Connectivity is an old game that great nations have played since times immemorial. To sustain its empire, Rome supposedly paved 55,000 miles of roads and built aqueducts across Europe. It is China’s turn to play this game now. Discussions on connectivity should address not only the physical infrastructure aspects but also the institutional, financial, commercial, legal, and management issues. International collaborative projects demand statecraft and sagacity of a unique order to reconcile different points of view.
The China-Pakistan Economic Corridor (CPEC) is a multi-billion-dollar strategic project that connects the Maritime Silk Road and the Silk Road Economic Belt, also known as “One Belt, One Road” (OBOR). It is an ambitious geostrategic plan to carve out a combination of continental and maritime influence. The aim of the project is to link northwest China with ports in the Arabian Sea via a road and rail corridor. It provides China the shortest and quickest access to the Arabian Sea and the Persian Gulf. Through CPEC, which includes Gwadar Port in the restive Balochistan province of Pakistan and construction in disputed Kashmir, China will project its power in the Indian Ocean Region. Artificial islands created by China in the South China sea and ports such as Hambantota, Karachi, Gwadar, and even Djibouti need to be viewed as part of one continuum.
Before looking at CPEC in detail, it is desirable to have a broad understanding of the genesis of OBOR. China realized that when its foreign direct investment – manufacture – export-driven growth model plateaued, it would have an over-capacity challenge, especially in the infrastructure industry; an idle industrial and financial capacity available for deployment; and an infrastructure-hungry Asia waiting to build projects. This was the genesis of OBOR. From the projects announced and undertaken, it can be surmised that OBOR will help China upgrade its industry by gradually moving its low-end manufacturing to other countries and taking pressure off industries that suffer from an excess capacity problem, thereby reducing the supply glut at home. China is deftly converting its domestic economic liabilities into its foreign economic and diplomatic assets.
According to Chinese President Xi Jinping’s statements, CPEC has four separate sections: energy, infrastructure, Gwadar, and industrial cooperation. Surprisingly, Gwadar, which only constitutes a small percentage of total investments, has found a mention in Xi’s categorization. The projects that form part of Gwadar include the port infrastructure, an airport, an expressway, a hospital, and water treatment, among others.
It is worth noting that Gwadar not only provides direct access to the Indian Ocean but it is also where the land and maritime networks of OBOR converge. Although Gwadar’s commercial viability as a transshipment port is suspect considering its distance from circum-equatorial navigation routes, low depths, and lack of rail connectivity, its administrative control was handed over to China for a period of 40 years in 2013. This continues a larger trend of Chinese control of ports, including Pakistan’s Karachi Port and Sri Lanka’s Colombo South Container Terminal. Chinese naval submarines, including a Ming-class, diesel – electric nuclear submarine, have docked in Karachi and Colombo. With its proximity to Hormuz, Gwadar could be used to accommodate naval warships and submarines and, over the longer-term, could serve as a hub for replenishment and weapon logistics. With an airport, it could become an ideal surveillance and interdiction hub. Recently, there were reports that Pakistan has created a special force, Task Force 88, for the protection of Gwadar port and that two warships gifted from China were pressed into service. These activities suggest that Gwadar is a strategic naval port and that it may well turn out to be China’s first overseas naval port much sooner than expected.
The other end of CPEC is in Gilgit-Baltistan (GB), a part of the princely state of Jammu and Kashmir (J&K), which joined India when its ruler signed the instrument of accession in 1947. From this view, Pakistan has no undisputed land borders with China. Its land borders with China are through its occupation of GB. As a consequence of these territorial disputes, CPEC will remain mired in tension at its extremities in Gwadar and in Gilgit – Baltistan. This has manifested itself in the form of internal security challenges for which Pakistan has already created and deployed a special force of 15,000 soldiers to protect CPEC in addition to the maritime force to protect Gwadar.
Energy projects under CPEC will eventually add over 16 GW capacity in energy production at a cost of over $34 billion, which amounts to approximately $2 billion per GW generated. About 75 percent of the CPEC energy mix will be generated by plants using coal. The environmental damage that this will cause in addition to the fact that Pakistan will have to import high-grade coal needs to be factored in. Pakistan will be contractually obliged to buy power from Chinese companies at a pre-negotiated high rate which can lead to a circular-debt problem. The coal-fired projects will be a windfall for the Chinese as Pakistan has offered up to 34.5 percent annual profit on equity invested in these projects. Once the energy projects are completed, Pakistan could have surplus electricity to export to its neighboring countries. Who will buy this surplus energy? India was invited to join CPEC, but it was not invited to build these power plants.
The numerous special economic zones (SEZs) lack transparency, and there are concerns that only Chinese industrialists will be allowed to set up industries within them. There is already disquiet amongst the industrialists and trade chambers in Pakistan as the Chinese will be granted long-term leases at concessional rates along with a 20-year tax holiday. There are around 19,000 Chinese personnel working on CPEC within Pakistan, and this number could swell by thousands more once the projects and SEZs are set up. How will the presence of the Chinese be viewed, especially by radicalized, unemployed youth in Pakistan? Can ideological or religious friction be avoided?
While strategic and other issues have been addressed above, the elephant in the room is the economic implications of CPEC for Pakistan. Some estimates suggest a financial outflow of $2-5.3 billion per year. Pakistan is likely to end up paying $90 billion to China over a span of 30 years against the loan and investment portfolio under CPEC, raising a number of difficult questions. For example, what will happen if Pakistan defaults on repayments? Will Pakistan end up compromising its sovereignty at the projects in Gwadar, GB, and in the SEZs by swapping its loans for equity? How will this impact the stability of Pakistan? China has used financial assistance to advance its strategic interests before, including with Sri Lanka’s Hambantota port.
In conclusion, what Prime Minister Narendra Modi said during an interaction with Chinese media organizations in September 2014 is worth repeating. As he put it, “Successful revival of the ancient trade routes require not only physical connectivity and requisite infrastructure, but even more important, a climate of peace, stability, mutual trust and respect, support for mutual prosperity and free flow of commerce and ideas.”
Ultimately, CPEC may have a great effect in Pakistan and on Pakistan-China relations, but it does not address issues of connectivity in South Asia. On the contrary, it draws Pakistan further away from South Asia towards China. There is no guarantee that Pakistan-China relations will remain as cooperative in the future. This may seem far-fetched, but the evolution of Pakistan’s relationship with Iran underscores how relations can change. CPEC poses many questions that only time will answer. As they say, “the jury is still out.” We have a long wait ahead.
Lt. Gen. PK Singh (Retd) is a former General Officer Commanding-in-Chief of the Indian Army and the Director of the United Service Institution of India, New Delhi, since January 2009.