For the regular visitor, Pakistan appears to have a vibrant economy. Flights are busy and hotels often see nearly full occupancy. Economic data support this observation with The World Bank predicting the Pakistani GDP growth rate expected to rise to 4.8% in 2017 and will accelerate modestly through to 2019. What is behind this? To a large extent it is driven by Chinese investment.
The China-Pakistan Economic Corridor (CPEC) is creating opportunities for investment through the advancement of key projects by the Chinese and Pakistani governments along a 3,000 kilometre route between the two countries.
A part of the Belt and Road initiative, CPEC is one of six economic corridors along the Silk Road Economic Belt and the 21st Century Maritime Silk Road.
The flagship initiative consists of a range of developmental projects connecting Kashgar in Xinjiang, China to Gwadar in Balochistan, Pakistan, including the development of roads, oil and gas pipelines, power stations, cables and airports. It is expected to be completed by 2030. In addition, CPEC also aims to increase cooperation between the two countries in other areas such as science and technology, agriculture, tourism and culture.
With the objective to strengthen economic ties between China and Pakistan, the respective governments hope that the collaboration will also enhance the region’s cohesiveness, accessibility and prosperity.
The first proposals for CPEC began in 2014 when the President of Pakistan, Mamnoon Hussain, visited China to discuss plans for an economic corridor in Pakistan. Following further discussions between Pakistan Prime Minister Nawaz Sharif and Chinese Premier Li Kequiang in November 2014, the Chinese government announced its intention to finance Chinese companies as part of a US$45.6 billion plan for energy and infrastructure projects. The CPEC Agreement was signed on 20 April 2015, and the two countries agreed to jointly undertake the development of these projects in Pakistan.
Some of the major projects under CPEC include:
Energy: Energy sector projects to tackle an electricity generation shortfall in Pakistan, such as the implementation of the “Early Harvest” scheme to develop over 10,400MW of energy generating capacity, the construction of Quaid-e-Azam Solar Park (the world’s largest solar power plant near Bahawalpur) and the US$2.4 billion 1,320MW coal-fired power project by China Power International Holding and Hub Power Company.
Railway: Railway projects to upgrade the Pakistani railway system, including an overhaul of the Main Line 1, Main Line 2 and Main Line 3 Railways.
Roads: Road projects financed by China to expand and upgrade the Pakistani transportation infrastructure, such as reconstructing the Pakistani portion of the Karakoram Highway (which is also known as the China-Pakistan Friendship Highway connecting Xinjiang and Gilgit-Baltistan across the Karakoram mountain range), and expanding and upgrading sections of the Eastern Alignment and the Western Alignment, which are corridors for cargo transport.
Infrastructure: Infrastructure works to expand the Gwadar Port and to construct a new international airport in Gwadar.
Mining: Pakistan and China have signed financing agreements amounting to approximately US$1.95 billion for the development of the Thar Block II 3.8 MT/A coal mining project and associated 2x330MW coal-fired power plant to be developed in the Thar region of Pakistan. The project is expected to be commissioned in 2018.
Mayer Brown JSM is currently advising the project company on the development and project financing of the 1,320MW coal fired independent power project located at Hub, Balochistan, Pakistan, one of the landmark projects along the China-Pakistan Economic Corridor. Hub, an industrial estate in Balochistan province, is 56 kilometres from Karachi – Pakistan’s port city and its financial centre. With an estimated project cost of US$2.4 billion, it will be one of the biggest private-sector investments in Pakistan and one of the largest project financing deals along CPEC.
The project sponsors are comprised of China Power International Holding, a wholly owned subsidiary of State Power Investment Corporation and the Hub Power Company, one of Pakistan’s largest independent power producers. State Power Investment Corporation is a newly established entity through the merger between China Power Investment Corporation and State Nuclear Power Technology Corporation, which formed one of China’s largest state-owned power companies.
This transaction is a key part of CPEC and the broader Belt and Road initiative, and was identified as a priority project on President Xi Jinping’s agenda in his last official visit to Pakistan in 2015. The power plant will be a vital part of Pakistan’s energy supply chain and will ease the electricity shortages in the country, which has traditionally been very reliant on heavy fuel oil and (now dwindling) domestic gas.
It certainly appears that CPEC is driving the development of infrastructure in Pakistan. In a period when much of the international community was sceptical of investment into the country, China stepped into the gap providing much needed capital and Chinese companies are profiting from these investments.
Nathan Dodd is a partner in the Singapore office of Mayer Brown JSM. He can be contacted on +65 6327 0235 or by email at [email protected]