Pakistan and China: CPEC’s journey from glittering ambition to virtual stall

The story so far: Seeking urgent funds to the tune of $65 billion via infrastructure investment, Pakistan’s caretaker Prime Minister Anwaarul Haq Kakar,on October 20, completed a five-day trip to Beijing. He was also attempting to allay China’s demands regarding the China-Pakistan Economic Corridor (CPEC), the ambitious infrastructure project spearheaded by Beijing from 2015 that has reached an impasse due to disagreements over the Gwadar port in Balochistan.

Meeting Chinese President Xi Jinping on the sidelines of the third Belt and Road Forum for International Cooperation, Mr. Kakar pledged that Islamabad would ‘not allow anything’ to undermine ties with Beijing, Pakistani publication Dawn reported. Terming the China-Pakistan partnership as ‘made in heaven’, he assured that Islamabad ‘blindly trusted China’ and was committed to CPEC and peace in the region.

Signing over 20 agreements with China, Mr. Kakar aims to boost his cash-starved nation’s coffers as Islamabad heads to another election in January 2024. The inked pacts include speedy development of the Gwadar port and its auxiliaries to facilitate regional connectivity, keeping the Khunjerab border (dividing China’s Southern Xinjiang and Pakistan Occupied Kashmir (PoK)‘s Gilgit-Baltistan) open throughout the year, construction of the New Gwadar International Airport, the Pakistan-China Friendship Hospital, a desalination plant and other projects.

Attempting to break the impasse , Mr. Xi sought effective security measures to protect the hundreds of Chinese workers and engineers working on CPEC infrastructure projects from Pakistan-based militant attacks. CPEC, a part of China’s Belt and Road Initiative (BRI), is set to receive a lion’s share of the 350-billion-yuan ($47.9 billion) financing windows to be set up by China Development Bank and the Export–Import Bank of China.

The move comes just a month after Beijing refused to further expand cooperation with Islamabad in areas of energy, water management, and climate change under CPEC.

Origins of CPEC & agreements signed

The original idea for bilateral investment in infrastructure projects in Pakistan began in 2001 when China agreed to finance the construction of Gwadar port and the Makran Coastal Highway which connected Gwadar and Karachi. Soon the port became functional and Hong Kong-based China Overseas Ports Holding Company began freight operations from there.

This success gave way to a bigger ‘economic corridor’ project when then Chinese President Li Keqiang visited Islamabad in 2013 and met his counterpart Nawaz Sharif to kickstart China’s One Belt One Road (OBOR)— an initiative to revive the 15th century trade route connecting China to West Asia and Europe via land and sea. Apart from Pakistan, Mr. Li had visited India, Bangladesh and Myanmar to rope them into OBOR.

CPEC routes from Pakistan’s Gwadar port in PoK to China’s Kashgar in Xinjiang district

CPEC routes from Pakistan’s Gwadar port in PoK to China’s Kashgar in Xinjiang district

CPEC — one of OBOR’s largest investments — was formally launched in 2015 during Chinese President Xi Jinping’s two-day state visit to Pakistan. Signing over 50 projects worth $45 billion, China set up the ‘Silk Road Fund’ to invest in CPEC projects planned till 2030. The main project was establishing the corridor connecting Pakistan’s Gwadar port in Balochistan to China’s Kashgar in south-western Xinjiang region.

Apart from this connecting corridor, a number of power projects including the 720MW Karot hydropower project and several special economic zones are to be developed under CPEC. Existing facilities of Thar coal-fired power plants (1980 MW) will also be improved using the $33.79 billion ear-marked in the Silk Road Fund for energy projects. Other power projects to be developed are— imported coal power plants at Port Qasim (1,320MW), Gwadar-Nawabshah natural gas pipeline, wind farm at Jhimpir (260 MW), solar park in Bahawalpur (900 MW), and two Thar coal mining blocks.

File photo: A general view of Gwadar port in Gwadar, Pakistan, October 4, 2017.

File photo: A general view of Gwadar port in Gwadar, Pakistan, October 4, 2017.
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Short-term projects are the Havelian-Islamabad link of the Karakoram Highway ($930m), Gwadar International Airport ($230m), Gwadar port ($66m), and a fibre optic project ($4m), while existing projects to be upgraded are the 1,681-km-long Peshawar-Lahore-Karachi railway line ($3.7billion) and Lahore Mass Transit system ($1.6 billion).

The Silk Road Fund, which manages the investment, is being financed by a consortium of Chinese banks including China Exim Bank, Industrial and Commercial Bank of China, and the China Development Bank. The projects themselves are undertaken by various Chinese firms in collaboration with Pakistani companies. For example, United Energy Pakistan Wind Power constructed the Jhimpir wind project with the China Development Bank Corporation financing it.

