Pakistan Discovers the High Cost of Chinese Investment

A new report sheds light on the true costs of the China-Pakistan Economic Corridor for Pakistan.

Pakistan’s desire to main­tain strate­gic rela­tions with China has result­ed in the $62 bil­lion China-Pakistan Economic Corridor (CPEC), a set of infra­struc­ture projects, being mired in insuf­fi­cient transparency.

But a Committee formed by Pakistani Prime Minister Imran Khan to exam­ine the caus­es for the high cost of elec­tric­i­ty to Pakistani con­sumers has lift­ed the lid on cor­rup­tion involv­ing Chinese pri­vate pow­er pro­duc­ers in Pakistan.

The report reveals that the Huaneng Shandong Ruyi (Pak) Energy (HSR) or the Sahiwal and the Port Qasim Electric Power Company Limited (PQEPCL) coal plants under CPEC inflat­ed their set-up costs.

For Pakistan’s cit­i­zens, who are always told how China is their most reli­able friend in the world, it was a shock to dis­cov­er that China does busi­ness mer­ci­less­ly and unscrupulously.

Successive civil­ian gov­ern­ments and Pakistan’s mil­i­tary have looked upon China as their prin­ci­pal backer against India.

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China’s con­sis­tent strate­gic sup­port, includ­ing help with Pakistan’s nuclear pro­gram, is often held out by Pakistan’s mil­i­tary estab­lish­ment favor­ably in con­trast with the more con­di­tion­al Pakistani alliance with the United States.

But it seems now that China is not in Pakistan to help its peo­ple but rather as a preda­to­ry eco­nom­ic actor.

The 278-page report by the “Committee for Power Sector Audit, Circular Debt Reservation, and Future RoadMap” list­ed mal­prac­tices to the tune of 100 bil­lion Pakistani rupees ($625 mil­lion) in the inde­pen­dent pow­er gen­er­at­ing sec­tor, with at least a third of it relat­ing to Chinese projects.

Given the close ties between CPEC and the all-pow­er­ful Pakistan mil­i­tary — the CPEC Authority is cur­rent­ly chaired by Lt. General Asim Saleem Bajwa, who is also the Prime Minister’s Special Assistant on Information and Broadcasting — the Committee tread­ed soft­ly in rela­tion to the Chinese projects.

According to the committee’s report, “excess set-up costs of Rs. 32.46 bil­lion (approx­i­mate­ly $204 mil­lion) was allowed to the two coal-based [Chinese] plants due to mis­rep­re­sen­ta­tion by spon­sors regard­ing [deduc­tions for] the ‘Interest During Construction’ (IDC) as well as non-con­sid­er­a­tion of ear­li­er com­ple­tion of plants.”

The inter­est deduc­tion was appar­ent­ly allowed for 48 months where­as the plants were actu­al­ly com­plet­ed with­in 27–29 months lead­ing to enti­tle­ment of an excess Return on Equity (RoE) of $27.4 mil­lion annu­al­ly over the entire project life of 30 years in the case of the Sahiwal plant.

The esti­mat­ed excess pay­ment, keep­ing in mind the 6 per­cent annu­al rupee depre­ci­a­tion against the dol­lar, works out to a whop­ping Rs. 291.04 bil­lion (approx­i­mate­ly $1.8 billion).

The Chinese com­pa­ny HSR claimed IDC based on a long-term loan at the rate of LIBOR +4.5 per­cent for the length of the entire con­struc­tion peri­od, even though it bor­rowed no mon­ey dur­ing the first year of con­struc­tion and used only short-term loans at sub­stan­tial­ly low­er inter­est rates dur­ing the sec­ond year.

The mag­ni­tude of prof­i­teer­ing by the Chinese com­pa­nies is incom­pre­hen­si­ble. The two projects exam­ined by the Pakistani experts’ Committee were worth $3.8 bil­lion at the time of their launch. The Committee found over­payments of Rs. 483.64 bil­lion, which amounts to $3 bil­lion at cur­rent rates of exchange.

This includes over­pay­ment of Rs. 376.71 bil­lion (approx­i­mate­ly $2.3 bil­lion) to HSR and Rs. 106.93 bil­lion (approx­i­mate­ly $672 mil­lion) to PQEPCL on account of excess set-up cost, excess return due to excess set-up cost in 30 years, and excess return due to mis­cal­cu­la­tion in Internal Rate of Return (IRR).

In its report, the Committee rec­om­mend­ed that Rs. 32.46 bil­lion (approx­i­mate­ly $204 mil­lion) be deduct­ed from the project cost of PQEPCL and HSR; the return pay­ment for­mu­la be cor­rect­ed to reflect actu­al con­struc­tion time; and Tariff of PQEPCL and HSR be adjust­ed accordingly.

Under the cur­rent for­mu­la, in two years of oper­a­tion, HSR has already recov­ered 71.18 per­cent of its orig­i­nal equi­ty invest­ed where­as PQEPCL has recov­ered 32.46 per­cent of its orig­i­nal equi­ty in the first year of operation.

This is over and above the prof­its that the com­pa­nies would have made with­out sub­terfuge. Imagine the return the Chinese will gen­er­ate on the $62 bil­lion CPEC projects. These num­bers are way too large to have been missed as over­sight or malfea­sance of indi­vid­u­als with­in the com­pa­nies and their Pakistani counterparts.

The expe­ri­ence of the Sri Lankan and Maldives gov­ern­ments sug­gests that these over­pay­ments are gen­er­at­ed with the com­plic­i­ty of lead­ers in the Pakistan gov­ern­ment and the loot shared by all parties.

Pakistan’s econ­o­my has been tee­ter­ing on the verge of bank­rupt­cy for some time and the COVID-19 pan­dem­ic has made the sit­u­a­tion even worse.

Instead of reform­ing their country’s poli­cies, Pakistan’s lead­ers, once again, sought debt restruc­tur­ing and waivers on account of the pan­dem­ic, just as they pre­vi­ous­ly sought inter­na­tion­al assis­tance as a reward for fight­ing terrorism.

But expect­ing the inter­na­tion­al com­mu­ni­ty to repeat­ed­ly bail Pakistan out from one eco­nom­ic cri­sis after the oth­er is unre­al­is­tic. Massive mil­i­tary expen­di­ture, deep root­ed cor­rup­tion, and lack of account­abil­i­ty are at the heart of Pakistan’s peren­ni­al and ever widen­ing gulf between rev­enue and expenditure.

Now, it seems, Chinese invest­ments have become a new lia­bil­i­ty. The International Monetary Fund (IMF) has been push­ing Pakistan’s offi­cials to raise tax­es and pow­er tar­iffs, effec­tive­ly ask­ing the Pakistani pub­lic to foot the bill for China’s rapa­cious practices.

The United States and Western finan­cial insti­tu­tions should not help Pakistan’s rul­ing elites in their own and China’s preda­to­ry behav­ior. The peo­ple of Pakistan deserve better.

Husain Haqqani, direc­tor for South and Central Asia at the Hudson Institute, was Pakistan’s ambas­sador to the United States from 2008 to 2011.

Original arti­cle: THE DIPLOMAT