August 2015 announced that concessionary loans for several projects in Gwadar totalling $757 million would be converted 0% interest loans. The projects which are now to financed by the 0% interest loans include: the construction of the $140 million Eastbay Expressway project, installation of breakwaters in Gwadar which will cost $130 million, a $360 million coal power plant in Gwadar, a $27 million project to dredge berths in Gwadar harbour, and a $100 million 300-bed hospital in Gwadar. Pakistan will only repay the principle on these loans.
In September 2015, the government of China also announced that the $230 million Gwadar International Airport project would no longer be financed by loans, but would instead be constructed by grants which the government of Pakistan will not be required to repay.
Loans to private consortia
$15.5 billion worth of energy projects are to be constructed by joint Chinese-Pakistani firms, rather than by the governments of either China or Pakistan. The Exim Bank of China will finance those investments at 5–6% interest rates, while the government of Pakistan will be contractually obliged to purchase electricity from those firms at pre-negotiated rates.
As an example, the 1,223MW Balloki Power Plant does not fall under the concessionary loan rate of 1.6%, as the project is not being developed by the Pakistani government. Instead, it is considered to be a private sector investment as its construction will be undertaken by a consortium of Harbin Electric and Habib Rafiq Limited after they successfully bid against international competitors. Chinese state-owned banks will provide loans to the consortium that are subsidised by the Chinese government. In the case of the Balloki Power Plant, state-owned banks will finance the project at an interest rate of 5%, while the Pakistani government will purchase electricity at the lowest bid rate of 7.973 cents per unit.
Asian Development Bank assistance
While the E-35 expressway is considered to be a crucial part of the route between Gwadar and China, the E35 will not be financed by CPEC funds. The project will instead be financed by the Asian Development Bank.
The N70 project is not officially a part of CPEC but will connect the CPEC’s Western Alignment to the Karachi-Lahore Motorway at Multan. The project will be financed as part of a $195 million package by the Asian Development Bank announced in May 2015 to upgrade the N70 National Highway and N50 National Highway. In January 2016, The United Kingdom’s Department for International Development announced a $72.4 million grant to Pakistan for roadway improvements in the province of Balochistan, thereby reducing the total Asian Development Bank loan from $195 million to $122.6 million.
The M-4 Motorway between Faisalabad and Multan is not to be financed by the Chinese government as part of CPEC, but will instead be the first infrastructure project partially financed by the Asian Infrastructure Investment Bank, and will be co-financed along with the Asian Development Bank for a total of approximately $275 million. Portions of the project will also be funded by a $90.7 million grant announced in October 2015 by the government of the United Kingdom towards the construction of the Gojra-Shorkot section of the M4 Motorway project.
Controversy over finances
In addition to the aforementioned issues, some sources have inappropriately suggested that the interest rate for CPEC related loans would be high, with one Indian source suggesting that Pakistan had unwittingly accepted loans that would “be offered at very high rates of interest,” although the actual interest rates were negotiated prior to acceptance, and for most projects will be 1.6% Several articles in Pakistan have criticised the project’s finances as being shrouded in mystery, while one article suggested that “there is far too much secrecy and far too little transparency.” The Private Power and Infrastructure Board has also been accused of irregularities in the approval process for coal power plants and the tariffs at which Pakistan is contractually obliged to purchase electricity from those plants, with special concern regarding potential irregularities in the tariff approved for the 300MW coal power plant to be built in Pind Dadan Khan by China Machinery Engineering Corporation.
CPEC is considered economically vital to Pakistan in helping it drive economic growth. China has expressed concern that some separatist groups in Xinjiang may be collaborating with insurgents in Pakistan, and has expressed a desire to strengthen security ties.
Opposition from Baloch nationalists
Baloch nationalists have expressed opposition to the project, stating that any large-scale development in the province would eventually lead to local residents “losing control” over natural resources. Other Baloch nationalists view it as a “conspiracy” that would stimulate migration of people from other provinces and make the Baloch a minority in the province.
Former Chief Minister of Balochistan province, Akhtar Mengal, suggested at a political rally in November 2015, that execution of CPEC projects would eventually result in ethnic Baloch being denied entry into the city, though no statements have been made in either Pakistan or China that would suggest such an outcome. He did, however, clarify that he would not oppose development projects in the province that he believed would uplift the plight of local residents. Shortly thereafter, the Pakistani government announced its intention to establish a training institute named Pak-China Technical and Vocational Institute at Gwadar which is to be completed by March 2016 at the cost of 943 million rupees to impart skills to local residents to train them to operate machinery at the port.
Indian objections to CPEC
The Government of India, which shares tense relations with Pakistan, regards portions of the CPEC project negatively as they pass through disputed territory which is claimed by India. Former Indian ambassador, Phunchok Stobdan, alleged that China and Pakistan intended to develop the corridor not just for its economic benefits, but also is motivated by the “strategic intent of besieging India,” though he also stated that India can do little to scuttle CPEC, and that avoiding China’s One Road One Belt project altogether would be to the detriment of India.
During the visit of Indian Prime Minister Narendra Modi to China in 2015, the Indian Foreign Minister, Sushma Swaraj reportedly told Chinese Premier Xi Jinping that projects passing through Gilgit-Baltistan are “unacceptable” as they require road construction in territory India regards as its own. India’s Foreign Secretary Subrahmanyam Jaishankar also confirmed that the issue had been raised with the Chinese government on the trip.
The Indian Ministry of External Affairs in May 2015 also summoned the Chinese envoy in New Delhi to lodge India’s opposition to the project. The Chinese Premier dismissed the concerns, describing CPEC as a “commercial project” that would not target any third party.
In March 2016, Indian Foreign Secretary Subrahmanyam Jaishankar, in reference to China’s ambitions One Road One Belt project and CPEC, stated that India’s vision of Asian connectivity was that of a consultative process rather than that of “unilateral decisions,” and that they should not “add to regional tensions.”
Despite objections, segments of the Indian public, as exemplified by former Indian Ambassador Melkulangara Bhadrakumar, regard the project as in India’s interest vis-a-vis Central Asia, and warn that India might “lose heavily” were India to remain opposed and isolated from the project.
In March 2016, Pakistan announced that it had arrested a suspected spy from India’s Research and Analysis Wing, Kulbhushan Yadav, who Pakistan accused of entering Pakistan from Iran specifically to destabilise regions in Pakistan’s Baluchistan province to hinder implementation of CPEC projects.