Teething troubles

The CPEC had teething troubles in 2016 as several projects ground to a halt over confusion on funding, contractor selection, delay in bidding process, differences over tax exemption, and obtaining of no-objection certificates (NOC) from ministries and military for key energy projects.

Gwadar port – one of the key CPEC projects – faced multiple issues, starting with water supply. The Rs. 11.2-billion project to supply, treat and distribute water to the port by connecting the Swad and Shadikaur dams was delayed as the port authorities were unclear if the project’s funding was via a grant, an interest-free loan or a commercial loan from China. This project is currently in its final phase of construction.

Similarly, the Rs.9.9-billion project to upgrade the Pak-China Friendship Hospital had faced a delay in the commissioning of the feasibility report, cost estimation, and supply of equipment for the existing 50 beds. As of date, only one of the six medical blocks with 50 beds each is functional.

300 MW Gwadar coal-fired power plant plan

300 MW Gwadar coal-fired power plant plan

Other projects like the 600 MW Gwadar coal-fired power plant, the Gwadar Smart Port City Master Plan, the 1320 MW coal-fired plant at Port Qasim, and the 1320MW Sahiwal Coal Power Project too ran into financial issues over uncertainty about project funding. Power projects were also faced with additional issues of synchronisation with the National Power Grid, which the National Transmission and Dispatch Company was hesitant to allow. While the Sahiwal and Port Qasim plants became operational between 2017 and 2019, the Gwadar power plant has stalled as Pakistan seeks to use domestic coal as fuel while China has insisted on using imported coal.

Hydropower projects like the Sukki Kinari Project in Khyber Pakhtunkhwa, the Karot project in Punjab and the Kohala Project in PoK ran into issues over slow land acquisition by the respective State governments. All of the above projects are currently under the final phase of construction and are scheduled to be completed by 2024.

These projects are financed by commercial Chinese loans and are insured by the China Export and Credit Insurance Corporation (Sinosure) against non-payment, guaranteed by the Pakistan government. Additionally, Sinosure levies a 7% debt servicing fee, a yearly varying interest, and financing fee, making the entire project a huge economic burden on the debt-ridden nation. Several power and infrastructure experts have argued that the high costs incurred in construction will diminish any gains from increased power production.

Opposition from locals & militants

The biggest thorn in CPEC’s side is the intense protests by locals in Balochistan against the Gwadar port city project. Land acquisition by the China Overseas Ports Holding Company for the port project, which spans 2,90,000 acres, has been difficult in the face of stiff opposition by the local residents. Fearing loss of local livelihoods such as fishing, and resisting the use of unskilled Chinese labour instead of Pakistani locals, Baloch residents have refused to sell land to the Chinese for building the port. Moreover, Gwadar port has been leased to the China Overseas Ports Holding Company by Pakistan government, with Beijing reaping 91% of the profits while Islamabad gains only 9%. This has also led to rise in anti-China sentiments among Baloch locals.

Complicating issues further, the Pakistani government has resorted to grabbing lands from locals, forcing them to resettle elsewhere. This has led to a rise in insurgency in Balochistan led by the Balochistan Liberation Front (BLF), Baloch Republican Army (BRA), and the Baloch Republican Guards (BRG), which seek independence for the district. These militant groups has carried out several attacks on Pakistani Army officials providing protection to Chinese workers.

Similarly, in Sindh province, locals see CPEC as an attempt by the Punjabi-dominated Pakistan army to infringe on Sindh locals’ land and rights. Insurgent and separatist outfit Sindhudesh Revolutionary Army (SRA) too has joined the Balochi insurgents in attacking Chinese workers and Pakistan army, viewing CPEC as an attempt to block local access to the Gwadar and Badin ports.

Local residents and rescue workers gather at the site of bus accident, in Kohistan Kohistan district of Pakistan’s Khyber Pakhtunkhwa province, Wednesday, July 14, 2021. A bus carrying Chinese and Pakistani construction workers on a slippery mountainous road in northwest Pakistan fell into a ravine Wednesday, killing a dozen of people, including Chinese nationals, and dozens were injured, a government official said

Local residents and rescue workers gather at the site of bus accident, in Kohistan Kohistan district of Pakistan’s Khyber Pakhtunkhwa province, Wednesday, July 14, 2021. A bus carrying Chinese and Pakistani construction workers on a slippery mountainous road in northwest Pakistan fell into a ravine Wednesday, killing a dozen of people, including Chinese nationals, and dozens were injured, a government official said

The two Thar coal fields, the Lahore-Karachi highway, the Karachi-Peshawar high speed rail link and the Hyderabad-Multan-Havelian Dry Port have also been hindered by attacks, civilian protests and slow land acquisition.

Recently in August, two militants were killed after they attacked a convoy carrying Chinese workers to Gwadar port. While no Chinese national was hurt in this attack, three Chinese academics and their Pakistani driver were killed in April 2022 by a suicide bomber in Karachi University. Similarly in 2021, five people were killed at a luxury hotel in Quetta hosting the Chinese Ambassador. The attack was claimed by ,Tehrik-e-Taliban Pakistan (TTP), which is active in South Waziristan. In another attack in 2021, 12 people – including nine Chinese workers – were killed in a bomb blast on a bus carrying staff to the Dasu dam site.

India’s opposition to CPEC

Since its inception, India has opposed CPEC as most of its projects run through areas in Pakistan-occupied-Kashmir (PoK). Cutting through Gilgit-Baltistan, CPEC projects link Balochistan to China’s Xinjiang region. New Delhi has always maintained that PoK was an integral part of India and has been illegally occupied by Pakistan since 1947.

Moreover, since the Taliban took over power in Afghanistan, they have expressed an interest in joining CPEC — a bid to tap into the mineral-rich Balochistan and also strengthen its ally TTP. India has vehemently opposed this move, stating that “a proposed participation of third countries in so called CPEC projects directly infringes on India’s sovereignty and territorial integrity.”

Disagreements between China andPakistan

In November 2017, China and Pakistan differed over one of CPEC’s biggest projects, the $14-billion Diamer Basha Dam, with the project ultimately being cancelled. Islamabad stated that China had imposed harsh conditions for financing the project — total ownership of the construction, and operation and maintenance of the dam along with approval for another operational dam.

Photo of Karakoram Highway in PoK

Photo of Karakoram Highway in PoK

A month later, China stopped funding three road projects — the 210-km Dera Ismail Khan-Zhob Road worth Rs 81 billion, the 110-km Khuzdar-Basima Road worth Rs 19.7 billion, and the 136-km Karakoram Highway worth Rs 8.5 billion — over suspicions of corruption. Though the funds had been cleared by the 6th Joint Cooperation Committee (JCC) meeting, China stopped the funding stating that ‘new guidelines’ for the release of the funds would be issued.

In a retaliatorymove, in May 2018, the Pakistan National Assembly’s Standing Committee ordered an inquiry into China Overseas Ports Holding Company (Pakistan) — the lessee of Gwadar port — claiming that it had been operating without valid security clearance. The port construction, already slow due to local resistance, virtually stalled. Chinese authorities tried directly contacting Balochi leaders, snubbing the Pakistan government itself. Defence experts see this subversion as Beijing’s attempt to establish a military or naval base in Gwadar to gain a strategic advantage over India.

China also complicated the Gwadar port issue by insisting on Yuan as a legal tender in the region, though not in rest of Pakistan. This demand was refused twice by the Pakistan Central Bank, which later allowed Yuan to be used for bilateral trade and investment activities.

In 2022, China refused to further expand cooperation with Pakistan in the areas of energy, water management, and climate change under CPEC. According to the minutes of the 11th JCC meeting, this was owing to the “challenges that both the sides are facing in deepening the economic ties.” Moreover, Beijing did not agree to measures proposed by Islamabad in energy, water management, climate change and tourism in Gilgit-Baltistan, Khyber-Pakhtunkhwa, PoK and the coastal areas. Beijing also refused to set up a new joint working group on water resources management and climate change and a 500kv transmission line from Hub to Gwadar to link the city to the national grid.

Pakistan caretaker PM Anwaar ul Haq meets Chinese President Xi Jinping in Beijing on October 19, 2023

Pakistan caretaker PM Anwaar ul Haq meets Chinese President Xi Jinping in Beijing on October 19, 2023

Beijing also refused several other proposed ventures including a South-North gas pipeline project, an underground gas storage project, a national seismic study for sedimentary areas, joint exploration, development, and marketing of metallic minerals, and a policy framework for coal gasification for fertiliser projects based on Thar coal. On the other hand, Islamabad has conceded to forgo usage of Thar coal in the 300MW Gwadar Power Plant and use imported coal instead, delivering a major blow to its own energy security and ballooning current deficit. It has also promised to ensure timely exchange of U.S. dollars for CPEC power projects to buy necessary fuels.

Impasse and road ahead

With the recent visit to Beijing by caretaker PM Anwaarul Haq Kakar, Islamabad is attempting to restart funding for its key projects. Apart from vowing to keep the Khunjerab border open throughout the year, both sides are yet to find any breakthrough on the issues dragging down the progress of the CPEC. While Mr. Kakar and Mr. Xi reviewed the progress of the New Gwadar International Airport and the Pak-China Friendship Hospital, the development of Gwadar port itself remains unresolved. With Pakistan polity going through churn, China will await a new administration’s arrival next year to revive CPEC again.

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